Methodology for compiling statistics on external trade in services of the Russian Federation by mode of supply

I. Introduction

Cross-country economic integration, driven by liberalised international trade in services, increased global penetration of capital and rapid technological advancements around the globe, promotes cross-border services and fosters their new modes of supply. New opportunities open up for both service suppliers and their consumers. The development of this area of external trade is essential to facilitating business processes in global production and consumption of goods.

With this in mind, international organisations are working to improve the system of international trade rules that guarantee fair and non-discriminatory integration in external trade in services to all participants, incentivise economic activity by formulating clear and transparent rules for access to national markets, and promote global trade through its liberalisation. National governments, in turn, are taking specific measures to regulate various modes of supply of international services as they are seeking to attract direct investment and create global value chains and the production and export of goods.

The availability of high-quality statistics in this area is indispensable for measuring the impact of national government policies, as well as the degree of the country’s integration in the global economic system. The Bank of Russia’s newly developed statistical model provides insights into the breakdown of Russia’s external trade by mode of supply. Focused on further improvements in these statistics, the model enables assessments whether the Russian Federation is competitive in external trade in services, the extent to which the country is involved in globalisation processes, how strong Russian service suppliers are and how open the national market is to foreign service providers. These statistical data are meant to fill in gaps in the information that must be available to trade negotiation participants to help them make informed decisions and strike a balance between the interests of domestic service companies and global service trends.

II.Global standards for compiling statistics on external trade in services by mode of supply

Statistical data on external trade in services by mode of supply are compiled based on the UN Manual on Statistics of International Trade in Services 2010, harmonised with the System of National Accounts 2008, the IMF’s Balance of Payments Manual and International Investment Position Manual (2010), and the General Agreement on Tariffs and Trade.

According to the underlying Manual, external trade in services includes the following two transaction categories:

— services provided as part of cross-border operations, i.e. between residents and non-residents (these transactions are recorded in balance of payments statistics and are the subject of this methodology);

— services provided by local enterprises that are controlled from abroad, i.e. services based on a commercial presence abroad (these are not cross-border transactions; they are not recorded in balance of payments statistics and are outside the scope of this methodology).

Modes of supply are determined based on the location of the supplier and the consumer at the time the service is being provided, taking into account their national affiliation or country of origin.

Mode of Supply 1. Cross-border supply: both the supplier and the consumer are located in the economic territory of their country. Mode 1 includes services to consumers in the economic territory of consumer residence by a foreign-based supplier (e.g. telecommunication services, legal advice by telephone and brokerage services). In the course of this service, the supplier’s property may be transferred from the supplier’s economic territory to the consumer’s economic territory.

Mode of Supply 2. Consumption abroad: the consumer or their property is outside the economic territory of their country (e.g. tourism, travelling abroad to study foreign languages and ship repairs abroad).

Mode of Supply 3. Commercial presence: the service supplier sets up a subsidiary, branch, office or commercial representation in the economic territory of another country based on which to provide services. The purpose of this presence is to ensure closer contact with consumers at various stages of production, sale, delivery and pre-sale services (e.g. financial services provided by a foreign bank branch, medical services provided by a foreign-owned hospital, or training provided by a foreign-owned school). Commercial presence is often, but not always, associated with direct investment flows.

Mode of Supply 4. Presence of natural persons: the natural person (an employee of a foreign service supplier or a self-employed individual) is based outside the economic territory of their country to provide services (e.g. a specialist travelling to provide technical advice).

In accordance with the Annex on Movement of Natural Persons Supplying Services¹ of the WTO General Agreement on Trade in Services, Mode 4 is not applicable to individuals seeking access to the labour market or to individuals whose permanent residence or employment is the host country. Therefore, statistical data on international trade in services do not cover the following transactions:

— services provided by a self-employed individual residing abroad for more than one year, since this individual becomes a host economy resident and such services are not recorded in balance of payments statistics;

— services provided by an individual residing abroad for up to one year who has an employment contract with a resident company of the host economy, since such services are recorded in balance of payments statistics as primary income in the labour remuneration item.

In statistical data on external trade in services, the breakdown of services by mode of supply is based on data on the location of parties to the transaction (consumer and supplier) at the moment the service is being provided, as well as on the type of supplier (natural person or a commercial company) (DIAGRAM 1).

III. The breakdown of statistical data on external trade of the Russian Federation in services by mode of supply

The breakdown of statistical data on external trade of the Russian Federation in services by mode of supply complements the methodology for compiling data on external trade of the Russian Federation in services, which is part of the balance of payments methodology.

Data for the breakdown by mode of supply are sourced from bank statements with transaction-based data on foreign trade settlements under work or service contracts and from statistical monitoring forms related to services provided to non-residents or by non-residents.

For certain types of services for which data are sourced from bank statements, the following approach is used to differentiate between Mode 2 and 4 transactions:

— if a Russian Federation resident provides to a non-resident a service paid by the non-resident from an account with a bank located in the Russian Federation, the non-resident consumer is considered to be located in the economic territory of the Russian Federation, i.e. outside their territory of residence, and the export of such services belongs to Mode 2.

— if a Russian Federation resident provides to a non-resident a service for which the non-resident pays to the resident’s account with a non-resident bank, the resident service supplier is considered to be located in the consumer’s economic territory and exports services through Mode 4.

— if a non-resident provides services paid for by a Russian Federation resident from their account with a non-resident bank, the resident is considered to consume the service outside the Russian Federation, and the import of such services belongs to Mode 2.

— if a non-resident provides a service paid by a resident to a non-resident’s account with a bank located in the Russian Federation, the non-resident service supplier is considered to be located in the consumer’s economic territory, i.e. in the Russian Federation, and the import of services belongs to Mode 4.

Approaches to specific services are described below².

1. Manufacturing services on physical inputs owned by others

Manufacturing services on physical inputs owned by others belong in their entirety to Mode 2, since consumer property is transferred to the supplier’s economic territory and the whole process of service provision and consumption takes place on the supplier’s economic territory.

2. Maintenance and repair services

Maintenance and repair services are largely classified as delivered through Mode 2, since consumer property is transferred to the supplier’s economic territory to enable service consumption.

The exceptions are cases of a maintenance and repair service provided in the consumer’s economic territory. The supplier may send their specialists to provide services to the consumer, but the consumer’s property stays within their economic territory and the service is provided in the consumer’s economic territory. In this case and in the event of a service provided by self-employed individuals in the consumer’s economic territory, services belong to Mode 4.

3. Transport services

Cross-border passenger transportation belongs to Mode 1. Domestic transportation of non-residents by Russian Federation resident transport companies across the economic territory of a foreign country (export), as well as domestic transportation of Russian Federation residents by non-resident transport companies across the economic territory of the Russian Federation (import), belongs to Mode 4.

Freight transportation belongs to Mode 1, except for:

— domestic freight transportation by Russian Federation resident transport companies across the economic territory of a foreign state (export), as well as domestic freight transportation by Russian Federation non-resident transport companies for the benefit of Russian Federation residents across the economic territory of the Russian Federation, which (import) belongs to Mode 4;

— domestic freight transportation by Russian Federation resident transport companies for the benefit of non-residents across the economic territory of the Russian Federation (export), as well as domestic freight transportation by Russian Federation non-resident transport companies for the benefit of Russian Federation residents across the economic territory of another country (import) which belongs to Mode 2.

Supporting and auxiliary transport services provided with regard to foreign ships and other vehicles in Russian ports, airports, hangars, railway and car stations, and freight terminals (export), and with regard to Russian ships and other vehicles in foreign ports, airports, hangars, railway and car stations, and freight terminals (import) belong to Mode 2. Commission and agency fees belong to Mode 1, since the nature of relevant services is usually cross-border.

4. Travel

Services in the Travel item belong to Mode 2 considering that they are consumed by individuals abroad.

The UN Manual on Statistics of International Trade in Services 2010 recommends that expenses on goods during travel abroad should not be categorised into any mode of supply in the breakdown of services by mode of supply; however, due to the difficulty of singling out expenses on goods in the total amount of individuals’ expenses abroad, this methodology does not apply this provision.

5. Construction

Building companies carrying out construction works in the economic territory of a foreign country for less than one year establish a commercial presence in this territory without setting up a direct investment company as a resident of the host economy, owing to the short-term nature of these operations. However, services by such building companies belong to Mode 3. Therefore, the bulk of both the export of construction abroad services and the import of construction in Russia services belong to Mode 3.

The following services are exceptions:

— construction services provided by self-employed non-resident individuals who are temporarily present in the economic territory of the Russian Federation (import) and self-employed resident individuals who are temporarily outside the Russian Federation (export) are categorised into Mode 4;

— subcontracting construction works performed by Russian Federation residents in the economic territory of the Russian Federation under contracts with non-residents (export) and subcontracting construction works performed by non-residents abroad under contracts with Russian Federation residents (import) belong to Mode 2.

6. Insurance and services of non-governmental pension funds

Reinsurance, supporting insurance services, life insurance (including services of non-governmental pension funds) and foreign trade cargo insurance belong to Mode 1.

The exceptions are cases when supporting insurance services (loss assessment services and insurance agent and broker services) are provided in the consumer’s economic territory by self-employed individuals or specialists sent by the supplier to the consumer. Such services belong to Mode 4.

Other types of direct insurance services provided to a consumer who is outside their country of residence (a representative office of a foreign legal entity or a non-resident individual) belong to Mode 2.

7. Financial services

In the overwhelming majority of cases, financial services are provided through Mode 1.

The exceptions are the following cases:

— the consumer (a representative office of a foreign legal entity or a non-resident individual) is outside their country of residence — Mode 2;

— financial services (e.g. financial intermediation advice) are provided in the consumer’s economic territory by self-employed individuals or specialists sent by the service supplier to the consumer — Mode 4.

8. Charges for the use of intellectual property

Charges for the use of intellectual property belong to Mode 1.

9. Telecommunication, computer, and information services

Telecommunication services belong to Mode 1.

Computer and information services are provided through Mode 1. The following cases are exceptions:

— the service consumer (a representative office of a foreign legal entity or a non-resident individual) is outside their country of residence — Mode 2;

— computer and information services are provided in the consumer’s economic territory by self-employed individuals or specialists sent by the supplier to the consumer — Mode 4.

10. Other business services

10.1. Services in the other business services category (research and development services, legal services, accounting, auditing, bookkeeping, and tax optimisation services, business and management consulting and public relations services, architectural, engineering and technical services, waste treatment and depollution, agricultural and mining services) belong to Mode 1.

The following cases are exceptions:

— the service consumer (a representative office of a foreign legal entity or a non-resident individual) or the consumer’s property is outside their country of residence — Mode 2;

— services are provided in the consumer’s economic territory by self-employed individuals or specialists sent by the supplier to the consumer — Mode 4.

10.2. Advertising, market research and public opinion polling services are delivered through Mode 1, except for services provided in the consumer’s economic territory by self-employed individuals or specialists sent by the supplier to the consumer — Mode 4.

10.3. Operational leasing services belong to Mode 1 inasmuch as they are entirely provided across borders.

10.4. Other services in the other business services category (trade intermediation services, printing and publishing services, and other services not otherwise classified) belong to Mode 1.

The exception is organising industrial fairs, exhibitions, conferences and workshops, and housing and utility services: they belong to Mode 2.

11. Personal, cultural and recreational services

These services are essentially delivered through Mode 1.

The following cases are exceptions:

— the service consumer (a representative office of a foreign legal entity) is outside their country of residence — Mode 2;

— services are provided in the consumer’s economic territory by self-employed individuals or specialists sent by the supplier to the consumer — Mode 4.

12. Government goods and services not otherwise classified

Based on international recommendations, government goods and services not otherwise classified are not broken down by mode of supply inasmuch as they are not provided on a commercial or competitive basis.

¹ Annex on Movement of Natural Persons Supplying Services Under the Agreement.

² The services are given in the order corresponding to their classification in balance of payments statistics.