Over two billion people—or one-quarter of humanity—live in conflict-ridden countries. While many of these people do not live directly in war zones, their livelihoods may be significantly altered by nearby fighting.

In a paper in the American Economic Review, authors Vasily Korovkin and Alexey Makarin investigate whether armed conflict reduces economic trade through the breakdown of ethnic trust—even in areas unaffected  by violence directly.

Specifically, they analyzed Ukrainian international trade before and after the start of the 2014 Russia–Ukraine conflict. Using a difference-in-differences estimation strategy, they found that Ukrainian businesses from districts with fewer ethnic Russians experienced a deeper decline in trade with Russia than their more ethnically Russian counterparts. 

Figure A6 from the authors’ paper illustrates what happened to trade before and after the start of the conflict.

Figure A6 from Korovkin and Makarin (2023)

The blue triangles plot the monthly average logarithm of the total weight traded with Russia—exports and imports—in districts where the share of the ethnic Russian population was below the 25th percentile. The red circles plot the same values for districts where the share of ethnic Russians was above the 75th percentile. The black vertical line marks the start of the conflict. (Trade in districts directly affected by the conflict were excluded.)

Before hostilities started in February 2014, firms from the two types of districts had a similar pattern of trade with Russia over time. However, after the start of the conflict, districts with fewer Russians decreased their trade more relative to areas with higher percentages of ethnic Russians, as indicated by the sharper decline in the blue line of best fit.

The authors’ findings suggest that a breakdown in social ties during conflict can be economically damaging even outside of combat areas.