International Relations and Trade between Ukraine and Russia – Through the Looking-Glass

International Relations and Trade between Ukraine and Russia – Through the Looking-Glass

The major part of this paper was written prior to the March-April 2019 presidential election in Ukraine, followed by the July 2019 snap election to the Ukrainian parliament (Verkhovna Rada) which may lead to a revision in both the executive and legislative governments’ policies. The paper reviews Ukraine’s industrialization followed by a deindustrialization in the post-USSR period. I construct an example called the ‘Donbas game’ to illustrate the use of game theory for analyzing deteriorated relations between Ukraine and Russia. Intuitively, the game’s best solution for Ukraine seems to accept separation by the rebellious republics, and for Russia to stop intervening in Ukraine’s affairs. However, the only Nash-equilibrium solution is obtained when respective strategies are (Regain territory, Keep intervening). In a game-theoretical formulation of trade between Ukraine and Russia, the dominant strategies lead to a Nash-equilibrium solution (Trade, Trade). Yet the perceived optimal solution is obtained when both players are concerned with harming the opponent by minimizing the latter’s payoff rather than maximizing their own. The new developments raise expectations that both countries will move away from the outlined strategies in order to achieve a peaceful resolution to the conflict.

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