Monopoly v chesst

The problem is that America, the EU and Russia do not quite understand the terms of «winning» and «losing» in the same fashion

TYLER COWEN had an interesting piece in the New York Times over the weekend arguing … that like the cold war, the conflict between America and Russia over Ukraine should be seen through the lens of game theory. Three of the game-theory concepts Mr Cowen cites — nuclear deterrence, «tipping points» between different equilibrium levels of conflict, and the fact that credibility can’t be faked when it isn’t anchored in concrete interests — were interesting and clearly relevant. The fourth, which he describes as «market deterrence», is also interesting and relevant, but I think there are a couple of wrinkles that didn’t make it into Mr Cowen’s piece. The idea behind «market deterrence» is that financial markets will punish countries for military adventurism, and this can deter aggression. The problem is that Russia’s government is far less susceptible to such deterrence than America’s.

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After Russia began sending unmarked troops into Crimea over the weekend of March 1st, the Russian stock market fell 10.8%. In America a fall of that magnitude would anger a wide array of shareholders, from ordinary citizens to asset managers to companies themselves, and this dissatisfaction could filter back to political leaders via the democratic process. In Russia, however, the cronyistic relationship between business and government means that powerful individuals may be insulated in the short term from these sorts of downturns, or may even profit from them. For example, the Russian newspaper Vedomosti reports that Victor Zubkov, chairman of Gazprom, unloaded his entire stake in the state-owned energy giant on February 11th. The sale followed a February 8th meeting in Sochi between Vladimir Putin and Victor Yanukovich, at which Mr Yanukovich asked for further Russian help in paying Ukraine’s gas debts. As Peter Pomerantsev wrote after the stock plunge, «for every announcement about war and peace made by Moscow, equity prices rise madly up or down, and someone, somewhere very near to Putin, is making a killing on the markets.» In a state where cronies can ignore insider-trading laws, the Kremlin can create fluctuations in the economy to reward its friends.

Meanwhile, Russia’s dependence on energy exports doesn’t necessarily mean that energy sanctions will have the effect Americans might expect. As Joseph Cotterill puts it, one difficulty with using energy sanctions is that Russia’s «entire economy is a giant oil-price proxy.» The prospect of sanctions or war tends to push that price up, not down. And while, as Charlemagne notes, it’s possible for the EU to interfere with Russia’s ability to sell its gas exports, which travel largely through fixed pipelines, it will be impossible to stop Russia from exporting its oil, which can be shipped to any number of countries that would never participate in sanctions. In the long run, financial and energy sanctions will weaken the Russian economy and create broad popular dissatisfaction. But in the short run, many powerful interests may benefit from Kremlin-provoked instability. «Market deterrence» may simply be too slow and unwieldy to influence Russian leaders’ decisions.

A game-theory approach to the Ukraine conflict needs to recognise that America, the EU and Russia are not quite symmetrical players who understand the terms «winning» and «losing» in the same fashion. Significantly, America and Russia don’t seem to attach the same value to conflict avoidance. Since the Maidan protests reached a crisis level, America and the EU have aimed to «de-escalate» the conflict with negotiations to maximise the interests of stakeholders without the use of force. Since the overthrow of Mr Yanukovich, Russia has been doing the opposite: rather than seek negotiated compromises that could achieve its declared interests (protecting the rights of ethnic Russians, getting paid for its gas, securing its naval bases in Crimea, or sketching out a roadmap towards a Crimean referendum on joining Russia), the country has deliberately provoked conflicts.

I can think of two kinds of situations in which players engage in this sort of behaviour. One is when a player is seeking to provoke a conflict that it thinks will lead to concrete gains that could never be realised through negotiations, as when the Bush administration undermined arms-inspection compromises with Iraq in early 2003 because it wanted to overthrow Saddam Hussein’s regime. Another is when a player is counting an adversarial clash with another player as a goal in itself, regardless of any more concrete gains or losses. As Ellen Barry’s description of the ideological return of Slavophilia in Moscow makes clear, there are influential people in the Kremlin who want an open conflict with the West, in part because it enhances their internal political power. This presents Barack Obama with a challenge similar to the one he faces in dealing with Tea-party Republicans, for whom compromise with the president is in itself a defeat. Mr Obama has not proven himself very adept at dealing with opponents who do not want to negotiate a reasonable deal that secures each side’s objective interests.

People in search of a metaphor to describe the difficulty of coping with Russia these days often describe Vladimir Putin as …


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