Conflict and Inter-Group Trade: Evidence from the 2014 Russia-Ukraine Crisis

Abstract

Does armed conflict reduce trade, even in noncombat 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 can be explained by erosion of inter-group trust. 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.

Keywords: Conflict, Inter-Group Tensions, Trade, Firms

JEL Classification: D22, D74, F14, F51, H56