  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 around the start
of the 2014 Russia-Ukraine crisis, 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 conflict events.
The magnitude of such second-degree effect of conflict is one-fifth 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. 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. For a median firm, network adjustment compensates for 80\% of the
network destruction a year after the conflict onset.
