in red, is situated below the fitted values line. This is true whether looking at gross value, direct value added, or total value added, in which forward linkages are considered. Some of Russia’s peers—e.g., India, South Africa, and Turkey—are above the predicted level of value‐added exports, while others— e.g., China and Indonesia—are below. This confirms that Russia has scope to increase the role of services in its trade, both as exports for final consumption and as inputs into exports of new goods or other services.

Russia’s positive performance of value‐added exports in terms of level of development mainly stems from the distribution sector,<sup>17</sup> which together with transport services shows a pattern in which more developed countries tend to export relatively less value added in these two sectors. In business services, however, value added in exports appears to increase the more developed a country becomes. Russia’s other business services position is below what could be expected; this is also true for communication.

Based on new indicators, Russia’s services exports are clearly performing below expectations. Also, the analysis illustrates the importance of services as inputs to other export activities, in particular energy. When the role of services as inputs into other economic activities is factored in, the analysis concludes, their share in total exports is consistent with Russia’s level of development. This is to a large extent what is found in such other resource‐rich countries as Kazakhstan, and it has important policy implications: (1) To increase and maintain a country’s competitiveness, efficient, high‐quality, and low‐cost services are necessary. (2) Other exports require the support of these services. (3) Finally, services as final exports can be developed if supportive policies are adopted (see section 5).

# **5 Services and Regional Development**

Russia is the largest country in the world. It spans nine time zones, has a complex geography and a variety of climate types, and shares land borders with nine other countries. Thus services are critical not only for Russia’s connections to the world economy but also to connect its regions with each other. This section explores the characteristics of regional services sectors using firm‐level data and assesses the extent to which internationalization of services differs by region.

Firm‐level data make it possible to explore more deeply the regional trade dynamics of Russian firms.<sup>18</sup> Figure 22 shows the revenue generated by each firm exporting services as part of their total services revenue, averaged across each regional services sector. It shows that the export propensity of firms is rather small, between 1.6 (North Caucasus) and 4.5 (Far East). Moreover, average export revenue is 2.9 percent of total services firm revenue in most regions. The high share of the Far East is mainly due to high revenue for transportation (12.2 percent).

> 17 The distribution services includes ISIC 50 Sales, maintenance and repair of motor vehicles and motorcycles; retail sale of automotive fuel; ISIC 51 Wholesale trade and commission trade, except of motor vehicles and motorcycles; ISIC 521 Non-specialized retail trade in stores; ISIC 522 Retail sale of food, beverages and tobacco in specialized stores; ISIC 523 Other retail trade of new goods in specialized stores; ISIC 524 Retail sale of second-hand goods in stores; and ISIC 525 Retail trade not in stores; ISIC 526 Repair of personal and household goods; ISIC 55 Hotels and restaurants.

> 18 The firm-level analysis applies both to Russia’s eight greater regions (Northwest, Central, South, Volga, Ural, Siberia, Far East, and North Caucasus), and to its 70 smaller regional districts. The data allow examination only of the number of exporting firms and their operational revenue in a single year, 2012; unfortunately, export and import data are not available in the database used.

13