Competition Takes Root in Russian Economy

Opening Remarks By Andreas Andrianopoulos
MP, Former Minister of Industry and Energy, Greek Republic
Team Leader, Competition Project, Tacis Program in Russia

It is essential for any ambitious policy of economic growth to establish firm rules of free and unhindered competition in the workings of its markets. The full development of market forces and the realization of all possible benefits of an open economy rely to a substantial extent upon the application of free competition practices. It is beyond ideological inflexibility and preconceived socio-economic dogma to assert that the benefit of consumers and the fulfillment of a viable and stable socioeconomic order can most certainly achieved through the implementation of policies that encompass a really open and free competition regime.

The ultimate objective of all economic policies is the welfare of a country’s citizens. And this can be realized only by means of guaranteeing popular satisfaction with the condition of the economy, with the transparency of the state’s (and, consequently, the taxpayers’) finance, with hopeful prospects and expectations for a prosperous future.

Within the context of a modern economy, obliged to compete in an environment of an essentially globalized worldwide open market, there are several options to be followed for success to be ultimately attained. The economy has to be open. So that investment can flow in, new technologies attained, modern projects initiated and the market forces achieve a balanced level of activities. The private sector of the economy has to be enlarged thorough privatization and the reduction of state monopolies. This policy enhances the possibilities of more vigorous economic action, expands the state’s finances by means of extending the available tax basis and opens more possibilities for new initiatives, innovation and modern entrepreneurial practices which add dynamism and tremendous potentiality to the furthering of growth and economic development. Productivity levels finally have to be raised. So that the country should be able to compete efficiently on the international economic arena at almost every level of financial endeavor. High productivity is the measure on the basis of which countries achieve satisfactory levels of growth and attain rapid rhythms of development.

To attain however high productivity levels it is more than essential for an economic regime to establish free and open competition practices. Any disruption of competition rules and any violation of its root concepts and characteristics undermines the smooth working of the market and diminishes the prospects of high productivity results. It is therefore imperative that competition rules should be clear, all encompassing, universally – within the context of a national economy of course - applicable and with as few as possible exceptions tolerated. And by means of exceptions an overtly open and sincere competition concept should consider all state policies that undermine free marker procedures, offer protection to specific segments of the economy, allows for unwarranted state intrusions to the functions of the market and hinder unobstructed competition policies.

It is with great satisfaction that one can observe the appropriate administrative departments of the Russian Federation to have embarked upon a process of adopting vigorous competition principles and embodying them in their legal state framework. During the past year the official competition public watchdog, the Federal Anti-Monopoly Service (FAS), have initiated a number of steps which aim at harmonizing the Russian market reality with the European Union competition rules and practices. Although one should not overlook the inherent difficulties in attempting to bring the realities of a transition economy to the practices of a large union of mature market economies, it is nevertheless not less than impressive the progress that has been made in altering the Russian legal framework by means of the new competition law introduced by FAS and voted by the Duma.

For the first time stern measures controlling state aids have been introduced. The natural monopolies have been placed in close observation by the anti-monopoly agency while steps have been taken and the discussion has started for the introduction of independent Regulatory bodies. Likewise, the possibility for introduction of block exemptions has been initiated while various measures are foreseen to tackle violations of competition law by executive bodies and to introduce more comprehensive rules as to the inspection of mergers and acquisitions and the safeguard of smooth marker functioning.

It is evidence of the progress herewith achieved that the Russian market has proceeded during the last year in a robust and healthy march and that foreign investment appears to have started strongly to enter the economy. This year has witnessed the largest inflow of foreign investment in the country, despite the problems that still exist, especially in the energy sector. Foreign direct investment in Russia rose to $64.1 billion in 2006, up 4.4 percent year-on-year, Russia's Federal Statistics Service said Nov. 20. Accrued foreign investment for 2006 reached $130 billion, up 34.8 percent year-on-year.

To a large extent the eagerness that FAS has shown to tackle existing and arising problems in market concentrations and monopoly formations has contributed to some extent in the process. Many observers were pleasantly surprised by the determination shown by the FAS leadership to intervene and closely inspect major movements that stir up the market. A case in hand has been the statement by the FAS Head Mr. Igor Artemyev concerning the proposed merger between RusAL and SUAL that "The process will not be a fast one," and that "An application will be examined in accordance with the new law."
Likewise, Russia is earning a very positive reputation among international economic circles as far as its economic potential is concerned. It is not accidental that the reputable Goldman Sachs international firm of consultants and investment bankers went out of their way to deny a relatively negative exposure of Russia’ economic potential in a FT article by insisting that if (the country) “can use its current wealth to diversify its future, and move to reduce inflation gradually …its economic future may be brighter than many perceive” (FT Dec. 6, 2006).

All these positive outcomes have not emerged naturally from competition policy alone. But the implementation of new competition rules enables the economy to drive energetically forward and clears the market environment for serious investment edeavours. Thus emanates the optimism for an even better outcome in the future.

                             Lessons Learned from the Project

Andreas Andrianopoulos

Consulting the government of the Russian Federation on critical economic issues has been a rewarding and mind enhancing experience. It has been rewarding because it is not common to be present, close to decision making mechanisms, during a society’s rapid change. The duration of the project coincided with Russia’s transformation from a disaster prone and unstable economy and society to a robust state, consolidating power and accumulating economic strength. Russia became a world power again exploiting its immense natural resources and becoming pivotal for sustaining global energy security. Within this context discovering the internal workings of the Russian administration, understanding processes and power sharing and implementation mechanisms and unearthing the real procedures behind rule making and adjudication has been of paramount importance.

The Russian government operates essentially on three parallel levels. The cabinet deals with all major issues related to the Ministries under direct Prime Minister control. There are also certain government departments, mainly the ones dealing with security, foreign policy and the armed forces that fall directly under central Kremlin control. Finally, all decisions pertaining to legal initiatives, before they are sent to the Duma for debate and final vote, need to earn the approval of the Presidential Administration. It is therefore a lengthy process, touching upon many agencies and departments, before a proposal or legal initiative is presented in Parliament (Duma) and becomes federal law.

Likewise, the process of working in Russia and coming in contact with people and institutions was a knowledge enhancing experience. Getting acquainted with a new and, for many of us in the West, different culture made us realize that processes and institutions do not go hand in hand with overall economic development. There is an overall lack of trust not only towards foreigners and strangers but also among Russians, of various political and social standing, themselves. Earning the trust of institutional representatives is not a light experience. After an atmosphere of confidence has been established however things run very smoothly and Russians, members of the administrative machine or representatives of the private sector, are open and very cooperative.

Working in the Russian provinces projects a substantial difference as far as peoples’ attitudes are concerned. Life there is less intense, substantial opportunities exist for more relaxed discussions on issues of major importance and pundits are more disposed to unveil their views on existing problems and on what must be done about them. Laws can be enacted but implementation relies to a very large extent on regional authorities and individual local bureaucrats. The more informed therefore cadres are in the regions the more possible reform can be materialized. This lesson we drew from the project application appears to be valid for far beyond the borders of the Russian Federation.