Strategic Interaction Between the EU and Russia in the Energy Market: A Game Theoretic Approach

This thesis examines the strategic game between the European Union (EU) and Russia in the energy market and applies a game-theoretic approach to analyze the energy market, focusing on the critical periods of 2014 and 2022. Traditionally, the Russian gas exports to Europe have been a major part of the EU-Russia economic relations, thus, representing the wider geopolitical interactions and strategic dependence. Annexation of Crimea in 2014 led to EU sanctions on Russia that drastically changed the energy trade flows and caused significant policy changes in the EU. The 2022 events, marked by the increased level of geopolitical tension and gas supply disruptions, further transformed the European energy security strategic landscape. The paper begins with an overview of the theoretical principles of the game theory as it is used in economics and political economy. It presents major concepts, including players, strategies, payoffs, and equilibrium, and the difference between one-shot and repeated games. Specific attention is given to cooperation, punishment, and credible threats and structured cooperation mechanisms, which are essential in the formation of strategic behavior in repeated interactions. The thesis then looks into the European gas market and the reliance of the EU on the Russian energy resources in the two periods mentioned. It examines the political and economic dynamics that shaped EU-Russia energy relations, such as the sanctions in 2014, market adaptations, and the escalated energy crisis in 2022. On the basis of this empirical background, a dynamic game-theoretic model of EU-Russia energy relations is developed in the study. This analysis shows the impact of strategic interdependence, political restraints, and economic incentives on the possibility of cooperation or conflict in 2014 and 2022. The results indicate that credible threats and structured cooperation mechanisms contributed to the reduction of possible conflicts, whereas unilateral actions and political pressures enhanced the threat of market distortions. The results are useful in understanding the connection between economic and political policies in global energy relations.