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Cartels wind their way through Russia’s economy

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(Russia Beyond the Headlines – rbth.ru – Tatyana Lisina, special to RBTH – September 12, 2013)

Cartels have appeared in nearly every sector of the Russian economy. The Federal Antimonopoly Service of Russia has detected or suspects price-fixing agreements in sectors ranging from the fishing, alcohol and meat industries, to medical care, transportation and notary services.

Over the last 15 years, a number of major cartels have sprung up in the Russian chemical industry. It all began in the caustic soda market.

“The idea of a cartel originated in 2000, when companies realized that it would be profitable to divide up the soda market. They assigned each buyer to a specific manufacturer. Each of the vendors has a fleet of tanks for transporting soda. Procter & Gamble in the Tula region was forced to buy soda in Irkutsk, and Russian Aluminum, which has plants in Siberia, had to buy in Central Russia, because the soda producers made a profit transporting soda over long distances. And then this idea was put into practice in other chemical markets ­ PVC, hexols. The companies simply cloned the cartel agreements,” says Andrei Tenishev, head of the Anti-Cartel Department of the Federal Antimonopoly Service (FAS).

It is not surprising that not only were profits very large, but fines levied by FAS were, too. For example, there was a 1.6-billion-ruble ($48.7 million) fine just for the soda price-fixing agreement. One participant in a number of cartels in the chemical industry ­ JSC United Trading Company ­ was fined a record amount of more than 900 million rubles ($27.3 million) for its soda price-fixing.

Cartels are often very active on commodity markets, due to a lack of competition. “The more competitors, the more difficult it is to negotiate with producers. So, in that same chemical industry, manufacturers of PVC for windows divided up the market until 2009; but then the cartel broke up under pressure from imports,” Tenishev says.

In addition to the chemical industry, several cases were found in the food industry. In April of last year, open-auction bidders that supply meat products to the Russian Ministry of Defense and the Ministry of Internal Affairs were convicted of bid-rigging in 2009 by FAS and were fined more than 30 million rubles.

FAS also investigated a number of major cases involving the supply of fish and other resources: salmon from Norway, pollock from the Far East and striped catfish from Vietnam. In Russia’s Primorye region, there was a case involving crab auctions.

Unfortunately for the Russian consumer, prices go up as a result of these agreements. Thus, according to Tenishev, 90 percent of Russian pollock is delivered to China; some of it is processed and returned to Russia, but at a higher price.

Another cartel that could have cost consumers was established by the Beeline and MTS mobile phone companies. The leading Russian cell phone providers were selling two models of the iPhone 4 in most outlets for exactly the same price. The companies were fined a total of 34 million rubles (over $1 million) for price fixing.

However, when compared with the penalties that are imposed on cartels in the EU, the Russian companies are far from the record holders. Fines are usually calculated as a portion of the illegally received income, and Russian firms make considerably less than their Western counterparts. Foreign companies do not often fix prices on the Russian market.

For example, the members of two monitor manufacturing cartels ­ including Philips, LG Electrics, and Samsung ­ were fined €1.6 billion ($2.1 billion) in 2012. In 2010, the European Commission fined several manufacturers of automotive glass €1.38 billion ($1.8 billion) ­ the highest amount ever for a single cartel.

One of the record fines for a company in 2007 was almost €480 million ($639 million), involving ThyssenKrupp for price fixing with elevator manufacturers.

Although Russia’s cartels make less money than Western ones, Russia comes in first place for the sheer number of price-fixing agreements. “We have more cartels than in developed economies, due to the fact that, in our country, there are many local markets with cartels operating in them ­ for example, taxi drivers that work at the airport, or the alcohol cartel in the Kemerovo region,” said Tenishev.

Local cartels also include, for example, dentists’ agreements in Khakassia, air transporters in Irkutsk, construction companies in a number of regions, and notary providers in several regions of Russia.

Unfortunately, statistics show that, in Russia, the authorities are very often involved in price fixing. “For example, we are now investigating the case of price fixing between the Ministry of Health of Yakutia and the Russian Siemens affiliate, as well as a Swiss company.

They agreed that Western manufacturers would supply various medical devices for the government, including CT scanners, and they didn’t allow other manufacturers to put in a bid,” said the head of the anti-cartel enforcement.

The active participation of officials in cartels is consistent with the general level of government corruption in the country: According to statistics from Transparency International, Russia ranks 133rd in the 2012 Corruption Perceptions Index.

Article also appeared at http://rbth.ru/business/2013/09/12/cartels_wind_their_way_through_russias_economy_29777.html

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