2017-11-30
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As Russia's fiscal stance improves (in part because of higher oil prices) and budget constraints harden economy-wide—that is, as firms and government agencies engage in cash transactions, bills are paid on time, and subsidies (including direct budgetary support and indirect subsidies such as tax arrears that are not penalized) are eliminated—inefficient large enterprises will likely continue to decline in importance. But proactive structural reforms are needed to foster enduring competition.
One set of competition policies should focus on reforming anticompetitive incumbent enterprises. The thrust of these policies should include more effective demonopolization and disintegration of anticompetitive dominant firms; prohibition of mergers and acquisitions that reduce the number of sellers and increase structural dominance; penalties for business practices—such as collusion, price fixing, and predatory pricing—designed to drive out competitors or deter entrants; and protection of consumers from unfair trade and false advertising practices. In the advanced countries, implementation of such policies is challenging and the track record is mixed. In transition economies as complex as Russia, their implementation is even more difficult because of protests from vested interests, and the significant political economy costs entailed by large restructurings mean they will take time. That does not make them any less necessary, however.
The other main prong of competition-enhancing reforms—measures to reduce barriers to entry—can be undertaken in the shorter run and should be implemented in parallel with policies dealing with incumbent firms. Even when existing firms have attained structural dominance, entry (indeed, just allowing for the credible threat of entry) can instill contestability and competitive performance, especially in markets where sunk costs are relatively small, thereby making exit easier should demand soften. Job creation by new firms will make it easier to restructure inefficient incumbent firms and lay off redundant workers. Greater openness to imports and foreign direct investment are also critical ingredients in engendering competition through the entry of new firms.
Russia's competition statutes are based on those in the industrial countries, including the European Union countries and the United States, and they are, for the most part, sound. The problem is implementation. The Ministry of Antimonopoly Policy and Support for Entrepreneurship is headed by a reformer, but the agency's budget has been drastically cut over the years, forcing it to retrench its regional branches, and skilled employees have been difficult to attract and retain. Competition policies in Russia, as in other transition economies, have focused on deterring anticompetitive conduct by incumbents rather than on correcting underlying imperfections in market structure, and steps to encourage entry have concentrated on providing financial support for small and medium-sized enterprises rather than on removing regulatory and institutional barriers and improving the overall business environment.
Competition policy toward incumbents. A more robust enforcement regime is needed in Russia to redress the substantial market imperfections that give incumbents a competitive advantage and to make their markets contestable. Countries that have made progress in this area emphasize dismantling excessive horizontal and vertical dominance; preventing anticompetitive mergers by implementing clearly defined and widely publicized merger guidelines that set parameters for distinguishing between procompetitive and anticompetitive mergers; establishing credible and sizable penalties for collusion and price fixing (cartels in the United States are subject to criminal sanctions); and ensuring that there is a strong, rules-based competition policy agency with political teeth and effective implementation capacity.
Competition policy toward entrants. In reducing barriers to entry, the priority is to deal first with markets where there is already significant structural dominance; other markets can be dealt with subsequently. Proactive policies to facilitate entry should concentrate on reforming infrastructure and distribution services; strengthening the judiciary and associated institutions for more efficient adjudication and enforcement of commercial disputes; enacting broad-based land reform; instituting uniform, rules-based procedures for licensing, registration, and inspections; and fighting corruption and organized crime.
Providing targeted support to small and medium-sized enterprises through government-subsidized lines of credit is likely to be counterproductive. Such support would undermine market-based reforms of the banking sector and nascent commercial intermediation by Russian banks. Worse, particularly in the context of weak property rights, it breeds corruption. Policies that could be helpful in this regard include strengthening the legal framework for venture capital and investment funds, supporting local banks that provide credit to small and medium-sized enterprises on commercial terms, and facilitating private cofinancing of projects by small and medium-sized enterprises and local banks.
Lowering entry barriers must focus not only on creating favorable conditions for potential rivals within a local market but also on enabling competitors based in other oblasts to sell or invest in the local market. This is critical to redressing Russia's regional market segmentation. It means that the federal government must have stronger enforcement authority to deal with the anticompetitive practices of local governments.
