The Korea Institute for International Economic Policy (KIEP) was founded in 1989 as a government-funded economic research institute. It is a leading institute concerning the international economy and its relationship with Korea. KIEP advises the government on all major international economic policy issues and serves as a warehouse of information on Korea’s international economic policies. Further, KIEP carries out research by request from outside institutions and organizations on all areas of the Korean and international economies by request.  

Contents

Executive Summary

I. Introduction

II. A Trade Model with Armington Elasticities

III. Data: Direction of Trade Statistics and Input-Output Tables

IV. Estimation and Simulation Results in a Static Model
1. Estimates of Armington Elasticities in a Static Model with Nominal Variables
2. Estimates of Armington Elasticities in a Static Model with Real Variables

V. Estimation of Armington Elasticities in a Dynamic Model
1. A Dynamic Error Correction Model of Armington Elasticities
2. Estimates of Armington Elasticities in a Dynamic Model

VI. Summary and Policy Implications
 

Korea’s export performance has exhibited a remarkable downturn since the end of 2014, declining over the 12 months of 2015 by about eight per-cent in nominal terms. Conjecturing this to reflect depreciation of the Jap-anese Yen and, during the second half of 2015, of the Chinese Yuan cou-pled with a sudden decline in China’s import demand, we apply an Armington (1969)-type trade model to match international trade data with input-output tables in order to identify the sources of export variation in Korea and, as a bridge between the theoretical model and empirical input-output table, to analyze the effect of income (GDP) and exchange rate variation. The major findings of the present study are three-fold. First, the estimated long-run elasticity (0.067) of trading partners’ GDP on Korea’s export is a lot smaller than the static short-run elasticity (0.755) of their GDP in nominal terms and the estimate of static short-run elasticity (0.462) of GDP in real terms. Second, we find that Korean Won’s real deprecia-tion helps boost Korea’s real exports in the short-run but its effect turns out to have a slightly negative effect in the long-run which implies that the positive effect of real depreciation of the Won may not last long. Third, we also find that a depreciation of Japanese Yen and Chinese Yuan in nominal terms has negative effects on Korean exports in the short-run, but the Jap-anese Yen’s real depreciation facilitates increases in Korea’s real exports consistently in both the short-run and long-run. The effects of the ex-change rate variation cannot be unidirectional in both short-run and long-run because the variation affects the relative competitiveness of imported intermediate goods. According to our findings, Korean exports, given a positive income shock in trading partner countries, tend to be replaced by foreign alternatives which reflects a tightening of technology as well as price competition in the global market, and suggests as an optimal export promotion strategy for Korea the pursuit of technological progress and a diversification policy that encompasses both destination and export prod-ucts.
 

Due to its rapid economic growth, industrialization, and urbanization, China now ranks first in the world as the country that produces the most air pollutant and municipal solid waste. The country also faces serious water scarcity and water pollution problems. In order to solve such problems, China has strongly revised its Environmental Protection Law as well as strengthening pollution controls and industry promotion policy in various fields of environment including air, water, and waste sectors.
Considering the development experience of the environmental industries of some of the major countries in the world, the environmental industry of China ？ a country whose GDP per capita is expected to exceed 10,000 USD during the 13th Five-Year Plan (2016~2020) ？ is estimated to enter the phase of explosive growth of a j-curve. On the other hand, the level of development in China’s regional environmental industries and markets vary due to the fact that local governments, who are the main actors in promoting environmental policies, have different strategic orientations ranging from quantitative growth to environmental protection. This research analyzes the state of China’s environmental pollution and its regional distribution, sectoral environmental markets and its regional characteristics, China’s regional environmental policies according to sectors and China’s environmental projects and major companies. Based on the analysis, this research sought to present Korean environmental companies’ exports strategy to the regional environmental markets in China as well as measures to strengthen government cooperations.
The primary findings of this study can be summarized as follows: In Chapter 2, we study China’s environmental market. It looks into the regional distribution of major pollutants and the pollution source, according to air, water and waste management; it also looks at the size of the environmental market and regional structure for each sector. For China, air pollution is mainly generated from thermal power ？ which creates energy by burning up fuels ？ and manufacturing industry, including steel and chemistry. Because of this, regions that have the country’s primary coal fields or heavy industrial centers, such as Shandong, Inner Mongolia, Hebei, Shanxi, Henan and Liaoning, were found to have high levels of pollutant emissions. Wastewater emissions were high in regions with a large economy and population, such as Guangdong, Jiangsu, Shandong, Zhejiang, and Henan, but water pollution sources (e. g. lead, mercury, nitrogen, etc) differed according to regions. Industrial solid waste, which takes up more than 90% of China’s waste emissions, are mainly produced in regions such as Hebei, Shanxi, and Liaoning, which have rich mineral resources or are manufacturing hubs. But the recycling rate of waste materials, processing ratio of recycling, and the reclamation rate differed by regions. Guangdong, Jiangsu, Zhejiang and Shandong, which have large population and economic size, produced an overwhelmingly large amount of municipal household waste. During the 13th Five-Year Plan, investment size of environmental industries is expected to reach around 17 trillion yuan. In the sectors of air, water, and waste management, investment amounting to 1.8 trillion yuan, 4.6 trillion yuan, and 4.3 ~ 5.1 trillion yuan, respectively, is estimated to be alloted. Factors restricting the growth of environmental industries and markets include low level of emissions controls, low cost of pollution disposal, and lack of punitive measures.
Chapter 3 investigates China’s environmental laws and related regulations and institutions as well as analyze regional environmental policies. Setting the Environmental Protection Law as the basic law, China has various pollution laws and regulations according to each environmental sector. It is also possible for local governments to regulate pollution emissions at a higher level than the central government’s standard. As the revised Environmental Protection Law is enacted from 2015, some major changes in China’s environmental policies include strengthened pollution regulation and legal force of its policies, expanded environmental infrastructure, local government’s environmental evaluations, and improved policy effectiveness through PPP. The revised Environmental Protection Law (in force since 2015), with its stronger legal force and stricter standards is a testimony of such changes. China has announced Action Plan in air and water sectors. Local governments are required to report work plans including yearly targets and major tasks within the year 2015.
However, there is no significant policy change in the waste sector nor has a specific Action Plan been announced. Also, whereas standard for pollution emissions of air and water is expected to increase by more than twice the current level, the standards for the waste processing fee is undecided, meaning the demand for waste processing is unable to function as a demand in the market. Regions such as Beijing, Shanghai, Jiangsu, Shandong, and Hebei are actively setting and reaching the improvement target of improving air pollution, providing subsidies and collecting pollution fees. In water management sector, Zhejiang, Tianjin, Shanghai, Anhui, and Shandong announced related measures and a rise in the pollution fee. Hubei, especially, is actively pushing for new regulations in order to implement regional standards in water management.
Coastal regions such as Guangdong, Shanghai, Jiangsu, Zhejiang, Shandong, Liaoning are actively pushing for policies on managing and separating municipal household wastes, processing fees and those related to waste disposing plants. Chapter 4 examines the ways in which China’s environmental projects work and case studies of major companies and projects by environmental sectors in China. In order to have environmental infrastructure in a short period of time, China expands PPP by giving opportunities for private capital participations. However, foreign companies are facing risks because of a lack of evidences for legal foundations for foreign companies to participate in PPP projects and Guanxi. It is expected to have more than 80 percent of demands for investments in the growing fast environmental markets. Notwithstanding of the above-mentioned facts, it is important to participate in PPP projects for entering Chinese environmental markets.
Chapter 5 offers suggestions for measures to strengthen cooperations on the basis of the above-mentioned analysis with sectoral and regional characteristics and suggest implications for the Korean government and Korean environmental companies. Considering each sector’s market size, local governments’ policies, central government’s drive, major companies’ distribution, we analyze Jiangsu, Shandong, Hebei are promising for air sector, Jiangsu and Guangdong are promising markets for water sector, and Guangdong, Shanghai, and Zhejiang are promising for waster sector.
Analyzing Chinese central government’s focal points of policies and local government’s investment for environmental sectors, we conclude the followings: First, markets with first priority are Jiangsu, Guangdong, Shandong, and Zhejiang where have excellent conditions for the environmental industries. Second, the second phase markets include Beijing, Shanghai, Hebei, and Liaoning. Third phase markets include central and west inland regions with relative better environmental market conditions such as Shanxi, Xinjiang, Henan, and Hubei.
Jiangsu can be utilized as a comprehensive platform for the penetration of the Chinese environmental market. It has a good market size, a strong political will, a high level of firms agglomeration, and cooperations with foreign companies. Yixing, where exists the only environmental industrial complex of China, concentrates water management companies that account for more than 40 percent of the Chinese water management market. Taking the advantage of which Yixing actively engages cooperations with Korea, we should make cooperative strategies at the company, association, and government level. On the other hand, Shandong and Hebei are where the Korean and Chinese governments are pushing forward for cooperative projects in the steel industry and air pollution prevention. But, these provinces do not have leading companies in air sector. We should utilize government-to-government cooperations as a platform for entering the Chinese market. Also, we should do a continuos monitoring and look for opportunities to take the advantageous position first in the central and west promising markets such as Hubei, Shanxi, Hunan.
Companies which wish to enter the Chinese environmental markets need to understand risks in relation to ways and practices of the Chinese environmental sectors and local governments’ risks. In order to minimize such risks, Korean companies should consider cooperations with local Chinese companies. Similarly, it is important to choose local partners that may offer project information and financing and have Guanxi. By doing so, it is important to find out project opportunities by attending environmental exhibitions and government-led business exchange platforms. On the other hand, it is imperative to do a continuous monitoring for the changes of environmental policies including standards for pollution emission costs and for emerging industries for investment. Small and medium-led Korean environmental sectors need to actively utilize government-led cooperative projects and build a consortium with large companies or public agencies to enter the Chinese market. Korean environmental companies should consider measures to strengthen cooperations by offering environmental management and services to Korean manufactures.
Preparing for possible additional negotiations for Korea-China FTA in the environmental sector, the Korean government should make suggestions for emerging environmental markets (e. g. building and operating for incineration plants, waste markets, food waste, and rural household waste) and for the relaxation of foreign exchange at the level of Shanghai Free-Trade Pilot Zone. In particular, we should consider the Northeast region, where has inferior environmental infrastructure and maintains a good relation with Korea, as a pilot area for environmental cooperations with a package of energy-saving and environmental protection projects.
Also, we should set a solid foundation for Korean companies to participate in PPP projects at the pre-developmental stage of PPP. Both Korean and Chinese governments could select incineration projects that are profit-making and support financing development costs. It is important to strengthen cooperations with local governments for expanding local environmental networks. Thus, we should expand to set up Korea’s environmental representative offices in provinces like Guangdong and Shanxi and to expand cooperative channels with local Chinese governments. Finally, in linking with Chinese relevant institutions, we should consider loans and credit guaranty funding systems when small and medium environmental companies enter the Chinese market.
 

This study conducts a historical and political analysis on the early years of European integration, including the establishment of European Coal and Steel Community (ECSC), from the perspective of “deal-making.” It probes the possibility that the creation of a specific regional institution may not guarantee an automatic spill-over to further functional progress and provides an alternative approach based on political engineering of cooperation. Early European integration often involved high political costs and progress was possible by taking political risks through multiple linkages of leadership.
Paradoxically, the alleged low political cooperation on coal and steel was enabled by the highest political drive to solve this “concrete and limited” issue. The pursuit of regional cooperation has a very limited window of
opportunity and would require skillful management in both domestic politics and diplomacy. The role of a leader is to secure a political space for the cooperation project and to convert latent opportunities into an actual deal.
Regional cooperation in Northeast Asia should directly deal with structural obstacles such as political environment and historical conflict. Instead of institution-building based on a unilateral proposal, regional cooperation strategies should focus on leadership networks, political coordination, and reconciliatory measures to facilitate actual “deal-making.” A preliminary consultation among the leaders is crucial in the early stage of regional cooperation; this needs to be complemented by politically empowered multinational expert groups on a long-term basis. The trilateral summit (South Korea, Japan, and China) and other high-level meetings should be more galvanized to build an effective communication channel that would clarify each other’s ideas and interests. Northeast Asian cooperation should be based on “the politics of dialogue” among diverse leaders and the public rather than introvert “declarations” and “monologues” targeting the domestic audience.
The agenda-setting of regional cooperation requires sufficient concentration and political endorsement on a “concrete and limited” project rather than proposing a spill-over-driven comprehensive package. The pragmatic utilization of existing networks and building blocks will facilitate the agenda-setting and increase the likelihood of successful cooperation. The examination of the European case also shows that a historical reconciliation may not be a precondition for regional cooperation. It could be drawn as an outcome of
the progress in multilateral projects, which will reduce the political cost of rapprochement by providing a useful political exit. Finally, the regional cooperation strategy in Northeast Asia should be complemented by a close coordination with the US and major international institutions to prevent a political veto and to expand the basis of common interests. 

Introduction

1. Trade Cooperation of the Russian Federation and the Republic of Korea
1.1. Trade in goods and services
a) Trade in goods
b) Trade in agricultural goods
c) Trade in services
1.2. Existing restrictions in mutual trade
a) Quantitative and tariff restrictions
b) Reduction of non-tariff barriers in mutual trade
1.3. The results of the survey of Russian companies doing trade with the Republic of Korea
1.4. Evaluation of competitiveness of industries in the Republic of Korea and the Russian Federation
1.5. Estimation of the potential and effects of the conclusion of Free Trade Agreement between the Republic of Korea and the States of EAEC

2. The Russian-Korean cooperation in the investment sphere
2.1. The investment policy of the Republic of Korea and Russia, the dynamics of mutual investment
2.2. Review of business activities of Korean companies in Russia
2.3. Assessment of the investment climate in Russia
a) Analysis of external factors
b) Analysis of internal factors
c) The main directions and possible strategies to attract Korean investors in the Russian market

3. The Russian-Korean cooperation on the development of the Far East region
3.1. Russia's policy in the Far East and Korea’s "Eurasian Initiative"
3.2. Prospects and existing restrictions of the Russian-Korean cooperation in the Far East of Russia
3.3. The geopolitical and geo-economic importance of the Russian Far East
a) The geopolitical and geo-economic features of the Russian Far East
b) Changes in the Far East of the Russian policy
c) The Advanced Territories of Development (TOR)
3.4. Perspectives, objectives and tasks of the Russian-Korean economic cooperation in the Far East of Russia
a) Prospects and cooperation goal
b) The main objectives of cooperation
c) A joint program of support and development

The basic directions and recommendations for the development of trade and economic cooperation between the Russian Federation and the Republic of Korea 

I. Trade cooperation
II. Investment cooperation
III. Cooperation in the Far East 

Summary (Russian) 

Executive Summary (English) 

References

Since the establishment of Korea-Russia diplomatic relations in September 1990, economic cooperation between the two countries has progressed rapidly. The fact that Russia’s industrial heartland is far away from Korea constituted an additional challenge in building close economic relations between the two nations. Despite the difficulties, Korea and Russia became “near top ten” trading partners. However, the fact still remains that the potential for economic cooperation of the two economies has not been fully realized.
Trade and economic cooperation between the Russia and Korea is strategic in nature. The Russian market is of great interest to Korean companies, as Russia can provide all the necessary types of industrial and agricultural raw materials in addition to energy. The Russian market remains attractive for many of Korea's products, and vice versa Korean market is of great interest to Russia’s products and resources. Korea can also contribute to Russia’s economic modernization and its regional development, particularly in the Far East and Eastern Siberia.
The Korean and Russian government acknowledged the need for systematic economic cooperation mid- and long-term, and decided to draw up mid- and long-term roadmaps for bilateral economic cooperation. KIEP and RFTA, representative institutes of Korea and Russia respectively, launched the joint research project, aimed at discovering cooperation issues and providing specific measures for implementation. This study evaluates the priority fields with greatest potential for tangible results and develops policy recommendations, focusing on cooperation in the three sectors of trade, investment and regional development.
For its part, Korea-Russia trade cooperation has been relatively vibrant. However, the trade structure is biased. The structure in which Korea exports manufacturing goods to Russia and Russia exports energy goods to Korea should be looked at as a starting point in order to maximize the trade potential. Decreasing Russia’s bias in exports of energy and increasing its trade of high-tech products can improve the trade structure, intra-industry trade should also be facilitated.
Russia aims at strengthening industrial competitiveness. For this, value chains between Russia and Korea need to be formed. This will be realized more effectively through collaboration of the two countries in determining industries that show promise, and implementing joint projects. Second, customs procedures need to be improved and non-tariff barriers need to be eased or lifted. Third, Korea and Russia could intensify collaboration of competition policy. Lastly, the two countries need to begin talks on Korea-EAEU FTA negotiations, in order to deal with all abovementioned points and seek ways for comprehensive and effective economic cooperation.
Significant Korean investment into Russia commenced in the late 2000s and reciprocal investment by Russia is minimal. Korea invests mostly in the manufacturing sector of Russia’s central regions, mainly Moscow and St. Petersburg. Due to economic situation in Russia, a number of Korean companies experienced sharp declines in sales profits. Providing financial support programs for Korean businesses and expanding Russian companies’ investment are currently important parts for facilitating investment and trade cooperation.
Establishing a Korea-Russia investment fund or increasing the availability of the Korean-Russian investment platform formed in 2013 could present good options. Second, setting a long-term joint plan for investment in promising industries and projects is necessary. There are only a few examples of Korea’s successful investment in Russia and vice versa. Investment risk needs to be lessened and a more systematic plan should be thought out through close cooperation.
Third, investment in Korea should be promoted among enterprises of Russia and EAEU members in order to raise the quality of investment cooperation. Russian companies can expand direct investment to Korean enterprises for import substitution purposes. Moreover, holding investment forums in Russian regions involving KOTRA’s Invest Korea, Korea-Russia Business Association, Chamber of Commerce and Industry of the Russian Federation, Moscow Business Association, etc. will be useful in attracting investment to Korea and Russia.
Fourth, a joint investment portal needs to be created in order for investment information to be easily accessible. This recommendation is supported by practical actions when entering the markets both Russian and Korean businesses tend to obtain information on investment from Korean companies that are already operating there.
Korea’s ‘Eurasia Initiative’ and Russia’s Far East development policy, cooperation in the Russian Far East are also studied in this report. Recent development policy for the Far East attempts to connect the Far East’s economy with the APEC’s value chains and strengthen transportation and logistics network between the regions. In order to increase efficacy regarding execution of the policy, the Ministry for Development of the Russian Far East was created and the special Deputy Prime Minister was appointed for this task.
All relevant organizations for development of the Far East - funds, investment agencies and human resources management, were newly established. Besides, new policy instruments such as tax incentives, the advanced development territories and related laws were adopted for its continuity.
Based on these, the following suggestions are proposed. First, Russia-South Korea-North Korea trilateral projects in transportation, logistics, energy network sectors must move forward. Second, it is desirable for Korean businesses to participate in the Advanced Development Territory in the Far East and the joint special industrial zones to be created in the territory over the long run. Cooperation can be fostered in the engineering sector as Russia can gain a new growth engine for economic development and Korea can obtain a new space for growth in the northern region.
Third, it is needed to establish a “Far East Development Committee” within the Korean Government. The committee can support Korean companies to invest in the Far East and coordinate all relevant joint projects between Korea and Russia and act as a counterpart for Russian Ministry for Far East development.
Implementation of these recommendation will move forward the cooperation between the Russian Federation and Republic of Korea, developing joint effective instruments of long term cooperation aimed at expansion of trade and investment and coherence of regional economic integration policies.
 

Since the establishment of Korea-Russia diplomatic relations in September 1990, economic cooperation between the two countries has progressed rapidly. The fact that Russia’s industrial heartland is far away from Korea constituted an additional challenge in building close economic relations between the two nations. Despite the difficulties, Korea and Russia became “near top ten” trading partners. However, the fact still remains that the potential for economic cooperation of the two economies has not been fully realized.
Trade and economic cooperation between the Russia and Korea is strategic in nature. The Russian market is of great interest to Korean companies, as Russia can provide all the necessary types of industrial and agricultural raw materials in addition to energy. The Russian market
Executive Summary remains attractive for many of Korea's products, and vice versa Korean market is of great interest to Russia’s products and resources. Korea can also contribute to Russia’s economic modernization and its regional development, particularly in the Far East and Eastern Siberia.
The Korean and Russian government acknowledged the need for systematic economic cooperation mid- and long-term, and decided to draw up mid- and long-term roadmaps for bilateral economic cooperation. KIEP and RFTA, representative institutes of Korea and Russia respectively, launched the joint research project, aimed at discovering cooperation issues and providing specific measures for implementation. This study evaluates the priority fields with greatest potential for tangible results and develops policy recommendations, focusing on cooperation in the three sectors of trade, investment and regional development.
For its part, Korea-Russia trade cooperation has been relatively vibrant. However, the trade structure is biased. The structure in which Korea exports manufacturing goods to Russia and Russia exports energy goods to Korea should be looked at as a starting point in order to maximize the trade potential. Decreasing Russia’s bias in exports of energy and increasing its trade of high-tech products can improve the trade structure, intra-industry trade should also be facilitated.
Russia aims at strengthening industrial competitiveness. For this, value chains between Russia and Korea need to be formed. This will be realized more effectively through collaboration of the two countries in determining industries that show promise, and implementing joint projects. Second, customs procedures need to be improved and non-tariff barriers such as TBT and SPS measures need to be eased or lifted. Russia’s customs procedures can be improved by expanded technological cooperation with Korea. An E-customs system will be a significant step in increasing transparency. Third, Korea and Russia could intensify collaboration of competition policy. Lastly, the two countries need to begin talks on Korea-EAEU FTA negotiations, in order to deal with all abovementioned points and seek ways for comprehensive and effective economic cooperation.
Significant Korean investment into Russia commenced in the late 2000s and reciprocal investment by Russia is minimal. Korea invests mostly in the manufacturing sector of Russia’s central regions, mainly Moscow and St. Petersburg. Due to economic situation in Russia, a number of Korean companies experienced sharp declines in sales profits. Providing financial support programs for Korean businesses and expanding Russian companies’ investment are currently important parts for facilitating investment and trade cooperation. Establishing a Korea-Russia investment fund or increasing the availability of the Korean-Russian investment platform formed in 2013 could present good options. Second, setting a long-term joint plan for investment in promising industries and projects is necessary. There are only a few examples of Korea’s successful investment in Russia and vice versa. Investment risk needs to be lessened and a more systematic plan should be thought out through close cooperation. Third, investment in Korea should be promoted among enterprises of Russia and EAEU members in order to raise the quality of investment cooperation. Russian companies can expand direct investment to Korean enterprises for import substitution purposes. Moreover, holding investment forums in Russian regions involving KOTRA’s Invest Korea, Korea-Russia Business Association, Chamber of Commerce and Industry of the Russian Federation, Moscow Business Association, etc. will be useful in attracting investment to Korea and Russia. Fourth, a joint investment portal needs to be created in order for investment information to be easily accessible. When entering the Russian market, Korean businesses tend to obtain information on investment from Korean companies that are already operating there. As a result, businesses with ties or affiliations in Russia can easily obtain needed information whereas enterprises without such links have difficulties in securing adequate information. The portal will provide sufficient information to any company from the two countries interested in the partner country.
Korea’s ‘Eurasia Initiative’ and Russia’s Far East development policy, cooperation in the Russian Far East are also studied in this report. Recent development policy for the Far East attempts to connect the Far East’s economy with the APEC’s value chains and strengthen transportation and logistics network between the regions. In order to increase efficacy regarding execution of the policy, the Ministry for Development of the Russian Far East was created and the special Deputy Prime Minister was appointed for this task. All relevant organizations for development of the Far East - funds, investment agencies and human resources management, were newly established. Besides, new policy instruments such as tax incentives, the advanced development territories and related laws were adopted for its continuity. Based on these, the following suggestions are proposed. First, Russia-South Korea-North Korea trilateral projects in transportation, logistics, energy network sectors must move forward. Second, it is desirable for Korean businesses to participate in the Advanced Development Territory in the Far East and the joint special industrial zones to be created in the territory over the long run. Cooperation can be fostered in the engineering sector as Russia can gain a new growth engine for economic development and Korea can obtain a new space for growth in the northern region.
Third, it is needed to establish a “Far East Development Committee” within the Korean Government. The committee can support Korean companies to invest in the Far East and coordinate all relevant joint projects between Korea and Russia. 

 This study looks at the current level of liberalization in services sectors among the OECD members and investigates the impacts of services liberalization on trade and GDP growth. In doing so, the gravity model and computable general equilibrium model are applied for the analytical work and the services trade restrictiveness index (STRI) developed by the OECD is included as an indicator for the liberalization of services sectors. This research provides four main outcomes as follows.
 First, the barriers in the services sectors consist mainly of the restrictions related to foreign entry and the movement of people among five policy areas of the STRI. In other words, measures on market access have been kept and remained more persistently than other measures.
 Second, the extensive differences in regulations and restrictions across countries are found in most services sectors. Since services trade liberalization does not mean the complete abolition of regulations or restrictions in services, one of the effective ways to reduce trade costs in services is to reasonably harmonize the regulatory differences across countries.
 Third, the empirical analysis using the gravity model provides an interesting outcome that domestic policy areas such as barriers to competition in public sectors or regulatory consistency and transparency have a relatively larger impact on trade than other policy areas such as restrictions on foreign entry or movement of people. Notwithstanding the domestic policy areas account less for the restrictions in services sectors, the empirical result implies that the regulatory reforms in those areas have a larger economic impact.
 Fourth, the CGE analysis using GTAP based on the TiSA(Trade in Services Agreement) scenario provides the outcome that further services liberalization lead most economies to grow faster in terms of GDP. Especially, relatively faster growth is identified in developing and emerging economies rather than advanced economies. Moreover, the output growth in manufacturing sectors in developing and emerging economies is more significant than in advanced economies as well.
 

 Russia achieved rapid economic growth till 2008, mostly as a result of high oil prices. The country proudly stood as a member of the G8 and a leading economy of BRICS group. However, the global financial crisis in 2008~09 ruthlessly battered the Russian economy, bringing about a 7.8% reduction in the GDP. The overdependence of the economy on energy resources was pointed out as the major factor in the GDP free-fall. The impact was so devastating that not even the recovery of oil prices could put Russian economic growth rates back on track. Rather, since 2010, growth rates continued to slowed down. Russia’s economic growth model, which led to high economic growth until the mid 2000s, was reaching its limit. Thus, securing a new engine of growth has come to the forefront of Russia’s economic policy agenda.
 Against this backdrop, then-president Medvedev announced the economic modernization policy as part of the industrial policy aimed at structural diversification of the economy. The five industries selected as key priority sectors include energy efficiency, nuclear technology, ICT, space technology, and medical and pharmaceutical technology.
 The goal of Russia’s economic modernization policy is to transform the economy heavily dependent on energy exports to an innovation-based economy. For this, the Russian government set up an advanced development strategy; intended to strengthen the lead in technology sectors where Russia has comparative advantage or development potential. At the same time, a catch-up development strategy - developing technologies through imports or technology-transfer was adopted.
 Institutional mechanisms of the economic modernization policy include a policy coordinating body and a number of implementing organizations. Specifically, the Council under the President of the Russian Federation on Economic Modernization and Innovative Development of Russia is responsible for coordination of these policies. The Agency for Strategic Initiatives, Skolkovo Foundation, Russia Venture Company, Vnesheconombank, and Rusnano; all implement and support innovation projects through cooperation among themselves and beyond.
 In December 2011 the Russian government presented a comprehensive direction for its economic modernization policy, with the ‘Strategy for Innovative Development of the Russian Federation for the period until 2020.’ Then, in 2014 government programs on the key five industries involved in economic modernization policy were confirmed. Those are ‘Energy efficiency and energy development’, ‘Development of Nuclear Power Complex’, ‘Information Society in 2011 2020’, ‘Space Activity of Russia in 2013-2020’, and ‘Development of the Pharmaceutical and Medical Industry.’
 There are diverse views as to achievements and limits of Russia’s economic modernization policy. However, experts do agree in general that economic modernization is a laudable policy direction for sustainable development, and that the government’s willingness, efficient operation of the constituent mechanisms, improving the investment environment through intensive structural reforms, and promoting innovation of SMEs through political and financial methods are critical factors for successful realization of the policy.
 The level of innovation in Russia is high compared to developing countries, however it falls way behind the level of developed economies. Russia still lacks efficient institutions and financial development that can utilize inputs adequately to produce quality outputs. Therefore, a more robust financial development is a must to facilitate R&D investment, and institutions in the innovation sector need to be realigned to manage resources efficiently.
 Among the five key industries selected for the economic modernization policy, the energy efficiency, medical/pharmaceutical technology and ICT sectors are steadily growing with government support and active international cooperation.
This is where Korea needs to develop strategies for the Russian markets. There is much room in terms of raising energy efficiency in Russia since the infrastructure is largely outdated. However, imported goods account for more than 70% of the domestic market due to low competitiveness of Russian products. In addition, global companies are beginning to localize production by establishing joint ventures with Russian companies.
 The medical and pharmaceutical sector grew nearly 10 percent in average in the last decade. Yet, the country is heavily dependent on imports for medical devices and medications. Responding to this, the Russian government implemented an import substitution policy for pharmaceuticals, to obtain advanced technology and know-how through promotion of direct investment from global companies. Since recently, medical devices produced outside the EAEU can no longer be included in government procurement. Thus, foreign companies are investing directly into special industrial zones in Russia to construct production facilities.
 The ICT services sector exhibits more dynamic growth than the ICT manufacturing sector in Russia. This is because Russia possesses competitiveness in developing software and programming. Foreign businesses tend to be more interested in outsourcing or in R&D cooperation than direct entry into the Russian market.
 Based on the findings of this study, measures for Korea-Russia cooperation in terms of Russia’s economic modernization policy are suggested as follows. First, a Korea-Russia business forum for innovative venture companies should be held simultaneously when the Korea-Russia Joint Committee on Economic, Scientific and Technological Cooperation convenes. The forum can enhance the efforts of the Joint Committee by generating tangible results, and examining achievements and forthcoming challenges for subsequent Committee meetings.
 Second, opening the Korea Innovation Center (KIC) in Moscow and setting up cooperative relations with implementing agencies of the economic modernization policy are necessary. KIC is expected to provide support for technological cooperation between companies, expand business activities and increase investment. So far, most of the policy implementing organizations in Moscow are collaborating with ministries and local companies only. In order for KIC Moscow to play a comprehensive and unique role, it should establish partnership with the implementing institutions of Russia’s economic modernization policy, such as the Skolkovo Foundation, Russia Venture Company, Agency for Strategic Initiatives, etc.
 Third, the next generation human resources should be nurtured to enhance scientific and technological cooperation between Korea and Russia. The Korean government need to make a long-term plan to nurture tech professionals with a profound understanding of Russian industrial technologies. This will be possible by sending out a number of students to Russia through the government scholarship program. Various forms of scholarship programs need to be developed. Those who are sent to Russia through such programs will become mediators for Korea-Russia cooperation particularly in the R&D sector and help overcome barriers of language, culture, information and network. In the long term, they will even play a crucial role in realizing the “Creative Continent” of the Eurasia Initiative.
 Fourth, Russia’s special industrial and innovative economic zones can be utilized as a platform for Korea-Russia cooperation related to Russia’s economic cooperation policy. R&D cooperation with skilled experts and use of business infrastructure in the zones can facilitate entry of Korean companies into the Russian market.
 Fifth, launching a Korean-Russian portal site for economic modernization and innovation will be helpful in strengthening bilateral cooperation. The governments and businesses from both sides can share information on policies and market conditions of the five key sectors and exchange industrial technologies through the site. This will eventually invigorate cooperation in the private sector. Moreover, providing consultation services with active participation of qualified consulting companies and governmental organizations in the technology sector from both sides will increase the synergy effect.