Russia's annexation of Crimea comes with a cost

Visitors leave the newly opened branch of Genbank in the Crimean capital Simferopol, on April 9, 2014. Moscow-based Genbank has become the first Russian bank to start operating in Crimea. 

The Russians are now suffering a double financial whammy from the crisis in Ukraine. Not only have they seen a big slowdown in their economic growth thanks to sanctions -- they’re also counting the specific cost of annexing the Ukrainian province of Crimea.

The annexation the Black Sea peninsula has proved wildly popular in Russia. But after the first flush of acquisition, reality is beginning to dawn and, like many takeovers in the corporate world, this one is turning out to be very costly.

“In many ways Russia may have bitten off more than it expected with Crimea. And I think the overhaul of the economy there is a bigger task than many would expect,” argues Raoul Ruparel of the Open Europe think tank.

The peninsula may be semi-detached physically from the rest of Ukraine, but it is well-integrated economically with the mainland. Prying it away from Ukraine and plugging it into Russia won’t be easy… or cheap.

“It is really dependent on mainland Ukraine for its power supply, and for its food supply, and for its public services. The banking system will be really difficult to disentangle,” claims Lilit Grevorgyan of IHS Global Insight. 

Building new infrastructure and new financial links between Crimea and Russia will cost a fortune. $3 billion for new power stations. $3 billion for a planned bridge between the two countries. And then there’s the pledge to raise pensions and public sector wages in Crimea to Russian levels, which will set the  Kremlin back a further $3 billion a year.

“In the context of an already difficult fiscal environment, those pledges pose a problem,” explains Sam Charap of the International Institute for Strategic Studies. “It’s not surprising that the Russian finance minister is complaining about the extra cost.”

There is an economic upside to the annexation. Russia will save an estimated $4 billion a year in rent for its naval base in Crimea. And there is the prospect of exploiting untapped oil and gas reserves off the Crimean coast. Not that annexing Crimea was motivated by money. It’s about national pride . The move has won the overwhelming approval of the Russian public – 79 percent are in favor. 

However - say the critics – that is no guarantee that Russia’s actions will prove successful in the long term. Most Germans applauded Hitler’s annexation of Sudetenland - the German speaking province of Checkoslovakia. And – as we know – that didn’t end well for Germany.

About the author

Stephen Beard is the European bureau chief and provides daily coverage of Europe’s business and economic developments for the entire Marketplace portfolio.

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