Putin’s Risk-Return Tradeoff

It is interesting–if unfortunate–to be watching international bargaining unfolding right in front of our eyes. Russia has seized the Crimean Peninsula, which has the awkward characteristics of being (1) on Ukraine’s southeastern fringe, (2) on Russia’s border, (3) predominantly inhabited by Russian speakers, and (4) the home of a Russian naval fleet.

Although where the crisis goes in in the next couple of days is anyone’s guess, Putin is engaging in a classic example of the risk-return tradeoff. International conflict–whether economic or militaristic–is costly for all parties involved. These costs incentivize the actors to reach negotiated settlements. After all, if everyone knows how conflict would end, they could implement that solution from the start and preserve the costs of fighting. Everyone finishes better off.

Unfortunately, combatants are not always certain of each other’s capabilities and willingness to fight. Putin, for example, might know that he can take some of Crimea without triggering war from Kiev or massive economic sanctions from the West, but he likely does not know the maximum Russian expansion those parties are willing to tolerate.

So how does Putin decide where to stop? The risk-return tradeoff provides some guidance. Bargaining positions range from conservative to aggressive. Adopting a conservative position means that other parties are less likely to reject your demands and fight a war or impose economic sanctions. While this is a safe choice, conservative positions are inherently costly because you must concede a lot to the opposition in the process. Alternatively, you could act more aggressively and try to take more. This pays off greatly when your plan succeeds and the other side concedes but risks backfiring if the other side rejects your demands and inflicts war/sanctions costs on you.

Ultimately, you have to weigh the risks of rejection to the high potential returns of capturing larger portions of the stakes. If the reward is great relative to the risk, you should adopt an aggressive position. If it is small, you should go conservative. If it is somewhere in between, you should take a moderate approach.

In this light, taking the Crimea was a relatively safe choice for Putin; given its population’s heavy Russian sympathies, any local resistance would have been minimal. It also has more value than other regions because of its positioning along the Black Sea. But as Russia advances to the northwest, it will find fewer sympathizers and more West-loyal Ukrainians. (Here is a useful map of the 2004 election results; purple is a decent proxy for Russian affinity.) This not only makes incremental gains more costly for Putin but also risks exceeding the most the West and Kiev is willing to give up. As a result, Putin might go a little further west, but don’t be surprised if this has a natural, peaceful, and relatively moderate outcome.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s