Improving Competition as a Mean of Facilitating Development of Economically Depressed Regions: A Case of North Caucuses

An analysis of origins of economic backwardness of some Southern subjects of the Russian Federation conducted by FAS in 2005 revealed insufficient development of market competition and its infrastructure as its major reasons.



Geographic boundaries of a number of commodity markets were artificially shrieked due to regulatory barriers to inter-region circulation of commodities created by some regional administrations and limiting the participants of tenders conducted by regional governments to local companies. Other reasons for limiting geographical borders of the markets include but are not limited to growth in tariffs for transportation services, market dominance of companies controlling essential facilities playing infrastructural role with regards to vertically integrated markets specifically to these of agricultural goods, inter-modal transportation junctions and services on cargo handling. Growth in tariffs of transportation natural monopolies e.g., railways, pricing in highly concentrated transportation markets, e.g. air transportation combined with constant growth of prices for fuel due to oligopolistic behavior and explicit and/or implicit price fixing by its suppliers were the main reasons for limiting geographic market borders. Some of these price fixing arrangements were revealed and ceased by FAS regional brunches, Ruston on Don one, in particular. These factors also led to decrease in competitiveness of South of Russia as potential transit area as well as to rupture of the region s links with distribution markets in the centre of the country.



More than half of the gross product of the Southern subjects of the Russian Federation is accounted for grain and other agricultural products. The turnover of these and other homogeneous goods is hindered by intermediary companies acting as market dominant buyers and/or sellers due to the lack of organized forms of trade in these goods, particularly futures trade and resulting possibility of direct bargaining between ultimate buyers and sellers.



Thus, the presence of intermediary companies holding positions of dominant buyers and sellers hinders the turnover in the market of homogeneous products, primarily agricultural goods accounting for about one half of gross product of the Southern Subjects of the Russian Federation. The dominance of these companies is feasible mainly due to the absence of organized forms of trade in these goods, specifically futures trade and possibility of direct bargaining between ultimate buyers and sellers of these goods.



A sound competition policy including a number of both immediate and long term measures looks instrumental for solving these problems.



The first type of measures provide for direct involvement of FAS and its Southern territorial brunches coordinated by Rostov-on-Don brunch. These measures are aimed at ceasing abusive practices of market dominant firms in energy sector, transportation and inter-modal junctions, trade in agricultural goods.



The second type of measures is related to government investments in creating infrastructure for development of market competition. They mainly include the development of highway network linking the Southern regions both with each other and with the central part of the country. The M4 road Moscow-Voronezh-Rostov-on-Don further splitting in to directions: Krasnodar on one hand and Stavropol region and further to Baku on another hand is considered a priority one in this context. It not only broadens geographic borders of a number of markets and makes them more competitive, therefore, but restricts the growth of railway and air tariffs due to inter-modal competition.



At the same time a network of electronic trade in agricultural goods started to develop basing on the Internet and embrace a growing number of farmer households, i.e. one of the most competitive segments of the market. Their involvement in interregional trade facilitate their capitalization and, thus, not only their short-term financial sustainability but the ability to invest in value added production based on the currently produced goods as well as in their storage and processing facilities. Meanwhile, market dominance of intermediary trading companies controlling access to essential infrastructural facilities, first of all - to grain elevators, hinders capitalization of farmer households and growth in agrarian sector, therefore.



The Russian experience in applying competition policy as a mean of economic development ion the Southern part of the country may present a certain practical interest for a large spectrum of countries facing the problem of economically depressed territories. These territories may include a group of regions/provinces in the same country or several relatively small countries in the developing parts of the world.



Apart from the above mentioned technical aspects of this experience an institutional one is equally important and implies a presence of a coordination unit capable to join the efforts of several regions on the basis of common interest. In the South of Russia this role is played by the Office of the Plenipotentiary Representative of the President assisted by the antitrust agency providing it with both practical and advisory assistance.



Vladimir Kachalin, Ph.D., Assistant to the Head of FAS Russia