I quantify the effect of political connections on misallocation of resources in the Russian economy. With firm panel data and a quantitative framework, I find large wedges between state-owned and private firms that prevent labour and capital inputs from flowing to more productive private firms. The aggregate TFP would increase by at least 11% if all wedges between state-owned enter-prises and private firms are removed. Using a unique natural experiment of staggered firm-level sanctions in Russia, I estimate the effect of sanctions on distortions between connected and not connected firms. Surprisingly, input-sanctioned firms on average gained 16.3% more capital inputs after sanctions. The effect is driven by sanctioned state-owned firms, getting 37% more capital relative to non-sanctioned firms. Using additional data on subsidies, I find that this result is explained by the government protection of targeted firms. On the aggregate, misallocation was exacerbated due to a joint effect of sanctions and shielding. I combine the causal estimates with the quantitative framework and estimate that the Russian TFP dropped at least by 0.33%, reaching 3% in relevant sectors.
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