Ukraine’s Relations and Trade with Russia: A Game-Theoretical Illustration

This paper briefly reviews Ukraine's industrialisation followed by a deindustrialisation in the post-USSR period. I construct an example called the ‘Donbas game' to illustrate the use of game theory for analysing 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 minimising the latter's payoff rather than maximising their own.