RUSSIA'S "TRUST BUSTER" EXERCISES ITS AUTHORITY

C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 000747 SIPDIS STATE FOR EUR/RUS; NSC FOR ELLISON; DOJ FOR ANTITRUST DIVISION CHRISTINE VARNEY E.O. 12958: DECL: 03/25/2119 TAGS: ECON EINV EPET RS SUBJECT: RUSSIA'S "TRUST BUSTER" EXERCISES ITS AUTHORITY Classified By: AMBASSADOR JOHN BEYRLE, REASONS 1.4 (b,d) -------------- SUMMARY -------------- ¶1. (C) In a March 19 meeting with the Ambassador, the Chief of the Russian Federal Antimonopoly (FAS) Service Igor Artemyev said the FAS had made signifcant headway in implementing Russian antitrust legislation. The second antimonoply package, recently passed by the Duma, further expanded the FAS's authority in the area of competition policy. According to Artmeyev, the FAS's expanded authority had enhanced competition and transparency in Russia, particularly in the government procurement process. He said the the FAS enjoyed a good working relationship with the MVD and Procuracy, and most of the FAS's decisions had been upheld by the courts. He said PM Putin was expected to approve the FAS proposal to allow third party access to Gazprom's distribution network. The FAS was prepared to offer seminars for prospective U.S. investors on the Strategic Sectors Law. Artmeyev explained that the FAS's rejection of Google and Disney investment proposals under the Strategic Sectors law was based on economic, not political criteria. ¶2. (C) Artemyev told the Ambassador he was grateful for DOJ and FTC cooperation with the FAS. He planned to further ties during a visit to the U.S. later this year. He also invited the DOJ and FTC to participate in the BRIC International Competition Conference, to be held in Kazan this September. The Ambassador welcomed the FAS's participation in a U.S.-Russia anti-corruption dialogue as part of an enhanced program for intergovernmental cooperation. End Summary. -------------- Antimonoply Legislation -------------- ¶3. (C) Artemyev said the 2006 Law on Protecting Competition provided the FAS with legislative authority to penalize and dismiss government employees for violation of antimonopoly legislation. This, in Artemyev's view, was a powerful tool for combating corruption. The FAS had prepared a "second antimonopoly package", which had recently passed the Duma in its first reading. This legislative package amended the existing Law on Protecting Competition to include criminal sanctions against corporate executives involved in antitrust violations, and expanded FAS's confiscation powers (including 
"early dawn raids"). It broadened the definition of natural monopoly to include any company (including state corporations) that had achieved a dominant market position in any given industry. ¶4. (C) The FAS planned to merge the laws on natural monopolies and protecting competition by 2010. This, Artemyev said, would allow the FAS to more effectively suppress violations of antitrust legislation by Russia's natural monopolies. -------------- Public Procurement -------------- ¶5. (C) Artemyev said the FAS was responsible for monitoring the public procurement process on the federal and regional levels. FAS oversight had led to greater competition and transparency in public auctions and tenders, saving the GOR an estimated $10 billion last year (an amount, he noted, equal to the total annual budget for education and health). The FAS was developing legislation to allow SME's to participate in public procurements, modeled after the U.S. system. -------------- FAS's Growing Influence -------------- ¶6. (C) Artemyev noted that the FAS had gained considerable "weight and influence" with the Russian bureaucracy and the public at large. He said that only 19 percent of FAS's rulings against natural monopolies had been overturned by the courts, largely owing to the FAS's solid working relationship with the Procuracy and the Interior Ministry. Moreover, there was growing public awareness about the social costs of antitrust violations, with the most egregious cases receiving wide media coverage which helped increase the FAS's public MOSCOW 00000747 002 OF 003 support. Lastly, the court judges were now receiving training in anti-monolpoly and competition policy, which would make them even more likely to side with the FAS in future rulings. -------------- Dealing with Gazprom -------------- ¶7. (C) Artemyev said he was confident that the FAS enjoyed sufficient backing at the "highest levels" (i.e., PM Putin) to take on the vested energy interests (Gazprom, Rosneft, TNK-BP, Lukoil and others). In addition to conducting investigations into the pricing of oil products, FAS was also pushing for third-party access to Gazprom's distribution network, in direct conflict with Gazprom's desire to maintain full control over the Russian gas distribution system. He said Russian companies were paying steep fines for flaring gas, and needed access to Gazprom's pipeline network to be able to transport and sell the gas instead. Artmeyev claimed that FAS's draft legislation permitting third party access, approved by all of the ministries, was now "sitting on Putin's desk", awaiting a final decision most likely to be in FAS's favor. -------------- -- Foreign Investors and the Strategic Sectors Law -------------- -- ¶8. (C) Artemyev said the FAS was authorized to collect and assess applications from foreign investors interested in buying shares in Russian companies undertaking a "strategic activity", as specified in the Strategic Sectors Law. The FAS would act as a "one-stop shop", collecting all the necessary documents and referring them to the relevant ministry or agency. The final decisions would be made by a special GOR commission chaired by the Prime Minister. ¶9. (C) Artmeyev offered to organize seminars at the Embassy or AmCham for U.S. companies interested in learning more about the Strategic Sectors law, its implementation, and FAS's role. He said the FAS was organizing similar investment seminars for the British, Canadian, Czech and Indian Embassies and their business communities. -------------- The Cases of Google and Disney -------------- ¶10. (C) The Ambassador inquired about FAS's rejection of Google's proposed acquisition of a Russian search/advertising engine last summer and of Disney's TV deal with Russian broadcasters last month. (Both proposals were supposedly subject to the provisions of the Strategic Sectors Law.) ¶11. (C) Artemyev maintained that FAS's rejections were based on economic, not political, grounds. He explained that by acquiring the Russian search engine "Begun", Google would have effectively controlled more than 51 percent of the Russian search engine market, thereby holding a "dominating position". Google's application was therefore rejected on the grounds that it violated the federal law on protecting competition. Had the FAS determined that Google's effective market share was less than 50 percent, the application would have been approved. When asked how the FAS determined the capacity or volume of the search engine market, Artemyev said it was done by estimating the "total number of clicks" or entries into the respective search providers. He added that the same methodology was used by the EU antimonopoly authorities when they recently rejected Google's application to buy a European search engine company. ¶12. (C) Artemeyv said the Disney deal involved buying 49 percent of a Russian broadcasting company, which was permissible under existing legislation. However, Disney had concluded a separate management contract with the Russian company giving Disney the last word on management and other issues, allowing Disney to effectively veto decisions of the majority shareholder while possessing less than half of the company's shares. This was why the deal was rejected. Artemyev said Disney could reconfigure the management contract and resubmit its application to the FSA. -------------- -------------- FAS Cooperation with DOJ, Russian-American Business Council -------------- -------------- MOSCOW 00000747 003 OF 003 ¶13. (C) Artemyev thanked the Ambassador for DOJ's and FTC's successful training programs with FAS staff in Moscow and the regions. He noted that DOJ's comments on FAS's draft antimonopoly were extremely useful. He planned to travel to the U.S. later in the year (perhaps November) to meet with his counterparts in the DOJ and FTC and formalize cooperation (e.g., memoranda of understanding, joint investigation commission). He proposed that future cooperation include developing a legal framework for joint investigations of international cartels (particularly in the areas of air cargo transport and telecommunications). Russia had similar agreements with some CIS countries and they had proven very effective. ¶14. (C) Artemyev said he was also invited to a meeting of the Russian American Business Council in Chicago, scheduled for November 1, and he would try to schedule his Washington visits at around the same time. -------------- BRIC International Competition Conference -------------- ¶15. (C) Artmeyev informed the Ambassador about the BRIC International Competition Conference to be held on September 1-2 in Kazan. The Conference will deal with strengthening competition, enhancement of advocacy efforts and anti-cartel activity. While the conference would focus on the BRIC countries (Brazil, Russia, India, China),Artmeyev said the organizers also wanted to invite the DOJ and FTC to make presentations and share their experience with their counterparts from the BRIC countries. He gave the Ambassador invitations addressed to FTC Chairman Jonathan Leibowitz and the DOJ Antitrust Division's Assistant Attorney General Christine Varney. (Embassy will ensure that the invitations are passed to the invitees.) -------------- U.S.-Russia Anti-Corruption Dialogue -------------- ¶16. (C) Acknowledging the FAS's excellent work in promoting competition and transparency in Russia, the Ambassador suggested that FAS consider taking part in a formal, inter-governmental dialogue with the U.S. on anti-corruption. An anti-corruption dialogue was under consideration as part of the restored broader intergovernmental bilateral dialogue that Presdients Obama and Medvedev were likely to discuss in their April 1 London meeting. ¶17. (C) Artemyev said he was receptive to the idea, which could build on the already excellent track record of cooperation the FAS had with the DOJ and FTC. -------------- Comment -------------- ¶18. (C) The FAS's successes in promulgating anti-trust legislation and developing its enforcement authority are due in no small part to Artemyev's drive, enthusiasm and legal experience. A Saint Petersburg-educated lawyer, he appears to have good working and professional relationships with both Putin and Medvedev. We plan to continue to build upon the DOJ's successful cooperation with FAS as part of our effort to encourage a more open and transparent Russian economy. End Comment. BEYRLE