How much do the neighbors pay? Economic costs of international gas disputes

by Olha Zadorozhna

The paper analyzes financial performance of European companies during Ukrainian-Russian gas disputes in January 2006 and 2009. Investors' reaction to the gas disputes is estimated for companies listed on the European stock exchanges and for which natural gas is the main factor of production. Economic costs of the gas cut-offs are estimated using event study methodology. It is found that the most severe decline in value due to the gas disputes was for companies located in the CEE states that are heavily dependent on Russian gas supply. The paper also contributes to the literature on the bargaining power of states, providing an empirical investigation of how much costs bears a party with less bargaining power in the dispute.