Does Russian Legal Reform Matter? Evidence from Crude-Oil Export Allocations

Abstract

The evolution of the Russian crude oil sector during the ongoing transition to a market economy is a fascinating case study in the determinants of state allocation of scarce transport capacity. Under socialism, the crude oil sector was a completely integrated monopoly and the all-Union government had exclusive control over investment, pricing, production, transport and export decisions. The substantial spreads between fluctuating world prices and fixed domestic prices provided one of the key sources of state hard currency earnings. During the transition, product market competition has increased in the crude oil sector. There has been the rapid formation and entry of large vertically integrated enterprises and the entry of foreign joint ventures. Prices have been liberalized. Nevertheless, substantial spreads between domestic and world market price have persisted beyond the 1995 price liberalization and the federal government has retained almost near monopoly control over crude oil transport and export allocation by retaining a controlling stake in the pipeline-transport joint stock company Transneft.

In order to understand just how the state (federal government) uses its near monopoly power during a period of rapid privatization and price liberalization, this paper analyzes the determinants of export capacity allocation to the major Russian oil companies. It is found that, by 1996, one relatively clear law was that a domestic firm's access to world markets should be proportional to its lagged production volume. It is found that this law was operational in 1996. However, controlling for this allocation law, scarce capacity was allocated to reward firms that incurred debts from sales due to non-payments from buyers in the domestic market and CIS (Commonwealth of Independent States) market. While export allocation was driven by these legal and political criteria, some attention was paid to efficiency considerations such as distance to port and production efficiency.

JEL Classification: L71, P21