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Estimating the Ad Valorem Equivalent of Barriers to Foreign Direct Investment

in the Maritime and Air Transportation Service Sectors in Russia

August 2003

October 2003 (revised)

November 2003 (re-revised)

January 2004 (final draft)

Fukunari Kimura (Keio University)

Mitsuyo Ando (Keio University)

Takamune Fujii (Aichi University)

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1. Introduction

2. Some conceptual issues

3. Restrictions on the Maritime Services Sector

4. Restrictions on the Air Transportation Services Sector

5. Estimating the Ad Valorem Equivalent of Barriers to the Transport Sectors

5.1 The Maritime Services Sector

5.2 The Air Transportation Services Sector

6. Summary and Conclusion

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1. Introduction

Service trade liberalization is now recognized as one of the most important

policy agenda in many countries in the world. However, different from the case of

trade in merchandise goods, the definition of barriers in trade in services itself is not

straightforward. Quantifying the seriousness of barriers as well as measuring

economic effects of removing such barriers is another difficult task. Despite a number

of technical as well as statistical difficulties, though, the measurement of barriers to

trade in services has increasingly been recognized as crucial inputs for constructive

policy discussions. There are urgent needs for reorganizing conceptual issues,

establishing the method of quantification, and estimating barriers to trade as well as

their economic impacts in an internationally comparable form.

This paper reports the results of our analysis on the maritime and air

transportation sectors in Russia. The study was conducted in cooperation with the

World Bank and Russian exports in Russian maritime and air transportation research

institutes. Since Russia does not have a membership of the World Trade Organization

(WTO) yet, information on trade restrictions based on the GATS Schedule, which is

often used in previous studies in other countries, is not available. The study therefore

depends on questionnaire surveys filled out by the Russian experts and in-detail

interviews with them. After settling a series of conceptual issues, we develop

restrictiveness index tables for two transportation sectors with scoring weights,

following McGuire, et al. (2000), and estimate restrictiveness indexes of barriers to

trade, which reflect the collected information on the regulatory environment in Russia.

Kang (2000) collected data on the regulatory environment for maritime

transportation services in 23 countries, i.e., restrictiveness indexes, from McGuire, et al.

(2000) in addition to shipping margins and cross-country and bilateral trade data.

Applying a regression method, he then estimated how such measures of the regulatory

environment affected the price of maritime transportation services. We assume that the

importance of these barriers across different countries, as estimated by Kang (2000), can

apply to Russia. We thus use our restrictiveness indexes and apply Kang’s estimates to

determine the extent to which prices of Russian transportation services are elevated by

barriers to FDI.

The paper plan is as follows: section 2 addresses several important conceptual

issues in the quantification of barriers to trade in services and clarifies our

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methodological approach. Section 3 obtains the restrictiveness index in maritime

services sector, and section 4 the restrictiveness index in the air transportation services

sector. Then, section 5 estimates ad valorem equivalents of barriers in the transport

sector, based on restrictiveness indexes in these two transportation services. The paper

is concluded in section 6.

2. Some conceptual issues

The Uruguay Round expanded the realm of international policy discipline

beyond trade in merchandise goods, and the newly established WTO started covering

trade in services, intellectual property rights, and other new fields. International trade

theory, however, has not yet fully digested the evolution of policy environment to

formulate rigorous conceptual framework. What should be regarded as barriers to

trade in services? How can we deal with the issue of borderline between international

policy discipline and domestic policies? How should we interpret the legal framework

centered by the GATS in the context of economic theory? To the authors’

understanding, these issues are not fully addressed and discussed in the economic

literature.

These issues are, however, essential when the empirical methodology is

discussed. In the following, we address our views on these issues in order to set stage

for our investigation.

(1) The WTO policy principle and domestic policies

Compared with the GATT regime, the WTO regime has a much more delicate

interface with the traditional logic of domestic policies in each country. From the

viewpoint of standard economics, possible conflicts are observed in the following three

dimensions. First, in the GATT regime, international policy discipline basically takes

care of border policies of each country with some minor exception. On the other hand,

the WTO regime, particularly the GATS and the TRIPS, does not stop at the border but

substantially steps into domestic policy arena. Globalizing economic activities

naturally justify the penetration of international policy discipline into domestic policies,

but it does not necessarily mean that all domestic policies should be disciplined by

international policy principle.

Second, the objective function for international policy discipline primarily

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deals with efficiency in resource allocation. On the other hand, domestic policies are

often dictated by a more complicated objective function, taking care not only of

efficiency but also of income distribution, poverty alleviation, regional development,

and other political objectives. Therefore, in principle, international policy discipline is

not supposed to or even should not penetrate up to the bottom of domestic policy arena.

Third, international policy discipline in the GATT regime is centered by the

non-discrimination principle. Although the precise theoretical statement must be

constructed with care, simple economic models basically provide supporting logic for

the MFN and NT principles as removers of wasteful market segmentation. On the

other hand, the WTO regime goes beyond the non-discrimination principle and partially

promotes harmonization or convergence of institutions. The globalization of economic

activities certainly enhances advantages of institutional convergence, but there is no

economic logic supporting the international convergence of all kinds of institutions.

The diversified institutions across countries often have their own justification.

Whether institutional convergence or harmonization is desirable or not must carefully

be investigated for each individual case.

(2) The structure of the GATS

To understand such characteristics of the WTO policy discipline, we must

read the text of the GATS with care. The GATS was not necessarily written up exactly

along the line of economic logics. Rather, the articles were constructed in the process

of political negotiations.

The GATS structures policy disciplines as follows: first, transparency

requirement and the MFN principle are imposed on all members, allowing negative

listing for the MFN obligations (Articles II and III). Second, national treatment and

market access are addressed on the positive list basis (Articles XVI and XVII). The

commitments are listed in the “Schedules of Specific Commitments” in the form of a

matrix with 4 transaction modes and 155 sectors, accompanied with the cross-sectoral

commitments. Third, the obligation on domestic regulation is presented when a

country makes specific commitments (Article VI).

Market access is a newly created concept in the process of the Uruguay

Round negotiations. National treatment requirement calls for equal-footing treatment

for foreign services providers vis-à-vis domestic services providers. However, it was

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claimed that various restrictions on the entry of services providers, such as restrictions

on the qualification, standards, and licensing for services providers, would virtually

work as barriers to foreign entry even if they are applied equally for both foreign and

domestic services providers. To take care of pre-entry restrictions, particularly

“quantitative” restrictions, the concept of market access was introduced. In addition,

“qualitative” pre-entry restrictions were taken care of by Article VI on domestic

regulation.

The relationship between these stratified obligations and policy discipline is

not entirely clear-cut. The MFN requirement and the national treatment requirement

can roughly be regarded as a part of the non-discrimination principle. On the other

hand, market access includes elements of both non-discrimination and the

harmonization/convergence of institutions. Remember that there is no economics that

justifies the harmonization/convergence of all sorts of institutions. Whether

harmonization/convergence is desirable or not must be judged case by case. In this

regard, full commitment on no restriction regarding market access is not necessarily the

best policy from the viewpoint of standard economics.1

Four modes of services transactions in the “Schedule” must also be

interpreted with care. Four modes, namely, (i) cross-border, (ii) consumption abroad,

(iii) commercial presence, and (iv) the movement of natural persons, are based on the

location of services suppliers and services consumers. The borderline between a pair

of modes, however, is sometimes unclear. Furthermore, the importance of each mode

as well as the mechanics of transactions is widely different across services sectors.

Therefore, the nature of restrictions is also of variety. Therefore, the listing of

restrictions and the weights across listed items must necessarily be constructed sector by

sector. In the case of transportation services, modes 1 and 3 are of particular

importance.

1 For example, many countries have restrictions on accounting services providers through qualified licensing system. Even in the case in which qualifying exams for accountants are not discriminatory across the nationalities of applicants, it may be a restriction on market access if foreign applicants are virtually in disadvantageous position vis-à-vis domestic applicants. However, we cannot jump into conclusion that accountants licensing system must be unified in the world because such institutions are history-dependent in each country and often has certain logic of justification. On such problems, please see Kimura (2003).

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(3) “Barriers” in this paper

Since the economic interpretation of the GATS policy discipline is not entirely

clear, the definition of “barriers to trade in services” could be different by researchers.

In our interpretation, the GATS obligation has two components: non-discrimination and

a limited portion of institutional convergence/harmonization on which the member

countries are agreed upon. When arguing what countries should do from the viewpoint

of economics, we had better not be satisfied with the legal interpretation of the GATS

text but have a solid basis of argument with policy principles.

When foreign services providers try to enter the market of a country

concerned and provide services, they face two kinds of impediments: impediments

imposed on foreign services providers in a discriminatory manner and impediments

affecting both domestic and foreign services providers. The former should obviously

be taken care of by the non-discrimination principle and be regarded as “barriers”.

The latter is partially in the realm of institutional convergence/harmonization, and we

must judge case by case on whether they should be regarded as “barriers” or not.

This paper primarily focuses on discriminatory impediments against foreign

services providers. However, some regulations seem to affect both domestic and

foreign services providers even though they could still be discriminatory against

foreigners. We will pick up some regulations as such in the following exercise for

maritime transportation services.

(4) The restrictiveness index method and ad valorem equivalents

This paper first applies the restrictiveness index methodology following

McGuire, et al. (2000), Dee (2003), and other previous studies, which enables us to

quantify the existence of barriers, utilizing the collected information on the regulatory

environment. Restrictions against foreign services suppliers are listed in

sector-specific restriction tables, and weights are assigned for listed restrictions. In

order to keep comparability with previous studies, we apply the restriction table for

maritime transportation services developed by McGuire, et al. (2000) as it is. The

restriction table for air transportation services is newly developed, trying to be

consistent with the case of maritime transportation services. Based on the

questionnaire survey and interviews, scoring sheets are filled out to obtain the overall

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restrictiveness of maritime and air transportation services in Russia. We obtain the

foreign restrictiveness index (FR index) and the foreign discriminatory restrictiveness

index (FDR index), the latter of which is a subset of the former and covers

discriminatory restrictions imposed only on foreign services providers. The detailed

design of restriction tables will be explained in the following sections.

Then, using the estimated restrictiveness indexes, ad valorem equivalents of

barriers are estimated. Kang (2000) uses restrictiveness indexes for maritime services

in 23 countries, which are obtained by McGuire, et al. (2000), and estimates the formula

to relate restrictiveness indexes to shipping margins. Utilizing his estimated results,

we convert our restrictiveness indexes into ad valorem equivalents of barriers.

Let us briefly explain our theoretical foundation of the concept of ad valorem

equivalents. Consider a simple partial equilibrium model of a service sector with

perfect competition. Assume that the country concerned is small and the service

supply by foreign services providers is perfectly elastic; i.e., the foreign supply curve is

supposed to be horizontal.2 When only discriminatory restrictions exist, the ad

valorem tariff equivalent (TE) is drawn as in Figure 1.3 When services provided by

foreigners and those provided by domestic suppliers are perfect substitutes, the upper

diagram of Figure 1 applies. When services provided by foreigners and those provided

by domestic suppliers are imperfect substitutes, a little more complicated interaction

between the market for domestic services and the market for foreign services occurs.

In this case, the lower diagram of Figure 1 applies. In either case, the TE is simply

measured as

TE (%) = [(Pf1 − Pf

0 ) /Pf0] ⋅100 ,

where 1fP is the price of services provided by foreign suppliers with restrictions

and 0fP is the price of services provided by foreign suppliers without restrictions.

==Figure 1==

2 If the foreign supply curve is upward-sloping, the increase in the domestic price of the services concerned would be smaller than the tariff equivalent of impediments imposed on the foreign suppliers. For the detail discussion, see Deardorff and Stern (2003, pp. 4-8). 3 Our model is constructed primarily for mode 1 (cross-border) transactions of services on the analogy of trade in merchandise goods. For simplicity, possible complications in our setting caused by different modes of services transactions are neglected.

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When some restrictions affect both domestic and foreign services suppliers,

the analysis becomes a bit more complicated. Suppose that discriminatory restrictions

are removed in the first step and restrictions common to domestic and foreign suppliers

are taken away in the second step. Then, in the second step, as drawn in Figure 2,

supply curves of domestic and foreign services suppliers shift downward, and the new

equilibrium is obtained with a lower price. The TE for foreign services is expressed as TE(%) = [(Pf

1 − Pf0 ') /Pf

0 '] ⋅100 , where '0

fP is the new equilibrium price when all restrictions are removed. In this

case, the TE can be proportionally decomposed into two: tariff equivalents of

discriminatory restrictions and those of non-discriminatory restrictions. This model

provides the theoretical basis of our work.

==Figure 2==

3. Restrictions on the Maritime Services Sector

To estimate the ad valorem equivalent of barriers to the maritime transport

sector, we first calculate the restrictiveness index. An index methodology has been

used to quantify the extent of restrictions on international trade in services. McGuire

et al. (2000), for instance, employed “restrictiveness index methodology” to estimate

the restrictiveness of maritime services in 35 economies. The method to obtain the

index is as follows: first, possible restrictions are classified into restriction categories

with weights. The weights are decided, based on the importance of the category in

terms of how significantly the restriction of the category would limit service suppliers

from entering or operating in the market, and the sum of weights for all categories is 1.

Second, a score with a range from 0 (least restrictive) to 1 (most restrictive) is assigned

for each category, according to the degree of restrictiveness, so that the score reflects the

type of restriction imposed by an economy. Third, the estimated score for each

category is obtained by multiplying the selected score by a weight that is assigned to

each restriction category. Finally, a restrictiveness index is calculated by summing up

the estimated scores.

Table 1 shows restriction categories, weights for them, and scoring for each

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category, which was developed by McGuire et al. (2000).4 Our study uses this

sector-specific restriction table and estimates the foreign restrictiveness index (FR

index) for the Russian maritime services sector, based on the information observed in

the questionnaire filled out by the Russian research institute, “Central Marine Research

and Design Institute (CNIIMF)” as well as the interview with the staff.5 The score

assigned to each category in our study is provided in Table 1, and the reasons for the

choice of scores are summarized in Table 2. Table 2 shows the estimated score for

each category and the sum of estimated scores or the FR index as well.

This study also attempts to estimate the foreign discriminatory restrictiveness

index (FDR index), which captures restrictions imposed specifically on foreign services

suppliers and not on domestic services suppliers. In order to estimate this index, lower

weights (than those in the calculation of the FR index) are assigned for some restriction

categories that apply to both domestic and foreign services suppliers, that is, possible

non-discriminatory restriction categories. Since such restrictions could still affect

foreign suppliers more seriously, a half of the weight is assigned for these restriction

categories to reflect the degree of possible and partial discriminatory restrictions. The

estimated scores and the FDR index are presented in Table 2.

Sokolov (2002) attempts to use the sector-specific restriction table developed

by McGuire et al. (2000) to calculate the FR index for the Russian maritime sector and

obtains 0.29. Since he uses different sets of information and assigns different scores

for some categories, he has a lower index than ours. How this paper revises his study

would be clarified when the reasons for our choice of a score for each restriction

category are explained in the following. For a comparison, Tables 1 and 2 include

scores chosen in Sokolov (2002) and the estimated scores.

==Table1==

4 McGuire et al. (2000) assigned weights to restriction categories by making a priori assessment of the cost of restrictions to economic efficiency; restrictions they considered to impose a greater cost on economic efficiency are given a greater weighting. 5 We had an interview with Yuri Ivanov (deputy general director), Tamara Novikova (head of laboratory), and Vyacheslav Sergeev (economist) from CNIIMF at their institute on 29th May, 2002.

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==Table2 ==

The restriction categories are classified into (i) restrictions on commercial

presence and cross-border trade and (ii) other restrictions. In Table 1, the categories

for restrictions on commercial presence and cross-border trade by foreign service

providers, which may affect the ability to be established as services providers and

provide maritime services, include “conditions on the right to fly the national flag”,

“form of commercial presence”, “direct investment in shipping service suppliers”,

“direct investment in onshore maritime service suppliers”, “cabotage”, “transportation

of non-commercial cargoes”, and “permanent movement of people”. On the other

hand, other restrictions consist of “port services”, “discretionary imposition of

restrictions”, “United Nations liner code”, “government permits conference”, “bilateral

maritime services agreements on cargo sharing”, “composition of the board of

directors”, and “temporary movement of people”.

Among the (i) restrictions on commercial presence and cross-border trade, a

category “conditions on the right to fly the national flag” has the highest weight of 0.15

since this is a critical sector-specific requirement for service suppliers to enter and

provide services. The rest of restriction categories such as restrictions on direct

investment in shipping service suppliers have a weight of 0.1 except a category

“permanent movement of people” with a weight of 0.02, considering that they are

generally to be more restrictive and a greater cost to economic efficiency than those

restrictions on the movement of people. As for (ii) other restrictions, the weights are

lower since they are considered to be less restrictive: weights are no more than 0.05

except that the weight for a category “port services”, 0.1.

We could “qualitatively” address that what sorts of barriers seem to be

important ones, based on the estimated scores (the score obtained by multiplying

weights by score chosen), though, precisely speaking, such barriers may not necessarily

imply the factors that cause the high tariff equivalents proportionally, which will be

estimated in section 5, because the estimated tariff equivalents are calculated based on

the summed-up restrictiveness indexes (not each individual component of

restrictiveness). In the maritime services sector in Russia, categories such as

“cabotage”, “conditions on the right to fly the national flag”, “port services”, and “form

of commercial presence” have higher estimated scores, i.e., 0.1, 0.75, 0.065, and 0.05,

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respectively, suggesting that they seem to be significant barriers to the maritime services

sector in Russia. In the following, how the score is chosen for each category is briefly

explained, and the detailed description is provided in the Appendix 1.

As for cabotage, “foreigners generally cannot provide domestic maritime

service” is chosen since only ships flying Russian flag are allowed to provide cabotage

services. The estimated score for this category is 0.1. As for conditions on the right

to fly the national flag, “commercial presence is required in the domestic economy” and

“ship must be registered” are chosen as the conditions, ending up with the estimated

score 0.075. Regarding the form of commercial presence, “measures which restrict or

require a specific type of legal entity or joint venture agreement” is chosen because new

non-Russian service suppliers are required to be legal entities with the legislation of the

Russian Federation in order to become established in the domestic economy and

provide cabotage services.6 Considering that national flag is required only when

cabotage services are supplied, a score 0.50 is assigned instead of 1.00 for this category,

and the estimated score is 0.05. As for permanent movement of people, “no entry of

executives, senior managers and/or specialists” is chosen because captains and some

other specialists (senior assistant of the captain, senior mechanic and radio operator) on

ships flying Russian flag must be Russian citizens, and the estimated score is 0.02. As

for direct investment in shipping services suppliers and onshore maritime service

suppliers, we choose “there is no restriction on maximum equity participation”, and thus

the estimated score is 0.0. Regarding transportation of non-commercial cargos, “no

restrictions on access to non-commercial cargos” is chosen because there are numerous

facts of transporting non-commercial cargo by private (including foreign) shipping

companies though there is no evidence on how this type of activity is regulated in

Russia (Sokolov, 2002). The estimated score is 0.0.

As for port services, some restrictions on access to ports exist; the mandatory

use of pilotage, towing, tug assistance, navigation, berthing services, anchorage, and

waste disposal. The estimated score concerning port services is 0.065, which is the

highest among categories for “other restrictions”. The category “government permits

6 Those who could obtain national flag are either citizens of the Russian Federation, legal entities with the legislation of the Russian Federation, the Russian Federation, or municipal bodies.

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conference” has estimated score 0.05, based on the fact that government permits the

operation of the conferences in Russia. As for bilateral maritime services agreements

on cargo sharing, this paper follows the procedure proposed by McGuire et al. (2000)

and calculates the score by adding Russia to the 20 economies selected in McGuire et al.

(2000) for this category. Since Russia has six bilateral agreements with Algeria, Brazil,

Tunisia, Mexico, Sri Lanka, and Ethiopia, and Brazil and Mexico are two of the 20

countries, the score is calculated by dividing two by 20. The estimated score is 0.045.

As for the United Nations Liner Code, Russia is the party but does not actually apply it.

The estimated score for this category is 0.0375. As for the category “discretionary

imposition of restrictions”, although our paper chooses “governments are able to impose

selective restrictions”, score 0.5 is assigned instead of 1 because various licensing

systems with complicated procedures in Russia may intentionally impose selective

restrictions to foreign suppliers in the process but may not. The estimated score is

0.025. As for the category “ temporary movement of people”, “no entry of executives,

senior managers and/or specialists” is chosen based on the same reason as the choice for

“permanent movement of people”, and the estimated score is 0.01. As for the

composition of the board of directors, there is no regulation on the share of the board

that can comprise foreigners. Thus the estimated score is 0.0.

With the choice discussed above, our study obtains the FR index for Russian

maritime services, 0.482, as Table 2 shows. Table 3 presents FR indexes for 12

industrialized economies and 11 developing economies examined by McGuire et al.

(2000). Compared with other economies, Russia’s maritime sector seems to be more

or less the average level of restrictiveness observed in developing economies and about

the same as Mexico while more restricted than most of the industrialized economies.

As discussed at the beginning of this section, the FDR index is also calculated.

Among restriction categories, we regard “transportation of non-commercial cargoes”,

“port services”, and “government permits conference” as those that partially restrict

activities of both domestic and foreign services suppliers, that is, possible

non-discriminatory restrictions. Since such restrictions could still be imposed on

foreign suppliers more discriminatorily but could be removed at the same time for both

domestic and foreign suppliers, half of their weights are assigned for these restriction

categories in calculating the FDR index. The FDR index obtained is 0.424, which is

88% of the FR index.

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==Table3==

4. Restrictions on the Air Transport Services Sector

This section also applies the “restrictiveness index methodology” to the air

transport sector and estimates the FR index, based on the information observed in the

questionnaire filled out by the Russian research institute, “Infomost” as well as an

interview with the staff.7 Unlike the maritime services sector, however, our study

newly develops a sector-specific restriction table for the air services sector and then

calculates the FR index, based on the table. Table 4 presents the sector-specific table

for the air transport sector with restriction categories, their weights, and scoring for each

category. The table is developed so that it includes possible restrictions in the form

basically comparable to the sector-specific table of the maritime sector, considering the

importance of the category in terms of how significantly the restriction of the category

would limit service suppliers from entering or operating in the market. Table 5 lists

estimated scores as well as the total score, i.e., the FR index. The reasons for the

choice of scores are provided in Table 5.

==Table4==

==Table5 ==

As Table 4 presents, the restriction categories are roughly divided into (i)

restrictions on commercial presence and cross-border trade and (ii) other restrictions.

The former restriction categories cover “form of commercial presence”, “direct

investment in international air transport service suppliers”, “direct investment in

domestic air transport service suppliers”, “permanent movement of people”,

“international air transport”, “domestic air transport”, “international charter flight”, and

“domestic charter flight”. Other restriction categories consist of “airport services”,

7 We had an interview with Boris Rybak (director) from “Infomost” and Andrew Shumilin (general director) from “Avia & Business Consulting” at the World Bank Moscow office on 27th May, 2002.

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“discretionary imposition of restrictions”, “discretionary imposition of subsidy to

protect domestic air companies”, “inter-government Air Service Arrangement (ASA)

agreement”, “composition of the board of directors”, and “temporary movement of

people”.

The categories for the (i) restrictions on commercial presence and

cross-border trade have a weight 0.1 except a category “permanent movement of

people” with a weight 0.02, considering that they are generally to be more restrictive

and a greater cost to economic efficiency than those restrictions on the movement of

people. As for categories for (ii), the weights are lower since they are considered to be

less restrictive: weights are no more than 0.05 except the weight for a category “airport

services” 0.1.

Similarly to maritime services, we could “qualitatively” address that what

sorts of barriers seem to be important ones, based on the estimated scores (the score

obtained by multiplying weights by score chosen), though, precisely speaking, such

barriers may not necessarily imply the factors that cause the high tariff equivalents

proportionally, which will be estimated in the next section, because the estimated tariff

equivalents are calculated based on the summed-up restrictiveness indexes (not each

individual component of restrictiveness). In the air transport services sector in Russia,

categories such as “form of commercial presence”, “domestic air transport“, “domestic

charter flight”, “direct investment in international air transport service suppliers”, and

“direct investment in domestic air transport service suppliers” have higher estimated

scores, i.e., 0.1, 0.1, 0.1, 0.051, 0.051, respectively, suggesting that restrictions on the

form commercial presence, domestic flights provided by foreign suppliers, and direct

investment (foreign ownership) seem to be under significant barriers. In the following,

how the score is chosen for each category is briefly explained, and the detailed

description is provided in the Appendix 2.

As for the “form of commercial presence”, “measures which restrict or require

a specific type of legal entity or joint venture arrangement” is chosen since to enter and

provide air transport services are restricted/prohibited for foreigners. The estimated

score is 0.1. As for domestic air transport as well as domestic charter flight, foreigners

generally cannot provide such domestic flight services. Thus, the estimated score for

both categories is 0.1. As for direct investment in international air transport sector and

domestic air transport sector, maximum foreign ownership is regulated at 49%. The

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estimated score for both categories regarding restrictions on foreign ownership is 0.051.

In contrast with domestic flight services, foreigners can provide international regular

flight services with inter-government agreements, ASAs, and international charter flight

services upon agreements. Thus, their estimated scores, 0.05, are lower than those for

categories concerning domestic flight services. Regarding the movement of people,

this paper chooses “no entry of executives, senior managers and/or specialists” because

manager must be Russian citizen. The estimated score for this category is 0.02.

Among categories for other restrictions, the category “Inter-governmental

ASA agreement” has the highest estimated score, 0.038; Russia has 138 bilateral ASAs,

105 agreements out of which permit only one or two appointed foreign air companies.

This paper regards such ASAs with only a few appointed foreign air companies as more

restrictive ones, and thus the score is obtained by dividing 105 by 138. Concerning

discretionary imposition of subsidy to protect domestic air companies, the estimated

score is 0.375 since “governments indirectly subsidizes only domestic companies” is

chosen, based on the fact that the government indirectly subsidies only some domestic

air companies, Aeroflot and Transaero, in the form of customs exemptions for

procurement of foreign machinery. As for composition of the board of directors, a

score of 0.677 is assigned because foreigners can consist of up to one-third of the total

number of the board of directors in an air transport services supplier, and the estimated

score is 0.0134. As for airport services, although foreign suppliers are permitted to

provide these air services, in practice, the major commercially registered providers of

these services are all 100% Russian except the case of fuel supply services, and it is

likely to be more difficult for foreign services suppliers to enter. Thus, a score 0.2 is

assigned to repair and maintenance services of aircraft, air services trade and marketing,

and computer reservation system, and the estimated score for this category is 0.009.

As for the category “ temporary movement of people”, “no entry of executives, senior

managers and/or specialists” is chosen based on the same reason as the choice for

“permanent movement of people”, and the estimated score is 0.01. As for the category

concerning discretionary imposition of restrictions, “governments are unable to impose

selective restrictions” is chosen, and the estimated score is 0.0.

With scores chosen above, the FR index, 0.630, for air transport services in

Russia is obtained as Table 5 presents. Note that the FDR index is same as the FR

index in the case of the air transport sector because all categories are considered as

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discriminatory restrictions against foreigners. The index is higher than the one for the

maritime services sector in Russia.

5. Estimating Ad Valorem Equivalent of Barriers to the Transportation Sectors

To convert FR indexes obtained in sections 2 and 3 into tax equivalents, our

study uses coefficients estimated by Kang (2000) that estimates the price impact of

restrictions on shipping margins. Therefore, let us briefly explain his estimation

method before discussing our ad valorem equivalents of barriers to the transport

services sectors.

Kang (2000) uses shipping margins as a proxy of shipping price. In his paper, shipping margins from country i (exporter) to country j (importer), Mij , are

defined as

Mij =IM ji

EXij

(1)

where IM ji represents the CIF value of imports of country j , which are imported

from country i , and EXij the observed FOB value of exports of country i , which are

exported to country j . Shipping margins, Mij, are the function of bilateral restriction ( Rij ), distance between countries ( Dij ), and the scale of bilateral trade ( SCij ). When

the functional form is of the Cobb-Douglas type, and natural logarithm is taken in order

to obtain the log-linear form, the equation can be written as ln(Mij ) = C +α ln(Rij ) + β ln(Dij ) + γ ln(SCij ) (2)

where C = ln(c) ( c is a constant term) and each coefficient represents elasticity. Note that Rij in this case includes the information on restrictions in both sides, i.e.,

exporter’s and importer’s. Thus, the equation (2) can be rewritten as follows: ln(Mij ) =C +α1 ln(Ri) +α2 ln(R j ) + β ln(Dij ) + γ ln(SCij ). (3)

where Ri and R j present the restrictiveness index in country i and j , respectively.

When Ri and R j are divided into restrictions on commercial presence ( Ric and Rj

c)

and those on other restrictions ( Rio and Rj

o), equation (3) can be rewritten again as

follows:8

8 Kang (2000) argues that, according to the argument by McGuire et al. (2000),

18

ln(Mij)=C+α11ln(Rio)+α12ln(Ri

c)+α21ln(Rjo)+α22ln(Rj

c)+βln(Dij)+γln(SCij). (3’)

Based on equation (3) or extended forms of equation (3’) with dummy

variables for taking care of development stages of trading countries, Kang (2000)

estimates the price impact of restrictions on shipping margins.9 The estimation results

as the representative model he chose for the case of i =developing economies are as

follows:

ln(Mij) =0.3388+0.1416ln(Ri)+0.0443ln(Rj

o)+0.0011ln(Dij)−0.0049ln(SCij).10(4)

With the coefficient for restrictions in an exporting country, or the elasticity of Ri in the maritime transport sector, this paper calculates ad valorem equivalents of

restrictions on the two transport services sectors11 in Russia in two ways; since

equation (4) does not allow us to consider the case of Ri =0, this paper instead, as a proxy of the case when all restrictions are removed, thinks of (a) the case that the degree

of existing restrictions in Russia is reduced by 100% (i.e., all restrictions are removed)

and (b) the case that the degree of existing restrictions in Russia is lowered to the level

of Singapore ( R=0.207), where McGuire, et al. (2000) found its FR index the lowest in

their samples, as the least restrictive situation in reality. To obtain ad valorem equivalents for both cases, (i) shipping margins with existing restrictions, MRussia , (ii)

those without restrictions for case (a), MRussia(a ) , and (iii) those with the least restrictions

for case (b), MRussia(b ) , are first calculated, with the coefficient and other variables

available from Kang (2000), based on the following equations: (i) ln(MRussia)=ln(Maverage)−0.1416⋅[ln(Raverage)−ln(RRussia)]

12 , (ii) MRussia(a) =MRussia⋅(1−0.1416) , and (iii)

restrictions on commercial presence are those on the movement of capital and restrictions on other restrictions are those on trade in maritime services. 9 Since the correlation between Ri

o and Rjc is high and there may be some

multicollinearity problem, the two should not be included in the extended forms of estimation equation (3’) at the same time. 10 The results of his various estimations show that restrictions on commercial presence of maritime services in importing countries ( Rj

c) have no significant impact on the shipping margins of exported products, and the exclusion of this variable slightly improves the fitness. 11 This paper applies the coefficient and other variables in the maritime transport sector to the air transport sector as proxy variables in order to convert the FR index for the air transport sector into tax equivalent. 12 Margin for Russia is also estimated by using the coefficient and other variables

19

MRussia(b) =MRussia⋅(1−0.1416⋅[(RRussia−0.207)/RRussia]), respectively.13

Since the elasticity and other variables of the maritime transport sector are

used as proxy variables to estimate margins in the air transport sector, this would also

result in over/underestimating ad valorem equivalent in the air transport sector.

However, estimated margins seem to be plausible, considering that the current shipping

margins fall between 1.05 and 1.09 in many developed countries.14

The ad valorem equivalent on a net basis (%), TE , is calculated as follows:

TE = {[(MRussia −1) − (MRussia(a ) −1)]/(MRussia

(a ) −1)} ⋅100 (case (a))

or TE = {[(MRussia −1) − (MRussia

(b ) −1)]/(MRussia(b ) −1)} ⋅100. (case (b))

Note that Kang’s shipping margins or CIF/FOB ratios ( M ) are here used as the basis of

ad valorem equivalent, and the gap between CIF and FOB (i.e., CIF/FOB ratio –1) is

regarded as the “price” of transport services.15 And, the “price” and the restrictiveness

index of each country are assumed to correlate with each other after controlling

country-specific conditions.

Table 6 presents ad valorem equivalents of restrictions on the two transport

sectors in Russia. As the table shows, the equivalent rates are very sensitive to the

benchmark price; 994% (case (a)) and 108% (case (b)) for the maritime services sector,

and 310% (case (a)), and 103% (case (b)) for the air transport services sector when

discriminatory and non-discriminatory restrictions on foreign suppliers are considered.

Since we assume the perfect substitutability between domestically supplied services and available from Kang (2000) because the comparable data of which are not available. 13 Since the values for Rj

o, Dij , and SCij are not also directly available for Russia, country-specific effects due to these variables are neglected. We also assume that the coefficient, 0.1416, is linearly applicable even when the restrictiveness index drastically changes its value; i.e., 1% reduction of restrictiveness index ( Ri ) pushes down MRussia by 0.1416%, and 100% reduction lowers MRussia by 14.16%. 14 See Kang (2000, Table 11.1) for shipping margins by country. 15 To be consistent with our theoretical setting, we here assume the perfect substitutability between domestically supplied services and foreign supplied services because we cannot distinguish these in the actual supply of transport services in Russia. If we could apply a model with imperfect substitutability between domestically supplied services and foreign supplied services, the reduction in the price of foreign supplied services due to trade barrier removal would be larger than that in the price of domestically supplied services, and thus the estimates of TE for foreign supplied services would be larger than our results.

20

foreign supplied services in small country setting, the equivalent rates imply that the

price of transport services provided by domestic and foreign suppliers is higher by the

rates than it would be without restrictions or with least restrictions. For instance, in the

air transport sector, the price of air transport services provided by domestic and foreign

suppliers is higher by 310% than it would be without discriminatory and

non-discriminatory restrictions and by 103% than it would be with least discriminatory

and non-discriminatory restrictions.

==Table 6==

On the other hand, when only discriminatory restrictions on foreign suppliers

are considered, the equivalents for the maritime sector are 875% (case (a)) and 95%

(case (b)). They suggest that the price of maritime transport services provided by

domestic and foreign suppliers is higher by 875% than it would be without

discriminatory restrictions and by 103% than it would be with least discriminatory

restrictions.

6. Summary and Conclusion

This paper presented the results of estimating ad valorem equivalents of

barriers to foreign direct investment in the maritime and air transportation sectors in

Russia. We obtained information on trade restrictions on Russia mainly from

questionnaire surveys filled out by the Russian experts and in-detail interviews with

them. We first applied the restrictiveness index methodology following McGuire, et al.

(2000), which enables us to quantify the existence of barriers, utilizing the collected

information on the regulatory environment in Russia. Then, using the estimated

restrictiveness indexes as well as the estimates of price margins obtained by Kang

(2000), we estimated ad valorem equivalents of barriers to determine the extent to

which prices of Russian transportation services are elevated by barriers to FDI.

In applying the restrictiveness index methodology, our study attempted to

estimate not only the overall foreign restrictiveness (FR) indexes for maritime and air

transportation services but also the foreign discriminatory restrictiveness (FDR) indexes,

the latter of which is a subset of the former and covers discriminatory restrictions

imposed only on foreign services providers, capturing restrictions imposed specifically

21

on foreign services suppliers and not on domestic services suppliers.

For the maritime services sector in Russia, we found that the FR index is

0.482, and the FDR index is 0.424. Compared with other economies covered by

McGuire, et al. (2000), Russia’s maritime sector seems to have more or less the average

level of restrictiveness observed in developing economies while more restricted than

most of the industrialized economies. In Russia, categories including “cabotage”,

“conditions on the right to fly the national flag”, “port services”, and the “form of

commercial presence” indicate significant barriers to the maritime services sector.

While foreign penetration has already been observed in the operation of international

maritime transportation services, foreign entry is still mostly restricted for domestic

maritime transportation services through explicit and implicit restrictions. In particular,

the requirement of national flag, which can basically be obtained only by Russian

citizens and legal entities with the legislation of the Russian Federation, effectively

blocks foreign services providers to become established in the domestic economy and

provide domestic maritime services. Citizenship requirement also applies to the

qualification of key personnel in providing services. Captains and some other

specialists such as senior assistant of the captain, senior mechanic and radio operator on

ships flying Russian flag must be Russian citizens.

For the air transport services sector in Russia, we obtained that the FR index

is 0.630. Note that the FDR index is same as the FR index in the case of the air

transport sector because all categories are considered as discriminatory restrictions

against foreigners. Categories including “form of commercial presence”, “domestic air

transport“, “domestic charter flight”, “direct investment in international air transport

service suppliers”, and “direct investment in domestic air transport service suppliers”

suggest that restrictions on the form of commercial presence, domestic flights provided

by foreign suppliers, and direct investment (foreign ownership) seem to be under

significant barriers. In Russia, as is in the maritime sector, foreign entry is highly

restricted for domestic air transportation services though foreign penetration has been

observed in the operation of international air transportation services. Domestic air

transportation services provided by foreign suppliers are prohibited, regardless of

whether regular flights or charter flights. In addition, for both direct investment in

international air transportation and domestic air transportation services sectors, the

maximal foreign ownership is regulated at 49%, and the maximal proportion of foreign

22

board members is one-third. These regulations apparently prevent foreign entry to the

air transportation services sector in Russia. A small number of Russian bilateral ASAs

with multiple appointed foreign air companies is also indirect evidence that reveals

restricted condition of Russian air transportation sector.

Ad valorem equivalents of restrictions on the two transport sectors

corresponding to the obtained the FR and FDR indices are estimated in two scenarios:

the case in which all the restrictions are completely removed (case (a)) and the case in

which the restrictions are removed up to the level of Singapore that presented the lowest

observed level of restrictions in McGuire, et al. (2000) (case (b)). As for the maritime

services sector, the equivalent rates for the FR index and the FDR index are,

respectively, 994% (case (a)) and 108% (case (b)), and 875% (case (a)) and 95% (case

(b)). As for the air transport services, the equivalents are found to be 310% (case (a))

and 103% (case (b)) for the FR index.

References

Deardorff, Alan V. and Robert M. Stern (2003), “Empirical Analysis of Barriers to

International Services Transactions and the Consequences of Liberalization: A

World Bank Course. Module 2: Empirical Analysis of Barriers to

International Services Transactions and the Consequences of Liberalization”,

mimeo.

Dee, Philippa (2003), “Measuring and Modelling Barriers to Services Trade: Australia’s

Experience”, mimeo.

Fink, Carsten, Aaditya Mattoo and Ileana Cristiana Neagu (2001), Trade in International

Maritime Services: How Much Does Policy Matter? World Bank Policy

Research Working Paper 2522

Hoekman, Bernard, Aaditya Mattoo and Philip English (2002), Development, Trade,

and the WTO: A Handbook, Washington D.C.: World Bank

Johnson, Martin, Tendai Gregan, Geraldine Gentle and Paul Belin (2000), “Modeling

the Benefits of Increasing Competition in International Air Services”, in

Findlay, Christopher and Tony Warren eds., Impediments to Trade in Services:

Measurement and Policy Implications, London; Routledge.

Kang, Jong-Soon (2000), “Price Impact of restrictions on maritime transport services”,

23

in Findlay, Christopher and Tony Warren eds., Impediments to Trade in

Services: Measurement and Policy Implications, London; Routledge.

Kang, Jong-Soon and Christopher Findlay (2000), “Regulatory Reform in the Maritime

Industry”, in Findlay, Christopher and Tony Warren eds., Impediments to Trade

in Services: Measurement and Policy Implications, London; Routledge.

Kimura, Fukunari (2003),“Globalization and Harmonization: The Case of Accountancy

Services in Japan.” In Takatoshi Ito and Anne Krueger, eds., Trade in

Services in the Asia-Pacific Region (NBER-East Asia Seminar on Economics,

Volume 11), Chicago: The University of Chicago Press.

McGuire, Greg, Michael Schuele, and Tina Smith (2000), “Restrictiveness of

International Trade in Maritime Services”, in Findlay, Christopher and Tony

Warren eds., Impediments to Trade in Services: Measurement and Policy

Implications, London; Routledge.

Sokolov, Denis (2002), a paper prepared for background paper of World Bank Project,

mimeo.

24

Appendix1: details of the calculations of the restrictiveness indexes for maritime

services

A category for “conditions on the right to fly the national flag” has the largest

weight of 0.15 since this is a critical sector-specific requirement for service suppliers to

enter and provide maritime services. This category includes four levels of

restrictiveness, that is, “commercial presence is required in the domestic economy” with

a score of 0.4, “50 per cent or more of equity participation must be domestic” (score

0.3), “50 per cent or more of the crew are required to be domestic” (score 0.2), and

“ship must be registered” (score 0.1). In Russia, a vessel or a fleet that could obtain

national flag is either of citizens of the Russian Federation, legal entities with the

legislation of the Russian Federation, the Russian Federation, or municipal bodies.16

Therefore, scores 0.4 (commercial presence is required in the domestic economy) and

0.1 (ship must be registered) are chosen as conditions on the right to fly the national flag,

and the estimated score for this category, 0.075, is obtained by multiplying 0.5 (the sum

of 0.4 and 0.1) by 0.15.

A category for “form of commercial presence”, which has a weight of 0.1,

include three levels of restrictiveness: “measures which restrict or require a specific type

of legal entity or joint venture agreement” (score 1.0), “shipping service suppliers must

be represented by an agent” (score 0.5), and “no restriction on establishment” (score

0.0). In Russia, national flag is required when cabotage services are supplied17, and

those who could obtain national flag are limited to either citizens of the Russian

Federation, legal entities with the legislation of the Russian Federation, the Russian

Federation, or municipal bodies as discussed above. In other words, new non-Russian

service suppliers are required to be legal entities with the legislation of the Russian

Federation in order not only to become established in the domestic economy but also to

provide cabotage services (i.e., to obtain commercial presence for cabotage services18).

Therefore, “measures which restrict or require a specific type of legal entity or joint

venture agreement” is chosen. Note that 0.5 is assigned instead of 1.0 for this category,

considering that national flag is required only for the supply of cabotage services, not

16 See Q10 in the questionnaire attached in the Appendix. 17 See commentary note for Q1 in the questionnaire. 18 See section 2 for concept of commercial presence and the related discussion.

25

for the supply of international shipping services.19 The estimated score for this

category is 0.05. This category is the first one that shows a different score from the

one in Sokolov (2002), which chooses “no restrictions on establishment”.

As for direct investment in shipping services suppliers and onshore maritime

services suppliers, both of the categories have a weight of 0.1, and the score 0.0 is

assigned to both since there is no regulatory restriction on maximum equity

participation.20 Thus, the estimated scores for them are 0.0. Please note, however,

that there is a sort of local content requirement for investors to primarily use Russian

legal entities regulated by The Federal Law on Production Sharing Agreements, which

could restrict services provided by new foreign suppliers.21 This paper does not take it

into account in calculating the restrictiveness index here because the CNIIMF addressed

that the law is supposed to be abolished by the end of 2003 during the interview with us.

The levels of restrictiveness regarding cabotage, with a weight of 0.1, include

“foreigners generally cannot provide domestic maritime services” (score 1.0),

“foreigners that fly the national flag can provide domestic maritime services” (score

0.75), “restrictions on type and length of time cargoes can be carried” (score 0.5), and

“no cabotage restriction” (score 0.0). This paper chooses “foreigners generally cannot

provide domestic maritime service” since Article 4 of Merchant Maritime Code says

that only ships flying Russian flag are allowed to provide cabotage services. Indeed,

the Decree No. 404 of the Government of the Russian Federation on the Transportation

and Coastal Towing by Ships Flying the Flag of a Foreign State (May 24, 2000)22

instructs applicable cases and the procedure, but in practice it seems to be almost

impossible for foreigners without Russian flag to provide domestic maritime services.

This category is the second one that shows a different score from the one in Sokolov

(2002), which chooses “foreigners that fly the national flag can provide domestic

maritime services”, emphasizing the existence of the Decree No. 404.

The weight 0.1 is also applied to a category “transportation of

non-commercial cargos”, which has three levels of restrictiveness: “private shipping

19 According to commentary for Q1 in the questionnaire, national flag is not required for the supply of international shipping services. 20 See Q7 in the questionnaire. 21 See note for Q3 in the questionnaire for the regulation. 22 See commentary for Q1 in the questionnaire.

26

service suppliers cannot carry non-commercial cargoes” (score 1.0), “national flag

shipping service suppliers can carry non-commercial cargoes” (score 0.5), and “no

restrictions on access to non-commercial cargoes” (score 0.0). We choose “no

restriction on access to non-commercial cargos” because, according to Sokolov (2002),

there are numerous facts of transporting non-commercial cargo by private shipping

companies including foreign shipping companies though there is no evidence on how

this type of activity is regulated in Russia. Therefore, the estimated score for this

category is 0.0.

A category for port services has the largest weight, 0.1, among those for other

restrictions. This category includes nine types of restrictiveness: “some restrictions on

access to ports” (score 0.3), “mandatory use of pilotage” (score 0.2), “mandatory use of

towing” (score 0.15), “mandatory use of tug assistance” (score 0.1), “mandatory use of

navigation aids” (score 0.05), “mandatory use of berthing services” (score 0.05),

“mandatory use of waste disposal” (score 0.05), “mandatory use of anchorage” (score

0.05), and “mandatory use of casting off” (score 0.05). In Russia, there exists no law

that regulates access to services directly disadvantageous against foreign carriers.

However, there are services mandatory for ships entering a port for the use of waste

disposal in addition to the use of pilotage, towing, tug assistance, navigation, berthing

services, and anchorage, which are chosen in Sokolov (2000).23 The estimated score

for this category, 0.065, is obtained by multiplying 0.65 (the sum of 0.2, 0.15, 0.1, 0.05,

0.05, 0.05, and 0.05) by 0.1.

Each of the following categories, “discretionary imposition of restrictions”,

“United Nations Liner Code”, “government permits conference”, and “bilateral

maritime services agreements on cargo sharing”, has a weight of 0.05. As for a

category “discretionary imposition of restrictions”, there are two levels considered:

“governments are able to impose selective restrictions” (score 1.0) and “governments

are unable to impose selective restrictions” (score 0.0). In Russia, there are various

licensing systems with complicated procedures as Q14 in the questionnaire explains,

and thus government could intentionally impose selective restrictions to foreign

suppliers in the process. Although our paper chooses “governments are able to impose

selective restrictions” contrary to Sokolov (2002), 0.5 is assigned to this category

23 See Q5 in the questionnaire.

27

instead of 1 because such licensing systems may result in discriminatory restrictions

against foreign suppliers but may not. The estimated score for this category is 0.025.

Regarding the United Nations Liner Code, there are three levels of

restrictiveness: “economy is party to the code and applies Article 2 of the code” (score

1.0), “economy is party to the code but does not apply Article 2 of the code” (score

0.75), and “economy is not party to code” (score 0.0). Russia is a party to the United

Nations Liner Code (40:40:20) as Q3 in the questionnaire presents. According to the

information obtained during the interview, however, Russia does not apply it in practice.

Thus, “economy is party to the code but does not apply Article 2 of the code” is chosen

for this category, and the estimated score is 0.0375. This category also has a different

score from Sokolov (2002) since he chooses “economy is not party to code”,

emphasizing that it is not applied in practice.

Regarding conference, government permits the operation of the conferences,

and thus both studies choose accordingly for this category.

As for bilateral maritime services agreements on cargo sharing, this paper

takes the procedure proposed by McGuire et al. (2000)24 and calculates the score by

adding Russia to the 20 economies selected in McGuire et al. (2000). Russia has six

bilateral agreements with Algeria, Brazil, Tunisia, Mexico, Sri Lanka, and Ethiopia.25

Among them, Brazil and Mexico are two of the 20 countries, and thus the score is

calculated by dividing two by 20. The score calculated by this procedure is 0.9, and

the estimated score is 0.045. Sokolov (2002) does not consider this point.

As for the movement of people, a category for “permanent movement of

people” has the lowest weight, 0.02, among categories for restrictions on commercial

presence and cross-border trade, six levels of restrictiveness are considered: “no entry of

executives, senior managers and/or specialists” (score 1.0), “executives, specialists

24 McGuire et al. (2000) considers 20 economies to obtain the score for this category: EU (16 countries), Argentina, Brazil, Canada, Chile, Colombia, Mexico, US, Australia, Hong Kong, India, Indonesia, Japan, Korea, Malaysia, New Zealand, Philippines, Singapore, Thailand, and Turkey. The procedure is as follows: each country is assigned 0 if it has bilateral agreement with a country concerned, say Argentina, and 1 otherwise. Then, the sum of the scores (max 19 and min 0) is divided by 19 (the number of the rest of economies) to obtain the score for Argentina in McGuire et al. (2000). 25 See Q3 in the questionnaire.

28

and/or senior managers can stay a period of up to 1 year” (score 0.8), “a period of up to

2 years” (score 0.6), “a period of up to 3 years” (score 0.4), “a period of up to 4 years”

(score 0.2), and “a period of up to 5 years” (score 0.0). Among them, “no entry of

executives, senior managers and/or specialists” is chosen because captains and some

other specialists (senior assistant of the captain, senior mechanic and radio operator) on

ships flying Russian flag must be Russian citizens, and thus the estimated score is

0.02.26

A category for “temporary movement of people” with a weight of 0.01 has

five types of restrictiveness: “no entry of executives, senior managers and/or specialists”

(score 1.0), “temporary entry of executives, managers and/or specialists up to 30 days”

(score 0.75), “up to 60 days” (score 0.5), “up to 90 days” (score 0.25), and “over 90

days” (score 0.0). Based on the same reason mentioned above for the category

“permanent of movement of people”, “no entry of executives, senior managers and/or

specialists” is chosen. The estimation score is 0.01.

As for a category for “composition of the board of directors”, which has a

weight 0.02, there is no law that regulates the percentage of the board that can comprise

foreigners. However, it would be more difficult for foreign citizens to become the

board members than Russian citizens, considering the conditions for foreign specialists

to be hired. Therefore, the score 0.2 is assigned to this category, and the estimated

score is 0.004.

Appendix2: details of the calculations of the restrictiveness indexes for air transport

services

Each of the categories for restrictions on commercial presence and

cross-border trade and other restrictions has a weight of 0.1 except a category

“permanent movement of people” with a weight of 0.02. As for a category for “form

of commercial presence” (with a weight 0.1), three types of restrictiveness are

considered: “measures which restrict or require a specific type of legal entity or joint

26 See Q18 (1) in the questionnaire. Sokolov (2002) also points out that though the new federal law "On the Legal Status of Foreign Citizens in the Territory of the Russian Federation" is supposed to be regulated by 2002 (see Q18 (1) for this law, too), it would still be difficult to hire foreign specialists in practice.

29

venture arrangement” (score 1.0), “air transport service suppliers must be represented

by an agent” (score 0.5), and “no restriction on establishment” (score 0.0). In Russia,

there is no regulation that restricts the number of new foreign suppliers to establish

branches/affiliates.27 There are, however, restrictions on supplying services by foreign

companies as Q2 in the questionnaire clearly indicates; domestic flights services are not

allowed to be provided by foreign companies in accordance with Chicago Convention

and RF Air Code. In other words, there are restrictions for foreign companies who

would like to form commercial presence (to establish branches/affiliates and also to

supply services) in Russia. Therefore, “measures which restrict or require a specific

type of legal entity or joint venture arrangement” is chosen. The estimated score is 0.1

for this category.

As for direct investment in the international air transport sector and the

domestic air transport sector, each of which has a weight of 0.1. Since the maximum

foreign ownership permitted is 49%, regardless of whether it is an existing firm or a

newly established firm, the score 0.51, which is inversely proportional to the maximum

equity participation permitted in an existing air transport service supplier, is assigned to

both categories.28 Thus, their estimated scores are 0.051.

Regarding categories for 4 types of air transport services (each of them has a

weight of 0.1), three levels of restrictiveness are considered: “foreigners generally

cannot provide air transport services” (score 1.0), “foreigners can provide air transport

services with certain agreements” (score 0.5), and “no restriction on air transport

services” (score 0.0).29 Since inter-government agreements (ASAs) are required for

foreigner companies who provide international regular flight services, “foreigners can

provide international air transport services with intergovernmental agreement, ASA” is

chosen for a category “international air transport”.30 Similarly, “foreigners can provide

air transport services with certain agreements” is selected for a category for

27 See Q1 in the questionnaire. 28 See Q8 in the questionnaire. 29 According to Q25 in the questionnaire, the total number of foreign air companies providing cross-border services is 40 for international regular flights and 15 for international charter flights. There is no foreign company that provides cross border services of domestic flights in Russia. 30 See Q3 in the questionnaire for restrictions on cross-border services for foreign air companies.

30

“international charter flight” because international charter flight services could be

provided by foreign suppliers only when they could get a permission of aviation

authorities and an agreement with domestic suppliers (carriers).31 The estimated

scores for these two categories are 0.05. On the other hand, foreign firms generally

cannot provide either domestic regular flight services or domestic charter flight

services.32 Therefore, “foreigners generally cannot provide domestic air transport

services” is chosen for these two categories, and their estimated scores are 0.1.

The category regarding airport services, with a weight of 0.1, includes

“foreigners generally cannot own airports” (score 0.4), “foreigners generally cannot

provide fuel supply services” (score 0.15), “foreigners generally cannot provide repair

and maintenance services of aircraft” (score 0.15), “foreigners generally cannot provide

air services trade and marketing” (score 0.15), “foreigners generally cannot provide

computer reservation system” (score 0.15), and “no restriction” (score 0.0). In Russia,

existing or new operators with foreign equity are permitted to provide these air

services.33 In practice, however, as Q25 in the questionnaire shows, the major

commercially registered providers of these services are all 100% Russian except the

case of fuel supply services, and it is likely to be more difficult for foreign services

suppliers to enter. Therefore, a score 0.2 is assigned to repair and maintenance

services of aircraft, air services trade and marketing, and computer reservation system.

The score for this category is 0.09 (the sum of 0.03, 0.03, and 0.03), and the estimated

score is 0.009.

Both of the categories for discretionary imposition of restriction/subsidy have

a weight of 0.05, and include two/three types of restrictiveness, respectively;

“governments are able to impose selective restrictions” (score 1.0) and “governments

are unable to impose selective restrictions” (score 0.0) for a category “discretionary

imposition of restriction”, and “government directly subsidizes only domestic

companies” (score 1.0), “government indirectly subsidizes only domestic companies”

(score 0.75), and “government does not subsidize either domestic companies or foreign

companies” (score 0.0) for a category “discretionary imposition of subsidy”. Since the

31 See Q2 in the questionnaire. 32 See Q3 in the questionnaire. As supplementary information, see also Q2 for restrictions on domestic flights. 33 See Q8 in the questionnaire.

31

government indirectly subsidizes only some domestic air companies, Aeroflot and

Transaero, in the form of customs exemptions for procurement of foreign machinery,

“governments indirectly subsidizes only domestic companies” is chosen, and the

estimated score is 0.0375.34 As for selective restrictions imposed by government,

“governments are unable to impose selective restrictions” is chosen, and thus the

estimated score for this category is 0.0.

Regarding bilateral ASAs, Russia has 138 agreements.35 Among them, 105

agreements permit only one or two appointed foreign air companies, and this paper

regards such ASAs with only a few appointed foreign air companies as more restrictive

ones. Therefore, the score 0.76, for a category “inter-governmental ASA agreement”

with a weight of 0.05, is obtained by dividing 105 by 138. The estimated score is

0.038.

As for movement of people, a category for “permanent movement of people”

has the lowest weight, 0.02, among categories for restrictions on commercial presence

and cross-border trade. Six types of restrictiveness for this category include “no entry

of executives, senior managers and/or specialists” (score 1.0), “executives, specialists

and/or senior managers can stay a period of up to 1 year” (score 0.8), “a period of up to

2 years” (score 0.6), “a period of up to 3 years” (score 0.4), “a period of up to 4 years”

(score 0.2), and “a period of up to 5 years” (score 0.0). Among them, “no entry of

executives, senior managers and/or specialists” is chosen because manager must be

Russian citizen, and thus the estimated score is 0.02.36

A category for “temporary movement of people” with a weight of 0.01 has

five levels of restrictiveness: “no entry of executives, senior managers and/or

specialists” (score 1.0), “temporary entry of executives, managers and/or specialists up

to 30 days” (score 0.75), “up to 60 days” (score 0.5), “up to 90 days” (score 0.25), and

“over 90 days” (score 0.0). With the same reason mentioned above for the category

“permanent of movement of people”, “no entry of executives, senior managers and/or

specialists” is chosen. The estimation score is 0.01.

A category for “composition of the board of directors” has a weight 0.02. For this

34 See Q18 in the questionnaire. 35 See Q6 in the questionnaire. 36 See Q8 in the questionnaire.

32

category, the score is given as the one inversely proportional to the maximum share of

foreign staffs permitted in management body. In Russia, the number of foreigner staff

cannot exceed one-third of the total number of the board of directors in an air transport

services supplier, and thus the score 0.677 is assigned here.37 The estimated score is

0.0134 accordingly.

37 See Q8 in the questionnaire.

33

Figure 1: Ad Valorem Equivalent (TE) of Barriers (Discriminatory Restrictions)

(a) Small country: the case of perfect substitutes

(b) Small country: the case of imperfect substitutes

1fS

S d

S d

X

fPdP

TE

P

0f

S

1fP

0fP

TE

);( dff ppD

);( 0dff ppD

fX

);( fdd ppD

);( 0fdd ppD

dX

1fP

0fP

11df PP =

00df PP =

D d

Foreign Services Domestic Services

1dP

0dP

34

Figure 2 Ad Valorem Equivalent (TE) of Discriminatory and Non-discriminatory

Restrictions

(a) Small country: the case of perfect substitutes

(b) Small country: the case of imperfect substitutes

S d

S d

X

fPdP

TE

P

1fP

0fP

'0fP

TE

fX

);( fdd ppD

);( 0fdd ppD

)';( 0fdd ppD

dX

1fP

0fP

'0fP

11df PP = 00

df PP = 00df pp =

1fS

0f

S

'0f

S

'0dS

D d

1fS

0f

S

'0f

S

);( dff ppD

);( 0dff ppD

)';( 0dff ppD

'0dS

Foreign Services Domestic Services

1dP

0dP

'0dP

35

Table 1 The foreign restrictiveness index: restrictions on maritime services in Russia

Weight ScoringScore

chosen inSokolov's

Scorechosen inthis paper

Category

Restrictions on Commercial Presence and Cross-Border Trade0.15 Conditions on the right to fly the national flag

0.40 0.40 0.40 Commercial presence is required in the domestic economy.0.30 50 per cent or more of equity participation must be domestic.0.20 50 per cent or more of the crew are required to be domestic.0.10 0.10 0.10 Ship must be registered.

0.10 Form of commercial presence1.00 0.50 * Measures which restrict or require a specific type of legal entity or joint venture arrangement.0.50 Shipping service suppliers must be represented by an agent.0.00 0.00 No restriction on establishment.

0.10 Direct investment in shipping service suppliers

0.00 0.00 **The score is inversely proportional to the maximum equity participation permitted in an existingshipping service supplier.

0.10 Direct investment in onshore maritime service suppliers

0.00 0.00 **The score is inversely proportional to the maximum equity participation permitted in an existing onshoremaritime service supplier.

0.02 Permanent movement of people1.00 1.00 1.00 No entry of executives, senior managers and/or specialists.0.80 Executives, specialists and/or senior managers can stay a period of up to 1 year.0.60 Executives, specialists and/or senior managers can stay a period of up to 2 years.0.40 Executives, specialists and/or senior managers can stay a period of up to 3 years.0.20 Executives, specialists and/or senior managers can stay a period of up to 4 years.0.00 Executives, specialists and/or senior managers can stay a period of up to 5 years or more.

0.10 Cabotage1.00 1.00 Foreigners generally cannot provide domestic maritime services.0.75 0.75 Foreigners that fly the national flag can provide domestic maritime services.0.50 Restrictions on type and length of time cargoes can be carried.0.00 No cabotage restrictions.

0.10 Transportation of non-commercial cargoes1.00 Private shipping service suppliers cannot carry non-commercial cargoes.0.50 National flag shipping service suppliers can carry non-commercial cargoes.0.00 0.00 0.00 No restriction on access to non-commercial cargoes.

Other Restrictions0.10 Port services

0.30 Some restrictions on access to ports.0.20 0.20 0.20 Mandatory use of pilotage.0.15 0.15 0.15 Mandatory use of towing.0.10 0.10 0.10 Mandatory use of tug assistance.0.05 0.05 0.05 Mandatory use of navigation aids.0.05 0.05 0.05 Mandatory use of berthing services.0.05 0.05 Mandatory use of waste disposal.0.05 0.05 0.05 Mandatory use of anchorage.0.05 Mandatory use of casting off.

0.05 Discretionary imposition of restrictions, including for retaliatory purposes1.00 0.50 *** Governments are able to impose selective restrictions.0.00 0.00 Governments are unable to impose selective restrictions.

0.05 United Nations Liner Code1.00 Economy is party to the code and applies Article 2 of the code.0.75 0.75 Economy is party to the code but does not apply Article 2 of the code.0.00 0.00 Economy is not party to code.

0.05 Government permits conference1.00 1.00 1.00 Governments permits the operation of conferences.0.00 Conferences are subject to effective competition.

0.05 Bilateral maritime services agreements on cargo sharing0.00 0.90 The score for an economy is taken from the 35 by 35 matrix of bilateral agreements on cargo sharing.

0.02 Composition of the board of directors0.00 0.20 The score is inversely proportionately to the percentage of the board that can comprise foreigners.

0.01 Temporary movement of people1.00 1.00 1.00 No temporary entry of executives, senior managers and/or specialists.0.75 Temporary entry of executives, senior managers and/or specialists up to 30 days.0.50 Temporary entry of executives, senior managers and/or specialists up to 60 days.0.25 Temporary entry of executives, senior managers and/or specialists up to 90 days.0.00 Temporary entry of executives, senior managers and/or specialists over 90 days.

Notes* : see Table 2 for the reason of scoring 0.50 for "measures which restrict or require a specific type of legal entity or joint venture arrangement".** : see Table 2 for some note regarding investment.***: see Table 2 for the reason of scoring 0.50 for "Governments are able to impose selective restrictions"."Weight" and "Scoring" are same as those of McGuire et al (2000).

36

Table 2 The estimated foreign restrictiveness index and foreign discreminatory restrictiveness index for the maritime services sector in Russia

WeightEstimatedscore in

Sokolov's (a)

Estimatedscore in our

paper (b)

Estimatedscore in ourpaper (b')

Category chosen and the reason

Restrictions on Commercial Presence and Cross-border TradeConditions on the right to fly the national flag

0.15 0.075 0.075 0.075 Commercial presence is required in the domestic economy.Ship must be registered by the resident firm according to Article 15 of the "Code of commercial seafaring".

Form of commercial presence0.10 0.00 0.05 0.05 (a) No restriction on establishment.

(b) Measures which restrict or require a specific type of legal entity or joint venture arrangement.Those who could obtain national flag are either of the following: citizens of the Russian Federation, legal entities with the legislationof the Russian Federation, the Russian Federation, and municipal bodies. In other words, unless Russian citizen or Russian Federationrelated organization, new foreign supplier must be legal entity with the legislation not only to become established in the domesticeconomy but also to provide maritime services. Since this is applied only to cabotage, 0.50 is assigned instead of 1.00.

Direct investment in shipping service suppliers0.10 0.00 0.00 0.00 * (a) No restriction on maximum equity participation.

(b) No restriction on maximum equity participation. There is, however, a sort of local content requirement for investors to primarily useRussian legal entities by The Federal Law on Production Sharing Agreements, which is said to be abolished by the end of 2003.

Direct investment in onshore maritime service suppliers0.10 0.00 0.00 0.00 * (a) No restriction on maximum equity participation.

(b) No restriction on maximum equity participation. There is, however, a sort of local content requirement for investors to primarily useRussian legal entities by The Federal Law on Production Sharing Agreements, which is said to be abolished by the end of 2003.

Permanent movement of people0.02 0.02 0.02 0.02 No entry of executives, senior managers and/or specialists.

The reasons for this scoring are as follows: first, according to the Decree of the Ministry of Transportation No.14, captains and someother specialists (senior assistant of the captain, senior mechanic and radio operator) on ships flying Russian flag must be Russia'scitizens. Secondly, although the new federal law "On the Legal Status of Foreign Citizens in the Territory of the Russian Federation"is supposed to be regulated by 2002, it would be still difficult to hire foreign specialists in practice.

Cabotage0.10 0.075 0.10 0.10 (a) Foreigners that fly the national flag can provide domestic maritime services.

According to the "Code of commercial seafaring", Article 4, only ships flying Russian flag can provide services. According to theDecree of the Russian Government No.404, however, ships without Russian flag may provide services in some cases as well with apermission of the Ministry of Transportation.

(b) Foreigners generally cannot provide domestic maritime services.Article 4 of Merchant Maritime Code says that only ships flying Russian flag are allowed to provide cabotage services. Indeed, DecreeNo. 404 of the Government of the Russian Federation on the Transportation and Coastal Towing by Ships Flying the Flag of a ForeignState (May 24, 2000) referees applicable cases and the procedure, but in practice it seems to be quite difficult for foreigners withoutRussian flag to provide domestic maritime services.

Transportation of non-commercial cargoes0.10 0.00 0.00 0.00 No restriction on access to non-commercial cargoes.

Though there is no evidence on how this type of activity is regulated in Russia, there are numerous facts of transporting non-commercial cargo by private (including foreign) shipping companies (Sokolov, 2000).

Other RestrictionsPort services

0.10 0.06 0.065 0.0325 (a) Mandatory use of pilotage, towing, tug assistance, navigation, berthing services, anchorage. "Rates of harbour dues in commercial seaports of the Russian Federation" decree imposes obligatory tonnage, light, canal, berth,anchorage, environment, pilotage and navigation dues.

(b) Mandatory use of pilotage, towing, tug assistance, navigation, berthing services, anchorage, and waste disposal.Discretionary imposition of restrictions, including for retaliatory purposes

0.05 0.00 0.025 0.025 (a) Governments are unable to impose selective restrictions.(b) Governments are able to impose selective restrictions.

There are various licensing systems with complicated procedures and thus government could intentionally impose selective restrictionsagainst foreign suppliers. Since such systems may result in discriminatory restrictions against foreign suppliers but may not, 0.5 isassigned to this category instead of 1.

United Nations Liner Code0.05 0.00 0.0375 0.0375 (a) Economy is not applied in practice.

According to Ivanov G.G.(2002) "Pravovoe Regulirovanie Morskogo Sudohodstva v Rossiiskoi Federacii", Moscow: "Spark", Russiahas ratified this code, but the code is not applied in practice because of the low tonnage of the Russian fleet.

(b) Economy is party to the code but does not apply Article 2 of the code.Government permits conference

0.05 0.05 0.05 0.025 Government permits the operation of the conferences.Bilateral maritime services agreements on cargo sharing

0.05 0.00 0.045 0.045 (a) Bilateral agreements are not applied in practice.

(b)

McGuire et al.(2000) considers 20 economies to obtain the score for this category: EU (16 countries), Argentina, Brazil, Canada, Chile,Colombia, Mexico, US, Australia, Hong Kong, India, Indonesia, Japan, Korea, Malaysia, New Zealand, Philippines, Singapore,Thailand, and Turkey. The procedure is as follows: each country is assigned 0 if it has bilateral agreement with a certain country, sayArgentina, and 1 otherwise. Then, the sum of the score (max 19 and min 0) is divided by 19 (the number of the rest of economies) toobtain the score for Argentina. This paper basically follows the procedure and calculates the score by adding Russia to the 20economies. Russia has six bilateral agreements with Algeria, Brazil, Tunisia, Mexico, Sri Lanka, and Ethiopia. As countries includedinto the 20 economies above are the two, i.e., Brazil and Mexico, the score for Russia is calculated by dividing two by 20.

Composition of the board of directors

0.02 0.00 0.004 0.004Although there is no law that regulates the percentage of the board that can comprise foreigners, it would be more difficult for foreigncitizens to become the board members than Russian citizens, considering the conditions for foreign specialists to be hired. Therefore,the score 0.2 is assigned to this category.

Temporary movement of people0.01 0.01 0.01 0.01 No temporary entry of executives, senior managers and/or specialists.

1.00 0.29 0.482 0.424 Total

Notes: (1) Estimated score is obtained by multiplying score chosen in each of the studies by "weight".

(3) When categories chosen in Sokolov' study and our study are different, the reasons are also provided: row (a) show a category chosen in Sokolov's and the reason while row (b) a categorychosen in our study and the reason.

(2) Estimated scores (a) and (b) are of the FR index while estimated scores (b') are of the FDR index. Thus, 0.29 and 0.482 represents FR indexes obtained by Sokolov's and our papers,respectively, and 0.424 the FDR index obtained by our paper. The half of the weights are assigned to restriction categories that apply to both domestic and foreign services suppliers.

37

Table 3 Foreign Restrictiveness indexes for maritime services in other economies

Industrialized economies Developing economiesSingapore 0.207 Argentina 0.331United Kingdom 0.239 Colombia 0.469Denmark 0.284 Mexico 0.478Finland 0.315 Chile 0.503Canada 0.320 Malaysia 0.520New Zealand 0.352 Brazil 0.521Germany 0.390 Indonesia 0.558Hong Kong 0.403 Korea 0.582Japan 0.408 Thailand 0.601Sweden 0.415 India 0.605Australia 0.416 Philippines 0.644United States 0.600Drawn from Jong-Soon Kang (2000). (Original source: McGuire et al. (2000).)

38

Table 4 The foreign restrictiveness index: restrictions on air transport services in Russia

Weight Scoring Scorechosen Category

Restrictions on Commercial Presence and Cross-Border Trade0.10 Form of commercial presence

1.00 1.00 Measures which restrict or require a specific type of legal entity or joint venture arrangement.0.50 Air transport service suppliers must be represented by an agent.0.00 No restrictions on establishment.

0.10 0.51 Direct investment in international air transport service suppliersThe score is inversely proportional to the maximum equity participation permitted in an existing airtransport service supplier.

0.10 0.51 Direct investment in domestic air transport service suppliersThe score is inversely proportional to the maximum equity participation permitted in an existing domesticair transport service supplier.

0.02 Permanent movement of people1.00 1.00 No entry of executives, senior managers and/or specialists.0.80 Executives, specialists and/or senior managers can stay a period of up to 1 year.0.60 Executives, specialists and/or senior managers can stay a period of up to 2 years.0.40 Executives, specialists and/or senior managers can stay a period of up to 3 years.0.20 Executives, specialists and/or senior managers can stay a period of up to 4 years.0.00 Executives, specialists and/or senior managers can stay a period of up to 5 years or more.

0.10 International air transport1.00 Foreigners generally cannot provide international air transport services.0.50 0.50 Foreigners can provide international air transport services with intergovernmental agreement, ASA.0.00 No restriction on international air transport services.

0.10 Domestic air transport1.00 1.00 Foreigners generally cannot provide domestic air transport services.0.50 Foreigners can provide domestic air transport services with agreements.0.00 No restriction on domestic air transport services.

0.10 International charter flight1.00 Foreigners generally cannot provide international charter flight services.0.50 0.50 Foreigners can provide international charter flight services upon agreements.0.00 No restriction on international charter flights services.

0.10 Domestic charter flight1.00 1.00 Foreigners generally cannot provide domestic charter flight services.0.50 Foreigners can provide domestic charter flight services upon agreements.0.00 No restriction on domestic charter flight services.

Other Restrictions0.10 Airport services

0.40 Foreigners generally cannot own airports.0.15 Foreigners generally cannot provide fuel supply services.0.15 0.20 Foreigners generally cannot provide repair and maintenance services of aircraft.0.15 0.20 Foreigners generally cannot provide air services trade and marketing.0.15 0.20 Foreigners generally cannot provide computer reservation system.0.00 No restriction.

0.05 Discretionary imposition of restrictions, including for retaliatory purposes1.00 Governments are able to impose selective restrictions.0.00 0.00 Governments are unable to impose selective restrictions.

0.05 Discretionary imposition of subsidy to protect domestic air companies1.00 Government directly subsidizes only domestic companies.0.75 0.75 Government indirectly subsidizes only domestic companies.0.00 Government does not subsidize either domestic companies or foreign companies.

0.05 Inter-governmental ASA agreement.

0.76The score for an economy is calculated, based on the number of participating airline companies in eachASA.

0.02 Composition of the board of directors0.67 The score is inversely proportionately to the percentage of the board that can comprise foreigners.

0.01 Temporary movement of people1.00 1.00 No temporary entry of executives, senior managers and/or specialists.0.75 Temporary entry of executives, senior managers and/or specialists up to 30 days.0.50 Temporary entry of executives, senior managers and/or specialists up to 60 days.0.25 Temporary entry of executives, senior managers and/or specialists up to 90 days.0.00 Temporary entry of executives, senior managers and/or specialists over 90 days.

Note:"Weight" and "Scoring" are developed by this study, based on categories of restrictions on maritime services.

39

Table 5 The estimated foreign restrictiveness index for the air transport services sector in Russia

Weight Estimatedscore Category chosen and the reason

Restrictions on Commercial Presence and Cross-Border TradeForm of commercial presence

0.10 0.10 Measures which restrict or require a specific type of legal entity or joint venture arrangement.Although there is no regulation that restricts the number of new foreign suppliers to establishbranches/affiliates, threre are restrictions on supplying services by foreign companies.

Direct investment in international air transport service suppliers

0.10 0.051The score is inversely proportional to the maximum equity participation permitted in an existing airtransport service supplier. In this sector, maximum foreign ownership is 49%.

Direct investment in domestic air transport service suppliers

0.10 0.051The score is inversely proportional to the maximum equity participation permitted in an existingdomestic air transport service supplier. In this sector, maximum foreign ownership is 49%.

Permanent movement of people0.02 0.02 No entry of executives, senior managers and/or specialists.

Manager must be Russian citizen.International air transport

0.10 0.05 Foreigners can provide international air transport services with intergovernmental agreement, ASA.Domestic air transport

0.10 0.10 Foreigners generally cannot provide domestic air transport services.International charter flight

0.10 0.05 Foreigners can provide international charter flight services upon agreements.Domestic charter flight

0.10 0.10 Foreigners generally cannot provide domestic charter flight services.Other RestrictionsAirport services

0.10 0.009

Although foreign suppliers are permitted to provide these air services, in practice, the majorcommercially registered providers of these services are all 100% Russian except the case of fuelsupply services, and it is likely to be more difficult for foreign services suppliers to enter. Thus, ascore 0.2 is assigned to repair and maintenance services of aircraft, air services trade and marketing,and computer reservation system.

Discretionary imposition of restrictions, including for retaliatory purposes0.05 0.00 Governments are unable to impose selective restrictions.

Discretionary imposition of subsidy to protect domestic air companies0.05 0.0375 Government indirectly subsidizes only domestic companies.

The government indirectly subsidies only some domestic air companies, Aeroflot and Transaero, inthe form of customs exemptions for procurement of foreign machinery

Inter-governmental ASA agreement.

0.05 0.038Russia has 138 bilateral ASAs. Among them, 105 agreements permit only one or two appointedforeign air companies (more restrictive). Therefore, the score is obtained by dividing 105 by 138.

Composition of the board of directors0.02 0.0134 The score is inversely proportionately to the percentage of the board that can comprise foreigners.

A score of 0.677 is assigned because foreigners can consist of up to one-third of the total number ofthe board of directors in an air transport services supplier.

Temporary movement of people0.01 0.01 No temporary entry of executives, senior managers and/or specialists.

Same reason for "permanent movement of people".1.00 0.630

Notes:

(2) The FR index and FDR index are same in the case of the air transport sector.(1) Estimated score is obtained by multiplying score by "weight".

40

Table 6 Ad valorem equivalents of restrictions in the transport services sectors

Margins withrestrictions

The FRindex

The FDRindex

The maritime sector (other developing countries)11 developing countries(average) 1.20 0.528

The transportation sectors in Russia (our study)Maritime transport 1.18 0.482 0.424Air transport 1.23 0.630 0.630

RussiaMarginswithout

restrictions

Ad valoremequivalent

with the FRindex (%)

Ad valoremequivalent

with the FDRindex (%)

Margins withthe least

restrictions

Ad valoremequivalent

with the FRindex (%)

Ad valoremequivalent

with the FDRindex (%)

Maritime transport 1.02 1047 922 1.08 116 102Air transport 1.06 315 315 1.12 90 90

Notes:Margins for Russia are calculated as follows:Margins in the case that the degree of existing restrictions in Russia is reduced by 100% :

Margins in the case that the degree of restrictions in Russia is lowered to the degree in Singapore with the lowest FR index, 0.207:

Now, transport costs are . Thus, ad valorem equivalents are calculated, using estimated margin rates, as follows:or .

Ad valorem equivalents of discriminatory restrictions are calculated by using the ratio of the FDR index to the FR index.

Case (a) Case (b)

Sources: Kang (2000) for margins and the FR index for the maritime sector in developing countries except Russia(Original source for restrictiveness indices is McGuire et al. (2000).), and authors' estimation for transportation sectors inRussia.

ln(MRussia) = ln(Maverage) − 0.1416 ⋅ (ln(Raverage) − ln(RRussia )).

MRussia(a ) = MRussia ⋅ (1− 0.1416).

MRussia(b ) = MRussia ⋅{1− 0.1416 ⋅ [(RRussia − 0.207) /RRussia ]}.

TE (a ) = {[(MRussia −1) − (MRussia(a ) −1)]/(MRussia

(a ) −1)} ⋅100 TE (b ) = {[(MRussia −1) − (MRussia(b ) −1)]/(MRussia

(b ) −1)} ⋅100M −1