Signaling, Game Theory, Inflation and Ukraine

“…as the war approaches its 500th day tomorrow, there is no end in sight. Not this year, or next year or the year after. That should be deeply concerning, especially because, contrary to received wisdom, all those who really matter — the Ukrainians, Russians and the Americans — are actually trying very hard to end it.”

I love reading about geopolitics, but know precious little about the underlying theory, and when I read about it, I approach it with the tools that I know a bit about – the tools of the economist. And so with this essay by Edward Luttwak – how can my knowledge of economics help me read it better? Where does my knowledge of economics not help while reading it? Let’s find out:

  1. Luttwak mentions that Zelenskyy doesn’t want a return to the status quo as of 2014, including taking back Crimea, and says that the current Ukrainian offensive is proof of the fact. In other words, he would like to end the war by getting to the negotiating table. I don’t know enough to agree or disagree, but that does then beg the question about why he doesn’t state his aims clearly. And this is because of two reasons. One of them Luttwak classifies as being military, while the other is personal.
    • The military reason: It’s because saying that “our aims are limited” can demoralize troops. Ukrainians on the battlefrom “must believe that their absolute commitment and self-sacrifice can end the war in victory.” Signaling, in other words.
      Read the whole article, as always, but first begin with this. Then scroll down to the section on “war” and ask how what we’re talking about might fit within that description. If it doesn’t, ask if my hypothesis is wrong – this is not signaling – or if the Wikipedia explanation is in this context incomplete.
    • The personal reason: “The personal reason is that Zelenskyy is a Jew, as is his defence minister, Oleksii Resnikov. And like the countless Jews who fought for their countries up and down Europe in the last century, the pair remain suspect in the eyes of the Ukrainian ultra-nationalists who are commonly antisemitic.
      It is, for them, no small irony that Ukraine should be led in its struggle for existence by two Jews since its founding hero, Bohdan Khmelnytsky, was Hitler’s only predecessor as a genocidally-antisemitic national leader; but instead of opprobrium, he has a city, a region, countless streets and Zelenskyy’s own Presidential Guard brigade named after him. Given the nationalists’ bigoted mistrust of the president, in spite of his stellar leadership from the first night of war, he cannot be seen to be a compromiser.”
  2. The other reason that Zelenskyy doesn’t want a return to the status quo is that an outright victory for Ukraine is actually bad news for it. How? Because an outright victory over Russia almost certainly means a regime change in Russia. That new leader, whoever they may be, “will promise not peace but a more effectively prosecuted war”. Better the known devil, in other words. More people should read The Art of Strategy, by Dixit and Nalebuff, particularly the section on “looking forward and thinking backward”.
  3. So these, Luttwak says, are the reasons for Ukraine preferring a negotiated truce rather than an outright victory. But they can’t clearly and openly state what they prefer, and so they continue to fight.
  4. What about Putin? Why would he want to come to the negotiating table instead of pushing for an outright victory?
    • Because, Luttwak says, he got into this war based on optimistic assessments that the war would be done and dusted in less than a week. That is obviously and painfully not true, and never has been. So why doesn’t he graciously retreat? Well, he can’t afford to. That signals weakness and defeat to Russians, and no dictator can continue to rule after appearing to have made a mistake, and then be seen as retreating from that mistake. Superman doesn’t negotiate or signal weakness, Superman does Superman things. So he can’t win, and he can’t be seen as having ordered a retreat. Signaling again!
      And there are a couple of factors that have helped him continue to carry out his grotesque and tragic charade:
    • First, Russia turns out to have been fairly self-sufficient. “Unlike China, the Russian Federation is autarkic in food and fuel, and manufactures all that is needed to sustain its armed forces and civilian population on a war footing, even if they are short of a few luxuries. So all Putin needed to keep fighting till his enemies lost patience was manpower, and to keep his conscripts out of combat.”
    • Second, he has enough roubles to throw at his soldiers. “Right now, joining the Russian army earns one a ₽600,000 sign-up bonus, ₽204,000 a month ($2,296 today), and stellar death benefits: ₽5,000,000 from the President himself an additional 2-3 million from the regional government and a monthly widow’s pension of ₽25,000 a month. Enough have joined to provide the forces that dug and fortified the long trench lines now holding up Ukraine’s offensive, along with almost 200,000 of the recalled reservists, who get the same pay and benefits.”
  5. So wait, that still doesn’t answer the question: why would he want to negotiate? One simple word: inflation.
    “Nabiullina is the formidable head of Russia’s Central Bank. Already very highly respected before the war, she is now the hero of Russian public finance for having successfully controlled inflation — better, in fact, than the Bank of England or the US Federal Reserve. The word is that she is tapering the printing of roubles, not for fear of a greater national debt (Russia’s is much lower than that of the US or UK) but of inflation. For Putin, too, that is a greater threat than anything his troops can encounter on the battlefield. Inflation will quickly drown Russia’s poor, many of whom are scattered across the endless steppe of Russia with very few opportunities to earn their way around rising prices.”
    And so he can’t clearly and openly state what he prefers, and so he continues to fight.
  6. And continuing with a game-theoretic approach, we can also understand why the US doesn’t want Russia to lose this war. There’s no grand conspiracy here, only simple logic: “the Biden administration (fully backed by most Republicans) does not want Russia destabilised by this war. For it knows only too well that Russian power alone keeps the Chinese from absorbing the vast spaces of Mongolia, Kazakhstan, the Kyrgyz Republic, Uzbekistan and Tajikistan — and that Russian weapons still flow to the only countries that actually fight the Chinese in recurring incidents: India on land and Vietnam at sea.”
  7. And so we reach a startling conclusion. Ukraine would like to end the war, but can’t afford to be seen as wanting to end it. Russia would like to end the war, but can’t afford to be seen as wanting to end it. The USA would like this war to end, but not at the cost of a destabilized Russia. And so it can’t end – it is actually “optimal” for the war to continue to grind on, so long as it doesn’t escalate further.

In other words, the good news is that the Ukraine war is, a polite, “limited war”, just like those of the 18th century that were later envied in the terrible 20th century of all-out, unlimited wars. But the bad news is that as long as only the Ukrainians are under fire, none of the other protagonists has an impellent reason to end the fighting. So like the 18th-century Seven Years’ War, it risks dragging on for at least another 500 days.

A very happy Monday to all of you.