The right of first contact


Russia is not just oil, gas or timber but 142 million buoyant buyers. Who will have the right of first access to this vast customer base? That is the question. And it is a question of big money and big politics.

Though well aware of their huge natural resources, Russians have so far been oblivious of their main treasure, themselves. Quite unlike neighbouring China, for example, which has never forgotten the true value of its consumers. The Chinese government used to prohibit foreign investments in retail and only gave up this restriction recently as part of its entrance fee for the WTO membership.

At one time a highly competitive industry divided among a large number of unorganised players, retailing is now turning into a dominant, almost unstoppable, sector with an extraordinary concentration of power in the hands of a few. In recent years the market has been growing three times faster than that of the economy, and even the crisis could not curb the expansion of the leaders: X5 Retail Group, for instance, opened 116 new stores in the first nine months of 2009, a store every two days. The largest supermarkets, though affected by the economic slump, seem to have managed to shift the impact of loss down the distribution chain.

The government is playing up the significance of retail chains in the misfortunes of the Russian economy

If truth be told, however, the government seems to be playing up the significance of retail chains in the misfortunes of the Russian economy. What is more, the authorities tend to believe that hypermarkets are a battlefield on which to fight all sorts of fraud, above all smuggling and tax evasion. Attacks on retailers, Arbat Prestige, Svaznoy, Eldorado or Evroset to mention just a few, have become the norm. In March 2008 the vice-head of the State Tax Service, Tatyana Shevtsova pinpointed retailers as the most frequent tax evaders: ‘Despite the growth of imports, the boom of hypermarkets, and the expansion of chain stores,’ she said, ‘the inflow of taxes from retailers in 2007 has fallen.’ She promised that supermarkets will remain in the ‘area of special attention’.

Now, it might seem, the time has come to foot the bill, yet in an odd way. The law ‘On the Basis of the State Regulation of Trade in the Russian Federation’ adopted last Friday seeks to cut retailers down to size, to humble rather than really damage them.

This law restricts the expansion of chain stores in a certain region if in that particular region the market share of this company, group of companies or even franchise exceeds 25%. This measure, made to sound harsh by libertarians or lobbyists, is nothing but a reinstatement of the good old law of competition: in most countries a 25% share of any market would be enough to trigger a monopolies inquiry.

The law seeks to humble rather than really damage

What this provision actually does, it is argued, is to assert that a superstore and a corner shop compete for the same market - and that is quite different from the findings of the European competition commission which in 2000 found that they actually fight for separate markets and, therefore, do not compete with each other.

From February 2010, when the law comes into force, retailers should not be able to twist suppliers’ arms by demanding payments for entering the chain or by charging for ‘merchandising’ goods. Delays in payment will be restricted. These measures, however, appear to be wishful thinking. ‘Anticipating cuts of bonuses in 2010 retailers set extra charges for ‘merchandising’ in 2009,’ says Tatiana Borisova, a lawyer from Saint-Petersburg, ‘the fee equals the difference between the old bonus and that allowed by the new law.’

There is something, however, that the law really does - and it does it for the benefit of hypermarkets. It seeks to redistribute competence in regulation of trade from local authorities to the centre. In practical terms, it should mean less corruption and fewer technical barriers, which, in fact, are the main hurdles to retail development in Russia.

Though what the law does is quite important, what it does not do is essential. It does not restrict foreign investments into Russian trade. Nor does it restrict the size of stores or the power of retailers to set the price.

Retailers tend to be among those who complain most. Yet, they have the greatest value, the right of first contact with us, the consumers, and whatever the outcome of the new regime we will pay for this privilege.


December 23, 2009
photo: Oleg Fedorkin -





TEXT: Dmitry Popov, associate, Baker & McKenzie

The law, adopted in the third hearing, has removed the most notorious and extreme regulation that was contained in the first drafts of the law and that worried and frustrated businesses, both wholesalers and retailers, as well as consumers.

Even so, the new law will noticeably restrict freedom of movement in relations between suppliers and retailers, which freedom retailers previously took most advantage of due to their strong bargaining power. The law aims to prevent, or at least restrict, the use of such ‘classic’ provisions that manifestly break the principle of the balance of contract as retailers’ bonuses, superfluous obligations on suppliers (i.e., to provide information on market conditions), and unreasonably long delays in payments for goods.

I think the retail chains will still be able to put pressure on producers after the law comes into force. The question is whether the retailers will accept the new terms quietly, or come up with new forms of pressure. The answer largely depends on activity of Federal Anti-Monopoly Service (FAS). Its latest practice suggests that it will keep a keen eye on the implementation of the law.

What is remarkable is that the law imposes very stringent restrictions on sales of food products, while sales of other goods needed by households (nappies, toys, china, tools, etc.) will be regulated by the law to a much lesser extent. This will mean retail chains will feel more comfortable in relations with manufacturers of washing powder than with suppliers of candy.

How the practical implementation of the law is going to develop, and how it will affect consumers, only time will tell. History shows, however, that the overall effect (for all participants, from producer to consumer) of such type of regulation is not always positive.





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