Trading around Geopolitics

Geopolitical fragmentation triggers complex dynamics in international trade. This paper examines the effects of sanctions through a stylized model and the empiri- cal analysis of Türkiye’s exports to Russia following its invasion of Ukraine in 2022. While sanctions prompted many exporters to exit the Russian market, firms willing to fill the gap faced reputational risks, higher nonpayment risk, and elevated costs of trading in international currencies. We show that Turkish firms sharply raised their exports of both sanctioned and non-sanctioned goods to Russia, charging higher prices, while also shifting toward cash-in-advance transactions and invoicing in Turk- ish liras instead of dollars. In contrast, Turkish affiliates of Western multinationals responded less, if at all, suggesting a desire to avoid secondary sanctions and repu- tational costs. For these firms, a back-of-the-envelope calculation points to aggregate annualized foregone revenues of $230 million, with a reputational-risk effect equiva- lent to tariffs of up to 42%.