Does armed conflict reduce trade, even in noncombat areas, through the destruction of intergroup social capital? We analyze Ukrainian trade transactions before and after the 2014 Russia-Ukraine conflict. In a difference-in-differences framework, we find that Ukrainian firms from districts with fewer ethnic Russians experienced a deeper decline in trade with Russia. This decline is economically signifi-cant, persistent, and can be explained by erosion of intergroup trust. Affected Ukrainian firms suffered a decrease in performance and diverted trade to other countries. Our results suggest that, through social effects, conflict can be economically damaging even away from combat areas.

How do localized conflicts disrupt supply chains and prompt firms to reorganize them? How do these forces affect firm-level and aggregate economic activity? Using firm-to-firm Ukrainian railway-shipment data before and during the 2014 Russia–Ukraine conflict, we document that firms with prior supplier and buyer exposure to the conflict areas substantially decreased their output. Simultaneously, firms reorganized their production linkages away from partners directly or indirectly exposed to the conflict shock. We build a general-equilibrium production-network model with endogeneous link formation, and we show that our model’s sufficient statistics accurately explains the observed relative decline in firm output once we account for network reorganization. Calibrating our model to the Ukrainian economy, we find that the localized conflict decreased aggregate output in nonconflict areas by 5.5%. This effect increases to 8.4% if we abstract from endogeneous link formation, suggesting that production-network reorganization partially mitigates the detrimental, far-reaching aggregate economic costs of conflicts.