The perils of Kremlin's influence: evidence from Ukraine

We examine the contribution of institutional integration to the institutional quality. To this end, we exploit the 2007 political crisis in Ukraine and examine the effects of staying out of the European Union for 28 Ukrainian provinces in the period 1996-2020. We construct novel subnational estimates of institutional quality for Ukraine and central and eastern European countries based on the latent residual component extraction of institutional quality from the existing governance indicators by making use of Bayesian posterior analysis under non-informative objective prior function. By comparing the residualized institutional quality trajectories of Ukrainian provinces with their central and eastern European peers that were admitted to the European Union in 2004 and after, we assess the institutional quality cost of being under Russian political influence and interference. Based on the large-scale synthetic control analysis, we find evidence of large-scale negative institutional quality effects of staying out of the European Union such as heightened political instability and rampant deterioration of the rule of law and control of corruption. Statistical significance of the estimated effects is evaluated across a comprehensive placebo simulation with more than 34 billion placebo averages for each institutional quality outcome.