This weekend, Tyler Cowen wrote a great piece in the New York Times discussing how the Crimean crisis can be viewed through a game theory lens. Game theory has been an incredibly framework for understanding foreign affairs since the mid twentieth century, when nobel winning economist and political scientist Thomas Schelling pioneered its use. During the Cold War, game theory provided a very relevant framework for understanding the actions of the US and Russia. Because both countries had nuclear arsenals that could wipe out each other (and take the rest of the globe with them) any threat of nuclear attacks was sure to be mitigated by mutually assured destruction. The threat of nuclear attack, therefore, was not a credible commitment from either country. Now as Russia plays the belligerent role again, it makes sense to turn back to game theory to try to better understand their actions.
First off, Cowen presents four game theory concepts that are relevant to the current situation in Crimea: (1) nuclear deterrence (2) tipping points (3) market deterrence and (4) credibility and consequences. To briefly summarize each of these points:
- Nuclear deterrence: This point is simple, but also very worrying – if Ukraine had nuclear weapons, they would have been much more capable of deterring Russia military intervention in the region. In fact, before 1995, Ukraine did indeed have a significant nuclear arsenal after the fall of the Soviet Union but they agreed to give them up after safety assurances from the US and Russia. The fact that Russia reneged on this agreement could make the appeal of attaining nuclear weapons stronger for countries like Iran.
- Tipping point: This point I find to be interesting, as it is less obvious than the first. Cowen argues that the world has been relatively peacefully over the last 25 years since the fall of the Soviet Union as new governments have peacefully formed in its wake and we have reach a relative equilibrium. Now, however, most of the situations that are capable of being peacefully resolved have been and we may be on the precipice of a “tipping point” towards more prevalent violent conflict resolution.
- Market deterrence: The point here is that financial market punish reckless military actions such as the Crimea gambit. The Russian stock market fell 10.8% the day they invaded Crimea but as the Economist brings up, financial shocks are probably less politically harmful in Russia than the US. Russia has an oligarchical elite that engage in cronyism with the Kremlin – many of whom could have received advanced warning about such a military escapade and positioned themselves to profit. On this point I slightly disagree with Cowen – while Russia is certainly exposed to financial markets more than they were during the Cold War, Putin can be reasonably sure that short term fluctuations in markets will not do significant political harm.
- Credibility and consequences: I believe that this is probably the most important issue raised. The question Cowen raises is how much credibility does the US lose by not acting to protect Ukraine as we pledged to do in the 1995 agreement? American self interests are not really on the line – Ukraine is more in Russia’s traditional sphere of influence and has limited economic and political ties to the US. Therefore any commitment to intervene may not be very credible. The consequences of this will be most interesting in Asia, where commitments to intervene for small Pacific countries that could one day face Chinese hostilities may be seen as not credible after the US response to Crimea.
Overall, I think Cowen has brought up several interesting points which have given me a different perspective when looking at this situation. At this point, it looks like the potential to be a prisoners dilemma type of scenario. While Russia and the US would be best off on the whole if they could cooperate to come to a reasonable compromise, the payoff of Russian defection is very high (they get to annex Crimea). They do not believe the US will credibly retaliate forcefully, which would be the worst outcome for everyone, so they defect and gain Crimea as a result. It will be interesting to see what the consequences of this repeated game are for both sides.