Conflict and Supply Chain Network: Evidence from the Donbas War in Ukraine (joint with Alexey Makarin)

Abstract:

How do severe shocks, such as an armed conflict, alter a country's economy? We study how the production network of a low-income country is affected by a devastating but localized conflict. We use the Ukrainian railway shipment data for 2013--2016 complemented by the administrative data on firms to document the propagation of a conflict shock throughout the supply-chain network. We document substantial spillover effects of conflict on interfirm trade outside of the conflict areas. Our estimates suggest that the second-order effects of conflict are about a third of the first-order effects. A naive difference-in-differences regression would have underestimated the total impact of conflict on the interfirm economic exchange by 72%. Finally, we study the consequences of a change in the network structure. Firms that, for exogenous reasons, became more central in the production network after the start of the conflict, received a boost to their revenue and profits.