Production Networks and War: Evidence from Ukrainian Railway Shipments

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. First, we document substantial spillover effects of conflict on interfirm trade outside of the conflict areas. Our estimates suggest that the magnitude of the second-order effects of conflict is about a third of the magnitude of the first-order effects. Second, we study the consequences of an exogenous 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 revenues and profits. However, losers from such changes in the production network structure outweigh the winners. According to our back-of-the-envelope calculations, conflict decreased sales by at least $5.8\%$ outside of violent areas due to the two effects. Finally, we document that if the firms were not allowed to adjust their trading networks, counterfactual losses from the exogenous network shock would have been three times larger than the observed losses.