New evidence on the contrasting economic experiences of regions within Russia following the annexation of Crimea in 2014 confirms the idea that the removal or weakening of borders improves the outcomes of nearby regions, while the creation or closing of borders worsens them.

The study by Kristian Behrens shows that regions in the north of Russia – neighbouring the long land border with Ukraine – saw a decrease in their market access as the Ukrainian government shut down border crossings and restricted the movements of goods and people. At the same time, regions in the south of Russia saw an increase in their market access as the border with Crimea dissolved.

The research uses data on night-time lights, manufacturing plants and border crossings to measure the extent of the economic impact. The results suggest a cost of as much as 8% in GDP growth for the regions losing out from the border changes relative to those that benefitted.

International borders shift over time. Besides geopolitical ramifications, changes in borders – and in the ease with which goods and people can cross them – have substantial economic consequences. This study investigate the effects of the latest such change, namely the Russian annexation of Crimea in 2014.

Following that annexation, Western sanctions, Russian countersanctions and the fall of the rouble had economic repercussions felt across all of Russia. At a more local regional level, the annexation has probably also significantly affected the economies of Russian border regions by changing their access to their largest regional trading partner, Ukraine.

Regions in the south of Russia – especially Krasnodar on the Black Sea – saw an increase in their market access as the border with Crimea dissolved. But regions in the north of Russia – neighbouring the long land border with Ukraine – saw a decrease in their market access as the Ukrainian government shut down border crossings and restricted the movements of goods and people.

These changes have been costly to the regional economies of Bryansk, Belgorod, Voronezh, Kursk and Rostov by disrupting regional trade, cross-border labour movements and regional supply chains in a historically highly integrated manufacturing region. The question answered in the new study is just how costly these changes have been in the north in terms of forgone GDP growth and the shutdown of manufacturing plants.

To quantify the economic effects of the border changes, the authors make use of detailed spatial data on satellite night-time lights images, manufacturing plants and border crossings between 2006 and 2018. Their findings support the idea that fewer or weakened borders improve economic outcomes.

They show that regions more to the north and closer to the main centres of economic activity in Ukraine before the annexation – Bryansk, Belgorod, Voronezh, Kursk, and Rostov – performed generally less well after 2014 compared with regions more to the south or farther away from the main economic centres in Ukraine before the annexation.

On average, growth in night-time lights after 2014 was about 25% lower for the Russian border regions in the north compared with those in the south. This 25% difference in the growth of night-time lights translates into a difference of approximately 5-8% in GDP growth. In addition, manufacturing plants in the north were about 30% more likely to exit after 2014 compared with those in the south.

The reason underlying these findings is that the northern regions were more strongly exposed to a hardening international border but far from the new market in Crimea, whereas the southern regions gained unfettered access to the Crimean peninsula but were far from the hardening international land border in the north.

Thus, changes in market access matter substantially for economic growth and plant survival of border regions, especially between highly integrated trading partners that share a common labour market as is historically the case in the industrial heartland spanning the land border between Russia and Ukraine.

The researchers highlight the importance of the cross-border labour market – characterised by substantial cross-border movements before 2014 – by analysing the local effects of the closing of border crossings starting in 2015. The Ukrainian government shut down all local border crossings and only kept open the international border crossings.

The direct consequence of these restrictions was that for some areas in Russia, especially more rural areas in the north, workers had to travel much longer distances to reach the closest open border crossing. The researchers show that areas that experienced a larger increase in their distance to the nearest open border crossing experienced less growth in their GDP after 2015 and marginally more plant exit.

In summary, the study confirms the idea that the removal or weakening of borders improves the outcomes of nearby regions, whereas the creation or closing of borders worsens them.

While much work has aimed to quantify the effects of Western sanctions on Russia after 2014, this analysis shows that there is also a direct effect of the annexation on regional economic performance via changes in borders and the ease with which they can be crossed. In follows that the direct cost of the annexation appears sizable in the northern border regions, irrespective of the exact effects of Western sanctions.

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Authors:

Kristian Behrens (Université du Québec à Montréal, Canada)
Maria Kuznetsova (HSE University)