News / Economy

Crimea Secession Likely to Spark Economic Disorder

An elderly woman walks at the main railway station in Simferopol, Ukraine, Friday, March 14, 2014
An elderly woman walks at the main railway station in Simferopol, Ukraine, Friday, March 14, 2014
When Crimea’s two million people wake up Monday after likely having voted in Sunday’s snap referendum to break with Ukraine in favor of joining the Russian Federation they will quickly feel the impact in their pockets from the secession and will endure months of economic disorder, say analysts.

“It is going to be a long and painful process and the chaos is going to hit and cost ordinary people hard,” says Yevhen Panchenko, a professor at Crimea’s Economics Institute, a branch of the Kyiv headquartered National University.

A lack of planning for how the region will manage the split with Ukraine – how Ukrainian state property will be handled, whether Ukraine will be compensated on assets losses or when existing private-sector business contracts have to be re-written to comply with Russian law – will compound the turmoil, he says.

No plan for the future

Russian and Crimean officials have discussed none of the economic or legal repercussions of breaking with Ukraine apparently. On March 14 at a press conference in Simferopol, Crimea’s newly installed Russian separatist Prime Minister, Sergei Aksyonov, said that all the technical details will be examined by working groups meeting in Moscow following today’s vote on a break-up.

An overwhelming majority of Crimeans is likely to back secession in a referendum called after Russian forces invaded the diamond-shaped peninsula. The Ukrainian government and Western powers say the plebiscite is illegal and is being held in an atmosphere of intimidation with an invasion force present and bands of uniformed Russian separatists patrolling the streets.

Ukrainian television channels have been blocked in the run-up to the vote and replaced with Russian channels. And rights groups say so-called “self-defense units” and paramilitary forces in Crimea have been abducting and harassing activists and journalists. “Crimean authorities are allowing illegal and unidentified armed units to run the show in the peninsula, and to commit crimes that go uninvestigated and unpunished, as if there is a legal vacuum,” says Rachel Denber of Human Rights Watch.

Currency issues

The first thing Crimeans are likely to see happen economically after the referendum is an abrupt replacement of the Ukrainian hryvnia as their official currency with the Russian Ruble.

According to Aksyonov, the currency switch could be introduced within days. Again he has been short on the mechanics of the process and hasn’t indicated whether there will be an official rate of exchange or whether the hryvnia will remain a legal tender for a few months to ease the switch.

The lack of planning for Crimea’s split with Ukraine stands in marked contrast with the detailed arrangements put in place for the 1993 dissolution of Czechoslovakia, say analysts.

State property in limbo

The question of what will happen with Ukrainian state property is worrying the director of Crimea’s Economics Institute, Victor Reutov, who says he has no idea who will own his higher education establishment in the coming days – Ukraine or Russia. Many of the institute’s 3000 students came from other parts of Ukraine.

“There are two ways this could go,” he says. “We were, we are and will be part of Kyiv National University and nothing will happen to us and nobody will cut us apart from the National University or we will be told we now belong to Russia.”

He adds, though, ruefully: “But there is an old Russian proverb: the bear is still alive but his body has already been divided up.”

As far as Yuriy Meshkov is concerned all of the bear should be Russia’s. Meshkov, who was President of Crimea between 1994 and 1995 and has been a longtime advocate of Russia annexing Crimea, says, “Everything in Crimea belongs to Russia, all the buildings and everything that Ukraine claims will be nationalized.”

And that includes all of Ukraine’s 19 warships currently being blockaded by the Russian navy in their ports in the Black Sea and all Ukrainian military equipment housed in dozens of bases in the peninsula.

Ukraine controls Crimea power and water

Such a move could prompt Ukraine to unleash an economic war on Crimea – it has some leverage. Most of Crimea’s electricity, water and food are supplied from the Ukrainian mainland through a narrow corridor connecting Crimea to the rest of Ukraine. There is no land connection with Russia and the energy challenge was one of the main reasons then Soviet leader Nikita Khrushchev transferred ownership of Crimea to Ukraine in 1954.

Eighty percent of Crimea’s water and 90 percent of its electricity comes from Ukraine. In an economic war Ukraine could cut off electricity and water. But to do so would no doubt trigger Russia to cut gas supplies to Ukraine. Russia has already raised the price of the gas it sells to Ukraine.

Speaking at the March 14 press conference Aksyonov hinted that some deals could be reached with Ukraine over Ukrainian state property. “It depends on how Ukraine behaves after the referendum,” he said. “Maybe we will pay some compensation, maybe we will pay some over time and maybe we won’t pay.”

Reparations could be costly for Moscow

Any compensation offered would add to the bill Russia will have to pay for Crimea. The peninsula is not economically self-sufficient and since 1991 has received more in subsidies from Kyiv than it pays in taxes. Its two main industries are tourism and agriculture but the former will likely be hit by the annexation with Russian visa requirements deterring Western tourists.

Russia has already committed a billion dollars for the next year for Crimea but some economists estimate annual costs for Moscow will be closer to $3 billion a year. Russian Prime Minister Dmitri Medvedev has already promised a 4.5 kilometer bridge will be built when Crimea is annexed to link the peninsula with Russia – that alone will cost half-a-billion dollars.

In the run-up to today’s referendum separatist leaders highlighted the fact that Russian state pensions are higher than Ukrainian ones – that was about the only economic detail offered in the days leading up to the vote.

* an earlier version of this report mistakenly referred to Nikita Khrushchev as president; VOA regrets the error.

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by: Not Again from: Canada
March 17, 2014 8:35 PM
It will be a costly mistake for Russia, in our Western eyes, but Russia and its people are used to terrible conditions; the Czars in their expansionist wars, got millions killed, even before the World Wars; during WWI estimates of to 2+ million killed, and not counting the revolutionary wars communist/white forces killings that added at least another 3 o4 million, and then by various causes, like starvation, progroms, Siberian Gulags, to as many as 15 million; WWII over 35 million killed, etc. In each instance, Russia chose to sacrifice its people so as to expand its territories/ borders. Thus from a historical context, Putin is no different, than the many expansionist leaders of the Russian past, like Peter the great, Ivan the Terrible, Catherine, Stalin etc; after all, they did clear most of Siberia, most of central Eastern Europe, and they did defeat the greatest Western general of the new ages, Napoleon Bonapart. So the choice, Putin made, was very predictable. The Russian people will just go back to what they are used to = difficult, miserable, poverty striken life, in darkness; but the territory they will hold. It is an unfortunate choice, but not unexpected; and that is why they do have the largest country on the planet. Violence, supression, lack of human rights, propaganda, is their way of life, and they are not going to change, notwithstanding those that see a different way, like the Russian writters, philosophers, scientists, mathematicians, journalists, lawyers etc. History just repeats itself, because of ignorance in the West, they forgot what Russia was all about, and retrograde visions, expansionism, as historically usual in Russia.
In Response

by: Anonymous
March 20, 2014 5:34 PM
Bringing in all this history is besides the point. Ukraine couldn't manage Crimea and keep it happy, under Russia's wing they will. Look how quickly citizens were given Russian passports. It is Western propaganda. Write articles about the people who want Crimea to join Russia, and why!

by: Dr. Joseph Spack from: NJ
March 17, 2014 8:00 AM
Roman, from Belarus is correct but ultimately economics prevail and the land-based model of political analysis is an anachronism.

by: mike k. from: nyc, ny
March 17, 2014 3:30 AM
Dr. Spack ought to read more news sources than the propaganda he obviously adheres to.Absurd.
In Response

by: Dr. Joseph Spack from: NJ
March 17, 2014 7:53 AM
I have a PhD in political science and work in the field. Russia's Czars have always neglected the economy while emphasizing the anachronistic land-based power model. Russia is doomed to fail once again.

by: Dr. Joseph Spack from: NJ
March 16, 2014 10:19 PM
Russia, as I stated, will lose this "war" and America will once again win it. This is the wake up call for Europe as Pearl Harbor was for us. Europe will seek to shed its dependence from Russia for energy and we will in due time replace the Russians. Ultimately, Ukraine is not important to the West and it will be a phenomenal financial burden for Russia. Czar Putin is repeating the same economic mistakes his predecessors made and the results will be identical.

by: Davis K. Thanjan from: New York
March 16, 2014 6:40 PM
While Crimea is not self sufficient, Russia has to unload rubles to stabilize the economy. While Ukraine hold the trump card for the supply of electricity and water to Crimea, Russia hold the trump card for the supply of gas to Ukraine. The compensation for the seizure of Ukrainean buildings, military bases and 19 war ships will be an enormous sum of rubles. While the expense of maintaining Crimea is expected to be a heavy prize for Russia, the impact of the economic sanctions by the US and EU are expected to be a disaster to the economic and political standing of Russia. The Russian ruble is expected further down fall. In the end, common sense will prevail in Moscow after a long protracted agony. Remember Cuba. Finally, Russia will stop the economic support for Crimea, similar to what happened in Cuba.
In Response

by: Roman from: Belarus
March 17, 2014 3:15 AM
I agree with you. Crimea will cost a big price for Russia. And she will
soon regret about this idea. But this is not the point. Russia is scared about idea of extending NATO in the region next to it border. People, that has come to power in Ukraine, so hate Russia because they think that Russia(an USSR too) too long opressed their independence though they almost never had it(sometimes they was part of Lithuania, sometime Poland, but they don't express the same feeling to them like to Russia). These people will allowed to deploy NATO bases on it territory cause they only want to harm Russia. And getting Crimea back is just a way to save their navy base at the Black sea. And I think they have rights to do that cause Crimea was part of Russia for 1.8 century and was just transmited to Ukraine in 1954 by Ukrainian leader of the USSR, Chryshchev. And more than half of Crimian are russian.

by: meanbill from: USA
March 16, 2014 4:50 PM
THE WISE MAN said it; ... The 2 million plus Crimea citizens will enjoy the 100 million dollars the Russians paid Ukraine yearly for renting the Russian Black Sea base, instead of Ukraine getting it..
NOW? .. In the long-run, will Russia and the Crimea people gain more, or will Ukraine lose the 100 million dollars rent, plus what the Russian fleet personal and families spent in Ukraine? ....... REALLY

by: Dr. Joseph Spack from: NJ
March 16, 2014 3:48 PM
Good points. Russia will lose this war because of their failure to understand twenty first century economics and financial dynamics. The Russian Czar is still operating with a nineteenth century mentality.

by: Oleg from: Russia
March 16, 2014 3:36 PM
it will not "spark" anything... Crimea is an independent autonomous region...
It seems to us in Russia that America's interests are skewed... they betrayed Egypt, they pressure Israel to make suicidal concessions to a murderous Islamic sect, they allow Iran to acquire apocalyptic weapons, they drew "red lines" which Assad laughed at... they are in the process of destroying their own economy... they have elected a "president" who is... well, the less said about him the better.
In Response

by: Dr. Salman Khan from: USA
March 17, 2014 1:01 AM
hey Oleg, do you really think that the US will pressure Israel to make suicidal concessions to the Arabs..?? if you do, than you haven't understood the indelible ties that bind the US and Israel... its almost spiritual.

by: sgk from: canada
March 16, 2014 10:57 AM
>...There is no land connection with Russia and the energy challenge was one of the main reasons then Soviet President Nikita Khrushchev transferred ownership of Crimea to Ukraine in 1954.

Not true. There was no Ukraine in 1954. It was one country - USSR. There were mostly internal political reasons of Khruschev's "re-assigning" Crimea to Ukrainean SSR.
In Response

by: Roman from: Belarus
March 17, 2014 3:17 AM
Khruschev was ukrainian. That's the reason))

by: Wayne from: Atlanta
March 16, 2014 10:35 AM
No doubt that Crimea will be a financial burden to Russia. All this other "what if" stuff is speculation; how things are resolved "depends." Personally, Russia is doing Crimea and Ukraine a great favor.
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