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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Comments page of 2
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by: D. Shumar from: Arizona, USA
March 16, 2014 10:26 AM
The Russian solution to the economic issues outlined in this article will likely be to invade or otherwise take control of what’s left of the Ukraine. This under the pretext it is saving the country from “terrorists”. There is little the European Union, or the United States can do to prevent it, short of military action; and that is highly unlikely. Russia, perhaps with the support of China, perhaps not, can render the United Nations harmless with their veto power. The threat of economic sanctions is a two-way street, especially when Europe depends on Russia for approximately 30 percent of its oil and gas.

Russia is simply duplicating Germany’s behavior during the late 1930’s. No one stopped them then, and it’s unlikely anyone will stop Russia now.
In Response

by: D. Shumar from: Arizona, USA
March 17, 2014 11:46 AM
I agree with your observations concerning Russian motivations, and will point out that in my first post I said; “There is little the European Union, or the United States can do to prevent it, short of military action; and that is highly unlikely.” Economic sactions can only go so far, and are a two-way street, epecially where the EU is concerned. At the present time Russia can pretty well dominate events in the Ukraine without having to resort to an invasion using its military forces, because the implied threat of doing so is enough. What is most worrysome is that one or more of the parties involved paint themselves into a corner they can’t get out of. In this context the most likely one is our president Obama, who on too many occasions has made statements he was unable to back up later.
In Response

by: Roman from: Belarus
March 17, 2014 3:32 AM
OMG. Do you really think that Russia want to capture all world?
It is thoughts of pro-USA politician. Russia have too poor ecomics to wage war. But they don't want extending of NATO influence in regions next to it border(Ukraine), they just want to save navy base in Crimea. And we can compare action of Russia and the USA that by reason of destroying of terrorism invaded in Irak and Afghanistan. Why didn't you mention that

by: Bruce West from: Pennsylvania, USA
March 16, 2014 10:23 AM
Russian aggression must be addressed, just nas German aggression was finally ended after WWII. Russia's ongoing imperialism over the past 300 years must be relegated to history, just nas German aggression is now a problem of the past. Putin is not a partner to any free nation. Putin must be dealt with sooner or later. I say we deal with him now.

by: Scott Atran from: New York
March 16, 2014 10:09 AM
Kruschev was First Secretary of the Communist Party and Chairman of the Council of Ministers, or premier, never President of the Soviet Union
In Response

by: Roman from: Belarus
March 17, 2014 3:35 AM
yeah. First president of the USSR was Mikhail Gorbachev in 1990-1991.

by: Sensi
March 16, 2014 10:07 AM
Ah, keep that one-sided propaganda of doom coming, it is so funny and hypocritical. The US had no problem with the arbitrary pro-western armed overthrown of a democratically elected president while armed "demonstrators" were surrounding the parliament, but they have a lot of legitimacy concerns now with a pro-russia separatist referendum, we get it.
In Response

by: martin from: Bremerton
March 17, 2014 3:45 AM
Don't forget the "arbitrary pro-western armed overthrow" was done thru the (elected) Ukrainian Parliament which deposed the President legally.... After the President fled the country. Why didn't he withdraw (say, to the Crimea) and call up the military if an "armed overthrow" was in process in Kyiv? Instead, he dumped the records of his corrupt regime in the swimming pool athis lavish mansion and ran to Russia.
In Response

by: Roman from: Belarus
March 17, 2014 3:45 AM
Yeah. I don't really like Russia but I'm very angry when people write about politics from only one side: invading in Irak, ousting of Yanukovich from chair of president of Ukraine are good things, but attaching of Crimea(where majority is russian) is bad thing.

by: Ludmila from: stl
March 16, 2014 9:59 AM
So how about protection that was promised?

by: George Kafantaris
March 16, 2014 9:56 AM
Democracy was moving too fast and too close for comfort, and this certainly explains Vladimir's blind dive off the deep end.
It must be painful for him to accept that the world has changed and a country's strength is now measure in economic terms.
Nor will Crimea help Russia economically -- any more than Georgia has.
Indeed, the whole affair has plunged Russia in isolation, the depth of which hit home today when China abstained in the U.N. vote.
What a waste of the good will from the expensive Sochi Olympics. It could have been used to propel the national economy forward -- and to improve the lives of all Russians.
In Response

by: Ally from: RF
March 17, 2014 3:16 AM
It's happening right now! Smiling Russian rallied this story ever and we have hope that the president and the government acting in the interests naroda.Posle nineties Russian difficult economic instability scare, scaring us insulated remember about the Iron Curtain. But the U.S. on the brink of default of its residents are not accustomed to indulge in unnecessary portions burger that do you? Unleash another war?
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