The first seven years of railway reform in Russia have demonstrated a solid progress so far, especially in the freight sector. The three-stage reform plan called for: (1) opening rail infrastructure for access by private non-integrated operators (like in Germany); (2) developing competition in the downstream market (operations); (3) promoting private investment in freight wagons and (possibly) locomotives. The infrastructure owner - Russian Railways JSC (or RZD) - encouraged the establishment of new operators competing with its downstream affiliate and welcomed investment in rolling stock since it faced the shortage of wagons coupled with the lack its own sources for investment. As a result about RUR 80 billion have been investedin private freight wagons during the first four years of reform. The traffic share (in tons) generated by dozens of private operators have increased from 27.2% in 2003 to 33.8% in 2005. It is expected that more than half of the wagon fleet will be owned by private companies within the next few years. In the presence of uncertainty about the future structure of vertically integrated industry the non-integrated rival will invest more in capacities the lower is the probability of vertical divestiture when it competes with RZD in prices given the pre-commited rolling stock capacities. Thevertically integrated industry structure may be compared favorably towards the vertically separated one in terms of welfare even when RZD can raiserivals costs to undermine their competitiveness (thus resorting to some discriminative activities that cannot be perfectly monitored by the regulator). The empirical analysis relies on the original set of data on investment in different types of freight rolling stock during the first years of railway reform in Russia. The data set covers about 2200 private wagon owners classified by the type of wagon. Data were also used on production and import of railway rolling stock in Russia available for the period of 1999-2005. The analytical framework developed is designed to model the 'without a map' approach to railway reform in Russia. The basic stylized facts ofthe reform to fuel the debate about the optimal future structure of the industry are considered. The problem of optimal structure of vertically related industry with price-setting firms competing downstream and having their capacities constrained is considered. For the covering abstract see ITRD E145999
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