Case on Violation of the Antimonopoly Legislation by
OJSC United Trade Company

The main producers of liquid caustic soda (sodium hydroxide) in the Russian Federation are CJSC Caustic, OJSC Caustic, OJSC Khimrom, OJSC SibYur-Neftekhim, OJSC NAK Azot, OJSC KChXK, OJSC Sayanskhimplast. Total share of the mentioned companies in the market of caustic soda is more than 65%.

The main feature of the caustic soda market was that buyers could obtain the good practically at every Russian producer.

Market appearance of OJSC United Trade Company (hereinafter ¡V OJSC UTC) had changed existing economic ties between producers and consumers of caustic soda and led to new schematic model of realization of this product. OJSC UTC had monopolized relevant commodity market when concluding purchase and sale contracts with caustic soda producers and sales companies for 100% of the total commodity output. As a result, prices for caustic soda in 2004 set by OJSC UTC amounted to 6000 rub/t except of VAT and transport expenses, and have exceeded price of the years 2002-2003 for 1.5 ¡V 2 times. Moreover OJSC UTC assigned as consignors producers, which have uncomfortable (more distant) geographic location comparably to traditional suppliers. OJSC UTC imposed exceeded and economically unjustified penal sanctions in offered contracts of delivery (and had been concluded with consumers of caustic soda) for violation of number of articles of the mentioned contracts.

In 2004 MAP Russia received complaints from consumers of caustic soda. They are the largest companies of chemical industry, paper-pulp industry, aluminium industry, motor industry and energy sector. Particularly OJSC Krasnoyarskenergo, OJSC Siassky Pulp and Paper Plant, OJSC Arkhangelsk Pulp and Paper Plant, OJSC Kotlass Pulp and Paper Plant, OJSC AVTOVAZ, OJSC Russian Aluminium Management, OJSC Lukoil-Neftekhim, OJSC Nizhnekamskneftekhim acted as applicants.

On the basis of the received applications MAP Russia analysed commodity market of caustic soda in accordance with the Procedures for Conducting an Analysis and Evaluation of the State of the Competitive Environment on Product Markets approved by Order of the RF MAP of 20.12.1996 No. 169 (hereinafter ¡V the Procedures) (redaction MAP Russia of 11.03.99 No 71) as well as studied materials provided by producers, OJSC UTC and consumers of caustic soda.

In the early 2004 in the market of caustic soda situation was formed when the main producers refused to conclude contracts for delivery of caustic soda to consumers referring to the purchase and sale contract had already been concluded with OJSC United Trade Company and the fact that all suppliers would be realized through OJSC UTC.
OJSC UTC offered to consumers of caustic soda to conclude the contracts of delivery of mentioned good for 2004 at the price of 6000 rub/t except of VAT and transport expenses, although the company purchased this product at the price of 4000 rub/t except of VAT and transport expenses.

Significant provision in the concluded by OJSC UTC with producers of caustic soda contracts was the following:
¡§The Seller has no right to realize or to otherways pass Production to be delivered to Buyer under this Contract to ownership of other persons, except Buyer.
If the third persons make a request for producing and selling them the mentioned good the Seller is obliged to address them to Buyer to solve this problem.¡¨

Contracts of delivering caustic soda defined penal sanctions to buyers in the form of 100% payment of good¡¦s cost if the buyer refuses to purchase the good less than 15 days before the beginning of the reporting month.

Actions of OJSC UTC and producers of caustic soda had led to the fact that enterprises-consumers lost the right to make a choice of supplier, and expansive growth of prices for caustic soda impaired economic conditions of enterprises-consumers and led to prices¡¦ growth for products where caustic soda is used during production.

In particular under the application by OJSC Krasnoyarskenergo the mentioned growth of price for caustic soda necessarily brings to increasing of electricity tariffs that in its turn will result in price increase in practice for all kinds of final output.

According to information provided by enterprises-consumers of caustic soda, gross loss will amount preliminary to 2.7 bln. rubbles (98 mln.US$) if annual intake is 1100 thousands tones. OJSC Trading House VISCOZA in case of purchasing liquid caustic soda at price 6000 rub/t will have losses in the amount of 13 mln. rubbles (0.46 mln. US$) a year. Losses of OJSC Volzhsky Orgsintas will amount about 73 mln. Rubbles (2.6 mln.US$). Total losses for paper-pulp industry will amount to 278 mln. rubbles (10 mln. US$).

A number of enterprises (OJSC Siassky Pulp and Paper Plant, OJSC Arkhangelsk Pulp and Paper Plant, LLC Kotlass branch Ilim Pulp Eksim) refused flatly to conclude a contracts with OJSC UTC because the prices and logistic structure did not serve theirs turn.

It is necessary to note that mentioned enterprises are local economic mainstay. Losses of these enterprises have led to negative effect in its financial and economic activities, and this was bound to be reflected in socioeconomic situation in relevant cities.

Economically OJSC UTC¡¦s activity has fundamentally changed business environment of the market of caustic soda. Economic relations which linked producers and consumers of caustic soda, were broken.

When OJSC UTC became the owner of the most part of the caustic soda produced in the Russian Federation OJSC UTC in practice occupied monopoly position in this market. As a result, already in January 2004 prices for caustic soda have increased for 1.5-2 times.

As fare back as 2002-2003 price for liquid caustic soda floated but was between 3000 ¡V 4000 rubbles/tonne (except of VAT and transport expenses), at that in 2003 prices slightly came down. In late 2003 cost of caustic soda production was at the level of 4000-4100 rubbles/tonne.

Although in 2003 price for energy resources was increasing and low inflation was revealed - these factors could not result in two times increasing of prices of caustic soda from January 1, 2004.

Thus, growth of prices was not motivated by economic necessity, but resulted from abusing of dominant position by OJSC UTC in the mentioned market.

Before the period when OJSC UTC appeared in the market, producers of caustic soda were engaged in competition and theirs activity satisfied demands of consumers. But, as a result of concluding contracts under terms of 100% sale of caustic soda output, competition among producers of this good (which before was aimed at consumers¡¦ satisfaction and secured the forming of market prices in conditions of fair competition) disappeared. OJSC UTC obtained possibility to unilaterally influence at common conditions of commodity circulation in the relevant market that lead to elimination of competition in the market.

OJSC UTC, producers of caustic soda and their sales companies concluded agreements and in accordance with these agreements realised concerted practice. As a result, competition between participants of the caustic soda market was eliminated. At that OJSC UTC is purchaser and his counterparties are sellers. At least resulting from conclusion of these agreements, the share of OJSC UTC in the mentioned market was more than 35%.

OJSC UTC fulfilled conditions of the mentioned agreements and in this way OJSC UTC coordinated entrepreneur activity of the commercial organisations-participants of the market of caustic soda. This coordination limited competition between participants of the market.

During consideration of the case MAP Russia has taken the following decisions.

Actions of OJSC United Trade Company were qualified as violations of Art. 5 (1) of the RSFSR Law ¡§On Competition and Limitation of Monopolistic Activity on Commodity Markets¡¨ No. 948-1 of 22.03.1991, manifested in abuse of dominance by OJSC UTC on the caustic soda market by setting a monopolistically high price of liquid caustic soda; imposing unprofitable contractual terms on consumers of this produce: geographically unprofitable consignors and economically unjustified penal sanctions.
Actions of OJSC UTC, JSC Caustic (Sterlitamak), OJSC Caustic (Volgograd), OJSC Sayanskhimplast (Sayansk, Irkutsk Region), OJSC Khimrom (Volgograd), OJSC SibYur-Neftekhim (Nizhniy Novgorod), OJSC NAK Azot (Novomoskovsk, Tula Region), OJSC Kchimprom (Volgograd), OJSC Plastcard (Volgograd) were qualified as violation of Art.6(3) of the Competition Law, manifested in realizing of concerted practices which have led to elimination of competition in the market of caustic soda.

Actions of OJSC UTC coordinating activity of JSC Caustic (Sterlitamak), OJSC Caustic (Volgograd), OJSC Sayanskhimplast (Sayansk, Irkutsk Region), and aimed at linkage of producers of caustic soda to particular consumers, were qualified as violation of Art.6(5) of the Competition Law.

MAP Russia issued Instructions to OJSC UTC, as well as to mentioned above economic entities to stop violation of the antimonopoly law.

Mentioned Instructions were appealed by OJSC UTC in arbitrage court. Decision by Court of first instance answered a claim of OJSC UTC and decisions issued by MAP Russia were declared invalid. Decision of the appellation Court affirmed decision of the court of first instance.

During proceeding of a case on violation of the Art.5(1) of the Competition Law OJSC UTC appeared a request to settle this case amicably with FAS Russia. Proceedings in a case were remitted.

In accordance with terms of amicable agreement OJSC UTC admitted a fact of infringement of the antimonopoly legislation in full volume, as well as assumed obligations to realize actions aimed at prohibiting of competition limitation. Federal Arbitrage Court of Moscow District approved mentioned amicable agreement.