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International Conference on Complex Systems (ICCS2006)

Games the parties of Eurasian gas supply network play: analysis of strategic investment, hold-up and multinational bargaining

Svetlana Ikonnikova
Humboldt University of Berlin

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     Last modified: May 15, 2006

We analyze cooperation and strategic investment in the Eurasian gas supply network. Russia
and Turkmenistan are the producers, Ukraine, Byelorussia, Azerbaijan, Georgia and
Iran are the transiters, involved in the supply network. We apply a two stage game in partition function form and study endogenous coalition formation among the players of the network. First, parties
of the network cooperate to invest in capacities and sign contracts over sharing of returns. Then,
capacities are given, investment are sunk, parties form coalitions to supply gas and bargain over
profit sharing. We assume, that some may renegotiate investment contracts to extract quasi-rents and thus, the "hold-up" problem arises. To strengthen its bargaining position with Ukraine and Byelorussia, Russia overinvest in expensive direct Baltic option. Turkmenistan initiates the bypasses along Azerbaijan and Georgia, or Iran to gain a leverage on Russia. Yet, if Turkmenistan and Russia can cooperate, they prefer to build the Baltic pipeline only.

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