New Tigers Corner Russia's Ringmaster

The American Beauty rose can be produced in all its splendor only by sacrificing the early buds that grow up around it," said John D. Rockefeller, the architect of the single biggest monopoly of the 19th century, the Standard Oil Trust, which gained a stranglehold on the fast-growing U.S. oil industry through control of refineries and pipelines.


Some in Russia believe that the Russian model of monopolization, the financial-industrial group, will itself be a bloom that withers. That, and if Russia's stock market emerges from its current doldrums, banks will be able to cash in their stock holdings at a premium.


But the dangers of monopoly are in some ways much more pernicious here than in the America of 100 years ago, because Russian business is overall less dynamic than were the "robber barons": The key word is control, not development. In this context, Rockefeller's words become even more pertinent. If the FIGs lead to a heavy degree of medium-term market concentration, they may do more than sacrifice the early buds of competition; they may completely squeeze out small firms and prevent others from entering the market.


Charles Blitzer, the chief economist of the World Bank in Moscow, called this state of affairs a "significant worry."


A worry, he said, because "large organizations make it easier to establish cozy relationships, rent seeking and tax concessions."


Few Eastern European countries have made much progress in breaking up monopolies. But the "barriers to entry" in many sectors of the Russian economy, notably in real estate and licensing regulations, are far more pronounced, Blitzer said. "The output rise in [other countries in] Eastern Europe is due to the new private sector rather than the privatized sector," he continued.


So what is Russia's record on curbing monopoly?


On paper a lot has been done. Russia'sdAnti-Monopolies Committee was set up five years ago. In theory, it is an important body. Its head, Leonid Bochin, has the ranking of a government minister. Relative to similar agencies in other countries, said Alex Kogan, an American lawyer in Washington, who has worked with the agency, it is not particularly understaffed and its staff exhibit enthusiasm and competence, he said.


Legislatively, it is armed. The anti-monopoly law, strengthened last year, is related to both U.S. and European practice. It requires the committee to investigate apparent monopolies, and any company with a market share of more than 65 percent is supposed to have to prove that it is not in a dominant position. The committee has the powers to enforce heavy fines.


But to little avail, apparently. Blitzer labelled the committee's record to date in curbing monopolies as "non-existent."


"The legal rule should be fairly clear," Blitzer added. "Russia needs clear merger and acquisition regulations. As a general rule there ought to be a commitment to break up industries into the smallest units possible ... and then allow them to merge and take each other over as long as this does not threaten competition. There need to be clear standards in this, clear guidelines about what is permitted and what is not, and freedom to challenge [a given situation] as anti-competitive."


An anti-monopoly agency, he said, is the normal way to implement such regulations. But the Russian committee, he judged, has largely "been pushing paper," something which can largely be attributed to its lack of budget and to the way it has seen its role. Not only has it not come to grips with monopoly, it is not trying to do much about lowering barriers to entry either.


Committee chairman Bochin admitted in a recent interview with Moscow News that "it is no secret that the ... committee's efforts are being resisted by powerful groups." He undermined his own case for the committee's independence in saying that it had helped work out the rules for last year's loans-for-shares auction scheme, which became notorious for the consistency with which the auction winner was the auction organizer.


Bochin further said that Russian oil companies had signed a declaration on the inadmissability of monopoly activities and unfair competition within their industry.


Such words are not going to cut much ice in the rough and tumble world of Moscow business.


In the opposite corner sits some heavy government firepower. Beyond the lobbying influence and money of all the big industrial conglomerates, the FIGs have their own champion in government in the form of the governmental committee on financial-industrial groups, chaired by Oleg Soskovets, the first deputy prime minister whose influence is growing following the ouster of reformer Anatoly Chubais.


Chubais stood for breaking up the big industrial groups: Soskovets stands for the opposite. The Wall Street Journal recently reported that Soskovets supported a decree signed by President Boris Yeltsin rejuvenating Roslesprom, a quasi-governmental operation that is trying to monopolize the timber industry and its exports. The paper also attributed to him a Yeltsin decree to group several metal companies together under an umbrella entity called Rosmetallurgiya.


With this yawning gap between intent and reality, one has to wonder why anti-monopoly legislation has been introduced at all. It would seem more probable that Russia, with its historical links and natural pull to Asian corporatism, would give the whole idea of opening up natural monopolies a wide berth.


One American lawyer in Moscow, who asked not to be identified, said the setting up of the Anti-Monopoly Committee reflected foreigners' aspirations on how the Russian economy and legal framework should develop more than enthusiasm on the Russian side. Russia needed to be perceived, the lawyer continued, as showing that it intended to create competitive markets.


At present, there has been no clear political consensus on what the state's role should be toward Russia's new economy. William Simons, an American attorney specializing in CIS law who teaches at the University of Leiden in Holland, describes the situation as part and parcel of the Russian dilemma of what the state's role in the economy should be after Soviet power collapsed and there was a huge swing in attitude in the early days of reform toward non-intervention. "The middle ground [of what to do] is not clear," he said.


The incompatibility of the two influences of closed inside dealing and a transparent regulatory regime is well illustrated in the approach to telecommunications, the most important natural monopoly of the information age, and the one in which the United States is the world leader. Natural monopoly can be defined as a situation where output is supplied most efficiently by a sole producer, such as pipeline transportation and electricity transmission, as well as telecommunications.


Last year, the Russian government announced that it was going to set up Svyazinvest, the holding company for the Moscow, St. Petersburg and regional phone companies, as a competitor to the existing main long-distance phone operator Rostelekom. An international investment tender for a substantial minority stake in Svyazinvest was launched at the same time. This was a page out of the U.S. book, and a much more radical step than any other reforming and former communist country in Eastern Europe had taken in the sector.


But the tender subsequently collapsed when winner STET, the Italian state-owned phone company, could not agree on terms with the government, largely because of the lack of clarity of what an industry "gatekeeper" regulatory agency would do and how it would do it.


In effect, there is no such gatekeeper in the Russian telecommunications industry, and no surety over what government policy in the area will be in the future. Without this, no new competitor could be expected to take investment decisions involving large sums of money. The situation about privatizing Svyazinvest remains in disarray, as does policy toward the telecommunications sector in general.


Consistent and unbiased regulation of monopolies is highly problematic, and many advanced countries with corporatist traditions of government intervention show no signs yet of being able to achieve it, or, for that matter, even trying to establish such regulation. Regulatory agencies are typically underfunded and spend much of their time trying to get information out of the giant companies they are supposed to be regulating. It is all too easy for them to fall under the sway of their supposed charges.


The United States is unusual in having a particularly wide-ranging and legally enshrined system of anti-monopoly control. But there remain many critics of the effectiveness of the U.S. legislation. Many effective monopolies, such as that of local monopoly newspapers, remain unchecked, while the merger trends of our age places the legislation under increasing strain.


Beyond government will, much of monopoly regulation comes down to arguing about numbers. It is no surprise that the first head of OFTEL, the telecommunications regulatory agency in Britain, Sir Bryan Carsberg, is a former professor of accounting.


The economist V.E. Capelik sets down the following areas as key to regulation of monopolies: the setting of excessive prices; earning 'excess' profits; withdrawing products from the market to raise prices; and price discrimination.


To effectively police these matters requires detailed financial information, which in Russia can be all too lacking.


Moreover, in Russia the whole regulatory process is shrouded in secrecy, which only increases the opportunity for insider dealing and favoritism.


Then there is the problem with the courts. "I wouldn't bring to court such a case," said the American lawyer. "The judges are just not trained to deal with economic disputes."


Those who give Russia the benefit of the doubt, believe that it is too much to expect that Russia could be expected to introduce such regulation effectively in such a short time. "The Russian court system is getting better," says Simons.


In a longer term perspective, Simons believes that theory and practice may well get closer. The U.S. legislation took a long time to have much effect: The Sherman Anti-trust Act was passed in America in 1890, but it was several years into the new century before it had much effect.


The Sherman Act was designed mainly to assuage public opinion, rather than seriously challenge vested industrial interests. Indeed, according to Anthony Samson, writing in "The Seven Sisters," a major text on the oil industry, "from the very beginning, anti-trust [legislation] had a bark worse than its bite."


But in a few years, it did bite. So powerful did Rockefeller and Standard Oil and other trusts continue to become, that their power eventually threw up a wave of public opposition, and the issue of control moved to center stage politically.


This in turn created the political will to go after the trusts. After the 1904 election, the reformist President Theodore Roosevelt launched a series of legal actions to bring them to heel.


In 1911, came the milestone ruling against Standard Oil, based upon the Sherman Act. The trust's offshoots still figure prominently among the world's great oil companies.


In the aftermath of the breakup, the gains were not immediately so apparent. The price of oil actually went up, and it took a while before the newly independent companies really began to compete with each other.


In a longer term perspective, however, the advantages are much more apparent. Daniel Yergin, author of "The Prize," a chronicle of the oil industry, told The Moscow Times that the Standard Oil breakup "encouraged technological innovation by avoiding concentration of decision making.


"It created a competitive landscape where there was not one before," he said.


The United States: There is substantial legislation which empowers federal institutions to investigate and take action over monopolies, cartels and abuse of a dominant position. The legislation is further reaching, and open to wider interpretation, than in many other countries. Among the major acts: The Sherman Act prohibits cartels and monopolization; the Clayton Act outlaws practices which would restrict trade; the Federal Trade Commission Act blocks anti-competitive and unfair trade practices; and the Robinson-Patman Act bans price discrimination.





Britain: The Office of Fair Trading has a duty to monitor business and investigate if it finds evidence of monopolization or cartel activity. Government has discretion whether to refer cases raised by the OFT to the Monopolies and Mergers Commission. If it does so, and the MMC finds evidence of such activity, the government has further discretion whether to take action.





Germany: There is a mechanism based on statute and similar to American anti-trust law. The Bundeskartellamt, or federal cartel authority, has a formal duty to investigate monopolization and cartel abuses and to take action. The Ministry of Trade and Industry has the right to veto any such action. The Bundeskartellamt's powers do not extend to activities of the state, which can set up monopolies as it so wishes.





European Union: The basic controls are to be found in the Treaty of Rome, the foundation document of the European Community. Article 85 restricts cartels, and Article 86 controls abuse of a dominant market position. There is more discretion under the latter article than under the former. An advisory committee of the European Commission judges such cases -- representatives of member states sit on the committee, and political lobbying is very common. Individual citizens may bring action in national courts under these articles. The legislation of member states is increasingly being brought in line with EU practice.





Sources, respectively: Akin, Gump, Strauss, Hauer and Feld, Washington; Denton Hall, London; Heuking Kuhn, D--sseldorf; Denton Hall