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Globe in Ukraine: Crimean adventure could cost Russia billions

A Russian soldier stands next to a machine-gun outside the Ukrainian infantry base in Perevalne, Ukraine, Wednesday, March 12, 2014. The Group of 7 world leaders said in a statement released from the White House on Wednesday that they won't recognize results of a referendum for the Crimea region to split from Ukraine and join Russia.

Vadim Ghirda/AP

If the breakaway region of Crimea becomes part of Russia – or even just a Russian protectorate – next week, it will do so as a geopolitical island, one that will cost the Kremlin billions of dollars to support.

Crimeans will vote Sunday in a referendum that leaves them with two choices: apply to join Russia or seek more independence from the government in Kiev. Either way, the two million people who live here are expecting lots of help from Moscow, aid that some say could push an already staggering Russian economy into crisis.

While Crimea was part of the Russian Empire for some 200 years before the 1991 breakup of the Soviet Union, it was always supplied overland via Ukraine. Though Crimea and mainland Russia are separated by less than five kilometres of water at the Kerch Strait, a bridge between the two sides is only now being built. The bridge will take an estimated three and a half years, and $1.3-billion (U.S.), to finish.

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In the interim, 80 per cent of this peninsula's electricity, and a similar share of its water for drinking and irrigation, are supplied by Ukraine's state utilities. Even the Russian natural gas that powers homes and factories here comes via pipelines that transit Ukrainian territory. Thus far, the interim government – despite being effectively bankrupt – continues to pay civil servant salaries and pensions of Crimea residents it insists will remain its citizens.

"There is no doubt that Russia will not [continue to] supply Crimea using Ukrainian infrastructure," said Nikolai Shutov, an economist in the southern Ukrainian city of Odessa. He estimated that connecting Crimea to Russian infrastructure would cost at least $10-billion. "And that's without supplying water."

Nor Crimea is economically viable on its own. The region has long been a net recipient of tax transfers from the central government, with two-thirds of the regional government's $1.2-billion annual budget coming from Kiev.

And that was during relatively good economic times. The peninsula's biggest industry is tourism, which seems sure to take a hit in the months ahead. Crimea's other businesses are largely reliant on the internal Ukrainian market. They are now effectively severed from that market, with flights to Kiev cancelled and road and rail borders patrolled by masked gunmen.

In the short term, Moscow is betting that Kiev – afraid of escalating the situation and alienating Crimeans – won't turn off the lights and water, or stop paying pensions. But Russia, fresh off pouring $51-billion into the Winter Olympics in Sochi, will have to invest massively and quickly to keep Crimeans from regretting their decision to choose union with Russia over staying in Ukraine.

"Russia will not want to take this responsibility for a long time," said Valeriy Chaly, a former deputy foreign minister of Ukraine and deputy director general of the Razumkov Centre, a Ukrainian think tank based in Lviv. "Russia has a very complicated economic situation now and if we have a drop in the price of gas or oil, Russia could face a difficult situation."

He added that the crisis in the territory has stalled economic development and the tourist industry in particular, something the Ukrainian government had spent years trying to build up.

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The burden on Russia – which is already subsidizing the breakaway governments of Abkhazia and South Ossetia in Georgia, Trans-Dniester in Moldova, plus pouring hundreds of millions of dollars a year into the pacification of restive Muslim regions in its own North Caucasus – could prove crippling.

"Crimea is eight times bigger than all these other Russian-sponsored territories combined," Prof. Shutov, the Odessa economist, said. "Russia is following in the steps of the Soviet Union., with so many parasites hanging off of it. [Paying for] Afghanistan, Vietnam, Cuba and [socialist] African and Arab states – this is what made the Soviet Union fall."

To avoid the high cost of connecting Crimea via Kerch, some analysts worry Russian President Vladimir Putin will choose instead to stir up pro-Russian sentiment in other parts of eastern and southern Ukraine. If those regions separate, and ask Moscow for protection, the Kremlin could potentially gain control of some of the existing Ukrainian infrastructure that supplies Crimea.

"Crimea is an integral part of Ukraine, financially and politically. It would simply be impossible to continue to supply [a breakaway] Crimea with water and electricity," said Sergii Glebov, associate professor of international relations at Mechnikov National University, which is also in Odessa. "This could push Putin to go further and capture eastern Ukraine, in order to supply Crimea."

Russia's markets have been badly rattled by talk of war and economic sanctions. MICEX, the main Russian stock exchange, fell 2.64 per cent on Wednesday, bringing its losses so far in March to a dramatic 11.8 per cent, comparable to the hit it took during the 2008 financial crisis.

The country's economy, reliant on oil and gas exports, was already struggling, expected to grow by just 1.5 per cent in 2014. By some estimates, it would already be in recession if not for high oil prices.

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Russia could lose much of that crucial income, too, if the international dispute over Crimea causes Western Europe to reduce its reliance on Russian energy. On Wednesday, the G-7 warned it would take unspecified measures to punish Moscow if it went ahead with the "annexation" of Crimea.

With a report from Paul Waldie in Kiev

Follow me on Twitter: @markmackinnon

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About the Author
Senior International Correspondent

Mark MacKinnon is currently based in London, where he is The Globe and Mail's Senior International Correspondent. In that posting he has reported on the Syrian refugee crisis, the rise of Islamic State, the war in eastern Ukraine and Scotland's independence referendum.Mark recently spent five years as the newspaper's Beijing correspondent. More


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