Paradise Lost in Crimea

In mid-August, during the latest wave of violence in the long-running Ukraine crisis, Russian President Vladimir Putin and a coterie of other Kremlin officials trekked out to Crimea. The high-profile visit was intended as a public sign of the Kremlin’s enduring commitment to its newest territorial holding. But behind the headlines, the story is far less reassuring: Russia is realizing that its Crimean annexation has become an increasingly costly venture in both political and economic terms.  

From the outset, it was clear that Russia’s spring 2014 annexation would need to be accompanied by major capital investments from Moscow. Early estimates of just how much it would cost Russia to maintain and modernize Crimea ran to $3 billion a year. Federal subsidies, added social benefits, improved infrastructure, and increased pensions to citizens would end up costing Moscow enough that other major projects—including a new port on the Black Sea and a bridge in Siberia—would have to be scrapped to make room in the country’s budget. 

The real sum, however, has turned out to be considerably larger: $4.5 billion or more annually, according to official Kremlin projections. Compounding these costs are elaborate construction projects designed to link the peninsula ever more closely to the Russian Federation, chief among them a $4 billion bridge across the Kerch Strait that was approved by the Russian State Duma this July.

These figures would be daunting enough if Crimea were a well-functioning territory. But it is not. Economically, the region lags far behind the rest of Russia, to say nothing of the rest of the world. Crimea, which experienced comparative prosperity as one of Ukraine’s regions, has seen a near-total reversal of fortune under Russian rule. Today, it is conspicuously absent from reputable professional rankings of investment attractiveness among Russia’s various territories. And last year, inflation hit a whopping 42.5 percent, second only to crisis-stricken Venezuela on a global scale. International banks have left the region. So, too, have shipments of supplies from Ukraine. 

Western sanctions, which have impacted Russia significantly, have proven even more damaging for Crimea. They have exacerbated commodity shortages and have profoundly dampened foreign investment. Real estate prices, for example, have dropped by an estimated 60 to 70 percent since annexation, because of flagging interest from locals and foreigners alike. 

Tourism, long known as the lifeblood of the Crimean economy, has slowed significantly as well. In 2013, the region drew an estimated six million visitors. Since then, however, those numbers have fallen by as much as half, prompting Moscow to launch an extensive campaign in recent months aimed at promoting Crimean visits as a manifestation of Russian patriotism. 

When it comes to politics, Russia’s newest territorial holding is a hotbed of corruption. As a recent analysis by Bloomberg notes, “Russia’s federal security service, the FSB, has opened criminal investigations of three high-ranking Crimean government officials, accusing them of graft and other misdeeds.” Other irregularities abound. “Four regional cabinet ministers,” the report continues, “have been forced from office in the past few months over allegations of corruption. And Kremlin auditors reported in June that two-thirds of the money Moscow sent Crimea last year for road building couldn’t be accounted for.”

Moscow, meanwhile, has footed the bill for this disarray. As the Bloomberg report points out, the Kremlin is “already paying 75 percent of the Crimean government’s budget, while subsidizing pensions and other benefits for local residents.” Over the next five years, the Russian government has pledged to provide the territory with much more: upward of $18 billion in federal aid.

That is an expenditure that Russia, now in full-blown economic crisis, can ill afford. Buffeted by Western sanctions and low oil prices, the country is officially in recession for the first time since 2009. Its economy is expected to constrict by as much as 3.4 percent this year alone, according to the latest projections from the International Monetary Fund. The Russian ruble, meanwhile, continues to weaken, trading at 60 to the dollar in late July for the first time since this spring. 

For now, Russian leaders are putting on a brave face. In April, Putin defiantly declared the annexation of Crimea to be nothing less than the rectification of a historical injustice. Prime Minister Dmitry Medvedev has said much the same thing; in his annual address before the Russian parliament that same month, he termed the resulting economic pressure from the West to have been an acceptable cost of acquiring the territory.

But as those costs continue to mount, Crimea—for all of its symbolic value—is rapidly becoming a practical millstone for the Russian state. It will also end up serving as a driver of further aggression against Ukraine, as Russia’s leaders scramble to demonstrate that they have secured a more decisive strategic victory than what they have managed to accomplish so far.