Modeling of the Nexus Between Environmental Regulations of Trade Partners and Export Volumes: Analysis of Russian Regions

Abstract

Export development is one of the priorities of the Russian economy. Exporters and companies planning to enter the international market face a number of limiting factors. Transitional climate risks, mainly represented by trading partner countries' environmental regulation aimed at internalizing national and global negative environmental externalities, are also among these factors. However, the global climate agenda can not only have a negative impact on export performance, but also generate growth opportunities. The purpose of this study is the econometric modeling of the impact of environmental regulation of trading partner countries on the dynamics of export volumes of Russia's regions based on data for the period of 2013-2020. In addition, the study is aimed at identifying regional factors that determine the sign of the influence of climate regulation of importing countries on export volumes. The study assumes that the effect of climate regulation on export performance is different for the regions of Russia and is determined by institutional and environmental characteristics. The estimation of the gravity equation using the Poisson pseudo-maximum likelihood method for different subsamples of Russia's regions demonstrated that the stringency of environmental regulation of the partner countries is negatively related to the volumes of Russian exports, but there is a positive correlation in the case of regions characterized by favorable conditions for innovation activity and active environmental policy. It was also detected that the regional budget spending on environmental protection do not provide a stimulating effect of climate regulations. Thus, in order to minimize the negative impact of transitional climate risks, special attention of the state should be paid to creating an environment conducive to innovation and the formation of the most effective environmental policy at the regional and national levels. The theoretical significance of the study lies in expanding the traditional gravity model by including the environmental determinants of trade, while the practical significance of the work is represented by recommendations to regional authorities on minimizing the negative impact of transitional climate risks.