Tuesday, February 20, 2018

What annexing Crimea will cost Russia's government

MOSCOW — Despite the pebble beaches and cliff-hanging castles that made Crimea famous as a Soviet resort hub, the Black Sea peninsula has long been a corruption-riddled backwater in economic terms. The Kremlin, which decided to take the region from Ukraine after its residents voted in a referendum to join Russia, has begun calculating exactly what it will cost to support Crimea's shambolic economy — which one Russian minister described as "no better than Palestine."

Here's a look at what Crimea needs most and the economic challenges Russia faces in absorbing it:

Great expectations

In the rapid run-up to the referendum in Crimea, voters were bombarded with the message that the grass was a lot greener on the Russian side.

President Vladimir Putin may have fanned such sentiment during Ukraine's anti-government demonstrations that preceded the Russian invasion of Crimea. He sympathized with protesters, casting them as fed up with an economy mismanaged by "one group of crooks" after another. And he extolled the comparative success of the Russian economy — firing off figures about pensions and wages in both countries to argue that people were better off in Russia.

Struggling economy

But as the Russian dream of acquiring Crimea becomes a reality, Moscow is trying to calculate the price tag of bringing in a region that — in the words of Russian Regional Development Minister Igor Slyunyayev — has an economy that "looks no better than Palestine."

As part of Ukraine, about 40 percent of Crimea's annual budget of roughly $500 million was propped up by subsidies from Kiev. Russia would be expected to at least match, and probably far exceed, the Ukrainian annual contribution to raise living standards in its new territory.

Living standards in Crimea are drastically different from Russia. The GDP per capita in Russia, home to more than one hundred billionaires, is about $14,000. In Crimea, it's about $5,000.

Ukrainian dependence

Crimea is highly dependent on Ukraine for energy and water, most of which is supplied across the thin strip of land that connects the peninsula to the mainland. About 80 percent of the region's electricity is supplied across the isthmus.

The governor of Russia's southern Krasnodar region, which is separated from Crimea by a stretch of water called the Kerch Strait, pledged to provide electricity to the peninsula by building an underwater supply system. Other officials have said Crimea may need to build its own electricity plant — a project that could come with a price tag of nearly $1.7 billion, analysts say.

Russia has promised to bolster infrastructure in the region. Moscow and Kiev have been talking about building a bridge over the Kerch Strait for more than a decade. In recent weeks, Russian officials have eagerly revived the project, which is estimated to take years and cost at least $1.4 billion.

Budget not an issue

Even if all of these projects add up to billions of dollars, it may still be small change to the Russian government.

"For Russia's budget, this is not a big deal," said Nataliya Orlova, chief economist at Alfa Bank. "Even if you spend $5 billion or $10 billion, this is not money that dramatically changes things."

Russia had a total of over $170 billion stashed in two rainy day funds as of late February.

Corruption

Orlova argued that Crimea's annexation could in fact turn out to be positive for Russia's economy in the short term, because investment could spur a consumption boom in Crimea.

But Crimea has long been known as an organized crime hub, and the Kiev government's long-standing reluctance to meddle in the autonomous region has meant that a culture of corruption has been tacitly allowed to flourish in the region since the Soviet collapse.

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