NICEP Seminar: Alexey Makarin (Einaudi Institute for Economics and Finance)

Conflict and inter-group trade: Evidence from the 2014 Russia-Ukraine crisis (with Vasily Korovkin)

Abstract:  Does armed conflict reduce trade even in non-combat areas through the destruction of inter-group social capital? We analyze Ukrainian trade transactions before and after the 2014 Russia-Ukraine conflict. In a difference-in-differences framework, we find that Ukrainian firms from districts with fewer ethnic Russians experienced a deeper decline in trade with Russia. This decline is economically significant, persistent, and explained by erosion of trust and the rise of local nationalism. Affected Ukrainian firms suffered a decrease in performance and diverted trade to other countries. Our results suggest that, through social effects, conflict can be economically damaging even away from combat areas.