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Paper short abstract

Western sanctions on Russia sharply reshaped Armenia’s trade. Using customs and employer–employee data, I document large shifts along the intensive and extensive margins and estimate the causal effects of sanctions-driven trade reorientation on firm performance.

Paper long abstract

This paper examines how sanctions on a major trading partner impact the firms and trade of a neutral economy, using the case of Armenia and the Western sanctions on Russia as an example. I first develop a theoretical framework in the spirit of Ahn, JaeBin, Amit K. Khandelwal, and Shang-Jin Wei (2011 Journal of International Economics) model that features both direct and indirect trading firms and benefits/costs associated with sanctions. Using matched customs and employer–employee data covering 2018–2023, I document a sharp increase in Armenia’s intermediary role, with exports to Russia rising markedly, especially along pre-existing firm–product–partner relationships. Trade in sanctioned goods was disproportionately rerouted through Armenian firms, with higher values and unit values concentrated among incumbents. At the firm level, exporters and dual traders expanded turnover, while importers and intermediaries captured mark-ups rather than expanding production. At the employee level, wages in trading firms rose, but employment creation was limited, suggesting that gains accrued mainly to existing workers rather than through broad-based labor market expansion. In addition to the empirical findings, the paper presents a description of Armenia’s newly accessible administrative datasets as a valuable resource for future economic research.