Auctions Without Competition: The Case of Timber Sales in the Murmansk Region

This report analyzes the timber-auction system introduced in Russia in 1997, focusing on the Murmansk region. The Russian auction system is strongly inspired by the North American practice but many preconditions for the system to function efficiently are absent. The main obstacles are the shortage of auction participants and the resulting possibility of collusion. Thus, the "one bidder-auctions" are common. This drives the Federal Forest Service (FFS) to lease timber at a low reservation price. By doing this, the FFS ensures social efficiency in the sense that a socially beneficial trade is carried out. However, this achievement is made at the cost of a modest rent appropriation. In Murmansk, we probably witness a true disinterest in timber resources, which caused by unpredictable economic and social conditions. Short-term contracts dominate forestry activities and there are few incentives for developing sustainable forest use. Auction theory asserts that collusion is more likely in oral auctions than in sealed-bid auctions. Since the latter auction form is most common, the FFS does seem to apply the formal means of control that they posses. This has made the market more transparent. However, with only a few market participants auctions may easily "collapse" into informal bilateral bargaining between the seller and the most likely buyer.