Crimea: Russia’s newest Potemkin Village

According to Russian television’s number one propagandist Dmitry Kiselyov, “Crimea gave Russia inspiration and strengthened faith in our own strengths.” But five years on from annexation, in terms of economic successes in Crimea, these have come at great cost to Russia – if you can even call them successes.

Subsidies from Moscow have led to a lopsided and highly militarised economy on the peninsula, squeezing out other sectors. Russia responded to Ukraine’s blockade of Crimea with prestige projects like the Kerch Bridge and energy links, but it has not been able to solve basic questions like water supply. To great fanfare, a “Ministry of Crimean Affairs” appeared on 31 March 2014, but was wound up in July 2015. Its role had been to attract and oversee investments, but Russian businesses shied away after initial enthusiasm.

In short, over the last five years Crimea has become more dependent on Moscow – and achieved the rare distinction of becoming both more expensive and poorer at the same time.

Mega-projects

Several grand projects have been completed in Crimea; but Moscow paid for all of them, and they have diverted resources from elsewhere. Opinion polls show that Russians increasingly complain about the expenditure. The Kerch Bridge officially cost 172.1 billion roubles ($2.6 billion), plus smaller contracts, but its prioritisation “stopped construction of nearly all new roadways and bridges in Russia. In 2017, only 10 new roadways were built across Russia”. The cost of building the Tavrida highway to Sevastopol has tripled, from 41.8 billion roubles to 144 billion roubles ($0.6 billion to $2.2 billion). Completion is not due until September 2020.

Before annexation the main supplier of power for Crimea was the Zaporizhzhia nuclear power plant to the north: 82 percent of energy supply came from outside Crimea. Since annexation, two new thermal power stations have been built, at no small cost of 49 billion roubles. Rosatom discussed building a nuclear plant in Crimea but eventually rejected the idea (the Soviet Union equally abandoned a project on the Sea of Azov as the region is too geologically volatile). Crimea’s main source of electricity is now the Rostov nuclear plant in Russia, necessitating the construction of a fourth energy unit by 2018, and two high voltage power lines to Crimea. An underwater gas pipeline from Krasnodar was finished in 2016, whose planned volume of gas supply is 2.2 billion m³.

Sanctions and their impact

Meanwhile, sanctions are having an effect: “44 Russian and Crimean companies and 155 individuals are currently under international sanctions”, as of September 2018. The last high-profile Western company, Best Western Hotels and Resorts, left Crimea last year. Siemens controversially sold seven gas turbines to Russia in 2015-16, and four made their way to Crimea to help build the new thermal power plants – supposedly without Siemens’ knowledge. Siemens then sold a 46 percent stake in the Russian company Interautomatika as a result of the scandal. According to one Crimean official, however, subtler schemes allow some Western companies to operate under the cover of the local authorities.

The militarisation of the economy and the strong criminal presence within the Crimean elite have shrunk the SME sector

At the International Tribunal for the Law of the Sea in Hamburg, Ukraine has accused Russia of illegally extracting 7.2 billion m³ of gas from the rigs west of Crimea seized by paratroopers in 2014, of which 3.5 billion was from the Odesa field, even closer to Ukraine’s shore. In March 2019 the Permanent Court of Arbitration in The Hague ruled that Russia had in 2014 “unlawfully expropriated Naftogaz’s assets in Crimea … valued at $5 billion, plus interest”. Russia has been told to pay Ukraine’s Oschadbank $1.3 billion, and $159 million for the seizure of companies and real estate rumoured to mainly belong to oligarch Ihor Kolomoisky.

Fear of sanctions means that mainstream Russian banks do not operate in Crimea. Of the three main operating banks, one is the state-controlled Russian National Commerce Bank, which was moved to Simferopol in 2014. The GENBANK and Black Sea Bank of Development and Reconstruction are indigenous Crimean banks, created immediately after annexation and belonging to the Crimean elite.  The whole banking system operates within the newly created Russia-only payment system Mir.

Sanctions on flights to Crimea were imposed after annexation, with the European Organisation for the Safety of Air Navigation introducing a ban in March 2014. Attempts by proxy companies to fly have largely been unsuccessful; they include Grozny Avia (claiming to fly into Istanbul from a stop-over in the Russian town of Anapa), Dobrolyt, and Pobeda. However, 21 Russian airlines fly to Crimea, with flights connecting to 56 Russian cities and 20 countries. “Many of the same planes travel to the Simferopol airport and then continue on to European cities,” in a clear breach of sanctions. According to local statistics, Simferopol airport has expanded its passenger numbers from half a million to five million a year, after a refit costing $537 million.

The Crimean economy

Official and non-official accounts of the state of the Crimean economy differ enormously. According to the speaker of parliament in Crimea, Vladimir Konstantinov, the Crimean economy made “… a fantastic breakthrough in its development. The regional gross product has tripled”. Despite the damages awards listed above, the speaker of the Russian State Duma Vyacheslav Volodin inverted this picture in March 2019, claiming that Ukraine should compensate Russia for its misrule of Crimea before 2014.

Russia has restored the military sector in Crimea, benefiting the large military plants in Feodosiya, Evpatoriya, Sevastopol, and Kerch. The weaknesses of other sectors, however, mean that Crimea’s general socio-economic situation is only 40^th among the  85 subjects of the Russian Federation (in 2015  – 53^rd) place and Sevastopol 66^th (in 2015 – 76^th). Crimea and Sevastopol are separate subjects.

There was a one-off administrative boost to real wages and pensions in 2014, but this was soon eroded by inflation, the substitution of more expensive Russian goods for Ukrainian ones, and shortages induced by blockade and sanctions. In terms of the standard of living, Crimea is only in 69^th place, Sevastopol is 52^nd. Crimea has an abnormally large number of pensioners to support: 0.7 million, which is 31.5 percent of the population.

The militarisation of the economy and the strong criminal presence within the Crimean elite have shrunk the SME sector. There were 15,553 small private enterprises in 2014, but by 2018 only 1,382. Small businesses used to employ 31.2 percent of the workforce – now the figure is only 19.5 percent.

There has been a notable influx of military personnel. In information supplied to the Ukrainian parliament, military analyst Dmytro Tymchuk stated that: “in the four and a half years of occupation 247,500 people have moved to Crimea … Given the ‘uninvited’ visitors, as well as natural movement (birth rate/mortality), during the occupation the population of Crimea has already changed by 20-25 percent.”

Tourism

Before 2014, Crimea was re-establishing the tourism industry that had collapsed in the 1990s. Crimea featured on big ship cruises. The official claim is that tourism figures are back up to nearly six million a year; but unofficial sources claim closer to two million. In the summer of 2018 Russia hosted the World Cup, so there were fewer Russian visitors (Crimea did not host any games). The 2019 or even 2020 season will be a better test. The opening of the Kerch Bridge to rail travel is expected for December 2019.

Crimea attracts few independent middle-class Russian travellers. Most post-annexation tourists are so-called ‘budgetniki’ – state employees with limited funds who make collective bookings at hotels and sanatoria (before the annexation, tourists often let individual rooms). Crimea used to be relatively cheap, even though services were primitive; now it is more expensive but the services are the same. The Russian middle classes prefer to go to Turkey, Bulgaria, and Egypt. Claims that Ukrainian tourists are returning have been hotly disputed.

The budget

A massive 77 percent of Crimea’s budget is currently paid by Moscow, and 60 percent for Sevastopol, rising to 79 percent for Crimea and 65 percent for Sevastopol in 2019-20. That makes at least $6 billion in budgetary subsidies alone since annexation. Other estimates state “at least $2.3 billion a year”, but warn that “indirect losses” are harder to count.

A federal programme called “Socio-Economic Development of the Republic of Crimea and the city of Sevastopol” draws in money from many other funds and structures. More than 80 percent of it has gone on big infrastructure projects. Only 5 percent has gone to tourism, and just 1.5 percent to “inter-ethnic unity”. A mere “0.4 percent of the peninsula’s budget (or 1.2 billion roubles) is earmarked for ‘defence, security and law enforcement.’” The huge military build-up, in other words, comes out of the Russian federal budget.

Water

Before annexation, 85 percent of Crimea’s water supply came from further north in Ukraine via the North Crimea Canal built by the Soviet Union in the 1960s and 1970s. In fact, securing the water supply was one of the main reasons for the administrative transfer of Crimea to Ukraine from Russia in 1954. The canal and its branches used to supply Crimea with up to 3 billion m³ of water a year. The occupation authorities have responded with wells, drilling down up to 400 metres, but with diminishing returns. The water extracted is of poor quality and ground water is getting salinated. Aerial maps show just how badly the situation has deteriorated in recent years.

About 70 percent of the green steppe is now dried up or damaged, and therefore unsuitable for farming. A state of emergency was introduced in four farming regions in 2018. Plans for expensive desalination plants have been mooted, but have not taken off. Some have suggested the possibility of a military strike northwards to secure the canal. But any mission would create big new open front lines. A cover story would be hard to create in a relatively rural, pro-Ukrainian region. The biggest local city, Kherson, is on the wrong (western) side of the river Dnipro.

Syria

Crimea plays a role in Russia’s hopes of benefiting economically from the end-game in Syria. Syrian participation at the Yalta Economic Forum in April 2018 led to the establishment of the Crimean-Syrian Shipping Company, and to plans to create a special trade zone in Crimea (in part to help circumvent sanctions on the two Donbas “People’s Republics”), secure phosphate supplies for Crimean factories, and even transfer captured Ukrainian oil rigs for use in Syrian waters. There are rumours of Russian tourism companies operating to Tartus and Latakia out of Sevastopol. Ironically, sanctions on Crimea might facilitate some of these more shady operations.

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After five years, Russia has not succeeded in creating a self-sustaining economy in Crimea. Instead, Crimea resembles the late Soviet Union: it is highly militarised, but it cannot solve basic questions of water and food. And nor is Crimea ‘stable under occupation’. Its economic problems and shadow economy are driving Russian adventurism elsewhere. Polarisation between a militarised economy and a marginalised Crimean Tatar community, with the Russian-speaking service economy shrinking in between, is not a recipe for long-term stability. The newly elected president, Volodymyr Zelensky, has come under pressure from at least one of his predecessors to ease the blockade on Crimea; but it is impossible to yet predict any of his policies with any certainty.

Ridvan Bari Urcosta is a research fellow at the Institute of International Relations at Warsaw University, where he specializes in Russian Foreign Policy and particularly Russian Grand Strategy in the Middle East.