Alaco

03.12.2015 | Crimea struggles to attract investment as its economy worsens

The Crimean economy has deteriorated under the weight of sanctions and a blockade by Ukrainian militants. Moscow is committed to reviving the region’s fortunes, but it faces an uphill struggle.

For Crimeans who voted for Russia’s annexation of the peninsula in last year’s highly controversial referendum, hopes of the region prospering under Moscow’s rule may be waning.  The territory is rapidly becoming an economic no man’s land.  US and EU trade and investment embargos, coupled with a two-month-long blockade by Ukrainian nationalists and Crimea Tartars, have stifled commercial activity.  There is a chronic shortage of goods, Ukrainian banks no longer operate on the peninsula, and international payment systems do not work.  Although after the annexation Moscow doubled the incomes of pensioners and public sector workers, soaring inflation – 42.5% last year – has severely eroded even their purchasing power.

In the latest blow to the region, the anti-Russian activists manning the blockade are suspected of sabotaging electricity pylons supplying Crimea.  The resulting blackout has forced many companies to temporarily close or significantly curtail their operations, despite Russia sending in a supply of emergency generators.  The blackout has underlined Crimea’s dependence on Ukrainian energy.  Moscow is laying a power cable across the Kerch Strait, linking the peninsula with the Russian mainland, but it will only provide half the region’s electricity needs.  Moreover, a bridge across the channel, seen as an economic lifeline, is not expected to be completed until 2018.

The local authorities, meanwhile, have been accused of exacerbating the region’s dire economic conditions.  A programme of ’forced nationalisation’ has led to the seizure of local companies, real estate, shipyards and hotels by the regional authorities.   Officials claimed they took over only businesses and assets that were inefficient, strategically important or linked to the Kiev government.  But others viewed the process as nothing short of state-sanctioned theft.  The Russian liberal opposition party Yabloko said “the action to legitimise robbery must be cancelled, stolen property returned to owners, losses reimbursed”.

The Kremlin appears to have become concerned over the reported excesses of the Crimean authorities.  The FSB has launched graft-related criminal investigations into three high-ranking government officials, including the Minister for Industrial Policies and the head of the Crimean office of the Federal Tax Inspectorate.  Four regional officials have lost their jobs over allegations of corruption.  And Kremlin auditors have revealed that much of the funds allocated from the federal budget for road building in Crimea could not be accounted for.

Moscow hoped that Russians would help to bolster the region’s economy, but few companies have so far invested in Crimea, possibly out of concern that they may incur sanctions-related penalties.  Demand for real estate has plunged 60 to 70 per cent since 2013.  Tourism, on which so many Crimeans depend, is struggling despite the Kremlin’s concerted efforts to promote the region as a holiday destination.  Around 4 million people have visited the peninsula so far this year, about a third less than before the annexation.

Most western businesses have pulled out of the region, including the likes of McDonald’s and Apple, and there is little evidence of international investors moving in.  China has reportedly pledged to develop oil and gas reserves, tobacco cultivation and the construction sector, but so far there is little to show for it.  Thirty Turkish investment projects have been suspended amid Moscow’s looming trade war with Ankara, and some foreign shipping companies have stopped placing orders for new vessels at Crimean shipyards, fearing that sanctions may result in them being banned from entering western countries’ territorial waters. 

For now, Russia is effectively bankrolling Crimea.  It funds 75% of the local government’s expenditures and has earmarked $18 billion worth of aid for economic development and infrastructure over the next five years.  Given the huge amount of political capital invested in region, the Kremlin cannot afford to see Crimea fail.  But the costs of reviving its fortunes will become harder to meet if Russia’s own sanctions-wracked economy continues to struggle.  Most Crimeans still appear to blame Ukraine, Europe and America for their troubles.  It’s in Moscow’s interest to maintain this perception.

Kiev’s apparent reluctance to put an end to the blockade of Crimea and restore electricity supplies suggests that it is prepared to exert economic pressure to achieve its stated goal of regaining the territory.  Recently, it tightened its grip by banning all freight shipments and has closed its airspace to Russian planes.  Russia has retaliated by cutting gas supplies and deliveries of coal – reserves of which are so low that Kiev admits it will need to implement emergency measures this winter.  It is hard to see anything good coming out of this political battle, least of all an economic revival.