Trading Around Geopolitics

Giancarlo Corsetti, Banu Demir, Beata Javorcik, Banu Demir Pakel and Beata Smarzynska Javorcik

No 12021, CESifo Working Paper Series from CESifo

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%.

Keywords: sanctions; trade diversion; dominant currency pricing; producer currency pricing; cash in advance (search for similar items in EconPapers)
JEL-codes: F13 F14 F51 (search for similar items in EconPapers)
Date: 2025
New Economics Papers: this item is included in nep-cis and nep-ifn
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_12021

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