BRIEFING BY HEAD OF FAS IGOR ARTEMIEV AFTER A MEETING OF THE GOVERNMENT OF RUSSIA
Igor Artemiev: Today, I had an opportunity to present the Annual Report on the State of Competition in Russia for already the 13th time. Back in 2005 a requirement was included in the Competition Act that FAS must draft such reports. Very few countries passed the law that the Government as a whole should hear Reports on the State of Competition.
We have always described not so much the actual achievements but the shortcomings that we must overcome. Today, perhaps for the first time in these 13 years, I said that there is some turnaround. It happened, in my opinion, because of the Presidential order that approved the National Competition Development Plan. Following on, the Government passed 18 sectoral programmes for developing competition: from education to the electric power industry and agriculture. These programmes are executed only halfway so far, but they are being executed. Upon a decision by the President and the State Council, competition development programmes are adopted in each region. I and my Deputies flied twice across all regions of Russia and held focused meetings with their Governors. And now Governors have approved their competition development programmes in all regions. It means that we, FAS are shifting from a purely safeguarding function to a constructive function. It is necessary to develop competition.
Today we talked about many positive characteristics. I am not going to stop on them. Let’s focus on our concerns.
Unfortunately, several federal laws drafted by FAS and approved by the Government, got negative opinions from the State Legal Department of the President’s Office. We respect their opinion very much and we will work so that they can be adopted during the winter session. What are they? The fifth digital antimonopoly package. It is not possible to base the efforts on legislative norms substantively originating in the 1960s – 1970s. It is impossible; the world has changed so the law also should become different.
The law on the basics of tariff regulation. We are now conducting a grandiose tariff regulation reform. Today we discussed the shifting to long-term, 10-year tariffs and in some cases we may even think about 20-year tariffs. Under the “inflation minus” principle. It gives stability to companies, a huge investment and loan resource. It immediately changes the entire situation because it gives all necessary elements of predictable state policy in terms of corporate financial means. Loans can be taken, securities issued. A totally different story.
There are also several questions related to medicinal drugs turnover. Led by Tatiana Alexeevna Golikova, together with the Ministry of Healthcare we managed to prepare a law on substitution. It means there will be competitive bidding procedures. The most important, consumers will have a choice at pharmacies. Today people often do not understand, do no know (and it is not registered legislatively), that the same organic molecule with the same method of administration – it is the same drug. The price difference, however, can reach hundreds of times! Because of advertising people sometimes have to forgo treatment, not understanding that there is a Russian equivalent nearby that costs 17 RUB. These things are not resolved so far, and we are pushing it. Today we hope once again to obtain principal support from the Government that these laws must be passed during the winter session. They constitute an integral part of the National Competition Development Plan.
A lot of goods things are done in the regions. At the federal level, I’d like to emphasize development of on-exchange trade that has played a significant role. How is life carved out? I gave an example to the Government and I’m going to repeat it to you later. Dozens of cases. You have a company, but its 5-year contract with “Gazprom” is expiring. You need gas. You have investments, you intend to modernize your enterprise, buy new equipment but you do not know whether the contract is going to be renewed. You come and the first thing that “Gazprom” staff tells you is that there is no gas. Can you guess how the problem is solved? It was always like this. What now? Now a Director can disregard it. He goes and buys gas on the exchange every day. Volumes are there. He does not need to beg anybody. And “Gazprom” must deliver gas, purchased on-exchange, via its pipelines on the priority basis.
The same relates to oil products. Come to a large company, especially in our vast territories where monopolists in the oil products sector are flourishing. Try to get a petrol quota for your private filling station that you’d like to develop as a small business. You’ll get nothing. Until you make arrangements with someone, again using the well-known method. And now you go the exchange and buy petrol.
Therefore, the most important in on-exchange trade is not that there are price indicators (which is absolutely essential: there is something to compare prices with, there is an understanding what costs what, the market environment, so it is a huge leap to market economy). The most important is that this is actually market demonopolization. That is important and the Government has done it in the recent years.
Certainly, we were the drivers and we are very pleased that the Ministry of Energy is a driving force, the Ministry of Economy began to develop all this, the Ministry of Finances because it saw a wonderful opportunity to collect taxes. All on-exchange transactions are legitimate so taxes are collected immediately. They cannot be hidden through a chain of intermediaries or in off-shores, they are right in front of you.
We would not be FAS if we do not talk about shortcomings. What are the main shortcomings that we see?
First, I already mentioned that most draft laws prepared following the Presidential Orders are not accepted by the parliament. We have passed through a painstaking coordination procedure on very complex laws. It suffices to say that one of the acts abolishes the law on natural monopolies completely. Can you imagine the battle around it? No advancement so far. We seek support of the Chairman of Government, who is personally involved and does a lot to enable adopting the laws. For example, the law on state unitary enterprises that practically bans this form. If not for the intervention of the Prime-Minister and the personal standing of the President, we would not be able to achieve anything.
The draft law on tariff regulation covers the entire system: what should tariffs include, what they should never include, which standards and formulas must be used to calculate them. The tsarist Russia or the Soviet Union never had any tariff laws. And currently there is none. As a result, tariffs of water supply plants in the same region can differ by 50 times. Think of that! You are in one district, I am in another. We have the same landscape, the same climate. Why somebody must pay 50 times more? Can you explain? Therefore, a system must be laid down. And we drafted the law. It has passed through complicated coordination procedures and is now approved by the Government. Yet, unfortunately, there is again a negative opinion from the State Legal Department. We shall continue our efforts.
How it is possible to live in one of the most essential economic regulatory elements without a federal law, when all this is broken down into thousands of governmental and local acts? How are we then going to put it all together in terms of investments? You come with your capital and say: “I’d like to build up a plant in the Lipetsk region. What will be the tariff?” And the response is: “It’s going to be what it’s going to be”. “At least in the next year?” – “We do not know”. And again the same story starts with gas. FAS law explains how it all is resolved, what are the benchmarks, what is the starting point for estimates, in which direction. Plus we close the gaps in the law, that regions used in order to raise their tariffs by 70%, 100% over the standards set by the Government –3% (with the “inflation minus” principle). Every year we had from 900 to 1800 such incidents.
These gaps are now closed by FAS with the help from the parliament and the Government, of course.
Federal amendments are passed to the law on the electric power industry and Governmental acts that do not allow raising tariffs higher that the threshold without consent of the Antimonopoly Service and recognition that the tariff is truly not justified economically. And economically justified tariffs are taken now from the benchmark rather than spun out of thin air. It is calculated. It is a specific figure for a particular year. Tariffs should get to the benchmark but should not be higher.
Thus, I’d like to reiterate that two thirds of tariffs in the Russian Federation are higher than the benchmarks, i.e., they are overrated. And this is what we must transfer into mandatory investments. What consumers pay today should be directed for construction and modernizing new plants; liquidating water and heat losses. We estimate this resource today at approximately 180 billion RUB that can be directed for this.
Certainly, cartelization of the economy is a big trouble. Today cartels in road construction, pharmacology are everywhere. It takes the form of bid-rigging. It means that the state gets the highest price. Enormous money is paid from the budget. But where is the trouble? When companies at auctions are forced into competitive relations, prices drop by 50, 60, or 70%. And what does the law on public procurement say? If you save due to price decrease at auctions, you may buy more at the established price per unit using all remaining funds. If the price is cut down by 50%, you can treat 200,000 rather than 100,000 patients. What does it mean when concerns cancer in children or other terminal illness? It means saving 100,000 lives.
I am often asked how competition is linked to life. Here is a real-life example. One auction can save 100,000 human lives. And in many cases today we cannot achieve this competition at auctions. Due to multiple legislative reasons. We should simply adopt these laws, fulfill the Presidential Order. That is why executing the Road Maps by less than 50% is definitely a big damage. The year is not over yet but it is necessary to move on.
Low privatization rate, statism in the economy, we always talk about it, mass violations at tenders and auctions, including the National Projects. That is why the National Projects must be integrated in the National Plan. The Prime-Minister and the President gave such orders and we are working on this task.
For 20 years non-discriminatory access to the gas sector is still absent. It is everywhere but not in the gas sector, which is a preserve of archaic procedures. If not for the on-exchange window that I described, it would be a total disaster.
Slow employment of an electronic price comparison system. If a program is formulated correctly and everything is properly registered legislatively, a computer can give you a system of comparing prices on a particular drug across the whole Russia in a split second. Do you know the differences? 10, 50, 70 times per tablet. It means that if a comparison system in Russia is open to public and rolled-out, we can instantaneously put violators on trial. And then not many will be willing to violate. Right now we have achieved universal electronization of tenders and auctions. Every tender and auction takes place on electronic sites. All is out on a system and to an independent registration, and in the common price comparison system. We have not finished building it up, but we will do it. We will be the first state in the world, especially such a vast state that will create a common electronic public procurement space covering its entire territory. And then these prices will give us clear indicators, formed on a particular day or hour, or in a particular month. There will be less abuse and corruption.
The prospects for public procurement are more or less OK. And we talked today about the situation with public sales. Privatization is slow but the procedures are transparent. But look how many non-competitive procedures are in property sale. Fish quota is given for free. To whom? Why? Why not an auction? We have been talking about it for many years. Have you heard anywhere or saw at least one notice about selling customs-confiscated goods? Have you seen at least one online offer that it is possible to come somewhere where customs-confiscated goods will be sold? Certainly not. Generally speaking, we have 54 different procedures. Nearly all of them are not open to public or semi-open. Various resources, goods, services are sold in an unclear manner for billions of dollars, the money that should go to the budget. I already said today that I have kept emphasizing for seven years in a row. We wrote a law – we cannot pass it. The Ministry of Economy wrote a law – it cannot pass it. We ask the Chairman to pay attention to it. I talked twice about it with Vice-Premier, the Minister of Finances, Anton Siluanov, that we must introduce a common auction sale procedure. Why does the state need selling property? More money to the budget in order to use them for the social sphere. Why on earth do we need procedures and pre-qualifications? Come, buy, give the money – everything goes to the budget, everything is clear. But nothing like this happens. The bankruptcy procedures, for example, when there also is an element of public property, in essence are carried out… Some electronic sites are created specially for a single procedure – to perform false bankruptcy and close down. Such stories happen. And it also is a big issue.
And now the most important in this part: the plans. First, it is simply necessary to fulfill the Presidential order and the decisions of the Government, the State Council for developing competition in Russia. The legal framework is now in effect. The second prospective task is to devise a new, 2021‒2025 National Competition Development Plan. Substantively important. Not just words for the sake of words but specific measures for each segment of the economy, what to do. It is the most important now, and it requires preparation. Already in 2020 we must present a draft Presidential order on behalf of the Government. And do the same every five years. 5-year planning is a good period for such kind of measures.
And briefly about the law on compliance. Thanks to the Government for supporting it today. What’s the essence? Many countries and now Russia have legislative novelties, which indicates what? If a company ‒ an economic entity (private, public, any) establishes typically a rather standard set of measures to prevent antimonopoly violations, train its staff under subscription, says that some things cannot be done, it is not possible to joint cartels, with a competitor for rivalry on fix product prices, divide markets, and the company itself punishes its employees for beaching something, without any intervention from FAS or Courts and the Prosecutor’s Office… A lot of companies work like this now, such as “Sibur”, “Baltika Brewery”, MTS, and they devised compliances with our help. The Antimonopoly Counsel Association should have a protocol template about compliance: adopt it and work. Today I tried to discuss with sufficient detail how business benefit from it? It seems that it generates training costs, etc. First, however, you will not be imposed turnover fines, because you will prevent violations; and secondly, there is a qualification problem. Very often we come and take information from a computer during an inspection at a company, and see that Head of Sales, Deputy General Director of a particular company, agrees in electronic communications about the prices with another Head of Sales, also Deputy General Director of a competing company. This is a cartel. What shall we do? We put the company on a turnover fine and accordingly it will pay, and it will not be allowed to participate in public procurement later, so there will be a lot of both criminal and administrative issues. What will happen when we see that a staff-member signed the adopted compliance policy, he knows that such conduct is banned? He attended training and retraining, took the relevant exams and credits – the company did everything to prevent this person committing any violations. Most likely FAS shall not fine the company. We will denounce this person to the law enforcement bodies as a swindler; he will be put on trial, while the company will be left alone. That is why business needs this law. Here the interests of the state and business match. The law will be passed in the near future.
Q: Please describe the draft law on liquidating unitary enterprises. Amendments are made to it and it is shelved. Tell us about the main problems with this draft law, the main standpoints. Are there are lobbyists among unitary enterprises that are against this project?
Igor Artemiev: Governors are the main lobbyists against this law. What’s the meaning of the law? We say that state unitary enterprises are a very bad form because even the property register is not seen, property slips away unnoticeably, financial results, etc. A closed-door agent, which was necessary for salvation back in the 1990s, so that somebody emerge and do something. Then the law on shareholding companies was passed, limited liability companies, and then Sergey Semyonovich Sobyanin conducted a full reform of budgetary enterprises. We do not say: kill it, so that nothing exists there. Simply transform a unitary enterprise into a budgetary institution where everything is transparent, a property register is kept, funds flows are registered. Stop stealing, stop anticompetitive stories, particularly, adopt a compliance policy that I described. We work like in the XIX century when telegraph or telephone was the best what was available. This is about modern forms of economy management, transparent and open for the tax and budget spheres, for control over spending of budgetary funds. Because these are state enterprises. Many Governors, however, due to, let’s say, inertia, and some not because of inertia but because they understand perfectly why it is good fishing in troubled waters, began lobbying the issue at the level, first of all, of the Land Chamber, the Federation Council. And they persuaded members of the Federation Council – who sharply opposed the law – and then members of the State Duma, who hesitated strongly. We held hearings at all factions of the parliament and there was criticism everywhere. We drafted a package of amendments that removed the ban of such companies in the cultural sphere, for example, or in the Russian North where the conditions are extreme. Ultimately, the Chairman of the Government took a principled stand: he reported to the President that it is crucially important for developing competition in Russia. And the President signed, as you are aware, the National Plan that directly specifies that all this must be done. Yes, with a transitional period – we extended it to 2025. But it must be done. Today, the President responded to the report made by the Chairman of the Government that he agrees, and a recommendation from the President and the Chairman of the Government is given to the parliament to adopt the law. Adopt because the Government is convinced that the law is necessary and the President is convinced, the law will be passed.
Q: Igor Yurievich, you said today that it is time to adopt a new national plan. Can you outline the most ambitious goals for the future?
Igor Artemiev: You know, one will stem from another. And we certainly must switch on feedback. First we shall see what is achieved – not on paper, in reports, but in reality by the regions of Russia and by all of us here, at the federal level. The general trends remain, however: liquidating state economy, mass privatization, decisive support for small and medium business in everything, changing the relevant economic regimes for investors – investments bring competition. And undoubtedly, strange as it may seem, measurers towards labour protection, increasing labour productivity. It is automation that enables much better progress in innovations and develops competition. It is protection of intellectual property rights and many other issues.
But first we will make a minor stop to analyze: we came up with all those ideas, but have we implemented them on paper or in reality? We will visit all Russian regions, look at all things done, all adopted acts to make sure that it is not work down the drain.
And then we’ll give a plan to the President. Certainly, we are thinking of putting several new strategic ideas to the National Plan. One of them I can disclose: it is necessary to destroy Russian state corporations, transform them into other organizational forms, shareholding companies. Since state corporations today are officially asserted by the federal law, let them hear me already, a few years ahead: they should become ordinary shareholding companies without privileges. Then there will be competition.
Q: VTB claimed that wanted to purchase half of terminals from Ulranian “Kernel” in Taman’. Has an application been filed?
Igor Artemiev: Not yet.
Q: It is also reported that an investor consortium led by Chinese “Fosun” intends to buy “Gold”. FAS was considering it but extended the period of consideration. Why?
Igor Artemiev: We extended because we need to get to the bottom. Since a foreign investor comes, the first thing we must understand is whether the acquisition falls under the law – not the “Law “On Protection of Competition” but No.57 Law - the Law on foreign investments in strategic spheres. Since the company is owned by the People’s Republic of China, we, perhaps, should prepare the issue to be considered by the Governmental Commission on Foreign Investments. This is what No.57 Law says. I believe that everything will be OK with the transaction but we must observe all procedures. Now, as we are guided not only by No.135 Law but also No.57 Law (perhaps the final decision will be passed today), we need time to coordinate arrangements with 12 federal executive authorities. They must give their opinions, to what extent the investment is useful and expedient for Russia. And then the Governmental Commission led by the Prime-Minister will say “yes” and the transaction will take place. This is a more complex mechanism.
We must say today whether No.57 Law is applicable to the transaction. I can state only one thing so far: from what I am reading (an opinion of the legal services of a specialized department is in preparation) – perhaps No.57 Law will be needed.
Q: Igor Yurievich, what is your attitude to VTB proposal on establishing an integrated grain holding? Effectively, it will be a huge state corporation, and you were just saying that they should be annihilated.
Igor Artemiev: My attitude is as I said. If we wish these corporations, i.e., our Russian “chebols”, using a Korean word... I’ve said many times that the Korean economic miracle happened only because they destroyed their monopolist corporations. Everybody preach to save thought the economy of scale, but nobody understands that in this case competition will be simply killed and the result will be close to disastrous for the economy. Korea conducted a gigantic reform, transforming “chebols” into shareholding companies, splitting them up, supporting small business and achieved the Korean economic miracle. The entire meaning of the National Plans that we are writing will be similar to it. We aspire a Russian economic miracle – it will not happen without competition. But we are moving in this direction. The quantity will definitely be transformed into quality.
That is why the following answer: here the size and preferences are important, as all shareholding companies are equal, and state corporation have plenty of preferences and specifics because they are established by a special federal law. State corporations use such preferences and specifics as their anticompetitive advantage, killing all competitors. What kind of market economy can be in those conditions? It cannot be possible. I can understand when it happens in defence, in close-door sectors, sometimes it is necessary. But it’s ridiculous in open markets. Who needs it in road construction?
Q: Is it also true for VTB and grain, what you are saying?
Igor Artemiev: Grain is an open market, certainly.
Q: Igor Yuirievich, some time ago you also suggested to change the principle of allocating access of airlines to international flights. Is there already anything specific, any proposals?
Igor Artemiev: Our letter on this issue will soon be submitted to the Government, Vice-Premier Akimov, and to Rosaviatsia [the Federal Air Transport Agency], we are working on it. And I think we will publish it.