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Trading Around Geopolitics

Author

Listed:
  • Giancarlo Corsetti
  • Banu Demir
  • Beata Javorcik
  • Banu Demir Pakel
  • Beata Smarzynska Javorcik

Abstract

Geopolitical fragmentation triggers complex dynamics in international trade. This paper examines the effects of sanctions through the lens of a stylized model and the empirical analysis of Türkiye’s exports to Russia in the aftermath of Western measures imposed on Russia following its invasion of Ukraine in 2022. As sanctions force many exporters to discontinue or reduce their sales in the target country, firms responding to profit opportunities in that market face (i) a rise in the risk of nonpayment, (ii) higher costs of established trading practice, such as making payments in international currencies through international circuits and (iii) reputational risks and the threat of punitive measures, if their trading with the sanctioned country is exposed. We show that, in response to Western sanctions, Turkish firms sharply raised their exports to Russia, charging higher markups and prices, but also increased their reliance on cash- in-advance transactions and invoicing in Turkish liras instead of dollars. In contrast, Turkish affiliates of Western MNCs responded significantly less, if at all, suggesting a desire to avoid reputational costs. For these firms, a back-of-the-envelope calculation points to annualized foregone revenues of $50 million, with a reputational-risk effect equivalent to tariffs of up to 376%.

Suggested Citation

  • Giancarlo Corsetti & Banu Demir & Beata Javorcik & Banu Demir Pakel & Beata Smarzynska Javorcik, 2025. "Trading Around Geopolitics," CESifo Working Paper Series 12021, CESifo.
  • Handle: RePEc:ces:ceswps:_12021
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    File URL: https://www.ifo.de/DocDL/cesifo1_wp12021.pdf
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    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F14 - International Economics - - Trade - - - Empirical Studies of Trade
    • F51 - International Economics - - International Relations, National Security, and International Political Economy - - - International Conflicts; Negotiations; Sanctions

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