Throughout the ongoing crisis in Ukraine, government leaders in Russia and the United States have not only disagreed about how to resolve the situation; they have consistently been talking past each other. Whereas Obama considers the interim government in Kiev to be “the legitimate government of Ukraine,” Putin called it an “anti-constitutional takeover, an armed seizure of power” and maintains that “Yanukovych is the only undoubtedly legitimate president.” Similarly, whereas Putin labels military activities in Crimea as “local self-defense units,” Obama accuses the Russian military of “violating the sovereignty and territorial integrity of Ukraine.” Accusations continue to fly from both sides, with Secretary of State John Kerry condemning Russia’s “falsehoods, intimidation and provocations,” while the Russian Foreign Ministry charges the United States of “barefaced cynicism and double standards.”
Why do Washington and Moscow keep talking past each other? Prospect theory offers a plausible explanation. At its core, prospect theory argues that people are willing to take greater risks to avoid losses than they are to achieve gains. Instead of making decisions that maximize their overall expected utility, people focus on a particular reference point and give more weight to losses from that reference point than comparable gains. Research applying this behavioral economic theory to international relations has demonstrated that, among other tendencies, state leaders exhibit a status quo bias, consider preventive war to forestall decline, and double down in enduring conflicts rather than withdrawing (e.g. the United States in Vietnam, Iraq, and Afghanistan).
Applying prospect theory to the current situation in Ukraine offers a rationale for Putin’s decision to occupy Crimea: When Yanukovych was deposed and Putin faced the loss of his previous influence over Ukrainian politics, Putin was willing to gamble either to recover that influence in negotiations on the shape of the future Ukrainian government or to offset it with territorial gains. In this case, Putin’s reference point is the status quo before the Maidan revolution, when Russia enjoyed a pliable ally in Kiev who was willing to turn down an offer of European integration to substantiate Putin’s envisioned Eurasian Union. Consistent with the predictions of prospect theory, numerous observers have identified the Russian invasion and potential annexation of Crimea as a remarkably risky venture for Putin.
First, it risks Russian influence in what remains of Ukraine and increases doubts that his Eurasian Union will ever materialize into a substantial economic bloc. Putin’s crowning foreign-policy objective, the Eurasian Union requires not Crimea but all of Ukraine as a member, yet the Russian occupation is strengthening national identity throughout that traditionally cleaved country, as well as alarming leaders in the Central Asian countries that are its other potential members. Second, it risks Russia’s energy leverage over Europe. European leaders are already hitting the brakes on the South Stream pipeline and stepping up efforts to diversify their supply, while Putin’s aggression has also sparked calls for the United States to develop its own energy exports as a counterweight. Third, it threatens to further undermine the Russian economy. The Russian stock market lost more in the first day after the invasion than Russia spent on the Sochi Olympics, and broader economic retaliation against the increasingly vulnerable Russian economy threatens to send Russia into a deep recession. Fourth, it risks fracturing Putin’s domestic political support. The invasion of Crimea may have been aimed at recovering public support after the Maidan revolution, but it presents a new set of domestic problems as Russian business leaders are afraid of losing access to Western finance and Western sanctions may contribute to instability among competitive Russian elites. Given these risks, Putin appears to be leaving his options open to salvage what he can from Ukraine.
The usefulness of prospect theory in understanding the present crisis goes even further, though. As Jack Levy has written, “people ‘renormalize’ their reference points after making gains much faster than they do after incurring losses.” In other words, if an international situation turns to the advantage of one state over another, the gainer will change its reference point to the “new normal” and resist efforts by the loser to revert to its own reference point, which will remain the status quo ante.
This explains why the United States and Russia keep talking past each other: U.S. leaders have ‘renormalized’ their reference point after the Maidan revolution, accepting the West-leaning interim Ukrainian government as a legitimate foundation for any resolution to the crisis. In contrast, the reference point of Russian leaders continues to be the pre-Maidan status quo, as they seek to recover their lost influence in Ukraine or achieve compensating territorial gains. As a result, the United States is focusing on rolling back Russian “aggression” in Crimea, while Russian Foreign Minister Sergei Lavrov objects to U.S. proposals because they take “the situation created by the coup as a starting point.” If U.S. and Russian leaders are bringing contradictory perspectives to their attempts at negotiation, as prospect theory predicts, it is difficult to envision a diplomatic resolution to the crisis that will satisfy both sides.
Here is a summary of our past coverage on the Ukraine crisis. More recent posts are:
Erik Voeten: Who predicted Russian intervention?