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Russian Sanctions and Game Theory

Ever since the fighting started in Ukraine, there have been increased tensions between Russia and the USA and EU. Due to Russia’s seeming support of the rebels in Ukraine, the USA and EU have been putting sanctions onto Russia. Russia in return has also out some sanctions on the West, though they don’t always give sanctions back. Instead they complain or threaten to appeal to the WTO. Last week the USA and EU levied more sanctions against Russia. These new sanctions are against some of Russia’s major banks doing long term business in the EU or USA. Russia has come back with some sanctions of its own, though less dramatic as it makes the importation of used cars illegal. Though even though Russia has given its own sanctions on the West, they are still considering going to the WTO to appeal the most recent sanctions. As we can see each side has multiple options of what to do here, so we can consider this a game.

So we can apply the game theory that we learned in class to this international dispute. For currently there are sanctions imposed on both Russia and the US from each other. Each side has the option to make more sanctions against the other, stop sanctions, or appeal to the WTO. For the US, there will be no pay off for appealing to the WTO if Russia continues sanctions, for US is more aggressive it its sanctions than Russia, and could have even a negative pay off if the WTO turned around and questioned their sanctions. And in this case Russia would have a slightly positive payoff since they were able to give sanctions without receiving any. Also either wouldn’t appeal unless the other gave sanction. The US could also drop sanctions against Russia. Pay out will be determined on whether or not Russia drops then or not. For if Russia drops them, then the conflict is deescalated and they each will receive a very high payoff since tensions will be drastically reduced. But alternatively, if Russia doesn’t drop sanctions, then the US would look weak and ultimately have an infinitely negative payoff for losing to Russia, and Russia would have a very high pay off for defeating the capitalist West. But if the US does put more sanctions on Russia, then they will get a high pay out, no matter what. For if Russia also sanctions, the US sanctions are good, and the fact that Russia is also damaging their own economy in return is even better, as Russia will have a slightly negative payoff, since the sanctions hurt their economy more than ours. And if Russia doesn’t put sanctions back, the US again get a very high payoff, since Russia will be affected by the sanction, and Russia will have a negative payoff since it was too weak to counteract the US. And lastly the US will have a slightly positive payoff if Russia goes to the WTO, while Russian will have a pretty negative payoff. Since realistically the WTO really has no influence on first world countries and very little power, so the sanctions would continue. And Russia would just have to deal with the sanctions. If we exam the graph we can make from this game, we can see that there is a Nash Equilibrium at both countries imposing sanctions on each other. Because it is in Russia’s best interest to counteract sanctions with sanctions, and the US to counteract sanctions with sanctions.

This is the main reason we have seen continued sanctions by either country, for each just continuously applies more sanctions in response to sanctions. Though recently we can see that the economic toll on Russia has lead to its payoff for returning a sanction for a sanction to decrease. And I believe that we are approaching a point where Russia’s payoff for sanctions is decreasing towards the payoff of going to the WTO, because they have begun to consider it, and don’t want their economy crippled much more.

http://rt.com/business/187432-wto-russia-sanctions-ulyukaev/

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