Ukraine (closed; covers till August 2014)

[Firn]

From an economic point of view it is important to look how the most similar 'independent' seperatist area, Abkhazia is doing. In this case Russian forces have enabled the creation of a new entity, practically completely politically isolated apart from Russian support. It was a tourism magnet before the collapse of the SU, with splendid beaches, but it has only 1/8 of Crimeas population and Russian tanks can just drive over the border. The economic and political situation was of course more desperate and especially more violent and in this case Russia supports another ethnic group which is barely larger then the second ethnicity.

In 2010 the following EU paper described the state of the economy:

B. ECONOMIC ASPECTS

1.Dependence on Russian financial aid and investment

Even though Abkhazia’s state budget has been steadily increasing over the past years, its dependence on Russia for budget support is as important as its reliance on Moscow’s military presence. In 2009, approximately 60 per cent (1.9 billion roubles, $65.5 million) of the state budget was direct support from Moscow. For 2010, the monetary figure will remain the same but fall in percentage terms, to 49 per cent (1.9 billion roubles, $63 million, out of a total budget of 3.875 billion roubles, $128.5 million). This includes both infrastructure projects and direct budget support. Russia also pays local pensions – many times larger than the Abkhazian gov-
ernment’s $17 monthly allocations – to Russian pass-
port holders, directly from its own budget.

Russia also accounts for 99 percent of Abkhazia’s “foreign investment” and is by far its largest trade partner. In 2008, (figures for 2009 are incomplete) Abkhazian exports totalled 890 million roubles, while imports were 6.2 billion, leaving a deficit of over 5 billion roubles ($165.8 million). Abkhazia mainly exports scrap metal, gravel, tea, tangerines, hazelnuts, wine and some flowers. In 2008 there was some trade with Turkey (metals, lumber exports and fuel imports) and Romania (fuel imports), but Abkhazian officials gave no amounts or monetary value. They estimated that 80 per cent of everything consumed in Abkhazia is imported from Russia.

The bit about the pensions to Russian passport owners out of the Russia budget is expecially interesting. Of course the Crimean pensions have been much higher and there should be a multiple of recipients. The balance of trade was even more amazing then I thought, roughly a relation of seven to one. On the other hand it is no surprise that Russia has to pay half of Abkhazias budget. If it was to do the same it could easily have to pay directly twenty times more.

I have to leave it there for now but there is some interesting stuff to add later.

[Firn]

I have to leave it there for now but there is some interesting stuff to add later.

A more recent paper on the Abkhazian economy:

B. Russian Financial Dependence

Abkhazia’s government is overwhelmingly dependent on Russia for budget and development funds. Since 2009 Moscow has provided about 1.9 billion roubles per year in direct budgetary support ($61-$67 million, depending on exchange fluctutions). In 2012, this amounted to 22 per cent of the official 8.6 billion rouble ($287 million) budget. But taking into account that Moscow allocated another 4.9 billion roubles ($163 million) that year as part of a “comprehensive aid plan” for infrastructure development, the actual subsidy for Abkhazia’s budget is at least 70 per cent. In addition, Moscow also hands out an estimated two billion roubles ($70 million) in pension payments for Abkhaz residents, most with Russian passports.

If we consider that example I think it is pretty likely that we see three major channels through which Russian money will flow into the Crimea:

1) Direct financial transfers to finance the Crimean speratist budget
2) Moscow-sponsered and cheaply financed infrastructure projects, mostly done by Russian companies
3) Direct transfers to retirees.

Only the first will be budgeted in, so as in the case of Abkhazia that portion alone would vastly underestimated the financial dependence.

The “[c]omprehensive aid plan for the socio-economic development of Abkhazia” is by far the biggest source of Russian funds – but also opaque and controversial Under it, Moscow orginally earmerked eleven billion ruble ($350 million) for frastructure projects in 2010-2012, including the rebuilding of roads, schools, government buildings and agriculture. Though many residents of Abkhazia say living standards have risen as Russian money has come in, some critics complain of a dependency syndrome, and both Abkhaz and Russian officials have alleged the funds have fuelled corruption. An opposition figure known for harsh opposition to the present Abkhaz leadership lamented: “Abkhazia’s economy is like a drug addict on Russian help. We want real help to support our economic development, not ‘façade’ assistance”.

The critical comments reflect my earlier concerns. The public sector will baloon compared to the private one, even if the multiplier will have partly a positive effect in some areas. Other parts of the private sector will be crowded out. This without taking even in consideraton the effect of the likely increased (up from bad) corruption and wrong investment allocation.

Italy's south encountered similar problems, but form a different basis and a different set of circumstances when forty to thirty years ago the state massively 'invested' into it. Ironically quite a few described it as 'drogato' by those public funds, which went mostly into the wrong hands and greatly increased in the long run the dependence on public spending. The gdp per capita rose for a short time to roughly 80% compared to the rest of the country but fell over the next twenty+ years to back to 60% or so...

To sum it up it the Crimean economy won't do well without getting very expensive for Russia, and in that case the long term growth doesn't look good either.