March 12th, 2014

The Crimean Burden

On March 16th, Crimea will hold a referendum on joining the Russian Federation. Russian authorities have already announced that $6 billion are to be invested in the Crimean economy. However, as analysts argue, the peninsula will become another subsidized Russian region, while its economic perspectives remain bleak.

Crimea’s annual GDP is estimated at $4 billion, which equals 0.2 percent of Russia’s GDP. If Crimea joins Russia after the referendum, Russian authorities promise to invest $6 billion in the new region—the amount that is much smaller than its past investment into South Ossetia, and is quite bigger than the finacial aid to Abkhazia. The key recipients of the Russian investments will be Crimea’s energy industry, transportation, tourism, and public sector.

Crimea is getting ready to join Russia.

Today, Crimea covers only 10 percent of its energy needs (the rest is provided by the Ukraine’s energy system), and the reorientation of the peninsula’s energy system towards Russia will cost about $2 billion. In terms of transportation, the key project is constructing a new bridge over the Kerch Strait that will shorten the route from Kherson (Ukraine) to Novorossiysk (Russia) by 450 kilometers. The bridge can also serve as a travel corridor for LNG transportation by fuel tankers or railroad tankers, which will help to resolve the region’s energy deficiency. This project is estimated at $1.4-3 billion.

Officially, tourism provides for no more than 6-8 percent of the Crimea’s GDP. In reality, the share of the tourism is probably much higher, but the majority of the transactions within this industry are conducted in the shadow sector of Crimea’s economy. Compensation of tourism’s revenues is estimated at $500-750 million. However, the 2014 resort season is most likely to be disrupted by the ongoing political crisis in Ukraine. Considering the more attractive in terms of “price-quality” ratio Turkish and Bulgarian resorts located nearby, it will be hard for Crimea to compete for Russian tourists.

Finally, according to Russia’s Ministry of Finance, Crimean public sector will require about $1 billion, while montly subsidies to the region will level at $70-80 million.

Overall, based on the Crimea’s population of 2 million people, Russian financial infusion into this region’s economy can reach up to $30 billion by 2025, or about $3 billion per year. The only question that remains open is: can Russia afford to support another subsidized region under the conditions of the slowdown in economic growth, ruble devaluation and the growing budget deficit?

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