Russia’s Crimean redevelopment quagmire

by Mathieu BOULEGUE on 7/27/2014 · 2 comments

AP Photo/Andrew Lubimov

 

While international attention is focused on eastern Ukraine, Crimea remains both a gaping wound for many Ukrainian citizens and a political nightmare for the Kyiv administration. Four months after Crimea and the city of Sevastopol were incorporated into the Russian Federation as individual subjects, the economic situation is starting to decay and Moscow’s response seems rather inadequate. With the stream of subsidies stemming from Ukraine completely quelled, Russia now has to find swift solutions to ensure the economic survival of its two newest territorial entities.

Crimea is already plagued with economic issues. Due to supply network malfunctions and a spiraling inflation, prices for basic goods and commodities have soared by more than 30 percent since the region adopted the ruble as an official currency. Salaries and pensions, however, have not been raised accordingly to meet expectations. Shortages of food products are recurring and the agricultural sector will also be affected, as the Ukrainian government decided to limit water supplies to the peninsula in June. Furthermore, because of the flight of capital investment and repeated bank closures, withdrawing money and paying by credit card has become a real problem.

 

Tourism represents an essential part of Crimea’s income, and especially in the summer, as “about 50-60 percent of working adults rely on tourism for all or a significant portion of their income” and 70 percent of the working population directly linked to the tourism industry. Yet, with most Ukrainian vacationers absent from the coast, revenues from tourism dwindle ominously. Ukrainians usually account for two-thirds of tourists traveling to Crimea each year: in this, the remaining Russians fail to make up for the lost influx.

Due to the poor results in tourism since April 2014, Moscow has been seeking to increase the number of Russian vacationers, accordingly by at least 50 percent, through several tactics. Helped by a national advertising campaign, the government is proposing special vacation packages whereby state employees are “asked” to go on semi-compulsory holidays in Crimea to support local businesses. President Putin also requested a sizable reduction of airplane tickets – Aeroflot already heard the call – and signed in late July a law allowing the creation of a gambling zone in Crimea.

The presence of Russian tourists is, however, hardly enough. In early July, Crimea’s Resort and Tourism Ministry reported that the flow of vacationers dropped 35 percent in the first half of the year, with 1 million tourists present instead of 1.7 million over the same period and a gloomy 30 percent occupancy rate in local hotels.

Logistical issues partly explain the absence of Russian vacationers: before the Crimean events in March 2014, half of the Russians would drive to the peninsula and 30 percent of them would take the train via Ukraine. Tourists now have to take a long detour to avoid mainland Ukraine – which doubles traveling time – or take the plane to the saturated Simferopol airport, which is considerably costlier. Ferries departing from the Russian coast are also heavily saturated. In terms of cost efficiency, it remains cheaper for a Russian tourist to buy a package tour to Turkey or Greece rather than travel to Crimea.

 

Apart from the appeal of sandy shores, Moscow has at least three options to ensure the economic redevelopment of Crimea: (1) pay from its own pocket, (2) create special economic zones in the region to attract investments, and (3) force private investors to fund development projects. On the short-term, the Kremlin will evidently have to start paying for Crimea on its own: Moscow has therefore developed a federal targeted program called “social and economic development of the Republic of Crimea and the federal city of Sevastopol until 2020”. The plan encompasses a total of 21.7 billion dollars from Russia’s budget, with a 3.75 billion funding this year alone and another 3 billion dollars earmarked for 2015. Yet the cost for Crimea’s redevelopment could soar up to 50 billion dollars.

The money will come from various sources. On the one hand, the government has decided to dig heavily into its federal “anti-crisis” National Pension Reserve Fund, for a total of 7.2 billion dollars. Retirement contributions from Russian taxpayers will simply be “borrowed” by the Kremlin. On the other hand, the government has decided to cancel several social and infrastructure projects in mainland Russia and reallocate the funds towards Crimea. State officials are also discussing the creation of a “solidarity tax” for Crimea and electricity rates will be increased by 2017 to make out extra budgetary lines.

Regional redevelopment priorities include ensuring proper power supplies and improving the transportation sector. This encompasses the construction of a 4.5 km-long bridge across the Kerch Strait, for an estimated price of 4.3 billion dollars. Finally, in order to boost the failing industrial sector, a new plan envisions the creation of a “center for engineering, aircraft testing, IT and winemaking” in Sevastopol and the Ministry of Defense is seeking to rebuild the military-industrial sector there.

 

The scope of the federal targeted program seems rather limited compared with the depth of the task at hand in Crimea. With most of its reserve funds already depleted, Russia barely keeps the local economy afloat and is forced to defund existing projects in order to reallocate them towards the peninsula. Things will become even more complicated when the Kremlin will genuinely have to invest in Crimea’s infrastructural development. Moreover, with a half million pensioners and 200,000 state employees, about 40 percent of Crimea’s population is directly living off Russia’s federal budget spending.

As of today, Moscow is barely keeping up with the day-to-day needs of the region. In the end, the incorporation of Crimea into Russia’s economy might end up being more painful than previously anticipated, if not become a dead weight hampering a much-needed national growth.


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This post was written by...

– author of 5 posts on Registan.net.

A Sciences Po and King’s College London alumnus, Mathieu Boulègue is an analyst in the field of Russia/CIS security and geostrategic issues. He currently works as a project manager for a risk management consulting firm. He is also a member of the Institute Prospective et Sécurité en Europe (IPSE), a leading French geopolitical think-tank.

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{ 2 comments }

DarkEyes August 4, 2014 at 10:49 am

Give the change from Ukraine to Russia again a bit more time.
The situation will normalize again but it needs some time.

jcee August 24, 2014 at 11:53 pm

“… if not become a dead weight hampering a much-needed national growth.”

The overall tenor of the post is pretty negative, not to say dire with respect to Crimea’s future within the RF. There are a number of reasons why Moscow will ensure this type of scenario doesn’t come about, not least the enormous symbolic value of Crimea and the patriotic pride that accompanied its integration within the federation. Despite the overreaction of the west, Crimea chose its own future and the transition was peaceful – certainly when compared to the violent American-backed coup in Kiev. It will take time but so far not much evidence that the people of Crimea are pining for the good ole’ days under the blue and yellow.

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