S7 Ep58: Trading around geopolitics

Episode Summary

Executive Summary: The episode examines how Turkish firms responded to post-2022 sanctions on Russia. Using unique firm-level customs data, the authors find Turkish direct exports to Russia rose about 30%, especially in sanctioned goods and products previously supplied by the EU. Firms also shifted payment terms toward cash in advance and invoicing away from dollars toward Turkish lira, while reputationally exposed firms were more cautious. The findings suggest trade diversion helped fill gaps left by Western firms, without clear evidence of broad trade creation.

Main Topics: Post-invasion sanctions regime on Russia: The discussion outlines the EU, US, UK and allied export sanctions imposed after Russia’s full-scale invasion of Ukraine, including restrictions on dual-use, industrial, and luxury goods. Why Turkey was outside the sanctions coalition: Turkey’s balancing role between Russia and the West, and the economic opportunity created by unmet Russian demand, help explain why Turkish firms could expand trade. Firm-level evidence from Turkish customs data: The researchers rely on unusually detailed transaction-level customs records that capture quantities, prices, payment terms, and invoicing currency for each export transaction. Export expansion and trade diversion: Direct Turkish exports to Russia increased substantially after sanctions, especially where European suppliers withdrew, suggesting Turkish firms filled a void rather than creating entirely new trade. Pricing, markups, and payment risk: Exports to Russia saw higher quantities and prices; the price increase was largely due to higher markups. Firms also shifted toward cash-in-advance and Turkish lira invoicing, indicating risk management and payment concerns. Reputation and secondary-sanctions exposure: Firms with stronger Western ties, including affiliates of Western multinationals and exporters heavily exposed to Western markets, were less likely to expand Russian trade due to reputational and sanction risks. Limits of sanctions enforcement: The episode concludes that sanctions can be partially rerouted around by third countries, but still restrict Russia’s access to advanced Western goods and technologies.

Key Arguments: Russian sanctions created a market gap because many Western exporters exited, and Turkish firms stepped in to supply goods already in demand. The paper isolates direct exports to Russia rather than re-exports, so the results show Turkish firms’ own trade responses, not just transshipment. The observed increase in Russian sales is not merely a general boom in Turkish exports; the authors control for firm, product, and country-level factors and use Eastern European countries as a comparison group. Higher Russian sales came with higher unit values and markups, implying firms could profit from reduced competition and scarce supply. Risk management changed quickly: more firms demanded cash in advance and moved away from dollar invoicing toward Turkish lira. Firms more exposed to Western markets or reputational scrutiny were less willing to expand trade with Russia, consistent with fears of secondary sanctions and public pressure. Trade diversion is likely when established relationships and geographic proximity exist, especially after a sudden geopolitical shock. Sanctions still matter because Russia remains cut off from many technologically advanced Western products, even if some trade is redirected through other countries.

Data Points: Countries participating in sanctions: 45 - Number of countries imposing export sanctions on Russia after the 2022 invasion. Export increase by Turkish firms to Russia: About 30% - Increase in direct exports after sanctions, focused on firms already serving the Russian market before the war. Share of price increase attributed to markups: About two-thirds - Of the observed rise in unit values/prices, roughly two-thirds is explained by higher markups. UN countries condemning invasion: 141 - Number of UN member states voting to condemn Russia’s invasion of Ukraine. Payment-term shift: More firms moved to cash in advance - Turkish exporters increasingly requested payment before delivery to reduce nonpayment risk. Invoicing shift: Away from dollars toward Turkish lira - Transaction data show a notable move in invoicing and pricing currency from the dollar to the Turkish lira. Time window discussed for trade creation: 2–3 years - The authors note that within the observed post-shock period they do not yet see significant trade creation, only diversion.

Pivotal Quotes: "trading around geopolitics" — Narrator: Title of the paper and the central concept used to describe firms adapting trade to sanctions and geopolitical fracture. "we abstract from the possibility that evasion of sanction is taking place by exports being routed from Europe via Turkey to Russia" — Banu Demir: Clarifying that the paper studies direct exports rather than re-export-based sanctions evasion. "there will be Market activities mending the geopolitical fracture" — Beata Javorcik: Broad takeaway that economic actors can partially reconnect trade even amid geopolitical conflict.

Implications: Sanctions can shift trade rather than eliminate it, with neighboring or familiar markets stepping in. For policymakers, this means enforcement and coalition breadth matter, while firms should expect higher reputational and payment risks in sanctioned trade.