same productive structure as in the national model of Russia of Jensen, Rutherford and Tarr; but we have constructed the regional models based on the data for the regions, including adding federal okrugs and we have incorporated data on foreign direct investment in business services in the regions of Russia.

The exogenous changes that we model as part of Russian WTO accession are (i) liberalization of barriers against multinational providers of business services; (ii) a 50 percent reduction in tariffs on goods; and (iii) an improvement in market access for Russian exports to WTO member country markets. The key messages from this paper are that it is the liberalization of barriers against multinational providers of business services that we expect to provide the greatest gains to from WTO accession, and that there is a lot more at stake in WTO accession for Russia (and we believe in trade and FDI liberalization more generally) than the Harberger triangle gains from resource reallocation effects due to tariff reduction or from the terms of trade gains due to improved market access. Liberalization of barriers against multinational providers of business services results in additional varieties of business services. Through the Dixit-Stiglitz-Ethier endogenous productivity mechanism, this leads to welfare gains that dominate the results. A traditional constant returns to scale model is not be able to capture the productivity effects of trade or FDI liberalization in services. To demonstrate this we simulate Russian WTO accession in a constant returns to scale model and find that the gains are about 4-5 percent of the estimated gains in our model with imperfect competition and FDI liberalization in services.

Partly our results derive from the fact that estimated barriers against multinational service providers are higher than tariffs on goods, but the significant cost share of business services in the production of manufacturing and agriculture is also important. At the regional level, regions vary significantly in their gains based on their capacity to attract additional multinational providers of business services. Thus, while improving its offer to foreign services providers within the context of the GATS has been one of the most difficult aspects of Russia’s negotiation for WTO accession, our estimates suggest that the most important component of WTO accession for Russia and its regions in terms of the welfare gains is liberalization of its barriers against FDI in services sectors.

More specifically, our central estimates are that the overall gains to Russia from WTO accession are 8.1 percent of Russian consumption (or 4.5 percent of GDP). By region, the welfare gains as a percent of GDP range from 3.8 and 3.9 percent in the cases of Siberia and the Urals, to 5.6 percent in the Northwest region.

Markusen, Rutherford and Tarr. Results in the Brown and Stern paper depend crucially on capital flows between nations, with capital importing nations typically gaining and capital exporting nations typically losing. In Dee et al., (2003), multinationals are assumed to capture the quota rents initially. So results of liberalization depend crucially on the fact that liberalization transfers rents to capital importing countries.

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