Economic modernization and export diversification are priorities in the Russian economic policy agenda, with several measures undertaken in recent years to promote growth in the nonoil and gas sector. Russia's export base has narrowed substantially over the past decade. Lack of diversification cannot be pinned down to a single cause. Competition and innovation are examined in this study as key drivers of export diversification. After presenting our findings we identify some key trade policy measures that could help firms enter foreign markets and sustain current trade relationships. A comprehensive competition policy will help establish a level playing field, facilitate entry of more efficient firms, and encourage orderly exit of less efficient firms, thereby contributing to increased productivity and export propensity. The government's current initiatives to foster innovation could be strengthened through a number of specific measures focusing on commercialization of public research and development and adequate research funding. This study is organized as follows. Section two scrutinizes various dimensions of Russia's trade performance, including export diversification, sophistication, and survival. A detailed analysis of the role of exports, innovation, productivity, and competition on firm performance is presented in section three. Section four analyzes the competition environment in Russia, by presenting analyses of price-cost margins, state ownership, and regional and sectorial characteristics of competition, while Section five provides an overview of Russia's innovation system and measures to increase the impact of research and development on the economy. Section six concludes and presents policy options.