Crimea as consolation prize: Russia faces some big costs over Ukrainian region

March 15

Russian President Vladimir Putin wanted Ukraine. He’s getting Crimea. Is that a prize or an encumbrance?

If Ukraine had come under the Kremlin’s sway, Russia would have expanded its economic reach, pushed the European Union back and likely gained control of the pipelines feeding Russian natural gas to the West.

That’s all lost — for now. Crimea is a different story.

Ukraine’s Crimean Peninsula votes Sunday in a referendum on whether to seek annexation by Russia. Ukraine, the European Union and the United States have all refused to recognize the speedily called referendum as legal, but a yes-to-Russia outcome seems certain.

Formal annexation could follow in a matter of weeks, or maybe months, but even if it doesn’t, Crimea will be Russia’s responsibility.

Crimea’s value to Russia, said Leonid Slutsky, a member of the Russian parliament, is this: It will be remembered as the place where Russia stood up to Washington and ended American dreams of creating a “unipolar world.”

In an interview on Ekho Moskvy radio, Slutsky, head of the Russian parliamentary committee that deals with neighboring countries, said the Kremlin’s handling of the Crimea crisis bolsters “Vladimir Putin's authority in our country” and is a powerful factor in the “consolidation of our civil society.”

Comments like that lead Mark Galeotti, a New York University professor who is in Moscow, to think that Russia has let its heart take precedence over its head as far as Crimea is concerned. The Kremlin, unusually, is being guided by emotion, he suggested.

“In strategic terms, this is a millstone around the neck,” said Jonathan Eyal, international director of the Royal United Services Institute in London.

Joining Russia, formally or informally, will bring 2 million additional people into Moscow’s fold (at least 15 percent of whom, the Crimean Tatars, won’t be happy about it), greater certainty over the security of the Russian navy’s Black Sea fleet and potential claims to offshore fields of natural gas.

Having just embarked on the construction of a hugely expensive undersea pipeline that would bypass Ukraine and deliver gas directly to Europe, Russia may be able to trim costs by rerouting it across Crimea.

But Crimea won’t be cheap.

Ever since Ukraine became a sovereign nation in 1991, Crimea has received more subsidies from the central government than it pays in taxes, and that would probably continue on Moscow’s tab. Russian levels of social spending are higher than Ukraine’s, and economists predict that Moscow may have to pay about $3 billion a year to support the region. On Friday, Russia committed to at least $1 billion for the upcoming year, even without annexation.

Crimea receives nearly all its electricity and drinking water from Ukraine, and Russia will need to build new infrastructure — including a long-planned bridge — to link Crimea directly to the Russian mainland. Until that is complete, it will have to pay Ukraine for the utilities.

An analysis done by Russia’s Moskovsky Komsomolets newspaper suggested that absorbing Crimea might cost Russia $20 billion during the next three years.

“Maybe it will be 30” billion dollars, Slutsky said. “Of course, it will all be quite expensive.” But standing up for Russians in Crimea will be worth it, he said.

Economic and political costs

Crimea is one of the least wealthy regions of Ukraine, said Boris Kopeykin, an analyst with Standard & Poor’s here. And its shadow economy probably constitutes a larger share of the overall economy than elsewhere in Ukraine.

Tourism, one of the region’s economic mainstays, will probably be severely affected by the crisis for months to come. Crimean leaders say they hope to foster a tourism boom in the years ahead, under Russian rule. There’s one problem with that: The competition is Russia’s own Black Sea resort of Sochi, which Moscow just spent $50 billion sprucing up for the Winter Olympics.

There would be other costs as well — financial and political.

Russia’s bid to join the 34-nation Organization for Economic Cooperation and Development was suspended by the group Wednesday. That means less support in modernizing and diversifying its economy. It’s a signal to investors, too, said Yevsei Gurvich, head of the Economic Expert Group, a think tank here.

Membership in the OECD would carry with it recognition that Russia has agreed to do business according to standardized rules, he said. “Suspension implies more uncertainty about our willingness” to do so.

The same thinking applies to sanctions, if the West should impose them, he said: The sanctions would do less damage than the overall sense of uncertainty in Russia that they would create among investors.

Alexei Kudrin, a former Russian economics minister, told a gathering Thursday in St. Petersburg that he expects capital flight from Russia to reach $50 billion a quarter if sanctions are imposed. That would be triple the 2013 rate. He said Russian companies are already finding it more difficult to obtain credit from foreign lenders.

International reactions

Putin’s plan in 2013 was to include Ukraine in his new Eurasian Economic Union, conceived as a bloc of former Soviet states that would stand apart from the E.U., with different values and standards. Ukraine, with a population of 46 million, would be key to its success, analysts said. The refusal of then-Ukrainian President Viktor Yanukovych to sign an agreement with the E.U. in November was good news for Putin, but it sparked the protests that led to his ouster last month.

By sending troops to Crimea, refusing to deal on any substantive level with the new government in Kiev and denouncing it as a nest of Nazi sympathizers who can’t control their own country, the Kremlin has all but ensured Ukraine’s turn to the West.

Officials in Kiev said they hope to sign the E.U. agreement as early as next week. President Obama welcomed Prime Minister Arseniy Yatsenyuk to the White House on Wednesday.

The United States and other Western nations have not yet been of one mind about how to react to Russia’s intervention in Ukraine, but the move hasn’t won any friends. Europe will look for ways to cut its dependence on Russian natural gas — one of Moscow’s primary sources of revenue.

Andrei Movchan, head of the Third Rome investment management company in Moscow, criticized Putin on the Slon.ru Web site for pursuing a policy that will earn Russia international enmity while not bringing in any benefits.

Iran and China, he noted, have been studiously quiet about the Ukrainian crisis. Even the two other main members of the Eurasian Economic Union, Belarus and Kazakhstan, have been putting distance between their positions and Russia’s on Ukraine.

Slutsky, speaking for the Kremlin, argued that Ukraine isn’t that important to the Eurasian association and that its eventual orientation is a more pressing issue for the West than it is for Moscow.

The more important concern for Russia, he said, was to step in to defend Crimea, which he suggested was facing the same fate as Iraq, Libya or Yugoslavia — attack and dismemberment at the hands of the West.

The payoff for Russia, he said, will be the gratitude of future generations.

Kathy Lally contributed to this report.

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