Strangled By Red Tape

Under the excuse of fighting the economic crisis, the Russian government is stepping up regulation that could severely restrict business growth. Ostensibly to stem the tide of rising prices, the government has initiated a dramatic cap on grocery retail chains. The bill submitted to the State Duma bans chains with sales exceeding 1 billion rubles ($31 million) from buying or building any new stores if they control over 25 percent of the market in a city or a town.

Formally, this measure is designed to stop retailers from charging monopoly prices and seems to express concern for consumers. A close analysis shows, however, that the provision would affect a limited range of retail chains and actually have little impact on the market and prices in general.

At first, Federal Antitrust Service head Igor Artemyev claimed the legislation would have no sales cap. But the next day, Deputy Prime Minister Viktor Zubkov revealed that Prime Minister Vladimir Putin had personally authorized the introduction of the sales cap into the bill.

The proposed cap would mostly affect only Russia’s largest retail chain, X5 Retail Group, headed by well-known businessmen Lev Khasis and intelligence veteran Yuri Kobaladze. The company’s sales in 2008 topped $31 billion rubles in Moscow alone and another $6 billion in St. Petersburg. Last month, the chain was targeted by Putin when he paid a surprise visit to one of its supermarkets located in a Moscow elite district and criticized its retail markups on some products. It looks like the assault on the company is ongoing, this time through resorting to powerful legislative pressure tools.

According to Khasis, the restrictions could severely cap growth opportunities for X5 in towns and villages, into which retail chains are usually not too keen on expanding. At the same time, certain chains enjoying the government patronage would be little affected by the new restrictions. For example, according to a spokesperson for French retailer Auchan, they were nowhere close to controlling a quarter of the market. It looks like the retailer Sedmoy Continent, also enjoying close links with the government, is not going to be hurt by the new regulation and could even bolster its operations owing to its competitors weakening. Thus, regulation not only puts some corporations at a disadvantage, but undermines the basis of a free competition.