Competition Policy: the sign of weakened integration

1. Introduction

The Eurasian Economic Union (EAEU) has formed as a customs union in 2011 after a series of attempts to build communities and unions on the territory that was previously occupied by the USSR. The main economic aim of the EAEU was to modernize economies of member states, promote their development and provide states with an environment that can help improve their competitiveness on the market. During the beginning of an integration process foreign, technical and sanitary policies of member states are being harmonized quite quickly; however, tax, financial and administrative issues are still governed by national legislation (Vinokurov 2017). As of 2016, according to Giucci and Mdinaradze (2017), about 88 per cent of the trade in the EAEU mostly consists of exports to third countries, rather than the Union’s member states. This number is much higher than in other unions including the EU where the figures are at about 36%. This situation implies low levels of integration in the EAEU.

Competition policy’s main aim is to prevent anti-competitive practices, the emergence of cartels and monopolistic markets. Normative and positive regulation theories usually ignore the roles of institutions in shaping the behaviour of regulators (Hix and Høyland 2011); however, the decisions are de facto made in a complex environment with the involvement of legislators, regulatory agencies and courts. Moreover, institutions have the power to limit regulatory agencies’ power, which can be detrimental for the development of the society if they are controlled very tightly (Hix and Høyland 2011). Overall, the fact that regulatory competition in the EAEU is weak is a large disadvantage to the countries which can become potential “magnets” and is an advantage for those, who might become donors.

This paper argues that despite some good prospects the competition policy is not developed in the EAEU and the reason behind this weakness might be the existence of Russian hegemony. The paper firstly investigates the current situation of Eurasian Economic Union integration, more specifically, the Commission’s powers. After that, it mainly focuses on the competition policy field of the Commission’s competence. Two cases of NLMK and Caterpillar on the competition policy are investigated in the paper and some possible ways of developing the policy are proposed.

2. Role of hegemony in the integration process of policies

Even though Kazakhstan’s elbasy, Nursultan Nazarbayev is considered to be the “godfather” of the Union, as he presented the idea in 1994, it seems that the project is driven by Russian interests (Vinokurov 2017; Dragneva and Wolczuk 2017). As it was mentioned by Dragneva and Wolczuk (2017), Russia’s main interest in the integration and making EAEU work is in increasing its own influence globally. The EAEU allows the Russian Federation to influence the foreign policy of other member states and govern them softly with its own interests. Russia is a regional leader and is more powerful militarily and economically among the members, so economic and military unification was probably not the main goal of Russia.

According to Dragneva and Wolczuk (2017), powerful states usually prefer quiet weak institutions and systems, which help them avoid costly commitments and constraints. This, in turn, results in the lack of commitment and ineffective work of institutions. Nevertheless, for a regional bloc to work efficiently, commitments should be made and willing to cooperate becomes vital. As governance is of quite low quality, institutions have to be effective for this system to work properly. Overall, the progress of the regional integration depends on the uniform existence of the “rules of the game”. However, from the previous arguments, it seems that the situation differs from what is expected, the Russian Federation being the most powerful member and exercising its powers in the Union.

3. Status Quo of the Competition Policy regulation

Competition is essential to ensure the proper functioning of a single market. In the EAEU, national antitrust authorities are responsible for the reduction of anti-competitive practices on the territory of Member States. Moreover, by the Treaty on the Eurasian Economic Union, the Commission is empowered with tools that can help prevent anti-competitive practices in the cross-border markets, where two or more member states participate (2014). The decision-making procedure on the EAEU level regarding the violation of competition rules consists of the application of the EAEU member states on violations, investigation of the Commission, consideration of the case and the decision of the Collegium (Analytical center under the government of the Russian Federation 2018).

One of the main tools of the harmonization of Member States in the competition policy is the model law on the competition established in 2013 (Analytical center under the government of the Russian Federation 2018). It aims to harmonize the legal regulation in the field and to establish common approaches to the legislation on competition protection. Still, the provisions are not binding and are rather recommendatory (Analytical center under the government of the Russian Federation 2018). This, in turn, raises the question on the extent of implementation within the Eurasian Economic Union member states.

The problem with the Eurasian Commission is that despite it being a relatively powerful institution its autonomy is limited to promote efficient integration. Because of the Treaty on the Eurasian Economic Union (2014), the Eurasian Commission does not have the power to proactively act and to take countries to the Court if they do not comply. Within the system of the EAEU, the Commission usually does not take key decisions, instead, it prepares drafts for the Supreme and Intergovernmental Councils to decide on which. Decisions are taken on a higher, member-states level ensuring the intergovernmental nature of the decision-making system. Additionally, the Commission does not have any mechanism that may influence domestic institutions of the member state that do not comply, it can only fine those who violate competition policy rules (Analytical center under the government of the Russian Federation 2018). As an additional feature, the Eurasian Economic Commission cannot apply to the Court against a member state because this possibility is reserved only for member states. These facts clearly show the limitations in the work of the institution and impede its roles of enforcement and monitoring (Entin and Pirker 2018).

EAEU, in theory, should work for the advantage of all member states, according to the Treaty on the Eurasian Economic Union (2014). However, so far it has created conditions that are favourable mainly to Russian entrepreneurs, goods and investments due to the country’s leadership position. It also seems that because of the weakness of the Commission, other states’ businesses have to compete under unfair conditions because the institution is not able to enforce its decisions and to proactively act.

4. Case 1 - NLMK and VIZ-Stal

The first decision of the Commission that protected the competition policy was the Novolipetsk Steel case. PJSC Novolipetsk Steel (NLMK) and LLC VIZ-Stal abused their dominant positions in the sector of electrotechnical steel (Eurasian Economic Commission 2017). Also, as it was found during the investigation, NLMK was the owner of LLC VIZ-Stal and these companies together contributed to a share of 99.9% in the electrotechnical steel field in the territories of three countries - Belarus, Kazakhstan and Russia (Collegium of the Eurasian Economic Commission 2017). The barriers of entering the market were also high and the competition was limited on the market, thus making it seem like NLMK was the monopolist on the market. The Russian enterprises added a condition while forming the final price of the steel, when consumers of Belarus and Kazakhstan had to pay additional macroeconomic risk factor. As a result, the price was increased. The amount of the discriminatory factor reached up to 23% of the initial price, by which it was bought by the consumers in the Republic of Belarus and the Republic of Kazakhstan while the consumers in the Russian Federation did not have to pay this discriminatory factor (Eurasian Economic Commission 2017; Analytical center under the government of the Russian Federation 2018). The Treaty on the Eurasian Economic Union (2014) does not allow market segmentation along the borders of the member states. As a result of their decisions, the companies could restrict competition and put manufacturers of Belarus and Kazakhstan in a position disadvantageous to the situation of the Russian manufacturers. The companies were fined for more than 217 mln rubles due to the violation of Article 76, paragraph 1, subparagraph 6 of the Treaty on the Eurasian Economic Union (2014), as they unreasonably established prices for the same goods in the territories of two member states, making use of their dominant positions by the Decision №130 of the Collegium of the Eurasian Economic Commission (2017).

NLMK was not satisfied with the decision taken by the Collegium. The enterprises filed the challenging of the Decision taken and argued that the discriminatory factor was used to compensate for high risks and instability of markets (Analytical center under the government of the Russian Federation 2018). NLMK and LLC VIZ-Stal debated that the law violation has not been proved by the Commission, which also does not have competence in the area. As a result of the challenging, there was a delay in the decision’s entry into force. The Eurasian Court refused to accept the application of NLMK and LLC VIZ-Stal (Analytical Center under the Government of the Russian Federation 2018). The need for the use of discriminatory factor was denied by the №22-AS-01 case, where it was clearly stated that the trade was done on a constant basis in Russian rubles with 100% prepayment. Moreover, it has been interpreted by the Court that this situation was in the Commission’s competence. The Commission ensured non-violation of competition rules in cross-border markets because the shares of the companies on each territory were higher than 35%. However, even after this, the challenging of the case has not stopped. The case was further taken into the consideration by the Intergovernmental Council of the EAEU in 2017 when the prime minister of Russia Dmitriy Medvedev asked to reconsider this decision (Analytical center under the government of the Russian Federation 2018).

The challenging of a decision highlighted that there is no certain appeal procedure in the field of competition policy, as it was done by the NLMK both via and without the Court. The fact that the challenging took so long shows that the mechanism of challenging of the Eurasian Commission decisions is not yet settled and needs further improvement. Moreover, a small number of cases the Commission has analyzed shows the weakness of the institution while tackling with monopolies and antitrust regulations implying on the low levels of integration.

5. Case 2 - Caterpillar

Another case that is worth noting is the “Caterpillar” case, case of an enterprise specializing in machinery used in mining. Again, Kazakhstani company applied to the antimonopoly body of the Republic of Kazakhstan which further sent the case to the Commission, because official distributors of LLC Caterpillar in the Russian Federation refused to supply product to other markets (Eurasian Economic Commission 2016). By the Decision №58 of the Supreme Council (2015), it is in the Eurasian Economic Commission’s competence and authority to monitor competition rules compliance measures on the cross-border markets on the territory of the EAEU. During the investigation of the Eurasian Economic Commission, it was found that the dealers of the company and Caterpillar agreed to define a strict market area for sale and if this was not followed, a fine would be provided. For instance, C-27 10R7244 engine was sold for 134 thousand dollars in Russia and for 189 thousand dollars in Kazakhstan by official dealers, resulting in a difference of about 40% (Eurasian Economic Commission 2016). Such agreements are restricted by Article 76, paragraph 3 of the Treaty on the Eurasian Economic Union (2014), as they restrict the competition on the market. As a result of this investigation, LLC Caterpillar has made amendments into the agreements on the distribution (Federal Antimonopoly Service of the Russian Federation 2016). The Eurasian Economic Commission still continued the investigation on other main mining industry players on their compliance with the competition rules on the EAEU territory.

The importance of this case is that a large-scale company has changed its contracts on the territory of the Eurasian Economic Union after the Commission’s intervention and monitoring. This has also emphasized the importance of the competition policy and fair competition rights for all member states. As a result, consumers from all member states are able to buy necessary machinery on the same conditions, which coincides with the competition policy rules in the EAEU. In this case, the Commission did not have to take any further enforcing actions, which would be difficult because of its inability to do so, except for fines. Andrey Tsarikovskiy, Deputy Head of the Federal Antimonopoly Service of Russia, emphasized that in this case “soft regulation method” of the Commission was used, where the main aim of the authority was to support the economic development rather than to punish the enterprises (Federal Antimonopoly Service of the Russian Federation 2016).

6. Conclusion and possible further implications

To sum up, this paper has analyzed the competition policy rules on the Eurasian Economic Union through the means of weak institutions and integration problems in the Union. The case of Novolipetsk Steel showed the weakness of the Commission being only able to fine companies and the issues of challenging the decisions of the Commission. It also showed the role of the Eurasian Court and its willingness to ensure the strengthening of the autonomy of the EAEU law. The case of the Caterpillar showed the “soft regulation method” as a way of solving disputes between the Commission and enterprises. Also, it seems that most of the integration problems resulted from the lack of commitment of the member states and the hegemony of the Russian Federation that further affected the powers of enforcing institutions.

To enhance the competition policy the interaction between the Commission, anti-monopoly bodies and business entities should be closer interrelated. Currently, the Eurasian Economic Commission lacks the power to initiate actions against companies from third countries. Also, it cannot initiate any warnings as preventive warnings, if the affected party does not specifically ask the Commission. The Commission might become the platform which will coordinate and monitor all competition restrictions if it is given more power. As the institution is currently weak itself, to ensure this situation some changes in the system have to be considered. For example, in the EU centralized system was replaced by a decentralized one because the insignificant staff of the Commission was not enough to ensure compliance (Hix and Høyland 2011). As a result of this, regulation mainly relies on the firms’ assessment and national administrative control instead of the Commission’s approval. The enhancement of relations between the Eurasian Economic Commission and national anti-monopoly bodies and programs of cartel screening might lead to better monitoring of the competition policy and therefore improve the situation on the market. Also, a public initiative mechanism based on the work of specialists and antitrust agencies might be of help to limit all competition restrictions and ensure equal access to all players. Businesses should be able to apply to the Commission regarding the issues in an accessible way (Eurasian Economic Commission 2018). Moreover, the power to restrain the anti-competitive actions of third countries should be given to the Eurasian Economic Commission.

Reference List

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