A network game analysis of strategic interactions in the international trade of Russian natural gas through Ukraine and Belarus

Natural gas is an important source of relatively low-emission, low-cost, non-nuclear and abundant energy; however, the difficulty of storage and transportation adds geopolitical and geostrategic complexity to its international trade. Much of the global natural gas trade occurs through natural gas pipelines, which as an infrastructure is strictly specific to the transportation of natural gas. Therefore, the very structure of natural gas pipeline networks can dictate the strategic relationship among countries involved in its trade. This paper applies a Network Game Model where these pipeline networks are modeled as graphs and respective value functions, and employs the Link-based Flexible Network Allocation Rule developed by Jackson (2005) as a solution concept to measure the relative power structure among these natural gas trading countries. The paper analyzes the case of trade between Russia, Ukraine, Belarus and Western Europe, and compares the results to existing analyses that employ a Cooperative Game Model in Characteristic Function Form and the Shapley Value as the solution concept. Whereas the results of the analysis conducted in the previous literature indicate that Russia's relative power was significantly stronger than other players both before and after the construction of the Nord Stream pipeline, the results provided in this paper draw a different conclusion. Ukraine's relative power was already equal to that of Russia before the Nord Stream. This may be understood as one of the underlying causes for the prolonged conflicts that occurred repeatedly in this region concerning natural gas trade. (C) 2014 Elsevier B.V. All rights reserved.