Economic integration of Crimea into the Russian Federation

Reasons, perspectives and possibilities for the integration of Crimea into the RF

From the moment in 1992, when Crimea declared its independence, never wanted to administrated by Kiev, never recognized Kiev and joining Russia has meant a lot the last year for the Crimean population. Unfortunately, the budget conditions of Crimea were terrible, in such a way that this problem would shift to the Russian federal budget, so Crimea is a costs for Russia. Crimea, had been financed from Kiev with 3,3 billions of “Grivnija”; more over Kiev payd for the pensions near 1,1 billions of dollars, in addition there is a “hidden deficit” that amounts to 50 billions of grivna.
Considering all, the “budget hole” is about 40 billions of dollars, a lot of money. It is remarkable moreover that main income of a Crimean (10610 rub.) is a half less than the one of the inhabitants of Krasnodar Krai. That means, that Russia not with the federal budget should have to handle the deficit, but also to “stabilize” the incomes of the Crimeans, this would cost so much to be compared with the costs that Russia paid for the Northern Caucasus.


According to Aleksey Pukhaev (author of the article) there would be more expenses to take from Russia:

  • Half a billion of dollars for the development of new energetic cables for electricity underwater.
  • The expenses for covering immediately the budget deficit (not for solve it) will be about one billion of dollars and Crimea needs 70-80 millions of dollars each month for paying welfare and pensions.
  • Tourism could bring 0,5-0,75 billions of dollars, that are 6-8% of the Crimean GDP.
  • Bridge on the Kerchenskiy proliv will cost from 1,4 to 3 billions of dollars, and it will be the way to connect Russia with Crimea, since there is no terrestrial connection.

According to the an estimation of the Russian newspaper “Kommersant”, the cost of Crimea for Russia would be about 30 billions of dollars, until 2025. Crimea yearly had a budget deficit of 1 billions of dollars, that with its own economy and even with the transfers from Ukraine is not able to satisfy and obviously it grows with passing of time.

So following this estimation Russia should spend minimum 2 billion, or better 3 billions for Crimea, covering the budget deficit, and the modernization of the island. Vladimir May (rector of the RANEPA university in Moscow and member of the Gazprom’s board) has described the Crimean economy with two main “osobennosti”, being diversified, without the good development of one particular sector (Tourism, energy, industry and agriculture) and on the other hand being based on small and medium businesses. According to him, this two characteristics would fit together with the perspective of Export through the many ports of Crimea especially the one in Feodosija.

The ports are a great element for the Russian Federation, in fact, controlling Crimea means practically to control the Black Sea and its trade routes. More over Russia would not have to pay anymore Ukraine for the military presence. This would save from the Russian cash around 100 millions of dollars that will stay in Russia and in addition Russia will not have to fulfill anymore the Kharkov agreements about a discount of the gas price for Ukraine of the 30% (in exchange of a time extension of the presence of the Russian army and navy in Crimea), that was enforced in November 2013 with the formal financial support of the RF to Ukraine in exchange of its integration in the Eurasian Union. This could give back to Russia from 4 to 6 billions of dollars, that could be used for the Crimean integration.

Thanks to Crimea there could be an alternative to the South Stream Project in a way to supply directly Europe without passing for Ukraine, this project would cost 20 billions of dollars and would not be appreciated from Turkey that would loose its role in the whole project. Something similar was proposed to the Cremlin by Janukovich in 2010 but, obviously, it wasn’t seen as a good idea since South Stream wanted to avoid passing trough Ukraine that obviously has its costs.

The energetic interest in Russia is the potential of Crimea in gas production that could be compared to the Sakhalin basin, according to the newspaper “Expert”. The estimation of this potential is about 1.5 to 3.2 trillions of cubic meters while in Sakhalin is 2.3 trillions.

One of the main characteristics of Crimea is tourist sector and by becoming part of Russia, this sector should speed up since, more Russians and more tourists would be attracted by that; according the estimations before the referendum.

The Economic Integration seen from the West

First of all, I want to clarify the meaning of the word integration, or change of jurisdiction instead of annexation or invasion. Integration is the change of jurisdiction of a territory into another or if it was autonomous, from an independent entity to be member of a bigger on, obviously the legal status is under the jurisdiction of the entity which we now belong to; obviously all that it is decided or with a referendum of by the political figures of a determinate system that we believe are representing the majority of their population. I’m sorry for this theoretical beginning, but Western’s media and politicians and analysts, in general the West when speaks about Crimea uses annexation or invasion. Annexation is the seizing of a territory into another one, or from an autonomous entity into another one, with the use of force (invasion) or with an international treaty.

The main difference between integration and annexation is the fact that in the first case there is an agreement of the population with a referendum or by the politician that as I said we’re expecting that are legitimate for the majority of their population; instead annexation happens when there is no consultations with the people and instead the borders are shifted with force by occupation or by a forced treaty; this method was the typical realist power politics that led the war until 1945, when after the creation of ONU, no one should be able to woke up in the morning and decide to reshape the world.

The West didn’t accepted anymore Janukovich’s government in the moment he decided to join the Eurasian Union and after, didn’t recognize the Crimean referendum, neither the possibility that some citizens of Ukraine could not recognize themselves as within the West; on the other hand has recognized the Maidan terrorists and the coup d’etat made by Jatsenuk, Poroshenko, Tymoshenko and the other Pro-West Oligarchs. So, even the Western approach to economic integration will reflect their political attitude towards Russia that returned to be the one towards Soviet Union. I have analyzed two articles for this section, one was written by the Centre of Eastern Studies based in Poland and the other by the institute of Modern Russia based in NYC and led by the Pavel Khodorkhovsky, son of one of the worst oligarchs and criminals in contemporary Russia.

According to the Centre of Eastern Studies, the first reason for the integration of Crimea (or “annexation” as they stated) is the increase of Putin popularity to 87-88%, then a saving of nearly 80 millions of dollars for not paying anymore Ukraine for the presence of Russian army and navy in Sevastopol and obviously the strategic access to the Azov Sea and the predominance in the Black Sea.

The ports possibilities will be expanded with the acquisition of Kerch, Feodosia and Sevastopol and there will be no need to create other ports. The integration of the peninsula has already coasted (the article is dated 29/07/2014) 4.5 billions of dollars to the Russian federal budget. Two subjects has been created: Crimean Republic and Sevastopol. Sevastopol as a federal subject will cost years 2.5 billions of dollars. The main new projects now required are the bridge on the Kerchenskiy proliv, Gasification and energy infrastructure, expansion and modernization of water supply and sewerage; unfortunately the Russian budget lacks of so much funds and additional finance sources are needed; moreover to support Crimean integration the government will have to abandon the development of other regions the proposed Lena’s Bridge (that will save 1.3$ billion); Putin has supported foreign investments mainly Chinese in Crimea in order to provide money, wealth and development.

From the 1st of June 2014, the value has been switched to the Russia ruble, and many contracts with the EU or in general with the west has been canceled due the sanctions or of a fear from European investors and firms and of being sanctioned by their countries. The Western sanctions ban all the export from Crimea including the Crimean wine “Massandra” while in Russia it is considered a “wine drink” and it is subjected very high excise duty. The 85% of water is pumped from Ukraine and also the agriculture in the island suffers of insufficient irrigation in the fields.

All the Ukrainians banks have withdrawn from Crimea and the Russian banks fears US and EU sanctions, so majority of transactions must be carried out of cash. From a legal point of view, the Crimean parlament has adopted a law granting the government the right to carry out compulsory acquisition of property if is it considered “strategic”, moving away any idea of investment from the outside or from the inside. Another problematic is the crisis of tourism, since the crisis, Ukrainians has decided to boycott Crimea and Russian or other tourist are not sufficient for compensating in such a way that is needed help from the Russian Federal budget to support the Crimean tourist sector.

To support Crimean economy, Putin has decided to open a gambling zone in Yalta, that would attract also tourist and boost up the local economy; but that could drive away, according to the authors, tourism from Sochi, for which Russia has already spent a lot.

The point of view of the Institute of Modern Russia is quite ideological and pathetical, that while accusing Russia of its propaganda, it makes a low level propaganda for the west. After stating that the economic integration “has not gone well”, it repeats about the creation of the bridge as a necessary step for the integration, and then turn to the economic crisis, since the 70% of visitors were from Ukraine, the tourism is suffering. It continues stating that there are empty supermarkets and cash machines, high food prices, queues for the passports, paralyzed postal service and inconsistent police work; like in the soviet stagnation of the eighties. The Tatar minority is Pro-Kiev while the Cremlin tries to show the good sides of being in Russia and offer as a model Tatarstan. The relations between Crimean Tatars and Russians are still reflecting the deportation after the collaboration with Hitler. In support of Tatar is John Kerry who accuses the Russian Crimean population have stole the Tatar land (Were not the Americans who enslaved Africans in plantations and sent the natives survived from the extermination to “reserves”?). Finally the article defines the Russian economy as a corrupt brand of State capitalism.

The Economic integration of Crimea according to Russia

One of the main point stressed by Russia and Russian sources is that from the fall of the Soviet Union until the referendum, quite nothing was done for the modernization of Crimea. Now there are two priorities: first attract investments, second modernizing infrastructures. In the “Plan of Development for Crimea until 2020”, the expenditure will be about 825 billions of rubles (24 billions of dollars) and 695 billions rubles (more than 20 billion of $) of the total, will be pumped from the federal budget. Tourism is seen as I wrote before, as a way to speed up the economy, and Aeroflot is going to carry daily 10 flights to connect the Island with the motherlands. A construction of a Gambling zone, that will start to function in 2016 (the article is dated 19/07/2014) and will bring 10000 jobs. The fiscal policy will be particular, for those who will invest 150 millions of rubles or more for three consecutive years will be exonerated of all taxes, excluding the income’s one, while the rate of incomes taxes for residents has been set to zero, in this way the Cremlin would like to transform Crimea in a place for capitals even foreign capital that would have a low taxation.

Another important issue is the energetic supply, because Crimea relay mainly on Ukrainian energy, and there are no infrastructure connecting it to Russia. The expenditure according to the Russian minister of economics would be of 100 billions of rubles (3 billions of $) however the estimation made by the Russian International affair council is about from 283 to 349 millions of rubles ( US$ 8,2 to 10,1 billion), that includes the cost of the bridge on the Kercheskvij proliv that should be built by 2018. As for the energy Crimea produces from 10% to 30% of its own energetic needs, for the rest is dependent from Ukraine, for that reason President Putin wanted to build two new power plants: the first directly in the island, and would deliver from 500 to 600 megawatts, while the second should be built in Novorossiysk and should bring 600 megawatts.

Other problems, that affected Crimea and its populations the switch with the mobile telecommunication companies, the switch of car plates, the non-acceptance of Grivnja and the difficult convertibility of it since the big depreciation. Obviously for the civil servants and the retired, and everyone who is employed or receive money from the state, the integration of Crimea is seen as an occasion for growing the wealth and the living standards, to the level of the Russian Federation (something that under Ukraine was not even imaginable), on the other for export and trading, to Crimean products the Russian market now it is totally open while the Crimean ports will enhance trade relations, and in generally trade; supporting also the local economy.

One of the main problem can be considered at a finance level, in Crimea no bank is working, the Ukrainians and foreign bank had closed and the Russian banks still don’t trust the atmosphere and fears sanctions from the west. So the only bank present is the “Russian national commercial bank” that support the use of credit cards such as visa and mastercard without commission.

The legal status of Crimea is now also a problem, for Ukraine Crimea was like a colony. The only thing that interested to Ukrainian political class were the seaside, resorts and beauty centers. The industry was left on its own still at the time of Leonid Kuchma, no one was interested to agriculture and the infrastructures were never modernized or fixed becoming useless or low productive. The result is that Crimea is not able to stand on its own feet, and Ukraine preferred to give money to a corrupted local class instead that administrate and modernize the island. (And this is something that Western media never mention, even if it is crucial for understandings the roots of the “actual” disease).

The impact of the Crimean’s integration on Russia has been forecasted negatively from the IMF cutting the yearly growth rate from 2.0% to 1.3% for 2014; while the Russian minister of economy expects the growth rate for 2015 to be 2.6% against the 1.1% of 2014.

In his visits in Simferopol in the mid-October 2014, Dmitrij Medvedev has decided about the creation of a Free Economic Zone “свободная экономическая зона” (СЭЗ) in Crimea, there are not taxes for the residents and there are no trade barriers; this would add Crimea to the many “internal offshore” region with a really special fiscal regime.

The special status for Crimea starts from the beginning of 2015 until the 1st of April 2064 (nearly 50 years). According to the Russian economists, this regime will attract investments, also foreign investment, mainly from country that are not sanctioning Russia and Crimea now, and maybe in the future, if the sanctions will be lifted, will be opened to all the world. The residents are exempted for the next ten years to pay taxes and for three years from the land tax (Земельный налог). For those who wants to receive a discount on taxes and become residents in Crimea, bringing there their capital, they need to pay 150 millions of rubles, and for the first three years they have to invest not less than 30 millions of rubles; thanks to that, since the Russian federal budget can’t support alone the burden of the Crimean integration, the government wanted to attract private businesses and companies.

The main sector in Crimea is obviously tourism, there resorts start opening still in the 19th century, and tourism represents the 75% of Crimean own sustainment in the budget; many of the resorts were built during the soviet time, while more new construction like Hotel or mini Hotels. All these structures need to be maintained, need to be enhanced the logistic part of Crimea since transports are not working quite well and the mini Hotels (considered small business) has to adapt from the tax regime of Ukraine to the one of RF. Russia, has created a special commission of the government that would take care all this issues, since it is actually (tourism) the first element of the local economy, on the other hand Crimea need to sustain itself; and that can be possible only with the development and modernization of all the other sector, like agriculture, industries and energy.

Another “osobennost” of the Crimea is its own wine, “Massandra” one between the ten important wine in the CIS and champagne “Новый Свет” that is exported in 11 countries in the world.

But the real opportunity for Russia, with the integration of Crimea, is the presence of natural gas and oil; in fact are present 1,93 trillion cubic meters of gas, and of 435 millions tons of oil. If exploited, these would energetically supply Crimea and the rest could be exported for high revenues. The integration of Crimea must be conducted in two main directions, firstly, what it is really need in the moment, what the inhabitants need, the local economy, the infrastructure, the financial sector; the second direction is a more long term action, a deep modernization of Crimean economy, and the reestablishment of all the sectors that were left on their own by the Ukrainian administration, only in this way; the integration could be effective.