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Wednesday, March 19, 2014

Russia can't afford Crimea- Christian Science Monitor Report on what might be a pig in a poke

It's nearly as impossible to understand how Russia president Putin believes he can support a corrupt Syrian President Assad, plus pay for the Sochi Olympics and now afford to take over the Crimea. As soon as Crimea stops paying taxes to the Ukraine, the people will seek government oversight from Moscow.  Russia will tax the Crimean people, who are now, apparently, Russians. Americans once called this dilemma "taxation without representation" and it led to the War of Independence from England. Perhaps the ambitious annexation of the Crimea was a huge economic mistake. Putin appears to be the ultimate Napoleonic dictator, but he's obviously not an accountant.Russia could be on an unsustainable economic course. In other words, the nation has a declining population and growing pension costs.  Owning the Crimea will be costly in and of itself, without having to also pay current government bills. 

Of  course, Russia can increase the cost of oil being exported to Europe to recover some revenues.Nevertheless, with summer coming, I suspect the European governments won't be knee jerked into signing any long term energy  contracts, right now.

A Christian Science Monitor report provides more information about the Russian fiscal risk.  In fact, the Russian economy could implode because of the takeover of the Crimea.

With dizzying speed, the Black Sea territory of Crimea has been plucked from Ukrainian jurisdictionand dropped into Russia. It was all very easy, almost bloodless, and done with overwhelming support of both the Russian and Crimean populations.

Mission accomplished?

No. As the initial euphoria of "bringing Crimea home" subsides, calculating the long-term price is coming to the fore. And though some projections are more rosy than others, all observers agree that Moscow’s annexation of Crimea will carry an exorbitant cost.
Crimea and Russia have been separated for a generation, embedded in different legal, economic, and political systems. As some countries have discovered through history – most notably in the course of Germany's reunification – reintegration can be a project that keeps on costing.

"When we look past the political euphoria about bringing Crimea back into Russia, I have trouble seeing any benefits," says Alexei Devyatov, chief economist with UralSib, a Moscow-based financial firm. Local livelihoods will improve, he says, but “it will be a drain on Russia” – albeit one that Moscow can afford.
A new Sochi?

Crimea, with its mountain scenery, subtropical climate, and Black Sea beaches, was once a major USSR vacation spot. But now it needs a major overhaul of its sorrowful infrastructure and tourist facilities. Crimea's roads and railways will need to be rebuilt, and Moscow has reignited old plans to construct a $3 billion bridge to the Russian mainland across the Kerch Strait.


This all may bring to mind another Soviet-era backwater on the Black Sea coast where the Kremlinhas just spent at least $50 billion to bring to life a modern, vibrant recreation zone: Sochi. But some of Crimea’s development needs go even deeper, due to the complexity of the switch it must make.

Crimean authorities are optimistic that within a year, the territory will have completed most of the necessary Ukraine-Russia transitions: legal, political, financial, and economic. In that time, its 2.5 million residents will have to switch currencies, passports, bank accounts, and, in some cases, employers. Estimates of the overhaul’s costs start at $6 billion, although the Russian government has offered no figures of its own yet.

That's in addition to regular subsidies for Crimea’s perennial budget deficit, reportedly costing Kievabout $2 billion per year and likely to be further boosted by Moscow. Russian lawmakers are already calling for a "priority development zone" in Crimea, raising hopes for huge, Sochi-like investments. Among the projects being mulled: building a new federal university and reviving Crimea's languishing shipyards with big defense orders.

Some 200,000 Crimean public sector workers, from traffic cops to teachers, will need to be reeducated in line with the Russian system. But they will be among the transition’s biggest immediate winners, seeing their salaries more than double. (Ukraine’s salaries for public-sector workers average $340 a month; Russia’s are around $800.) The price tag for their raises will exceed $1 billion per year, according to Russian media.

Another lucky group will be pensioners, whose monthly payments will be boosted at the expense of Russia's national pension fund, which they have never paid into.

Then there is the question of Crimea’s resource needs. The peninsula currently depends upon Ukraine for gas, electricity, and water supplies — all of which are under threat if political relations between Moscow and Kiev continue deteriorating at their current rate.

Some are taking the long view

Some Russian experts say the expenses will be offset by other factors. "Of course at the first stage there will be problems, but Crimea will not be a burden in the long run," says Mikhail Yemelyanov, deputy head of the Russian parliament's economic policy committee.  

"Once the transition is complete, Crimea will be an attractive destination for private investment" and will achieve growth previously impossible under Ukrainian rule, he says.

Other pro-Kremlin analysts argue that you can't put a price on human satisfaction. (What? Since when has the Russian government cared about human satisfaction, unless graft, corruption and greed are involved?)

"Crimeans have won morally. How can you count the monetary cost of returning home after years in exile? These positive feelings will help Crimeans themselves boost their well-being and improve their surroundings," says Vladimir Zharikhin, deputy head of the Kremlin-funded Institute of the Commonwealth of Independent States in Moscow.

But the international repercussions of annexing Crimea could put a damper on all the private investment Moscow hopes to attract to fuel economic renewal.

“There will be some investment, of course, mostly from the Russian government," says Mr. Devyatov. "But the reaction of international investors [to Crimea's annexation] is likely to be serious," and deter big global companies and foreign tourists from going there until Russia's relations with the West have normalized, he adds.

Annexation supporters have pointed to another way to recoup the upcoming costs: Moscow will no longer have to pay Kiev about $100 million a year to lease Sevastopol, the base of the Russian Black Sea Fleet.

As a point of comparison, on Monday, the day Crimea officially joined Russia, Moscow cut the peninsula its first subsidy check. According to unofficial reports (including a Twitter post by Crimean Prime Minister Sergei Aksyonov) it was worth about $400 million.

Of course, the $100 million Moscow paid to Kiev to lease Sevastopol will be needed to pay off the contractors who I'm reasonably sure are still waiting to be paid to build Sochi, while Russia's population declines and the population requires pensions.

There was a time in 1956, when Russian President Krushev said the Russians would "bury us". It was a statement, he said, was an economic analogy. Well, maybe it was also prophetic because the world has an opportunity to "bury Russia" instead.

Let's hope Russia can't afford President Putin's ambitions. Crimea may have voted for the proverbial "pig in a poke".

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