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With the following simple setup.py
$ cat setup.py
from distutils.core import setup
from distutils.command.install import install
class install1(install):
 sub_commands = install.sub_commamnds
setup(name='bug', cmdclass={'install': install1})
I get
>>> from distutils.core import run_setup
>>> run_setup('setup.py')
Traceback (most recent call last):
 File "<stdin>", line 1, in <module>
 File "Lib/distutils/core.py", line 216, in run_setup
 exec(f.read(), g, l)
 File "<string>", line 4, in <module>
 File "<string>", line 5, in install1
NameError: name 'install' is not defined
Furthermore, on an even simpler setup.py:
$ cat setup1.py
from distutils.core import setup
setup(name='bug')
run_setup runs, but clobbers sys.argv:
>>> from distutils.core import run_setup
>>> run_setup('setup1.py', script_args=['--name'])
bug
<distutils.dist.Distribution object at 0x101dddef0>
>>> import sys;sys.argv
['setup1.py', '--name']

Attached patch fixes both issues.

Added tests.

The change in exec doesn't make sense to me (but see lower :))
__file__ should be in globals, not locals, right?
Also if it is right, then exec(foo, g) should be equivalent :)
The reset of the patch looks ok. But I can see your patch shows this breaking - I'm guessing its one of the things I keep forgetting about module scope evaluation and the import system - anyhoo.
Applying to 3.6.
Also looking at it the saving of argv is still broken even with your patch - the original argv is mutated, and the /name/ not the /value/ is restored. We should rebind argv to the copy, then restore the binding. But that can be done later.

New changeset d8950778e3c2 by Robert Collins in branch 'default':
Issue #23426: run_setup was broken in distutils.
https://hg.python.org/cpython/rev/d8950778e3c2