EAEU: The Commission’s weak stance over competition policy

The Eurasian Economic Union is a first attempt of Central Asian countries’ economic integration on international level. Comprised of 5 countries, the EAEU is a single market with freedoms of labour, capital, goods and services (four freedoms), which introduced a set of common policies in investment, industry, energy sectors as well as trade and competition policies. A significant responsibility over the latter, the competition policy, was introduced to the Eurasian Economic Commission by the official treaty on the EAEU. However, it did not outline its key decision-making sources to achieve common and coordinated competition policy across the Union. By using rational-choice institutionalism theory, it becomes evident that there also exist a set of internal cleavages among member states in regards of competition rules, which indicates an unstable position of the Commission in this area. Further application of this theory shows weak administrative capacity of the EEC and a need for stronger enforcement mechanism in competition discipline.

The official treaty on the Eurasian Economic Union serves as a legal basis for the Eurasian Economic Commission’s duties and responsibilities. Though it provides the Union with wide variety of competence, the EEC has limited power over regulation of its competition policy. With EU-based institutional structure, the EAEU has special bodies covering its each policy domain. In regards of the competition policy, the Eurasian Economic Commission enjoys a shared competence over competition, antitrust and price regulation and its municipal (state) procurement. Authorised by the official Treaty on the Eurasian Economic Union (Article 3), the Commission is obliged to detect and eliminate any anti-competitive behaviour both on the member States’ territories and on their trans boundaries (Article 74).[1] The Commission should oversee the successful implementation of competition policy across the Union in respect of countries’ economic entities. It is also empowered to set the requirements criteria for transboundary markets.[2] However, the same treaty restricts the Commission’s competence by stating that “nothing in this Section shall be construed so as to prevent any Member State from taking any action it deems necessary to protect the fundamental interests of national defense or national security”[3], showing that member states still act in accordance with their own legislation, only extending Union’s rules of competition to their third party relations. In the case of disobedience, the Commission is fully capable of initiating an independent investigation to violators. As stated in the treaty, the EEC must monitor the general compliance of member states with the antitrust and competition rules and can take “countervailing” measures but only “upon the request of the investigating authority”.[4] Still, the decisions after the process of investigation are made only in the form of recommendations and are required to be submitted to the Court for an approval.[5] In the case of non-compliance, the Commission imposes fines under the “agreement on uniform principles and rules of competition”. The size of the fine depends on the specific case and the amount of the basic fine.[6] So, the treaty vaguely characterizes the Commission’s abilities stating that it “should take the necessary enforcement measures”[7] and that “Member states shall be in charge of suppression of violations by economic entities.”[8] This demonstrates that prevailing number of decisions regarding competition policy are not enforced in the EAEU and that the Eurasian Economic Commission cannot legislate in this area, all of which significantly diminishes the Union’s capacity.

Apart from rather contradictory nature of the treaty in relation to the Union’s competition policy, the number of inner conflicts among Member states in competition further proves the Commission’s restricted power and the need for stronger enforcement. Rational-choice institutionalism framework and its principal-agent theory can explain the reason behind member states’ internal cleavages and the EEC’s weak position in competition. Generally, the rational-choice theory relies on the concept of rationality, implying that any social or economic system have rational actors who can use necessary information to calculate all costs and benefits in determining the choice of their actions. Moreover, the decision to make any action depends on a relationship between agents and principals. Their collective behaviour reflects the “aggregation of individual choices.”[9] Individuals, in turn, are expected to maximize their utility, but their choices are under certain constraints. Rational choice institutionalists say that these constraints are imposed by formal and informal institutions in a state because “principals” give their power to “agents”.

Here, the “rational agent” is a supranational institution, such as the European Commission and the Eurasian Economic Commission and the “principals” are the member states of the Union.[10] It has been explained that this delegation of responsibilities to supranational organs happen because member-states find it rational to shift the liability of policymaking to supranational “agents” in order to cut its transaction costs. By doing it and authorizing the Commission, member state principals allow themselves to “commit credibly to international agreements” as well as equally benefit from the supranational agencies’ policies.[11] While this is true for the European Union, where the European Commission has an exclusive competence of executive function over competition policy and a capacity to make binding decisions with effective enforcement procedures in case of violations, it may not be true for the Eurasian Economic Commission. The EEC cannot be fully considered as an “agent”, because its council is purely intergovernmental, consisting of deputy heads of governments and only collegium is supranational. The member states of the Union have also not delegated their full competence and power of competition policy to the DG of competition of the EEC. Therefore, the “principals” in the EAEU keep their policymaking and executive power in competition and are not constrained by institutional power of the EEC “agent”.

The EEC’s weak stance in competition policy can be seen from internal cleavages of the Union. Firstly, the Union’s largest member- Russia is a controversial example of a country willing to push integration and agree on common set of laws and rules in certain economically important sectors. The reason for it is Russia’s rather unstable attitude towards the EAEU seen from its numerous violations of the Union’s policies and the overall trend of disobedience of them. It has been long argued by some part of scholars that EAEU was created to “manifest Russia’s geopolitical and hegemonic ambitions”[12] in the Central Asia region. It was assumed that with rapid growth and success of the European Union, Russia felt the need to encounter this European countries’ alliance, who act as one bloc and try to attain common objectives for the whole Union.[13] Another assumption is Russia’s wish to play a greater role in international political system.[14] These assumptions could indeed be supported by the EEC decisions in regards to Russia. With the entry into force of the Commission’s competition policy, Russia was found to violate competition rules several times and was under the process of commission’s investigations. In 2015, for example, ministry of commerce of the Republic of Belarus appealed to the Commission for the need to identify Russia’s probable violation in antitrust area. The Commission has found that The Russian Federation has decided to prohibit the admission of goods originating from foreign countries as well as work and services performed by foreign people for the purpose of procuring goods and works “for the needs of defense of state security.”[15] The EEC discovered that the Russian Federation was in violation of the provisions of the EAEU Treaty and decided that it was necessary for Russia to eliminate the revealed violation.[16] So, this case demonstrates Russia’s unwillingness as “principal” to let the EEC as “agent” to make decisions and act on behalf of the Union, sometimes even disrupting or dissociating from Russian interests. Another example of Russia’s noncompliance is the EEC’s 2017 decision on finding out the fact of violation of the agreement on the EAEU in case of violation of competition rules in a cross-border market.[17] The case was appealed by Kazakhstani AO “KTZ”- Kentau Transformer Plant (Zavod) in regards to “NLMK” (Novolipetsk Steel), Russia’s largest domestic crude steel producer and to “Viz-stal”, Russia’s largest producer of grain-oriented and cold-rolled electrical steel.[18] The Commission established a violation of the EAEU Treaty, which resulted in the abuse of a dominant position by creating discriminatory conditions on member states’ territories. After a thorough investigation, the EEC made a decision to impose fine on Russia’s two companies: “NLMK” and “Viz-stal”.[19] This second case is another evidence of internal instability in the Union seen in Russia displaying its hegemonic position and wishing to protect its domestic interests. Despite Russia having several infringement actions in regards of competition policy, the EEC, due to its technical incapability, could only impose fines (once) and were not able to penalize the country in any form, which proves the Commission’s lack of competence in enforcement.

Other cases of the internal cleavage and Commission’s inability to tackle it are Armenia and Belarus. The Commission has long been investigating cases of unfair competition, for example, setting prices of transboundary air and train tickets and identifying monopolies. However, the EEC was unable to do more than recommendations to violators. Armenia, alongside with Belarus, has a large extent of cartels and monopolies and how the EAEU will defend its competition policy and ensure its proper working was questioned from the beginning. Armenia with its conflict economy has commodity-based cartels[20] and the Republic of Belarus with state involved and subsidized economy, has large, state-run monopolies.[21] These still existing cases are significant obstacles to the process of harmonization of competition policy and they also project the Commission’s limited power in international political arena. The differences in economies are also making it challenging for the Commission to make decisions for the whole union. Belarus, for example, has the least developed economy among member states and faces difficulties to liberalize its economy.[22] The development of four freedoms are also on different stages in member countries. Belarus and Kazakhstan still encounter cases of discrimination in access to Russia’s gas transit system, which further diminishes chances of common energy market. Kazakhstan, in turn, still protects its domestic transporters by abstaining from liberalization of transport services, thereby creating a barrier for common transport market.[23] Another part of four freedoms, which is movement of goods and people are also under major restrictions. People still face strong residency rules while trying to open or relocate businesses in member states’ territory. Goods are also restrained, because member states are “unwilling to fully open their markets to competition.”[24] In addition, member countries such as Kazakhstan and Russia are seen to be “too weak or too cautious” to lobby the Commission for their interests. The Commission is also weak in promoting the competition policy for better integration. This two-way interaction problem is seen as a crucial limit of the EEC and the Union itself. [25]

With the establishment of four freedoms and common competition policy, it is necessary to limit member states’ (principals) capacity to undermine these freedoms either because of search for their own profit or of the wish to protect their national services and private entities. It is, indeed, counterproductive to member states’ domestic industries to still form cartels and cartel-like organs or engage in price-discriminating actions and other anti-competitive behaviour within the ambition of forming a strong and productive customs union. Relying on the European Union’s experience, from the beginning of a common integrated market idea, it became clear that there is a necessity of some “institutionalized control at the supranational level”[26], which would ensure the security of competition policy. According to the principal-agent theory, the EU integration history in competition discipline shows that member states (principals) fully delegated their power to the European Commission (agent). The Commission then became authorized to systemize, administer and exempt fines to violators after an independent process of investigation. By this delegation of power, the Commission now acts as an “autonomous and quasi-judicial” organ over the competition rules, with an exclusive competence to investigate, execute, make independent decisions and supervise the obedience of competition law.[27] Having all responsibilities delegated by the states, the Commission becomes a supranational agent, which is also visible from its structure: the European Commission is comprised of epistemic community of competition experts, who act separate from their national interests. This rapid development of competition laws under the supervision of the European Commission is seen as a source of grown integration. The competition policy depicts “very heart of the idea of the single market”[28]because it balances all economic benefits of collaboration compared to individual and separate economies working together in the Union. Based on the EU experience and importance of the facilitated competition policy in integration, it becomes evident that the EAEU lacks this full delegation of power to the Commission by member countries, which is slowing down the development and increase of the EEC competence over competition.

There is a chance, however, for the Eurasian Economic Commission to have a greater competence in competition discipline. The trend of positive integration in competition rules is seen in several changes of member states’ economies. Presently, for example, the EEC is conducting an investigation of possible violations in automobile tires, trucks and cars market, as well as railway transport wheels and machine industry. The required changes in member states’ policies are visible in amendments to their national legislation, which began in 2016.[29] A year before, the Commission has received 18 applications regarding competition rules’ violations in elevator markets, seaport services, electrical equipment, sales of butter, cheese, poultry, garden machinery, movable gate systems and dietary supplements at the cross-border markets.[30] The EEC has taken into consideration 9 of these cases and presently is conducting an independent investigation to each of them. Another example of positive integration of competition policy is a case of “Caterpillar”, an American company of mining equipment which was accused of price discriminating and initiating unfair competition towards its Russian and Kazakhstani consumers. The Commission being in charge of international dealer agreements analyzed the case and revealed unequal conditions of member states created by the Caterpillar company. The company was forced to guarantee equal application of tariffs for all members of the Union. Now, this case creates opportunities for citizens of the Union to participate in tenders, sales and product service with this company, allowing any buyer from the EAEU state to purchase the necessary equipment from the dealers.[31]

Thus, it is evident that since the EAEU countries have delegated transboundary competition policy to the supervision of the Commission, they reduced the cost and time of solving violations of international agreements with third countries.

The Eurasian Economic Union is still a young union with many ambitions to harmonize member state policies and reach the European Union level economy. Several attempts have been taken to develop the economic integration through single market and the competition policy, over which the EAEU institution- the Eurasian Commission has a shared competence. This shared form of competence posits a problem from the perspective of principal-agent theory. Member state principals have not delegated their full power to agent, the Commission, which is restricted in its decisions and actions. This is evident from several cases of member countries violating Union’s competition policy and the EEC not being able to resolve them. The treaty itself puts the EEC under constraints and guarantees more competence to principals. Still, there exist an overall positive outlook for further development of competition policy in case of stricter enforcement mechanism to the agent- the EEC, fully delegated by the Union members.

Reference list:

Adomeit, Hannes. "Putin’s ‘Eurasian Union:’Russia’s Integration Project and Policies on Post- Soviet Space." Neighbourhood policy paper. A Project of the German Marshall Fund: Center for International and European Studies 4 (2012).

BTI. Armenia Country Report, Bertelsmann Transformation Index. (2014) http://www.bti- project.org/uploads/tx_itao_ download/BTI_2014_Armenia.pdf.

Consolidated version of the Treaty on the Eurasian Economic Union. [Official EAEU website, 18.10.2010]

Decision 130/2017/EAEU on establishing the fact of violation of Article 76 of the Treaty on the Eurasian Economic Union of May 29, 2014 in the case of violation of the rules of competition in the cross-border market No. 22-AC-01 [Official website of the EAEU Commission, 26.09.2017].

Decision 31/2016/EAEU of the Eurasian Economic Commission Collegium of 12 April 2016 on recognition of the fact of violation of the Russian Federation of obligations under section XXII of the Treaty on the Eurasian Economic Union of May 29, 2014, and the need to eliminate the revealed violation [Official website of the EAEU Commission, 12.04.2016].

Krickovic, Andrej. "Imperial nostalgia or prudent geopolitics? Russia's efforts to reintegrate the post-Soviet space in geopolitical perspective." Post-Soviet Affairs 30, no. 6 (2014): 503- 528.

McGowan, Lee. "Theorising European Integration: revisiting neo-functionalism and testing its suitability for explaining the development of EC competition policy?" European Integration Online Papers 11, no. 3 (2007).

Moravcsik, Andrew (1998) The Choice for Europe: Social Purpose and State Power from Messina to Maastricht. Ithaca, N.Y.: Cornell University Press.

Pollack, Mark A. (2003) The Engines of European Integration: Delegation, Agency, and Agenda Setting in the EU. Oxford: Oxford University Press.

Polonskaya, Julia. 2016. "Perspectives on the Cross-Border Market - Kazakhstan News." Kazpravda.Kz. https://kazpravda.kz/news/eaes/perspektivi-transgranichnogo-rinka.

Roberts, Sean P., and Arkady Moshes. "The Eurasian Economic Union: a case of reproductive integration?" Post-Soviet Affairs 32, no. 6 (2016): 542-565.

Smirnova, Ekaterina. "Steel Conspiracy: Eurasian Economic Commission Fines NLMK” Forbes.Ru. 2017. Forbes.Ru. https://www.forbes.ru/biznes/351815-stalnoy-sgovor- evropeyskaya-ekonomicheskaya-komissiya-oshtrafovala-nlmk.

"Supervision of Compliance With Unified Rules Of Competition" 2019 http://www.eurasiancommission.org/en/act/caa/cpol/control/Pages/default.aspx

[1] Consolidated version of the Treaty on the Eurasian Economic Union. [Official EAEU website, 18.10.2010]

[2] Ibid. clause 2

[3] Ibid. clause 5

[4] Annex 2 to the Consolidated version of the Treaty on the Eurasian Economic Union. [Official EAEU website, 18.10.2010]. (Chapter VI, clause 221).

[5] Ibid. Chapter III,clause 36

[6] "Supervision of Compliance with Unified Rules Of Competition" 2019

http://www.eurasiancommission.org/en/act/caa/cpol/control/Pages/default.aspx

[7] Ibid. clause 276

[8] Annex 19 to the Consolidated version of the Treaty on the Eurasian Economic Union. [Official EAEU website, 18.10.2010]. (Chapter III, clause 8).

[9] Moravcsik, Andrew (1998) The Choice for Europe: Social Purpose and State Power from Messina to Maastricht. Ithaca, N.Y.: Cornell University Press.

[10] Pollack, Mark A. (2003) The Engines of European Integration: Delegation, Agency, and Agenda Setting in the EU. Oxford: Oxford University Press.

[11] Ibid. p.15

[12] Adomeit, Hannes. "Putin’s ‘Eurasian Union: “Russia’s Integration Project and Policies on Post-Soviet Space." Neighbourhood policy paper. A Project of the German Marshall Fund: Center for International and European Studies 4 (2012).

[13] Ibid. p.3

[14] Krickovic, Andrej. "Imperial nostalgia or prudent geopolitics? Russia's efforts to reintegrate the post-Soviet space in geopolitical perspective." Post-Soviet Affairs 30, no. 6 (2014): 503-528.

[15] Decision 31/2016/EAEU of the Eurasian Economic Commission Collegium of 12 April 2016 on recognition of the fact of violation of the Russian Federation of obligations under section XXII of the Treaty on the Eurasian Economic Union of May 29, 2014, and the need to eliminate the revealed violation [Official website of the EAEU Commission, 12.04.2016].

[16] Ibid. p.2

[17] Decision 130/2017/EAEU on establishing the fact of violation of Article 76 of the Treaty on the Eurasian Economic Union of May 29, 2014 in the case of violation of the rules of competition in the cross-border market No. 22-AC-01 [Official website of the EAEU Commission, 26.09.2017].

[18] Ibid. p.20

[19] Ibid. p.21

[20] BTI. Armenia Country Report, Bertelsmann Transformation Index. (2014) http://www.bti-project.org/uploads/tx_itao_ download/BTI_2014_Armenia.pdf.

[21] Roberts, Sean P., and Arkady Moshes. "The Eurasian Economic Union: a

case of reproductive integration?" Post-Soviet Affairs 32, no. 6 (2016): 542-565.

[22] Ibid. p. 549

[23] Ibid. p. 549

[24] Ibid. p.549

[25] Ibid, p.550

[26] McGowan, Lee. "Theorising European Integration: revisiting neo-functionalism and testing its suitability for explaining the development of EC competition policy?" European Integration Online Papers 11, no. 3 (2007).

[27] Ibid. p.4

[28] Ibid. p.3

[29] Smirnova, Ekaterina. “Steel Conspiracy: Eurasian Economic Commission Fines NLMK” Forbes.Ru (2017).

[30] Polonskaya, Julia. "Perspectives on the Cross-Border Market - Kazakhstan News." Kazpravda.Kz. (2016).

[31] Ibid. para. 6