The economic costs of conflict: A case study of the Russo-Ukrainian War

• Thesis title in Czech: Ekonomické náklady konfliktu: případová studie rusko-ukrajinské války
• Thesis title in English: The economic costs of conflict: A case study of the Russo-Ukrainian War
• Key words: válka na východní Ukrajině, ekonomický dopad konfliktu, HDP, regionální HDP, syntetická kontrolní metoda
• English key words: Russo-Ukrainian conflict, economic cost of conflict, GDP, GRP, synthetic control method
• Academic year of topic announcement: 2019/2020
• Thesis type: diploma thesis
• Thesis language: angličtina
• Department: Institute of Economic Studies (23-IES)
• Supervisor: PhDr. Jaromír Baxa, Ph.D.
• Author: hidden - assigned by the advisor
• Date of registration: 26.07.2020
• Date of assignment: 26.07.2020
• Date and time of defence: 15.06.2022 09:00
• Venue of defence: Opletalova - Opletalova 26, O109, AULA Michala Mejstříka č. 109
• Date of electronic submission: 02.05.2022
• Date of proceeded defence: 15.06.2022
• Opponents: doc. PhDr. Michal Bauer, Ph.D.

Guidelines

Methodology
Until now, many different methods have been used by econometricians to estimate the cost of a conflict. We will focus on those that are based on time series and panel data. Kholodilin and Netšunajev (2018), in example, used the structural vector autoregression to find the effect of sanctions on the economy of the euro area and Russia. Their results indicate a negligible effect for both sides. We will verify their results with comparative synthetic control methodology that is commonly used to estimate the economic effect of specific events or circumstances, like the armed conflict in Northern Ireland (Dorsett, 2013), Basque Country (Abadie and Gardeazabal, 2003), or policy interventions (Abadie, Diamond, and Hainmueller, 2010). In our case, this technique allows us to see the level of the GDP that could be achieved by both countries given regular circumstances. Variables like interest rate, consumer price index, trade openness, index of the foreign exchange value of the domestic currency or price of oil will be included to control for other possible effects. Data for the estimation will be obtained from open data sources, like the World Bank, OECD, and others.
Outline
1. Introduction
2. Russo-Ukrainian War
a. Explanation of the conflict and its history
b. Reaction of the international community and sanctions
c. Costs of conflict
3. Literature review
4. Methodology and Data
5. Results
6. Conclusions

Contribution
Although the conflict has gained the interest of general public and there is a surprisingly high number of papers on this topic, there exist only a limited number of studies that offer an in-depth econometric analysis of the economic costs of the Russo-Ukrainian War on a country level. Assessing the complex impact of this conflict on both countries in depth and quantifying the most significant ways through which the economies are affected using innovative methods is crucial for understanding what the sources of vulnerability of both countries’ economies. Conclusions of this research may serve as a powerful tool for policymakers and international organizations and can help them to navigate their future foreign policy decisions, not only in regard to this conflict.

References

Bibliography
Konstantin A. Kholodilin & Aleksei Netšunajev (2019): Crimea and punishment: the impact of sanctions on Russian economy and economies of the euro area, Baltic Journal of Economics, 19:1, 39-51.
Alberto Abadie, Sofia Dermisi (2008): Is terrorism eroding agglomeration economies in Central Business Districts? Lessons from the office real estate market in downtown Chicago, Journal of Urban Economics, 64:2, 451-463, ISSN 0094-1190.
Gardeazabal, Javier (2010): Methods For Measuring Aggregate Costs Of Conflict, The Oxford Handbook of the Economics of Peace and Conflict, 10, 1093/oxfordhb/9780195392777.013.0011.
Evsey Gurvich, Ilya Prilepskiy (2015):The impact of financial sanctions on the Russian economy, Russian Journal of Economics, 1:4, 359-385, ISSN 2405-4739.
Oliver Fritz & Elisabeth Christen & Franz Sinabell & Julian Hinz (2017): Russia's and the EU's Sanctions. Economic and Trade Effects, Compliance and the Way Forward, WIFO Studies, WIFO, number 60669.
Richard Dorsett (2013): The effect of the Troubles on GDP in Northern Ireland, European Journal of Political Economy, Volume 29, 119-133, ISSN 0176-2680.
Abadie, Alberto & Gardeazabal, Javier (2003): The Economic Costs of Conflict: A Case Study of the Basque Country, American Economic Review, 93, 113-132, 10.1257/000282803321455188.

Preliminary scope of work

Motivation
Since 2014, there is an ongoing political conflict between Ukraine and Russia. After the removal of the pro-Russian president Viktor Yanukovich and escalated tension between the two parties, Russia invaded the territory of Crimea. This was followed by a referendum organized by Russians, which led to the annexation of Crimea by Russia. This marked the start of a military conflict between military units of the Ukrainian government and Russia-backed separatist forces also in other, eastern parts of Ukraine. According to the UN (2019), ’7 % of Ukraine’s territory, including Crimea and eastern parts of the Donetsk and Luhansk regions, are currently under occupation, with about 13,000 people killed and more than 28,000 wounded in the conflict, which began in 2014.’

Actions taken by Russia are seen as an infringement of international law by most of the international community and many countries, such as the US or European Union countries, imposed restrictions on Russia, Russian organizations, or individuals. These sanctions and other measures imposed on Crimea and Russia are since then regularly prolonged or even expanded and are believed to negatively affect both the Ukrainian and Russian economies. According to Havlik (2019) the key consequences are:
• deep recession in Ukraine and a shrink of its economy by approximately 15 % during the 2014 - 2015 period and its slow growth,
• economic losses for the Russian economy estimated to be equal to 1 % of GDP in 2014 - 2015 and 0.5 to 1.5 % of foregone economic growth.
Sanctions are also believed to be a partial cause of the Russian economic recession in 2015, stagnation in 2016, and slow recovery afterward.

The aim of this thesis is to build on already existing literature and with the use of modern econometric methods answer the following questions: By how much could the GDP of both countries be higher, had the conflict and subsequent measures not existed? What was the main trigger behind the economic problems of both countries? To which extent can we assign them to the imposed sanctions and to other factors, such as falling oil prices?

Hypotheses
1. Both countries' economic growth has been negatively affected by the Russo-Ukrainian War.
2. The economic effect of the Russo-Ukrainian War has been more severe for Ukraine.
3. Asymmetry in the economic effect of the conflict can be explained by differences in the size of the economy, the level of economic development and foreign trade patterns of both countries.
4. The main reason for the economic recession, stagnation, and slow growth of Russia are the sanctions.

Preliminary scope of work in English

Motivation
Since 2014, there is an ongoing political conflict between Ukraine and Russia. After the removal of the pro-Russian president Viktor Yanukovich and escalated tension between the two parties, Russia invaded the territory of Crimea. This was followed by a referendum organized by Russians, which led to the annexation of Crimea by Russia. This marked the start of a military conflict between military units of the Ukrainian government and Russia-backed separatist forces also in other, eastern parts of Ukraine. According to the UN (2019), ’7 % of Ukraine’s territory, including Crimea and eastern parts of the Donetsk and Luhansk regions, are currently under occupation, with about 13,000 people killed and more than 28,000 wounded in the conflict, which began in 2014.’

Actions taken by Russia are seen as an infringement of international law by most of the international community and many countries, such as the US or European Union countries, imposed restrictions on Russia, Russian organizations, or individuals. These sanctions and other measures imposed on Crimea and Russia are since then regularly prolonged or even expanded and are believed to negatively affect both the Ukrainian and Russian economies. According to Havlik (2019) the key consequences are:
• deep recession in Ukraine and a shrink of its economy by approximately 15 % during the 2014 - 2015 period and its slow growth,
• economic losses for the Russian economy estimated to be equal to 1 % of GDP in 2014 - 2015 and 0.5 to 1.5 % of foregone economic growth.
Sanctions are also believed to be a partial cause of the Russian economic recession in 2015, stagnation in 2016, and slow recovery afterward.

The aim of this thesis is to build on already existing literature and with the use of modern econometric methods answer the following questions: By how much could the GDP of both countries be higher, had the conflict and subsequent measures not existed? What was the main trigger behind the economic problems of both countries? To which extent can we assign them to the imposed sanctions and to other factors, such as falling oil prices?

Hypotheses
1. Both countries' economic growth has been negatively affected by the Russo-Ukrainian War.
2. The economic effect of the Russo-Ukrainian War has been more severe for Ukraine.
3. Asymmetry in the economic effect of the conflict can be explained by differences in the size of the economy, the level of economic development and foreign trade patterns of both countries.
4. The main reason for the economic recession, stagnation, and slow growth of Russia are the sanctions.