Production Networks and War

45 Pages Posted: 18 Jan 2022

See all articles by Vasily Korovkin

Vasily Korovkin


Alexey Makarin

Einaudi Institute for Economics and Finance (EIEF); Centre for Economic Policy Research (CEPR)

Date Written: November 22, 2021


How do severe shocks such as war alter the economy? We study how a country's production network is affected by a devastating but localized conflict. Using unique transaction-level data on Ukrainian railway shipments, we uncover several novel indirect effects of conflict on firms. First, we document substantial propagation effects on interfirm trade --- trade declines even between partners outside the conflict areas if one of them had traded with those areas before the start of the war. The magnitude of such second-degree effect of conflict is one-third of the first-degree effect. Ignoring this propagation would lead to an underestimate of the total impact of conflict on trade by about 67%. Second, war induces sudden changes in the production-network structure that influence firm performance. Specifically, we find that firms that exogenously became more central --- after the conflict practically cut off certain regions from the rest of Ukraine --- received a relative boost to their revenues and profits. Finally, in a production-network model, we separately estimate the effects of the exogenous firm removal and the subsequent endogenous network adjustment on firm revenue distribution. At the median, network adjustment compensates for 80% of the network-destruction effect a year after the conflict onset.

Keywords: Conflict, Trade, Firms, Firm Linkages, Production Networks

JEL Classification: D22, D74, F14, F51, H56

Suggested Citation

Korovkin, Vasily and Makarin, Alexey, Production Networks and War (November 22, 2021). Available at SSRN: or

Vasily Korovkin

CERGE-EI ( email )

P.O. Box 882
7 Politickych veznu
Prague 1, 111 21
Czech Republic


Alexey Makarin (Contact Author)

Einaudi Institute for Economics and Finance (EIEF)

Via Sallustiana, 62
Rome, Lazio 00187

Centre for Economic Policy Research (CEPR) ( email )

United Kingdom

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