It is in everyone’s economic interest, both short and long-term, to solve the Ukrainian crisis; and therefore they will – or, at least, that is what rational thinking would suggest. But the reality is very different. And it is not necessarily because the parties involved in this crisis are irrational. Rather, it is because they are stuck in what game theorists call a “prisoners’ dilemma”. In the process, the risks of adverse global economic spillovers are on the rise.
The recent escalation of events in Ukraine has narrowed the set of options available to the four major parties involved – the country itself, Russia, central and western Europe and the US. As this occurs, the probability of each party attaining its desired outcome is rapidly declining, let alone them retaining sufficient control over developments on the ground. Indeed, the current course is one that leads to growing internal Ukrainian fragmentation, biting western sanctions on Russia, counter-sanctions by Moscow on western energy supplies, and a mounting financial bill for all. Continue reading »