Ukraine (closed; covers till August 2014)

[Firn]

Firn---in comments yesterday by a former Russian Finance Minister the Russian budget this year was targeting a growth rate of 3.5% and if sanctions are imposed he is saying the growth rate may in fact be 0% and the Crimea costs were not factored in and approved for this year.

Average Russian taxpayer will be carrying the Crimea burden for years to come.

He indicated that there is talk of 80-90M USD per month in just support to keep the Crimea running and the Crimean's felt that with joining Russia their individual salaries would be going to Russian levels (was posted on placards around the cities) which is also not in the budget that was approved so he is estimating an annual cost of 20B USD per year just to do a steady state.

His comment was interesting---the EU understands our economy better than we do.

I can't comment on such details and he certainly knows more about the Russian economy then I will ever do. Still it is important to look at the basics.

Right now the private sector rests on two pillars, tourism and agriculture. The public sector is rather large, partly due to the relative high number of retirees caused by the outflow of the (mostly ethnic Russian) youth and the attractive Crimean (think Florida) status and climate.

With tourism facing a massive demand shock, bar miracles worked by Russian-sponsored incentives and 'patriotic' feelings and agriculture living on Ukrianian goodwill there will be many losers in the private sector. Now the Russian government can most easily (and costly) increase demand by pumping in Rubles by various means. Raises of public salaries and pensions, subventions and public works might be on the table but all that money has to come in from Russia as the Crimea was a net receiver of transfers even before.

Given the poor track record of corruption and bad capital allocation in Russia and the terrible one it those 'frozen regions' I fear that in the long run many of the sky-high expectations of those who voted Russia will land hard. There will be some spillover into the private sector, but I doubt that the productivity will raise anywhere near the 'Russian wages', which should raise labour costs greatly and make some economic activities unattractive. All in all Russia will pay a high direct price for the Crimea and mght still come up short of the expectations of many...
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Stepping back I think that the 'center of gravity' of the Ukraine is the political willpower of the West, while the one of the Crimea is the economic strenght of Russia...