by James Davis
In the news recently was the Russian navy seizing three Ukrainian vessels, a flare up of tensions stemming from Russia’s annexation of Crimea in 2014. War has been ongoing in Eastern Ukraine for the last five years as Russian backed rebels fight for control from the Ukrainian government. This conflict also takes the form of personal power struggles as Russia’s president Vladimir Putin and Ukrainian president Petro Poroshenko use it to justify their governments position and for promoting various domestic agendas. Economically it means that this situation is a classic example of game theory, specifically a scenario similar to the Prisoner’s dilemma.
As seen in the table above, although both countries withdrawing would be mutually beneficial, the better option for both independently is to hold on to their position in the war, putting conflict as the Nash equilibrium and the scenario we see playing out. So long as the current situation continues so will conflict unless the scenario fundamentally changes. This could happen thorough a number of ways, such as a different, pro-russian political party gets elected in Ukraine or if the Putin government is sufficiently harmed through international pressure that it makes withdrawing the least worst option and occupying Ukraine becomes too costly.
On a different economic perspective, this war has lead to Ukraine losing a lot of people to migration and many industries to leave the country. This is due to cost; as conflict increases the risks that capital is damaged or destroyed it becomes more expensive to operate profitably in the country. Many industries are leaving for more profitable locations inside the European Union or Russia. Some effects of this are a decrease in income, especially in the eastern part of the country in the Donbass area where conflict is the heaviest, causing many people there to switch to inferior goods rather than the normal goods that could otherwise been afforded.
One last economic ramification of this war is reliance of Europe on Russian natural gas to power their energy sector. According to CNN, Europe imports 69% of their natural gas, the most important source of energy in the EU, and nearly 40% of that comes from Russia through the Ukraine. Although this war has been troubling for many in Europe, Germany and other major countries in Europe have limited their actions against Russia to words as the cost of them switching from Russian gas is high. Under President Trump, the United States has criticized Europe for this reliance and calls for them to transition away from this reliance. Currently, however, this represents how a monopoly, Russia, can leverage demand to increase prices, in this case monetary and political, to earn a profit.
Works Cited
Kottasová, Ivana. “Europe Is Still Addicted to Gas from Russia.” CNNMoney, Cable News Network, 5 June 2018, 11:37, money.cnn.com/2018/06/05/news/economy/russia-europe-gas-dependency/index.html.Kuzio, Taras. “[Opinion] The Azov Crisis Will Backfire.” EUobserver, 26 Nov. 2018, 17:25, euobserver.com/opinion/143498.
“Russia Fires on and Seizes Ukrainian Vessels.” The Economist, The Economist Newspaper, 26 Nov. 2018, www.economist.com/europe/2018/11/26/russia-fires-on-and-seizes-ukrainian-vessels.
Weir, Fred. “Behind Ukraine-Russia Naval Tensions, a More Brutal Economic War.” Yahoo! News, Christian Science Monitor, 26 Nov. 2018, www.yahoo.com/news/behind-ukraine-russia-naval-tensions-more-brutal-economic-165636598.html.
When you look at the game theory matrix, it's easy to see why neither country backs down. For each country, remaining in conflict is the dominant strategy; they either look strong or stay in power rather than risk looking weak to the other. Unfortunately, playing to the dominant strategy results in Nash equilibrium, which holds more consequence in matters of conflict. Rather than both refraining from fighting, where each country could save lives and resources, the mutual distrust forces a situation where both countries waste resources battling the other for the sake of remaining in power.
ReplyDeleteThis article was really interesting. To see game theory applied to politics and not just economics made the concept more relevant and coherent. Generally, colluding seems like a negative thing (at least in America), but this example shows how colluding can be good to save lives and infrastructure. The dominant strategy for both counties is to fight, but this causes the most amount of harm to everyone. Its kind of funny to call it the dominant strategy, because it is making both countries less dominating. Also, seeing that Russia is a monopoly in Europe, it is possible for the natural gas industry to become a oligopoly if they started importing from Saudi Arabia (which isn't too far from Europe).
ReplyDeleteIt's super fascinating to see game theory applied in a real life situation, especially outside of economics. With politics and the matrix, it's easy to see the dominant strategy for both is to remain in the war. Though collusion of both Russia and Ukraine withdrawing would be overall better for both nations, obviously the prisoner's dilemma would lead them both to choose their dominant strategy and go to the Nash equilibrium. Looking at countries as oligopolies is really interesting but makes game theory seem more applicable. However, Russia can also be considered a monopoly in the matter of Europe's natural gas provider. Obviously, then Russia can charge much more than what society may want to pay as a whole, leading to America's criticism. Thus, Europe has a lot depending on this war as Ukraine is a median between the natural gas and Europe. There is the possibility Ukraine could stall or limit the transportation, leading to a surplus on Russia's side and a shortage for the rest of Europe.
ReplyDeleteGreat analysis! In this scenario collusion is essentially a peace treaty. The Minsk Accords were an attempt at that a few years ago but as Russia broken the treaty Ukraine was forced back into their strategy of countering Russia. Something else to consider about Europe is that America has become a net exporter of oil and natural gas, potentially able to compete with Russia for the European market in the near future. Part of American criticism of Russia could be a result of that aspiration to get through the high barriers to entry of the international energy market.
DeleteThis was a great post! With international relations hinging so much on decision-making, it makes sense to look at this situation through the lens of what we've been learning in economics. I found the application of game theory especially interesting, as it greatly simplifies the situation and makes it significantly easier to understand than trying to do so by just reading a normal article online would be.
DeleteThe question I started to ask when you talked about industries leaving the country because of the increase in violence and capital destruction, how many businesses are looking to start in Syria or Yemen? Not many, I'm sure. Then comes in the question of after the Ukrainian conflict subsides (whenever and however that happens), what comes next? I assume government and international programs will work to rebuild infrastructure and incentivise firms to come back into the country, but will these firms feel this is a worthwhile investment with the volatility of the area? Anyway, quite the interesting article, good job on that.
ReplyDeleteThis is a super interesting take on game theory! With heavy in-class economic and money related applications, it's sometimes difficult to see these real-life scenarios. We can see that the Nash equilibrium they are now in is not as beneficent for either party as it would be if they both withdrew, but of course, Russia and Ukraine both have the availability to fight in this situation which would make each singularly better off if the other surrenders. As a result, they end up in Nash equilibrium. In these instances we see how convoluted game theory is, not only in economic scenarios, but also political scenarios where many lives are at risk.
ReplyDeleteThis was super interesting. It can be sometimes very hard to see these real life scenarios. Both Russia and Urkraine have the availablity to fight in this situation. They would wind up in a nash equilibrium. In these instances we see how convoluted game theory is, not only in economic scenarios, but also political scenarios where many lives are at risk.
ReplyDelete