THE WILLIAM DAVIDSON INSTITUTE AT THE UNIVERSITY OF MICHIGAN Privatization with Government Control: Evidence from the Russian Oil Sector By: Daniel Berkowitz and Yadviga Semikolenova

Governments that privatize state industries often retain control over key distribution assets. While there are many examples of this form of partial privatization, to our knowledge there are no substantial quantitative studies of how governments use their control under these circumstances. In this paper we argue that the Russian government privatization of the oil sector during 1994-2003 is a useful case study because the federal government privatized oil production but retained monopoly control rights over the transport of crude onto world markets. Based on a simple analysis of the costs and benefits of control and ownership, we argue that that in these circumstances the federal government would use its control over transport capacity to provide privileged access to those companies over which it has influence. We find that in 2003 this is indeed the case and that this system detracted from economic efficiency. In particular, private and regionally owned companies had to be much more productive than companies over which the federal government (the state) had influence to receive comparable access to world markets; state-influence companies had preferential access to routes with more capacity; and, the allocation of route capacity was sensitive to transport costs only in the state-influence sector.