diff --git a/common/lib/xmodule/xmodule/tests/test_video.py b/common/lib/xmodule/xmodule/tests/test_video.py
index 3ac7226e94..6a27491e99 100644
--- a/common/lib/xmodule/xmodule/tests/test_video.py
+++ b/common/lib/xmodule/xmodule/tests/test_video.py
@@ -15,8 +15,10 @@ the course, section, subsection, unit, etc.
 import os
 import unittest
 import datetime
+import shutil
 from uuid import uuid4
 
+from tempfile import mkdtemp
 from lxml import etree
 from mock import ANY, Mock, patch, MagicMock
 import ddt
@@ -24,6 +26,7 @@ import ddt
 from django.conf import settings
 from django.test.utils import override_settings
 
+from fs.osfs import OSFS
 from opaque_keys.edx.locator import CourseLocator
 from opaque_keys.edx.keys import CourseKey
 from xblock.field_data import DictFieldData
@@ -31,7 +34,7 @@ from xblock.fields import ScopeIds
 
 from xmodule.tests import get_test_descriptor_system
 from xmodule.validation import StudioValidationMessage
-from xmodule.video_module import VideoDescriptor, create_youtube_string
+from xmodule.video_module import VideoDescriptor, create_youtube_string, EXPORT_STATIC_DIR
 from xmodule.video_module.transcripts_utils import download_youtube_subs, save_to_store
 from . import LogicTest
 from .test_import import DummySystem
@@ -672,11 +675,18 @@ class VideoExportTestCase(VideoDescriptorTestBase):
     """
     Make sure that VideoDescriptor can export itself to XML correctly.
     """
+    def setUp(self):
+        super(VideoExportTestCase, self).setUp()
+        self.temp_dir = mkdtemp()
+        self.file_system = OSFS(self.temp_dir)
+        self.addCleanup(shutil.rmtree, self.temp_dir)
+
     @patch('xmodule.video_module.video_module.edxval_api')
     def test_export_to_xml(self, mock_val_api):
         """
         Test that we write the correct XML on export.
         """
+        edx_video_id = u'test_edx_video_id'
         mock_val_api.export_to_xml = Mock(return_value=etree.Element('video_asset'))
         self.descriptor.youtube_id_0_75 = 'izygArpw-Qo'
         self.descriptor.youtube_id_1_0 = 'p2Q6BrNhdh8'
@@ -691,10 +701,10 @@ class VideoExportTestCase(VideoDescriptorTestBase):
         self.descriptor.html5_sources = ['http://www.example.com/source.mp4', 'http://www.example.com/source1.ogg']
         self.descriptor.download_video = True
         self.descriptor.transcripts = {'ua': 'ukrainian_translation.srt', 'ge': 'german_translation.srt'}
-        self.descriptor.edx_video_id = 'test_edx_video_id'
+        self.descriptor.edx_video_id = edx_video_id
         self.descriptor.runtime.course_id = MagicMock()
 
-        xml = self.descriptor.definition_to_xml(None)  # We don't use the `resource_fs` parameter
+        xml = self.descriptor.definition_to_xml(self.file_system)
         parser = etree.XMLParser(remove_blank_text=True)
         xml_string = '''\
          <video url_name="SampleProblem" start_time="0:00:01" youtube="0.75:izygArpw-Qo,1.00:p2Q6BrNhdh8,1.25:1EeWXzPdhSA,1.50:rABDYkeK0x8" show_captions="false" end_time="0:01:00" download_video="true" download_track="true">
@@ -710,9 +720,10 @@ class VideoExportTestCase(VideoDescriptorTestBase):
         expected = etree.XML(xml_string, parser=parser)
         self.assertXmlEqual(expected, xml)
         mock_val_api.export_to_xml.assert_called_once_with(
-            [u'test_edx_video_id', u'p2Q6BrNhdh8', 'source', 'source1'],
-            ANY,
-            external=False
+            video_id=edx_video_id,
+            static_dir=EXPORT_STATIC_DIR,
+            resource_fs=self.file_system,
+            course_id=unicode(self.descriptor.runtime.course_id.for_branch(None)),
         )
 
     @patch('xmodule.video_module.video_module.edxval_api')
@@ -723,7 +734,7 @@ class VideoExportTestCase(VideoDescriptorTestBase):
         self.descriptor.edx_video_id = 'test_edx_video_id'
         self.descriptor.runtime.course_id = MagicMock()
 
-        xml = self.descriptor.definition_to_xml(None)
+        xml = self.descriptor.definition_to_xml(self.file_system)
         parser = etree.XMLParser(remove_blank_text=True)
         xml_string = '<video url_name="SampleProblem" download_video="false"/>'
         expected = etree.XML(xml_string, parser=parser)
@@ -746,7 +757,7 @@ class VideoExportTestCase(VideoDescriptorTestBase):
         self.descriptor.html5_sources = ['http://www.example.com/source.mp4', 'http://www.example.com/source.ogg']
         self.descriptor.download_video = True
 
-        xml = self.descriptor.definition_to_xml(None)  # We don't use the `resource_fs` parameter
+        xml = self.descriptor.definition_to_xml(self.file_system)
         parser = etree.XMLParser(remove_blank_text=True)
         xml_string = '''\
          <video url_name="SampleProblem" start_time="0:00:05" youtube="0.75:izygArpw-Qo,1.00:p2Q6BrNhdh8,1.25:1EeWXzPdhSA,1.50:rABDYkeK0x8" show_captions="false" download_video="true" download_track="true">
@@ -763,7 +774,7 @@ class VideoExportTestCase(VideoDescriptorTestBase):
         """
         Test XML export with defaults.
         """
-        xml = self.descriptor.definition_to_xml(None)
+        xml = self.descriptor.definition_to_xml(self.file_system)
         # Check that download_video field is also set to default (False) in xml for backward compatibility
         expected = '<video url_name="SampleProblem" download_video="false"/>\n'
         self.assertEquals(expected, etree.tostring(xml, pretty_print=True))
@@ -774,7 +785,7 @@ class VideoExportTestCase(VideoDescriptorTestBase):
         Test XML export with transcripts being overridden to None.
         """
         self.descriptor.transcripts = None
-        xml = self.descriptor.definition_to_xml(None)
+        xml = self.descriptor.definition_to_xml(self.file_system)
         expected = '<video url_name="SampleProblem" download_video="false"/>\n'
         self.assertEquals(expected, etree.tostring(xml, pretty_print=True))
 
@@ -785,7 +796,7 @@ class VideoExportTestCase(VideoDescriptorTestBase):
         The illegal characters in a String field are removed from the string instead.
         """
         self.descriptor.display_name = 'Display\x1eName'
-        xml = self.descriptor.definition_to_xml(None)
+        xml = self.descriptor.definition_to_xml(self.file_system)
         self.assertEqual(xml.get('display_name'), 'DisplayName')
 
     @patch('xmodule.video_module.video_module.edxval_api', None)
@@ -794,7 +805,7 @@ class VideoExportTestCase(VideoDescriptorTestBase):
         Test XML export handles the unicode characters.
         """
         self.descriptor.display_name = u'这是文'
-        xml = self.descriptor.definition_to_xml(None)
+        xml = self.descriptor.definition_to_xml(self.file_system)
         self.assertEqual(xml.get('display_name'), u'\u8fd9\u662f\u6587')
 
 
diff --git a/common/lib/xmodule/xmodule/video_module/video_module.py b/common/lib/xmodule/xmodule/video_module/video_module.py
index 7603892232..b14ab5bbd6 100644
--- a/common/lib/xmodule/xmodule/video_module/video_module.py
+++ b/common/lib/xmodule/xmodule/video_module/video_module.py
@@ -47,6 +47,7 @@ from .transcripts_utils import (
     get_video_ids_info,
     Transcript,
     VideoTranscriptsMixin,
+    clean_video_id,
 )
 from .transcripts_model_utils import (
     is_val_transcript_feature_enabled_for_course
@@ -98,6 +99,9 @@ log = logging.getLogger(__name__)
 _ = lambda text: text
 
 
+EXPORT_STATIC_DIR = u'static'
+
+
 @XBlock.wants('settings', 'completion')
 class VideoModule(VideoFields, VideoTranscriptsMixin, VideoStudentViewHandlers, XModule, LicenseMixin):
     """
@@ -711,19 +715,22 @@ class VideoDescriptor(VideoFields, VideoTranscriptsMixin, VideoStudioViewHandler
                 ele.set('src', self.transcripts[transcript_language])
                 xml.append(ele)
 
-        if edxval_api:
-            external, video_ids = get_video_ids_info(self.edx_video_id, self.youtube_id_1_0, self.html5_sources)
-            if video_ids:
-                try:
-                    xml.append(
-                        edxval_api.export_to_xml(
-                            video_ids,
-                            unicode(self.runtime.course_id.for_branch(None)),
-                            external=external
-                        )
+        edx_video_id = clean_video_id(self.edx_video_id)
+        if edx_video_id:
+            try:
+                # Create static dir if not created earlier.
+                resource_fs.makedirs(EXPORT_STATIC_DIR, recreate=True)
+
+                xml.append(
+                    edxval_api.export_to_xml(
+                        video_id=edx_video_id,
+                        resource_fs=resource_fs,
+                        static_dir=EXPORT_STATIC_DIR,
+                        course_id=unicode(self.runtime.course_id.for_branch(None))
                     )
-                except edxval_api.ValVideoNotFoundError:
-                    pass
+                )
+            except edxval_api.ValVideoNotFoundError:
+                pass
 
         # handle license specifically
         self.add_license_to_xml(xml)
diff --git a/lms/djangoapps/courseware/tests/test_video_mongo.py b/lms/djangoapps/courseware/tests/test_video_mongo.py
index ad7314441c..96206e4710 100644
--- a/lms/djangoapps/courseware/tests/test_video_mongo.py
+++ b/lms/djangoapps/courseware/tests/test_video_mongo.py
@@ -1,14 +1,22 @@
 # -*- coding: utf-8 -*-
-"""Video xmodule tests in mongo."""
+"""
+Video xmodule tests in mongo.
+"""
 
 import json
 from collections import OrderedDict
 from uuid import uuid4
 
+from tempfile import mkdtemp
+import shutil
 import ddt
 from django.conf import settings
+from django.core.files import File
+from django.core.files.base import ContentFile
 from django.test import TestCase
 from django.test.utils import override_settings
+from fs.osfs import OSFS
+from fs.path import combine
 from edxval.api import (
     ValCannotCreateError,
     ValVideoNotFoundError,
@@ -16,7 +24,8 @@ from edxval.api import (
     create_profile,
     create_video,
     get_video_info,
-    get_video_transcript
+    get_video_transcript,
+    get_video_transcript_data
 )
 from lxml import etree
 from mock import MagicMock, Mock, patch
@@ -32,6 +41,7 @@ from xmodule.tests.test_import import DummySystem
 from xmodule.tests.test_video import VideoDescriptorTestBase, instantiate_descriptor
 from xmodule.video_module import VideoDescriptor, bumper_utils, rewrite_video_url, video_utils
 from xmodule.video_module.transcripts_utils import Transcript, save_to_store
+from xmodule.video_module.video_module import EXPORT_STATIC_DIR
 from xmodule.x_module import STUDENT_VIEW
 
 from .helpers import BaseTestXmodule
@@ -43,6 +53,16 @@ MODULESTORES = {
     ModuleStoreEnum.Type.split: TEST_DATA_SPLIT_MODULESTORE,
 }
 
+TRANSCRIPT_FILE_DATA = """
+1
+00:00:14,370 --> 00:00:16,530
+I am overwatch.
+
+2
+00:00:16,500 --> 00:00:18,600
+可以用“我不太懂艺术 但我知道我喜欢什么”做比喻.
+"""
+
 
 @attr(shard=1)
 class TestVideoYouTube(TestVideo):
@@ -1509,12 +1529,15 @@ class VideoDescriptorTest(TestCase, VideoDescriptorTestBase):
         super(VideoDescriptorTest, self).setUp()
         self.descriptor.runtime.handler_url = MagicMock()
         self.descriptor.runtime.course_id = MagicMock()
+        self.temp_dir = mkdtemp()
+        self.file_system = OSFS(self.temp_dir)
+        self.addCleanup(shutil.rmtree, self.temp_dir)
 
     def get_video_transcript_data(self, video_id):
         return dict(
             video_id=video_id,
             language_code='ar',
-            url='/media/ext101.srt',
+            url='{media_url}ext101.srt'.format(media_url=settings.MEDIA_URL),   # MEDIA_URL is /static/uploads/
             provider='Cielo24',
             file_format='srt',
         )
@@ -1547,7 +1570,14 @@ class VideoDescriptorTest(TestCase, VideoDescriptorTestBase):
         )
 
     def test_export_val_data_with_internal(self):
+        """
+        Tests that exported VAL videos are working as expected.
+        """
+        language_code = 'ar'
+        transcript_file_name = 'test_edx_video_id-ar.srt'
+        expected_transcript_path = combine(self.temp_dir, combine(EXPORT_STATIC_DIR, transcript_file_name))
         self.descriptor.edx_video_id = 'test_edx_video_id'
+
         create_profile('mobile')
         create_video({
             'edx_video_id': self.descriptor.edx_video_id,
@@ -1561,34 +1591,48 @@ class VideoDescriptorTest(TestCase, VideoDescriptorTestBase):
                 'bitrate': 333,
             }],
         })
-        create_or_update_video_transcript(
+        transcript_url = create_or_update_video_transcript(
             video_id=self.descriptor.edx_video_id,
-            language_code='ar',
+            language_code=language_code,
             metadata={
                 'provider': 'Cielo24',
-                'file_name': 'ext101.srt',
                 'file_format': 'srt'
-            }
+            },
+            file_data=ContentFile(TRANSCRIPT_FILE_DATA)
         )
 
-        actual = self.descriptor.definition_to_xml(resource_fs=None)
+        actual = self.descriptor.definition_to_xml(resource_fs=self.file_system)
         expected_str = """
             <video download_video="false" url_name="SampleProblem">
                 <video_asset client_video_id="test_client_video_id" duration="111.0" image="">
                     <encoded_video profile="mobile" url="http://example.com/video" file_size="222" bitrate="333"/>
                     <transcripts>
-                        <transcript file_format="srt" file_name="ext101.srt" language_code="ar" provider="Cielo24" video_id="{video_id}"/>
+                        <transcript file_format="srt" file_name='video-transcripts/{transcript_name}' language_code="{language_code}" provider="Cielo24"/>
                     </transcripts>
                 </video_asset>
             </video>
-        """.format(video_id=self.descriptor.edx_video_id)
+        """.format(
+            transcript_name=transcript_url.split('/')[-1],
+            language_code=language_code
+        )
         parser = etree.XMLParser(remove_blank_text=True)
         expected = etree.XML(expected_str, parser=parser)
         self.assertXmlEqual(expected, actual)
 
+        # Verify transcript file is created.
+        self.assertEqual([transcript_file_name], self.file_system.listdir(EXPORT_STATIC_DIR))
+
+        # Also verify the content of created transcript file.
+        expected_transcript_content = File(open(expected_transcript_path)).read()
+        transcript = get_video_transcript_data(video_id=self.descriptor.edx_video_id, language_code=language_code)
+        self.assertEqual(transcript['content'], expected_transcript_content)
+
     def test_export_val_data_not_found(self):
+        """
+        Tests that external video export works as expected.
+        """
         self.descriptor.edx_video_id = 'nonexistent'
-        actual = self.descriptor.definition_to_xml(resource_fs=None)
+        actual = self.descriptor.definition_to_xml(resource_fs=self.file_system)
         expected_str = """<video download_video="false" url_name="SampleProblem"/>"""
         parser = etree.XMLParser(remove_blank_text=True)
         expected = etree.XML(expected_str, parser=parser)
@@ -1597,12 +1641,12 @@ class VideoDescriptorTest(TestCase, VideoDescriptorTestBase):
     @patch('xmodule.video_module.transcripts_utils.get_video_ids_info')
     def test_export_no_video_ids(self, mock_get_video_ids_info):
         """
-        Tests export when there are no video ids
+        Tests export when there is no video id. `export_to_xml` only works in case of video id.
         """
         mock_get_video_ids_info.return_value = True, []
 
-        actual = self.descriptor.definition_to_xml(resource_fs=None)
-        expected_str = '<video url_name="SampleProblem" download_video="false"><video_asset/></video>'
+        actual = self.descriptor.definition_to_xml(resource_fs=self.file_system)
+        expected_str = '<video url_name="SampleProblem" download_video="false"></video>'
 
         parser = etree.XMLParser(remove_blank_text=True)
         expected = etree.XML(expected_str, parser=parser)
diff --git a/lms/envs/test.py b/lms/envs/test.py
index 8969262e5d..ecd383d87b 100644
--- a/lms/envs/test.py
+++ b/lms/envs/test.py
@@ -579,6 +579,16 @@ ACTIVATION_EMAIL_FROM_ADDRESS = 'test_activate@edx.org'
 
 TEMPLATES[0]['OPTIONS']['debug'] = True
 
+########################## VIDEO TRANSCRIPTS STORAGE ############################
+VIDEO_TRANSCRIPTS_SETTINGS = dict(
+    VIDEO_TRANSCRIPTS_MAX_BYTES=3 * 1024 * 1024,    # 3 MB
+    STORAGE_KWARGS=dict(
+        location=MEDIA_ROOT,
+        base_url=MEDIA_URL,
+    ),
+    DIRECTORY_PREFIX='video-transcripts/',
+)
+
 ####################### Plugin Settings ##########################
 
 from openedx.core.djangoapps.plugins import plugin_settings, constants as plugin_constants