The Russian Constitutional Court has explained what income should be understood to mean in article 178 of the Russian Criminal Code
In its Resolution dated 19 April 2023, the Russian Constitutional Court held that income in article 178 “Restriction of competition” of the Russian Criminal Code (the "Criminal Code") is understood mean a contract price without it being reduced by any costs.
The provisions of article 178 of the Criminal Code became the subject matter of verification of compliance with the Constitution to the extent of how the legislature resolved the question of determining the amount of income which was derived by entering into a cartel agreement to increase, reduce or maintain prices during a tender.
1. Facts of the case
In its verdict, the court held that the individual (the applicant) was guilty of attempting to commit the crime for which clauses ‘a’ and ‘c’ of part 2 of article 178 of the Criminal Code provide. The crime manifested itself in an attempt to restrict competition when competing business entities entered into an agreement (cartel) which restricts competition and is banned by antitrust legislation.
Being the sole member and a director of a business entity, the applicant entered into an unlawful agreement aimed at securing that the business entity won an electronic tender. Under the terms of the agreement, another company, a party to the cartel, refused to participate in the tender in exchange for a subcontractor agreement being concluded with it, and yet another one participated in the tender only formally.
As a result of the anti-competitive agreement being implemented, the company headed by the applicant was recognised as the winner, while the other parties reduced the initial (maximum) contract price only to a very slight degree.
Please be reminded that article 178 of the Criminal Code stipulates criminal liability for restricting competition by entering into a cartel if this has resulted in large-scale damage being caused to individuals, companies or the state or resulted in a large-scale income derived (part 1) and if it has resulted in especially large damage being caused or an especially large income derived (clause ‘c’ of part 2). According to note 1 to article 178 of the Criminal Code, income in an especially large amount means income that exceeds RUB 250 million.
When the court fixed the punishment it proceeded on the assumption that the income which the applicant could have obtained if he had realised his criminal intent was equal to the price of the contract concluded (RUB 768 million), which is regarded as especially large income.
Having disagreed with the decision the applicant appealed the sentence to higher courts and substantiated his position by arguing that RUB 768 million was not net income (profit) and that taxes and the cost of work under the contract should have been deducted from the above amount to calculate the income. Nevertheless, the courts of appeal and of cassation upheld the position of the first instance court.
The above prompted the applicant to apply to the Constitutional Court seeking to have the controversial provisions of the Criminal Code verified in terms of whether they comply with the Constitution, those provisions allowing for such income to be calculated without deducting such costs as taxes, the cost of work and a company’s profit margin which are connected with a contract being fulfilled.
2. The Constitutional Court’s position
First of all, the Constitutional Court pointed to the high level of danger that cartels pose to the public, especially those which are entered into to increase, reduce or maintain prices during tenders. The Court stated that when such an agreement is concluded it not only encroaches on normal competition but prevents the efficient spending of budgetary funds from being ensured and threatens the full discharge by the state of its social and economic obligations.
That said, the Court, citing the Resolution of the Supreme Court’s Plenum (the “Plenum”), indicated that in the event of illegal economic activity the amount of illegal income should be determined based on the revenues the relevant person generated over the whole period of such activity without any costs of such person being excluded that are associated with such activity.
In that Resolution of the Plenum, the definition of ‘income’ was explained in relation to article 171 “Illegal entrepreneurship” of the Criminal Code. However, the Constitutional Court specified that the term ‘income-generating activity’ cannot be, for the purposes of imposing criminal liability, interpreted completely differently insofar as articles 171 and 178 of the Criminal Code were included in the same chapter of the Criminal Code which was singled out by the legislature based on the common object of the criminal offence.
In answering the question of how income should be determined in cases concerning the restriction of competition, the Constitutional Court stated that the definition of ‘income’ that is used in the provision of article 178 of the Criminal Code means the contract price without it being reduced by the amount of any costs which have been or are anticipated to be made in connection with the contract being fulfilled.
In justifying its position, the Court pointed to a number of circumstances:
In a situation where there is an attempt to restrict competition (as in the applicant’s criminal case) no such costs have yet been incurred and, therefore, the assumption with regard to the ongoing crime that costs should be taken into account to determine the amount of income is utterly pointless;
If a different approach was applied, this would mean that preparing to commit a crime or attempting at committing it, when no relevant costs have yet been incurred, would entail, all other factors being equal, graver consequences for the offender than a finished crime when costs which have been incurred can be supported with documents and assessed. Alternatively, such approach would completely rule out the stages of preparing for and attempting a crime, where an act could be classified only as a finished crime and only when all costs have been assessed, with all other signs of the cartel agreement being in place. This would clearly contradict the objectives of the Criminal Code and the principles of the Constitution. It is complicated to take into account costs which are only anticipated in future owing to the risk-related nature of entrepreneurial activities;
The court practice of how article 178 of the Criminal Code is applied also suggests that income, including when an attempt is made to commit the offence stipulated by the article in dispute, means the price of contracts which are concluded based on the results of a tender;
Currently, the possibility is being considered at the legislative level of enshrining the understanding of the definition ‘income’ which has been developed in practice by amending the article which was contested.
What to think about and what to do
We believe that the Constitutional Court has put to an end the interpretation of the term ‘income’ if applied to the provisions of article 178 of the Criminal Code by pointing that it is inadmissible to reduce a contract price by any costs, including those which have been or are intended to be incurred in connection with the contract being discharged.
We recommend reading the text of the Resolution and taking account of its provisions when carrying out professional activity.
Help from your adviser
Pepeliaev Group's lawyers have considerable experience of providing legal support to clients with regard to antitrust regulation and the legislation on the contractual system.
Our lawyers continually monitor changes in antitrust legislation, case law, and administrative and judicial decisions. They are ready to provide comprehensive legal support in all areas of antitrust regulation, which includes concluding agreements/concerted actions that restrict competition.
 The Constitutional Court’s Resolution No. 19-P dated 19 April 2023 in the case to verify whether part 1 and of clause ‘c’ of part 2 of article 178 of the Russian Criminal Code as well as of clause 1 of the note to the above article comply with the Constitution in connection with an appeal filed by the individual S.F. Shatilo (the ‘applicant’).
 Clause 12 of Resolution No. 23 of the Supreme Court’s Plenum “On case law relating to illegal entrepreneurship” dated 18 November 2004.
 Since there are no costs associated with the economic activity, the portion of income which would constitute profit cannot be singled out.
 Draft law No. 848246-7 “On amending article 178 of the Criminal Code of the Russian Federation and article 151 of the Criminal Procedure Code of the Russian Federation” (passed on 15 December 2019 by the State Duma in the first reading).