OREANDA-NEWS  On 26 February was announced, that FAS Russia published report about developing competition in the markets of oil products (February 2009).

The purpose of the FAS Russia's activities is developing the Russian economy in general, with the primary objectives including protection of competition, as the main factor of normal market functioning, building-up the business-facilitating environment, and elimination of abusive practices of the companies-monopolists and favouritism of the authorities towards selected entrepreneurs.

The Federal Antimonopoly Service and its regional offices continuously monitor sales markets of oil products and the price level in the regions. Throughout Russia, except Moscow and St Petersburg, regional wholesale and retail oil products markets are in a varying degree controlled by vertically integrated oil companies (or their subsidiaries). Although there are a few formally independent vertically integrated oil companies (VIOCs), they do not compete on internal oil products sales markets. Effectively, the territory of the Russian Federation is divided into control zones, or the so-called "regions of presence". VIOCs cultivate close interaction with the authorities of their chosen regions with regard to the sales of oil products in a particular area and sign co-operation and partnership agreements to this purpose. Such practices allow VIOCs to fix excessive prices in retail sales of oil products, unlawfully enriching themselves at the consumers' expense.

These companies do not experience any significant competitive pressure from other market participants because the latter cannot match their possibilities of obtaining oil products directly from oil refineries and using petroleum-storage depots, or their influence in the "regions of presence".

The main way to resolve this pricing problem in the Russian market economy is to ensure development of competition on the domestic markets. In the world practice, petrol stations traditionally are operated by small, family businesses. In this connection, principal decisions must be made on changing the business structure and organizational splitting-off of the companies-owners of petrol stations that operate on the retail markets. Successful competition development also requires the following:

1. Organizational splitting-off of oil refineries in order to transform the relations with oil sellers, customers of oil refining services and wholesale buyers of oil products (members of a particular VIOC or independent) from the intra-company level to the commodity exchange level (introducing to the market).

2. Refineries that have free capacity must not refuse to conclude contracts for oil processing with independent companies - the owners of oil as well as on request of other VIOCs.

3. Independent companies - the owners of petrol stations should be able to buy products directly from refineries (or owners of the products who supplied oil for refining), rather than from a network of intermediaries.

4. Independent companies - the owners of petrol stations should be able to use products storage services at the regional petrol-storage depots, owned by VIOCs.

5. Organizational splitting-off of retail fuel sales at petrol stations into separate legal entities in order to transform relations of the owners of petrol stations with wholesale sellers of oil products and the owners of oil depots from the intra-company level to the commodity exchange level (introducing to the market).

6. Refineries that are not part of VIOCs should remain independent; new state-of-the-art independent refineries must be constructed.

Such objectives cannot be achieved by the Federal Antimonopoly Service independently and required adopting an appropriate Federal Law. The draft Programme on Developing Competition in the Russian Federation, devised by the Ministry of Economic Development jointly with the Federal Antimonopoly Service and the Ministry of Industry and Commerce, proposes introducing a statutory provision that different types of activities of vertically integrated oil companies must be performed by different legal entities.

FAS Russia monitors actions of the monopolists and suppresses their abusive practice (primarily, fixing of monopolistically high prices for retail and wholesale oil products) as long as there are formidable artificial barriers to market entry that prevent emergence of new entrepreneurs. In such situations the Federal Antimonopoly Service is forced to intervene in the pricing processes on the monopolized wholesale and retail markets of oil products.

When the Federal Antimonopoly Service and its regional offices discover the facts of fixing monopolistically high prices, the antimonopoly bodies, acting within their scope of reference and being governed by No.135-FZ "On Protection of Competition" of 26th July 2006, issue determinations to reduce the prices and impose fines upon the violators, calculated as a percentage of the company's annual turnover.

For instance, in 2008 FAS Russia and its regional offices (82) processed around 150 antimonopoly cases related to the fuel-and-energy complex. Of which 82 investigations of antimonopoly violations were related to the markets of motor petrol, and 64 cases - to the markets of aviation kerosene and services of fuel-and-energy-complex in airports. The antimonopoly bodies imposed fines for the total amount over 6 billion Rubles (134 530 000 euro).

In particular, FAS Russia found that in summer 2008 the largest vertically integrated companies fixed monopolistically high prices on the wholesale markets of oil products. Having investigated the cases, FAS Russia:

Imposed 1 356 million Rubles (30 404 000 euro) fine upon "Gazprom Neft" OJSC;

Imposed 1 112 million Rubles (24 933 000 euro) fine upon "TNK-BP Holding" OJSC;

Imposed 1 509 million Rubles (33 834 000 euro) fine upon "Rosneft" Oil Company" OJSC; and

Imposed 1 443 million Rubles (32 354 000 euro) fine upon "LUKOIL" OJSC.

Oil products markets are characterized by the following recent trends.

In August 2008 - January 2009, when the global oil prices dropped down, the rates and level of decreasing retail prices for motor fuel were considerably below the rates of decline of oil prices and wholesale prices for oil products.

FAS Russia and its regional offices monitor retail and wholesale prices in the Russian regions. Using the obtained data, FAS Russia has analyzed changes of the markup values (retail margin - the difference between wholesale and retail prices for a litre of fuel) for different fuels, and found considerable increase of the markups (in both absolute and relative values).

FAS Russia's analysis reveals considerable, steady increase of absolute profitability of retail sales per liter of fuel. It significantly exceeds the level of inflation, which was 5.93% in June 2008 - January 2009.

In this connection, regional offices of FAS Russia initiate proceeding upon discovering the facts of fixing monopolistically high retail prices for petrol and diesel fuel by economic entities or their engaging in concerted actions, which resulted in price or markup maintenance (Articles 10 and 11 of the Federal Law "On Protection of Competition", with account of the provisions of Article 8). The cases are initiated and investigated at the level of regional antimonopoly offices because of the local nature of the retail markets for selling motor fuel at the service stations.

When oil prices were stable, retail sellers of petrol were gaining sufficient income to produce and sell the goods in question. In other words, their income was sufficient to finance the necessary costs (primarily, for purchasing the goods) and gain the profit to ensure normal functioning of the sales outlets.

Fast growth of profitability of retail sales in the regions means the income acquired by the sellers exceeds the level necessary to ensure goods production and distribution.

The argument, that proceeds from the retail trade are needed to cover the losses incurred by VIOCs in export sales of oil, should be disregarded. Absorption of additional sums to support internal subsidization is based on non-market pricing principles typical for non-competitive markets, where companies abuse dominant position. In this case, we refer to the contracts for buying fuels (filling a motor vehicle), and the buyer is not obliged to support other activities, in which the selling company is involved.

The situation started changing in the second half of January 2009: wholesale prices for oil products are going up sharply. According to an independent information-and-analytical center "Kortes", since the beginning of 2009 the wholesale ex-works selling prices for oil products in Russia have increased on average:

- for diesel fuel - by 23%

- petrol А-76 - by 37%

- petrol А-92 - by 57%

- petrol А-95 - by 14%.

Increasing wholesale prices reduce profitability of retail operations (retail margin).

FAS Russia believes that maintaining retail prices from August 2008 to January 2009 at the level mismatching the level of wholesale (purchasing) prices and subsequent dramatic increase of the wholesale prices are related. Both processes are of non-market nature and are driven by large oil companies. They reflect planned transformation of the pricing policy of vertically integrated oil companies and shifting the price burden to the wholesale sector, in particular, in order to enable VIOCs to acquire the assets of independent retail sellers.

FAS Russia considers it necessary to establish both types of violations on the oil products markets:

1. By the regional offices - violations on retail markets in August 2008 - January 2009, when retail prices for petrol and diesel fuel did not conform to the level of wholesale (purchasing) prices, and retail sales had unreasonably high profitability;

2. By the Central Office - abusing dominant position or concerted actions on wholesale markets of petrol and diesel fuel in January -February 2009, with dramatic growth of wholesale prices and shortage of products in the wholesale sector.