Crimea: Russia must confront malaise if economy is to prosper

Nine hundred miles is a long way to go for a cabinet meeting, but Dmitry Medvedev, who led a government delegation to Crimea on Monday, was on a mission to show that Russia would defy the West and absorb the Black Sea peninsula into its territory for good.

Unveiling plans to develop Crimea, Russia’s prime minister promised that his government would “create conditions for a peaceful and worthwhile life” in the region, “confidence in tomorrow and a feeling of being part of a strong country”.

Events have moved with lightning speed since Crimeans voted overwhelmingly in favour of seceding from Ukraine and joining Russia in apopular referendum – denounced by the West as illegal – on March 16th. Two days later Vladimir Putin signed a treaty making Crimea and the strategic Black Sea port of Sevastopol constituent parts of the Russian Federation.

Medvedev chaired the Monday government meeting in Sevastopol instead of Moscow’s White House this week, becoming the highest-ranking Russian official to visit Crimea since the takeover. Developing Crimea was a “national priority,” he said, calling on all Russian officials, state firms and private enterprise to back a massive endeavour to bring prosperity to the region.

With its fairy-tale castles, archeological sites and sun-kissed beaches, Crimea looks attractive in tourist brochures. But the one-time playground of the Soviet elite is run down in real life.

After touring a local school and hospital, Medvedev told the government meeting in Sevastopol that city infrastructure was in a “lamentable” condition and much of the housing stock derelict. Russia would provide investors with special tax breaks to encourage the development of tourism, wine growing and agriculture in Crimea, he said.

Economic cost
Russia is paying a heavy price for its policy in Ukraine. Moscow's stock exchange has fallen by more than ten per cent since the start of the year and about €45 billion has been taken out of the country, almost as much the total outflow in 2013.

Sanctions imposed by the US and the EU to punish the Kremlin for annexing Crimea have added to the problems and could tip the Russian economy into recession.

Developing Crimea will be a high-cost endeavour, adding to pressure on the federal budget at a difficult time.

For a start, Russia will have to pick up the tab for the €870 million annual subsidies Crimea has been receiving from Ukraine to keep it afloat. Medvedev promised to increase pensions in Crimea to Russian levels, a populist measure that will cost some €700 million this year alone.

Russia is moving rapidly to assimilate Crimea. Passports are being handed out to citizens who want to switch from Ukrainian to Russian citizenship. Shopkeepers in Sevastopol already accept payment in Russian roubles and local clocks have been turned back two hours to chime with Moscow.

Dmitry Kozak, Russia's Ukrainian-born deputy prime minister, who oversaw preparations for the 2014 Sochi Olympics, has been entrusted with responsibility for the even more challenging task of developing Crimea.

Daunting challenge
As at Sochi, Kozak is likely to call on wealthy Russian corporations to pull their weight in Crimea and invest in essential transport and energy infrastructure.

The challenges will be immense. Getting to Crimea is difficult. Ukraine controls all land routes to the region and has sealed the border since the Russian takeover. Capacity at Sevastopol, Crimea’s only international airport, is limited. Ukraine also has a stranglehold on energy supplies to the region.

Medvedev ordered Avtodor, the state highways construction company, to build a bridge linking Crimea with Russia’s southern region of Krasnodar across the Kerch Straits. Until that €700 million project is finished, the only passenger route across the Kerch Straits is by ferry.

In a bold step, Crimea's new authorities have nationalised Chernomorneftegaz, the local oil and gas company, and propose to sell the assets to Russia's Gazprom. Black Sea gas fields could eventually cover Crimea's energy needs, but under international law they belong to Ukraine.

Chernomorneftegaz’s new owners might find themselves subject to sanctions for receiving stolen property, warned Mikhail Korchemkin, the founder and managing director of the East European Gas Analysis consultancy.

Tourism is the backbone of Crimea’s economy and with the season opening in a month, the immediate concern is to ensure that holiday makers show up.

Lean year
Medvedev said the government would subsidise air tickets from Russian cities to Sevastopol to boost tourism this year and called on large corporations that buy package holidays for workers to pick resorts in Crimea. Hoteliers in Crimea will get tax breaks to help them survive what could be a lean year. Ukrainians, who usually account for most of the tourists to Crimea, are not expected to venture for some time into what is now enemy territory.

Many Russians who grew up in the Soviet-era look back with nostalgia to childhood holidays on the beaches round Sevastopol and Yalta. But Russians are now free to travel abroad and Crimea cannot compete in terms of cost or comfort with resorts in Turkey, Spain and Bulgaria, which are beckoning the growing middle class.

It will be difficult to build a competitive large-scale tourist industry in Crimea, said Stanislav Savinov, a macroeconomics analyst at the UFS Investment Company in Moscow. However, the wave of patriotism sweeping Russia in the wake of the Crimea takeover is likely to bring large numbers of tourists back to their childhood holiday haunts this year.