country’s rule of law or regulatory environment belong to this group of policy factors, such as the quality of a country’s rule of law or regulatory environment (Goswami et al 2012; van der Marel 2011).

Russia’s barriers are comparable to those of European countries, as can be seen in Table 11, which presents average tariff equivalents for Russia and a host of comparable countries over the period 2009– 2011 for two separate values of the elasticity of substitution (the two values can be seen as a band in which the exact tariff equivalent can vary) for which there is country information. Although according to this indirect method of measuring trade barriers, more are captured than can possibly be measured by the regulatory indexes, the results in Table 11 are nevertheless largely in line with the previous outcome using direct index approaches, such as the STRI. For example, Russia’s estimated trade barriers in services are below those of Belarus, although not for Germany, the Czech Republic, or Romania, with an estimated tariff equivalent of just over 54 percent, assuming the lower elasticity value.

Russia’s trade in services also depends on policies related to the domestic economic and institutional situation—“domestic enabling factors.” These factors (or fundamentals) promote trade in services, but at least in the short run they are given and cannot be influenced by policies. Among these enabling factors are a country’s factor endowments, such as the level of human capital, skills, and entrepreneurial ability; natural resources, such as those attracting tourism; and infrastructure essential to the services trade, such as good telecommunication networks that facilitate delivery of services. Finally, institutions may also be enabling factors, such as how well a country adheres to the rule of law and the quality of the regulatory environment (Goswami et al. 2012; van der Marel 2012).

The importance of the rule of law is related to the type of services an economy like Russia is capable of exporting. Services that are more complex tend to also be more sophisticated and have higher value added. The reason for their complexity is that many different contracts apply to their production processes. For optimal exploitation of trade in these services, the rule of law must be strong enough to enforce contracts. Figure 33 shows that there is a positive relationship, which appears to increase disproportionately at the high end of a country’s development, between rule of law and the importance of complex services.<sup>21</sup> Russia is situated just above the average fitted values line, meaning that the competitiveness of its complex services is relatively fine from the rule of law point of view. However, Russia’s exports in these sectors is still extremely low, confirming again that there is potential for increasing the role of more sophisticated and high value‐added service exports.

In addition to institutions, governance structures are of major importance for economic activity. Figure 34 illustrates a negative relationship between restrictiveness and regulatory quality. This means that the higher the restrictions in services trade policies and on direct investment in services, the lower the regulatory quality. In other words, governments with good regulatory policies facilitate well‐functioning and competitive services markets. In terms of policy, this means that addressing trade restrictiveness is a necessary (though not a sufficient) condition for increasing competitiveness: domestic institutions may have a complementary role in creating competitive markets. While Russia is where it is expected to be, there is still much room for improvement through deregulation of services policies.

> 21 The horizontal axis shows the index of Rule of Law taken from the World Bank’s governance indicators. The vertical axis shows the share of trade in those services sectors which are considered as complex, namely Professional services such as accounting and legal services, plus Finance and Insurance services. This measure is based on Costinot’s (2007) calculations.

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