ANTI-MONOPOLY (ANTITRUST), UNFAIR COMPETITION AND NATURAL MONOPOLIES LEGISLATION
All matters related to competition and antitrust policy in Kazakhstan are regulated by the following legislative acts:
- Code of the Republic of Kazakhstan No. 375-V of 29 October 2015 (Entrepreneurial Code of the Republic of Kazakhstan) (Section 4, Economic Competition);
- Law of the Republic of Kazakhstan On Natural Monopolies of 27 December 2018; and
- other legislative acts and regulations.
The competition (antitrust) law enforcement functions are vested in the Agency for Protection and Development of Competition of the Republic of Kazakhstan.
Natural Monopolies
Pursuant to the Kazakhstan Law On Natural Monopolies, a natural monopoly is where the conditions of a services (goods/works) market are such that it is either impossible or economically inadvisable to create conditions for competition to satisfy the demand for a certain type of services (goods/works) due to technological specifics of production and provision of such type of services (goods/works). The Law On Natural Monopolies recognizes the following services (goods/works) as those of natural monopolies:
1) transportation of oil and/or petroleum products via trunk pipelines, save for the transportation of oil and/or petroleum products through the Republic of Kazakhstan and export thereof from the Republic of Kazakhstan;
2) storage and transportation of commercial gas via interconnection or trunk gas pipelines and/or distribution networks, operation of group tank facilities, and transportation of crude gas via interconnection pipelines, save for the transportation of commercial gas through the Republic of Kazakhstan and export thereof from the Republic of Kazakhstan;
3) transmission and/or distribution of electricity;
4) production, transmission, distribution and/or supply of heat, except for the heat generated by ground, ground water, river, reservoir, sewage from industrial enterprises and power stations, and sewage treatment plants;
5) technical dispatch of grid output and consumption of electricity;
6) ensuring balance between the production and supply of electricity;
7) services of mainline rail network, unless the mainline rail network is used for transportation of containerized cargoes and empty containers, and transit transportation of cargoes through the Republic of Kazakhstan;
8) services of railway lines with railway transport facilities under public-private partnership agreements, including concession agreements, in the absence of an alternative railway line;
9) services of access roads in the absence of an alternative access road;
10) flight navigation services, except for the air navigation services provided to international and transit flights;
11) services of ports, provided that there is no competition on the market of port services;
12) services of airports, except for the services provided to transit flights through the Kazakhstan air space requiring technical landing in Kazakhstan airports for non-business purposes and international flights;
13) providing for property lease (rent) or use of cable conduit system, except for small business operations; and
14) water supply and/or sewage systems.
The watchdog for natural monopolies regulation is vested with the power to exercise control over the natural monopolies’ prices; to institute administrative and judicial proceedings against the natural monopolies charged with violation of antitrust law; and to oversee the reorganization and liquidation of natural monopolies and procurements thereof.
Monopolistic Activities
The Entrepreneurial Code restricts the following monopolistic practices:
1) anticompetitive agreements between market participants;
2) anticompetitive collaboration of market participants; and
3) abuse of a dominant or monopolistic position.
Monopolistic practices are subject to criminal, civil and administrative liability. Administrative liability is imposed in the form of fines determined as a percentage of the proceeds from the restricted monopolistic practices and in the form of forfeiture of the monopolistic proceeds. Moreover, when a dominant or monopolistic undertaking is held administratively liable for abuse of its dominant position twice within one calendar year and persistently pursues anticompetitive practices, the antitrust watchdog may, for the purpose of competition enhancement, institute a judicial action for compulsory division of such undertaking or spin-off of one or several entities from such undertaking on the basis of its structural subdivisions.
The main qualifying element of anticompetitive agreement and anticompetitive collaboration is the limitation of competition. Offenders committing violations in the form of anticompetitive agreement and anticompetitive collaboration include private individuals, legal entities and branches thereof qualified as independent taxpayers (except financial organisations), as well as foreign legal entities (and branches and representative offices thereof) engaged in business activities and non-profit organisations conducting business in accordance with their charter objectives.
An impending violation of any legitimate right of a market undertaking or an indefinite range of consumers is sufficient to qualify an abuse of a dominant or monopolistic position (apart from a potential market foreclosure and prevention/limitation/elimination of competition as a result of such abuse) as an antitrust offence. The Entrepreneurial Code sets out an extensive list of types of abuse of a dominant or monopolistic position, where the abusers of a dominant or monopolistic position are qualified as antitrust offenders.
The term “monopolistic position” means the position of a natural monopoly OR a government monopoly OR an undertaking whose dominance share in the respective commodity market is one hundred percent.
In this regard, the Entrepreneurial Code provides two definitions of the term “market undertaking holding a dominant or monopolistic position”. Articles 172.3 and 172.4 of the Entrepreneurial Code qualify the position of a market undertaking as dominant, when:
1) its share in the relevant commodity market is at least 35% (under certain conditions);
2) the total share of maximum three market undertakings holding the largest shares in such market is at least 50% (under certain conditions); and
3) the total share of maximum four market undertakings holding the largest shares in such market is at least 70% (under certain conditions);
and the position of a financial organisation as dominant, when:
1) the total share of maximum two financial organisations holding the largest shares in the relevant market of financial services is at least 50%; and
2) the total share of maximum three financial organizations holding the largest shares in the relevant market of financial services is at least 70%.
Article 172.1 defines a dominant or monopolistic position as the position of a market undertaking or a number of market undertakings on the relevant commodity market which allows such market undertaking or a number of such market undertakings to exercise control over the relevant commodity market, including significant influence on the overall conditions of the commodity circulation.
To determine the share of a market undertaking in the relevant commodity market the antitrust authority analyses such commodity market based on the data procured from government authorities, market undertakings and associations thereof.
Unfair Competition
The Entrepreneurial Code also regulates the matters related to the prevention/detection of unfair competition and restraining of competition. Unfair competition includes certain actions pursued by a market undertaking (a group) or a number of market undertakings (a group) in an attempt to gain competitive advantages in business that contravene the laws of the Republic of Kazakhstan, good business practices, and principles of integrity, reasonableness and equitable discretion, and that may inflict damage on competitors or their business reputation.. It is worth noting that the Entrepreneurial Code sets out an open-ended list of unfair competition forms.
Economic Concentration Control
Apart from the above, the antitrust authority is authorized to exercise control over economic concentration. Economic concentration is defined as direct or indirect control over business activities of a market undertaking exercised by a person (or a group of persons).
The current legislation recognizes the following transactions as economic concentration:
1) reorganization of market undertakings through mergers or acquisitions;
2) acquisition by a person (a group of persons) of voting shares/participation interests in the charter capital of a market undertaking whereby such person (group of persons) acquires the right to dispose of more than 50 percent of such shares/participation interests if, prior to the acquisition, such person (group of persons) did not have the right to dispose of shares/participation interests in such market participant or had the right to dispose of 50 or less percent of voting shares/participation interests in such market participant. This provision does not apply to the founders of a legal entity in the process of its incorporation;
3) acquisition, including through contribution to or payment of the authorised capital, by an undertaking (group of undertakings) of an ownership, possession or use right to PPE and/or intangible assets of another undertaking, if the net book value of the transacted assets exceeds ten percent of the net book value of the PPE and intangible assets of the seller/assignor of the assets;
4) acquisition by a market undertaking of the rights (including under a trust management agreement, joint venture agreement or trust deed) permitting binding instructions to be given to another market undertaking in connection with its business activities or performance of functions of its executive body; and
5) membership of the same individuals in the executive bodies, boards of directors, supervisory boards or other management bodies of two or more market undertakings, if such individuals determine the conditions of the undertakings’ business operation.
Consent of the antitrust authority to consummation of the transactions specified in paragraphs 1), 2) and 3) above or its notification of the transactions specified in paragraphs 4) and 5) above is required when the total book value of assets of the reorganized market undertaking (group) or the acquirer (group) and the market undertakings whose voting shares/participation interests/stakes are being acquired, or the total volume of sales for the last financial year exceeds the 10,000,000-fold monthly calculation index as in effect at the date of the application/notification.
Consent to economic concentration involving a financial organization is required if the asset value or the own equity of the financial organization exceeds the threshold determined by the antitrust authority in consultation with the National Bank of the Republic of Kazakhstan.
It is particularly important for a person considering the acquisition of a business in Kazakhstan or the establishment of control over a supplier/provider of goods/works/services in the Kazakhstan market to comply with the requirements of the antitrust legislation with respect to obtaining prior consent to economic concentration because, if the antitrust authority establishes the fact of illegal economic concentration, it may, apart from administrative response measures, invalidate the economic concentration unconsented by the antitrust authority in compliance with the statutory procedure, if such concentration has resulted in creation or strengthening of a dominant or monopolistic position of the market undertaking (group) and/or competition limitation.
Moreover, in the absence of antitrust consent, any stakeholder may file an action for invalidation of the economic concentration transaction and, under civil law, the stakeholder does not incur the burden of proof that the aforementioned negative implications have occurred.
It is worth noting that, although the requirement to obtain antitrust consent to economic concentration is not new in Kazakhstan, representatives of the Kazakhstan business community (not to mention foreign companies) often remain unaware of this requirement and risk to lose their newly acquired businesses and/or investments.
Other Powers of the Antitrust Authority
Apart from the prevention, detection and restraint of monopolistic activities and unfair competition, as well as the control over economic concentration, the antitrust authority is also called to prevent anticompetitive practices on the part of the central government and local government authorities/agencies responsible for the regulation of market undertakings’ activities, and to control the government’s involvement in business by demanding preliminary coordination of new incorporations with the antitrust authority when the government decides to incorporate a public enterprise or a legal entity in which at least fifty percent of shares/interests are held by the government (or an affiliate of such enterprise/entity) and when the government decides to expand and/or change the scope of such enterprise’s/entity’s activity.
The authority of the Kazakhstan competition regulator does not cover all antitrust offences committed in the Republic of Kazakhstan.
Hence, under certain conditions (please see below the cross-border market qualification criteria), some offences are to be investigated by the Eurasian Economic Commission.
The Treaty on the Eurasian Economic Union (EAEU) entered into force on 1 January 2015. The EAEU unites the Republic of Belarus, Republic of Kazakhstan, Russian Federation, Republic of Armenia and Kyrgyz Republic.
Section XVIII of the Treaty on the EAEU provides for the common principles and rules of competition ensuring the detection and interdiction of anticompetitive practices in the EAEU Member States, as well as any other practices which might negatively affect competition in transborder markets of two or more Member States.
The Treaty on the EAEU sets out the following common principles of competition:
1. All Member States shall apply their competition (antitrust) laws to business entities (market undertakings) thereof on equal terms (i.e. similarly and equally irrespective of their legal structure and place of incorporation).
2. All Member States shall legislatively ban the following:
(i) executing any agreements between central government authorities, local government authorities, other agencies or organisations performing government functions, or between the specified authorities and market undertakings, provided that such agreements entail or might entail non-admission, limitation or elimination of competition, unless otherwise provided for by the Treaty on the EAEU and/or any other international treaty between Member States; and
(ii) granting state or municipal preferences, unless otherwise provided for by the national legislation of Member States, considering the specifics provided for by the Treaty on the EAEU and/or any other international treaties between Member States.
3. All Member States shall apply stringent measures for the prevention, detection and suppression of the actions/omissions set forth in Clause 2(i) above.
4. Subject to their national laws, all Member States shall ensure strict control over economic concentration to the extent sufficient for the protection and development of competition in each Member State.
5. Each Member State shall put into place a government agency authorized to implement and/or to pursue the competition (antitrust) policy ensuring, inter alia, that such agency is vested with the powers to enforce the prohibition of anti-competitive practices and unfair competition, to control economic concentration, to prevent and detect competition (antitrust) law offences, to stop such offences and to prosecute offenders.
6. All Member States shall legislatively provide for punitive measures applied to market undertakings or public officers pursuing anticompetitive practices in accordance with the principles of efficiency, equality, enforceability, inevitability and certainty, and shall ensure the monitoring of such measures application. Besides, all Member States acknowledge that, if such punitive measures are applied, the most stringent of them shall be applied to those offences which constitute a threat to the cause of competition (e.g., anti-competitive agreements or abuse by market entities of the Member States of their dominant position in the market), while the preference shall be given to those punitive measures which are based on the offender’s proceeds from the sale of commodities or from the offender’s expenses for the purchase of commodities in the market of which the given offence has taken place.
7. Subject to their national laws, all Member States shall ensure the transparency of their competition (antitrust) policies which includes, inter alia, the publication of information on activities of the Member States’ competent authorities in mass media and on the Internet.
8. Subject to national laws and the Treaty on the EAEU, the competent authorities of the Member States shall intercommunicate through (i) the exchange of notices, information requests, consultations and information on investigations (case hearings) that affect the interests of the other Member States; (ii) the performance of investigations (case hearings) at the request of competent authorities of another Member State and the reporting on the outcome thereof.
Besides, the Treaty on the EAEU sets out the common rules of competition which ban the following:
· actions/omissions of a dominating market undertaking which entail or might entail the prevention, limitation or elimination of competition and/or the infringement of third party’s interests;
· unfair competition;
· agreements between the Member States’ market undertakings operating and competing in one commodity market which entail or might entail:
1) fixation or maintenance of prices/tariffs, discounts, markups/surcharges or extra charges;
2) downward/upward adjustment or maintenance of tender prices;
3) market sharing by the territoriality principle, volume of sales/purchases, assortment of sold goods or vendor/customer structure;
4) reduction in production or phaseout of certain goods; and
5) refusal to sign contracts with certain vendors or customers;
· vertical agreements between market undertakings, save for those vertical agreements which are admissible subject to the admissibility criteria set forth in Exhibit 19 to the Treaty on the EAEU, provided that:
1) such agreements entail or might entail the fixation of resale prices, unless a vendor sets a price ceiling for resold goods; and
2) such agreements provide for the vendor’s commitment not to sell goods of a competing market entity. This ban does not apply to agreements on the organisation of distribution of goods under trademarks or other means of vendor/manufacturer individualisation;
· any other agreements between market undertakings, save for those vertical agreements which are admissible subject to the admissibility criteria set forth in Exhibit 19 to the Treaty on the EAEU, if it is found that such agreements entail or might entail the limitation of competition; and
· coordination of economic activities of the Member States’ market undertakings by individuals or profit/non-profit organisations, if such coordination has or might have any of the aforementioned effects (applicable to prohibited agreements) which may not be recognized as admissible subject to the admissibility criteria set forth in Exhibit 19 to the Treaty on the EAEU. The Member States may legislatively prohibit the coordination of economic activities when such coordination has or might have the effects which may not be recognized as admissible subject to the admissibility criteria set forth in Exhibit 19 to the Treaty on the EAEU.
To determine the scope of authority of the Eurasian Economic Commission, the Supreme Council thereof has developed a number of criteria subject to which a market may be qualified as a cross-border market, in particular:
· a market is deemed to be a cross-border market for the purpose of applying the unified rules of competition when the geographic boundaries of such market cover two or more Member States;
· the Eurasian Economic Commission shall preclude the violation by businesses (market undertakings) of the bans on unfair competition when:
the business whose activities violate the introduced bans and the competing business(es) or its/their business reputation is/are inflicted damages as a result of such violation are incorporated in different Member States;
· the Eurasian Economic Commission shall preclude the violation by businesses (market participants) of the bans on anti-competitive agreements, when:
at least two businesses (market undertakings) whose activities violate the bans are incorporated in different Member States;
· the Eurasian Economic Commission shall preclude the violation by businesses (market undertakings) of the bans on abusive behaviour subject to the aggregate of the following conditions:
1) the share of sales and purchases of the business dominating in the commodity market, meeting the criteria set forth in paragraph 2 of the criteria description, whose activities lead to violation of the statutory ban, in the total volume of commodities circulating in each Member State affected by the violation is at least 35%;
2) the ban violation leads or may lead to prevention, limitation or elimination of competition in the commodity market, meeting the criteria set forth in paragraph 2 of the criteria description, or to discrimination against other persons in two or more Member States;
3) the aggregate share of sales and purchases of a number of businesses each of which dominates in the commodity market, meeting the criteria set forth in paragraph 2 of the criteria description, and whose activities lead to the ban violation, in the volume of commodities circulating in each Member State affected by the violation is, for maximum three businesses (market undertakings), at least 50% or, for maximum four businesses (market undertakings), at least 70% (this provision does not apply when the share of at least one of the specified businesses is under 15% in each Member State);
4) during a long period of time (during at least one year or, if such period is less than one year, during a period of the respective market existence) the reference shares of businesses are constant or undergo minor changes, and the access to the respective commodity market is impeded for new competitors;
5) the commodity sold or purchased by businesses may not be replaced with another commodity when consumed (including the consumption for production needs), and the commodity price growth does not give rise to the respective decrease in demand for the commodity; the information about such commodity price, and sale and purchase conditions in the respective commodity market is available for an unlimited number of persons; and
6) the ban violation leads or may lead to prevention, limitation or elimination of competition in the commodity market, meeting the criteria set forth in paragraph 2 of the criteria description, or to discrimination against other persons in two or more Member States.
Some of the provisions of the Treaty on the EAEU outlined below may be of special interest to the reader:
1) The dominant position of a business in a transborder market is determined by the Commission in accordance with the methodology for assessment of competition in a transborder market approved by the Commission. The market share of a market undertaking is not the only determination value, because all the following circumstances are to be considered: the share of a business entity as compared to the market shares of its competitors and consumers;
2) the ability of a business entity to unilaterally determine the price level of goods and to have a decisive effect on the general conditions of sale of the commodity in the respective commodity market;
3) the existing economic, technological, administrative or other restrictions for entering a commodity market; and
4) the time period during which a business entity has had the ability to have a decisive effect on the general conditions of circulation of a commodity in the commodity market.
Subject to the methodology for assessment and imposition of penalties approved by the Commission, the Commission imposes penalties for violation of common rules of competition in cross-border markets and for non-disclosure or untimely disclosure of information, at the Commission’s request, or for deliberate misrepresentations in documents provided to the Commission, at the following rates:
1) unfair competition inadmissible under Article 76.2 of the Treaty on the EAEU entails the imposition of penalty on officers and sole traders in the range between RR20,000 and RR110,000, and on legal entities in the range between RR100,000 and RR1,000,000;
2) execution by a market entity of an agreement inadmissible under Articles 76.3, 76.4 and 76.5 of the Treaty on the EAEU, as well as the participation in such agreement, entails the imposition of penalty on officers and sole traders in the range between RR20,000 and RR150,000, and on legal entities in the range between 0.01% and 0.15% of the offender’s proceeds from the sale of goods/works/services in the market of which the given offence was committed or of the offender’s expenses for the purchase of goods/works/services in the market of which the given offence was committed, but in any event not more than one-fiftieth of the offender’s total proceeds from the sale of all goods/works/services and not less than RR100,000. When the offender’s proceeds from the sale of goods/works/services in the market of which the given offence was committed exceed 75% of the offender’s total proceeds from the sale of all goods/works/services, the penalty ranges between 0.003% and 0.03% of the offender’s proceeds from the sale of goods/works/services in the market of which the given offence was committed or from the offender’s expenses for the purchase of goods/works/services in the market of which the given offence was committed, but in any event not more than one-fiftieth of the offender’s total proceeds from the sale of all goods/works/services and not less than RR100,000;
3) coordination of market entities’ economic activities inadmissible under Article 76.6 of the Treaty on the EAEU entail the imposition of penalty on individuals in the range between RR20,000 and RR75,000, on officers and individual entrepreneurs in the range between RR20,000 and RR150,000, and on legal entities in the range between RR200,000 and RR5,000,000;
4) commitment by a dominating market entity of actions recognized as the abuse of dominant position and inadmissible under Article 76.1 of the Treaty on the EAEU entails the imposition of penalty on officers and individual entrepreneurs in the range between RR20,000 and RR150,000, and on legal entities in the range between 0.01% and 0.15% of the offender’s proceeds from the sale of goods/works/services in the market of which the given offence was committed or of the offender’s expenses for the purchase of goods/works/services in the market of which the given offence was committed, but in any event not more than one-fiftieth of the offender’s total proceeds from the sale of all goods/works/services and not less than RR100,000. When the offender’s proceeds from the sale of goods/works/services in the market of which the given offence was committed exceed 75% of the offender’s total proceeds from the sale of all goods/works/services, the penalty ranges between 0.003% and 0.03% of the offender’s proceeds from the sale of goods/works/services in the market of which the given offence was committed or from the offender’s expenses for the purchase of goods/works/services in the market of which the given offence was committed, but in any event not more than one-fiftieth of the offender’s total proceeds from the sale of all goods/works/services and not less than RR100,000; and
5) non-disclosure or untimely disclosure of the information set forth in Section XVIII of the Treaty on the EAEU and the Protocol of the Commission, including non-disclosure of information or deliberate misrepresentations in documents provided to the Commission, entails the imposition of penalty on individuals in the range between RR10,000 and RR15,000, on officers and individual entrepreneurs in the range between RR10,000 and RR60,000, and on legal entities in the range between RR150,000 and RR1,000,000.
A fine is payable to the budget of the Member State in which the non-compliant market entity is incorporated or in which the non-compliant individual permanently or temporarily resides.
The person who voluntarily reports to the Eurasian Economic Commission and/or the national competent authorities any inadmissible agreements will be exempt from the liability for offence, subject to the aggregate of the following conditions:
· on the date of the person’s report to the Eurasian Economic Commission, the Commission did not have any information or documents regarding the offence;
· the person refused to participate or to continue their participation in an agreement inadmissible under Article 76 of the Treaty on the EEA; and
· the provided information and documents are sufficient to establish the fact of the offence.
The person who is the first to comply with all the conditions above shall be released from the liability. No notice is accepted if made by several persons who have entered into a prohibited agreement.
The Eurasian Economic Commission, a successor of the Customs Union Commission, is authorized to monitor and enforce compliance with the unified competition rules in the single economic space.
The Eurasian Economic Commission:
· considers reports/materials on any signs of violation of the common rules of competition, and performs any necessary investigations;
· institutes and conducts proceedings when competition rules are violated;
· issues orders and makes decisions binding upon business entities (market undertakings);
· requests and collects information;
· delivers an annual report on the competitive situation in cross-border markets;
· posts judgments issued in connection with the violation of any common rules of competition on the official website of the EAEU; and
· exercises other powers as may be required for implementation of the provisions of the Competition Agreement.
Actions or omissions of the Eurasian Economic Commission in the field of competition may be appealed in the Court of the Eurasian Economic Union.
The provisions of the Treaty on the EAEU with regard to the restriction of government control over prices are not applicable to (i) the government control over prices for all services, including the services provided by natural monopolies, (ii) government procurement and commodity interventions, and (iii) the following goods:
1. natural gas;
2. liquid gas for household needs;
3. electric and heat energy;
4. vodka, liqueurs and other alcohol products with at least 28% alc/vol (minimum price);
5. ethyl alcohol from food raw materials (minimum price);
6. solid fuel and furnace oil;
7. nuclear power cycle products;
8. kerosene for domestic needs;
9. petroleum products;
10. pharmaceuticals; and
11. tobacco products.