ACTA UNIVERSITATIS CAROLINAE AUC GEOGRAPHICA 55 1/2020 CHARLES UNIVERSITY • KAROLINUM PRESS AUC Geographica is licensed under a Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited. © Charles University, 2020 ISSN 0300-5402 (Print) ISSN 2336-1980 (Online) Original Article 3 The impact of external institutional shocks on Russian regions Irina V. Danilova1, Olga A. Bogdanova1, Angelika V. Karpushkina2, Tatiana M. Karetnikova3,* 1 State and Municipal Administration South Ural State University (National Research University), Department of Economic Theory, Regional Economy, Russia 2 South Ural State University (National Research University), Department of Economic Security, Russia 3 State and Municipal Administration South Ural State University (National Research University), Department of Economic Theory, Regional Economy, Russia * Corresponding author: [email protected] ABSTRACT The aim is to assess the susceptibility of the regional economy to shocks associated with unexpected changes in institutional rules, trading instruments, as well as accession to international organizations. The impulse response approach to the study of shocks served as a methodological basis. The authors propose and test a new methodological approach that consists in identifying regions characterized by persistent development or a potential for changing the gross regional product as a response to an external shock impulse. It also allows to determine resonant factors that affect the vulnerability, depth and scale of economic consequences. The study reveals that an external institutional shock influences the economic development of regions in various ways, which is due to a number of vulnerability factors. This leads to the formation of territories that differ in the level of susceptibility to shocks and possess the ability to maintain the trend of economic development. KEYWORDS external institutional shocks; vulnerability; vulnerability factors; regional development; persistence Received: 6 December 2018 Accepted: 9 February 2020 Published: 14 May 2020 Danilova, I. V., Bogdanova, O. A., Karpushkina, A. V., Karetnikova, T. M. (2020): The impact of external institutional shocks on Russian regions. AUC Geographica 55(1), 3–14 https://doi.org/10.14712/23361980.2020.7 © 2020 The Authors. This is an open-access article distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/4.0). 4 Irina V. Danilova, Olga A. Bogdanova, Angelika V. Karpushkina, Tatiana M. Karetnikova 1. Introduction An external institutional shock spreads over a regional economy due to the following factors: Under conditions of free trade and intensive interac- 1) changes in the institutional rules of foreign trade tion among countries, external shocks, due to chang- or foreign investments affect the decisions of es in world markets, political events, and institution- companies and the population on production and al rules, affect countries and, in particular, regions. consumption; A shock can have different consequences depending 2) there is a change in the scale of foreign trade oper- on the degree of region’s openness, the level of its ations, import and export prices, business activity, development and industrial structure. as well as the size and rate of GRP growth. An external institutional shock implies unexpected The properties of persistence/non-persistence changes in the norms, rules, procedures, and instru- were used to assess the effects of a shock on region- ments that regulate foreign economic interactions. al development. Persistence is viewed as the pres- These changes introduce uncertainty and unpredict- ervation of the long-term impact of a shock on the ability in the reaction of economic subjects (compa- dynamics of the gross product, which is manifested nies, the population) and lead to unpredictable chang- es in the parameters of regional development, which growth without the possibility of returning to it in can be due to the introduction or adjustment of rules thein a future. significant Non-persistence change in the is characterizedprevious pattern by short- of its in connection with the formation of interstate inter- action (for example, customs unions), the accession by a restoration of the current development trend in to international economic organizations (for example, theterm economy. fluctuations Accordingly, of economic depending parameters on their followed reac- the WTO), and the unexpected application of trading tion to institutional shocks, regions are divided into instruments (for example, imposing sanctions). two types: vulnerable and invulnerable. The reaction based on the following criteria: factors resonant to a shock). 1) durationThe authors (shocks classified with external a limited institutional or unlimited shocks dependsThe economies on a specific of a setnumber of ‘vulnerability’ of countries, factors including (or duration); 2) the intensity of the shock impulse (one-time institutional shocks, namely: changes or a set of measures; shocks that affect Russia, are currently under the influence of external trade and economic relations or investments, or consistent formation of the Customs and the Eur- both spheres at the same time). 1) asianthe intensification Economic Union, of integration as well as processes the accession and the of Russia to the WTO; is related to the fact that the records of institutional 2) striking changes in the directions of the trading changesThe practical causing significancea shock will of allow such singling a classification out the policy and its instruments: the defensive change following types of shocks: a) Temporary shocks, such in trade barriers during the crisis in 2008-2009, trade and economic sanctions and retaliatory limited period. Theoretically, this kind of shocks do anti-sanctions. notas the cause influence fundamental of organizations changes in introduced economic overdevel a- A wide range of external institutional shocks are opment trends (sanctions are typically imposed for a clearly observed in Russia, a spatially large and het- short period, therefore, sanctions and anti-sanctions - are considered temporary shocks. Examples of excep- qualities due to natural and climatic conditions, the tions are medium-level sanctions against Iran and historicalerogeneous peculiarities country with of land significant development regional and ine the Russia. b) Permanent shocks associated with a set of location of production, regional resources, and trans- institutional changes and having an unlimited dura- tion. These shocks change the institutional regime of centers. The weight of external institutional shocks, foreign economic relations and the trend of regional inport combination routes, as withwell aas high proximity level of regionalto major differenti financial- economic development over a long period (illustrated ation, predetermines the authors’ interest in studying by the accession of Russia to the WTO, the formation the impact of shocks on a region based on the example of the Customs Union, and the Eurasian Economic of Russia. Union). The aim of the work is to assess the consequences This article suggests that institutional shocks, as of the impact of external institutional shocks on the unpredictable events, can cause uneven regional con- regional economy in countries with high economic sequences in spatially inhomogeneous large coun- differentiation, using the example of Russia. Differ- tries, which is due to different sets of economic fac- tors that can strengthen or neutralize the impact of a the socio-economic development of regions. The The - maximumentiation presupposes value of gross a significant regional product gap in the per level capita of omy predetermines the scale of consequences (the exceeds the minimum value of gross regional product abilityshock. Into otherchange words, or maintain the specifics the trend of a regional of economic econ per capita 16 times (Bakhtizin, Buchwald, Kolchugin development) and affects the status of the region – 2017). Regional differentiation, indeed, complicates ‘vulnerable’ or ‘invulnerable’ to shocks. the process of ensuring the sustainability of the The impact of external institutional shocks on Russian regions 5 economic system, which grants the topic of the study rate of response to shocks. An econometric analy- with special relevance. sis of the impact of shocks on the regions of Greece Based on key channels (trade-economic and (Petrakos and Sycharis 2016) revealed an increase in investment) of the expansion of external institutional regional inequalities. It is necessary to point out that shocks in Russia during the period of 2009–2015, the developed export-oriented regions better adapted to - the economic crisis, and solid integration with the EU tion of increasing vulnerability. These factors include market did not improve the regional indicators. authors identified the factors that indicate the situa The assessment of the impact of shocks on the lev- level of foreign trade openness, and the activity of el of the national economy, including shocks caused investmentthe diversification ties. level of the industry structure, the by external factors, requires a wide range of diverse instruments for analysis, the most popular of which is the vector autoregression method (Crescenzi et al. 2. Literature Review 2016; Pesaran et al. 2003;