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19 August, 2015  ▪  Oleksandr Kramar

Going on Life Support

The direction taken by Crimea's economy destroys its self-sufficiency and makes reintegration into Ukraine exceedingly difficult

It has been more than a year since Russia seized Crimea, the second tourist season under occupation is underway. It used to be the primary source of income for the population when the peninsula was part of Ukraine. The Ukrainian Week looks into the way Crimea transformed and continues to transform under the Russian authorities.

What catches the eye from the get-go is the drop in availability of statistical information regarding the economic and social situation on the peninsula since the occupation. The scope and the detail of the statistical data on the Crimean webpage of the Federal State Statistics Service for 2015 is a fraction of what it used to be in 2014 (the local statisticians still used the Ukrainian-standard sheets with all their columns and sections). This considerably complicates the analysis of the social and economic situation on the peninsula. No longer available is the information on the numbers and average income of the Russian military stationed in Crimea, along with the other forces. Moreover the data on the dynamics of production in various areas of economy, actual volumes of particular products, employment by sectors, finally, there is no data on the situation in small business and among those who pay the simplified tax (number of such entities, their staff, production volume etc.).

All of this makes it difficult to assess the state of affairs for the majority of Crimean population, especially those residing away from the central city of Simferopol. Regardless, we will attempt to outline the social and economic situation based on the available data, testimony, publicly available information and expert opinions.

Living standards

In 2013 the average monthly salary of a staff worker in Crimea made USD 350, according to State Statistics Bureau of Ukraine. The March 2015 figure, when calculated using the official ruble exchange rate, is exactly the same. However, there were only 282.1 thousand staff employees in companies, establishments and organizations (not including small firms) in Crimea with population of nearly 2 million. The current overall number of the employed (including self-employed and working for small businesses) in the Crimean economy is something that the official stats no longer provide. Last year this number made 820.6 thousand. Therefore little more than a third of all employed residents are permanent employees, 97.7 of them concentrated in the administrative centre – the city of Simferopol. Its population made less than 20% of the overall population of Crimea. There were only 184.4 thousand staff employees among the 1.55 million population residing outside Simferopol. That's only one in eight residents.

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The comparison of the pre-occupation and post-occupation income of the categories (officials, pensioners, state employees), who are believed to have profited the most from the Crimea's annexation by Russia, shows that it didn't change significantly. The pensioners and the state employees felt barely any improvement, if at all, since Crimea become de-facto part of the Russian Federation. The main culprit here is the prices, which are several times as high as in the continental Ukraine. They increased considerably compared to pre-annexation times even in dollar equivalent.

Exactly how many of the 280 thousand staff employees are currently working for the occupying state is something the statisticians chose not to disclose. Before the annexation 144.6 thousand Crimean residents were employed by administrative bodies, law-enforcement, defence, and the government sector. It is unlikely that this number increased. The opposite is more probable. In areas with the highest income the employment rate was negligible: only 17.5 thousand in government bodies (excluding local governments), where the average salary exceeded USD 550. High wages were also the prerogative of servicemen, of whom there were several tens of thousands. But, as was mentioned above, statistical data regarding them, let alone their income, has been made unavailable.

Pensioners belong to the second echelon of the occupier state's "clients". There are 540 thousand of them in Crimea. As of early 2014 the average monthly pension made USD 180; it increased to USD 200 by April 2015. Another category is the local government employees and state sector workers. After the annexation their nominal salaries in dollar equivalent have either grown somewhat, or remained stable. Crimean statisticians do not provide generalized data per sector, so we'll have to compare what's available. In March 2015 the pre-school educators got USD 300, comprehensive school teachers – USD 360, higher education teachers – USD 375. In 2013 the average salary in education used to make USD 340. Mid-level medical personnel has USD 305 per month. Doctors and other medical specialists with higher education degrees make USD 480. In 2013 a medic's average salary made USD 315. The income of local government employees in March 2015 made USD 330, while Ukrainian statistics for 2013 provide an average figure of USD 420 for employees of the state administration sector and defence.

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We deliberately compared the income level of Crimean state employees with that in the pre-occupation Crimea, instead of the current income in the mainland Ukraine at large or the regions adjacent to the peninsula. After February 2014 Crimea developed separately from the rest of Ukraine with the local prices becoming exceedingly higher than the ones on the continent. The residents of Crimea themselves saw the level of income as one of the most alluring aspects of becoming part of the Russian Federation and are comparing their new level of income with the Ukrainian one that they had before the occupation, and not with the one in the mainland Ukraine after the occupation, which bears no relevance to them.

Foodstuffs, other consumer goods, which are predominantly imports, went up in price after the invasion. For instance, the a kilo of beef on the peninsula now goes for 160 UAH (hereinafter according to exchange rate of 1 RUR = 0.4 UAH), pork – 138 UAH, butter – 153 UAH, cottage cheese – 85 UAH, smetana [Ed. Note: type of sour cream] – 58.5 UAH, rye-wheat bread – 12.8 UAH, 1 liter of milk – 19.2 UAH, 100 grams of chocolate – 29.5-58.5 UAH, coffee in fast food restaurants – 23.5 UAH. Considering the 1.5-2 fold price hike compared to the Ukrainian ones, questions arise regarding the adequacy of the official subsistence level, which for the first quarter of 2015 was set at 2.2 thousand UAH for the employable and 1.72 thousand for the retired. It's even less than currently in Ukraine.

In contrast, the living standards outside the government sector are looking worse not only compared to pre-occupation Crimea, but to the contemporary one in the mainland Ukraine. The monthly salaries of USD 150-250 are lower than those in 2013. And while the real economy is declining (more on this below) the workforce supply is higher than the demand. The hidden unemployment is growing while revenues tumble. The worst situation is in small business, the data on which is missing in the official Crimean stats for a reason. Back in the Ukrainian Crimea, in 2013 almost 200 thousand persons were employed by small enterprises and private businessmen, which is much more than in the state sector and only 1.4 times less than the entire number of current staff employees in Crimea.

Turned on its head

Crimea is turning into an exceedingly unsustainable economy, for which subsidies from the Russian federal budget directed at keeping the military and the pension system afloat turn into the prime source of income while the real economy sector and tourism decline.

The downturn in most areas of processing industry is becoming ever more serious: while in 2014 production went down by 11.8% compared to 2013, in January through May 2015 compared to the same period of 2013 it dropped by 24.6%. This is worse than the production drop in Ukraine (if the Luhansk and Donetsk oblasts engulfed in hostilities are to be ignored) for the same period. In spite of the foodstuffs deficit, even the production of meat and eggs is in decline: compared to the first half of 2014 in the second half it dropped by 14.8% and 7.4% accordingly, and by 18.2% and 10.5% in January through May 2015 compared to the same period of the previous year. The tourism industry and the transportation plunged. The transit from the Russian Federation objectively cannot compensate for the losses due to all but nonexistent flow of tourists and goods from the mainland Ukraine.
For the 282 thousand staff workers, almost half of which are also employed by the government sector, there are 543 thousand pensioners in Crimea. It is obvious that such a number of staff workers will never be able to provide the twice as large number of pensioners with pensions, which currently amount to 55% of the average wage. This would require a pension fund tax larger than the taxed salary itself. At the same time capping the salaries at a level sustainable for the Crimean economy would mean slashing them 2.5-3 times to an average amount of USD 79-85, roughly the level existing in today's Ukraine. But with the price tags currently observed on the peninsula this would leave the locals with a living standard 1.5 or 2 times worse than the current one in Ukraine.

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Therefore pension payments (USD 1.4 billion) are possible only owing to Russian federal budget subsidies, which also being the source of generous salaries in the government sector are gradually becoming the main foundation of livelihood and employment for the local manufacturers and services providers. The peninsula's economy has no option but to readjust to this chain of "life support": the military, the administration, state employees, and only after come those, who supply and service them. Concordantly the idea to concentrate extraordinary numbers of military in Crimea can be seen not only in the context of Putin's fixation on turning the peninsula into an "unsinkable aircraft carrier", but also as an attempt to compensate the losses from the withering flow of tourists and the curtailing of real economy at large.

Having said that, the amount of subsidies that Crimea was promised during the annexation is constantly being revised and reduced. At first, for its support and development the peninsula was to receive almost USD 11 billion, according to the then-current exchange rate, for 2014 alone. Yet the newly amended programme approved in 2015 envisages only USD 12 billion (according to current ruble exchange rate) through 2020. Granted, a country of 140 million population and not inconsiderable (albeit halved compared to just a few years ago) oil and gas revenues theoretically can afford spending a few billion per year to subsidize Crimea. But for how long will the Russians be content with their tax money being spent to maintain the "shop window of the Russian World" in Crimea knowing that it will never achieve self-sustainability. On the contrary, the peninsula will continue drifting in the opposite direction. And what will happen to the population of Crimea itself, when the subsidy-addicted junkie faces a reduction of complete withdrawal of such backing?

Between Ukraine and Russia

The warped social and economic reality created by the Kremlin in the occupied Crimea will make its return to Ukraine even more difficult from the financial and social standpoints. Ukraine will not be able to afford to maintain the current level of payments for the pensioners and state employees. Therefore the reintegration of Crimea into Ukraine would cause dramatic decline in the level of income (at least nominal) and growing discontent of the many current "clients" of the Russian state.

The saving grace could come in the form a transition period, when Crimea as a result of separation from Russia or its refusal to continue subsidizing the peninsula would undergo sharp reduction of payments for pensioners and state employees with these payments being adjusted to the internal capacity of the local economy. After this Crimea's reintegration into Ukraine would not lead to decrease of living standards for any category of the peninsula's population. On the contrary, it would ensure improvement for a large portion, if not the majority of the population due to falling prices and growing tourism revenues.

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At the same time, the year following the annexation showed the inability of the Ukrainian authorities to ensure an effective transport and economic blockade of the peninsula. Putting it in place will become ever more difficult due to business interests of the players involved in trade with the peninsula.

Furthermore, even for Ukraine Crimea is slowly becoming one of the largest export markets. For instance, according to State Statistics Service of Ukraine, only in January through April 2015 USD 308.7 million worth of goods have been exported to what is officially called "free economic zone Crimea". This makes nearly 2.4% of all Ukrainian export. Crimean export surpassed Ukraine's export to France threefold, it was 1.5-2 times larger the export to Moldova, Romania, Czech Republic, the United States and beat Ukrainian export to Belarus (USD 243.3 million), Iran (USD 250.7 million) and Hungary (USD 282.4 million). It equaled half the export to Poland (633.9 million) and came close to the export to Germany (USD 433.8 million) and Spain (USD 356.7 million).

And the rate of Ukraine's export to Crimea is growing rapidly. For example, in the first two months (January-February) of 2015 it made USD 96.5 million, while in the next two months (March-April) it grew to USD 212.2 million. If this trend is to continue, by the end of the year Crimea may become the 4th or 5th in the list of Ukraine's biggest export markets. And considering that such goods can make their way through the occupied peninsula further into Russia proper and by doing so avoid the Moscow-imposed trade restrictions, Crimea's economy may become not only that of pensioners and the military, but also the economy of flourishing contraband and re-exportation, a place used by the Ukrainian suppliers to bypass the quotas and restrictions for Ukrainian goods that are already in place, as well those that are to be introduced in the future in response to the enactment of the economic section of the Association Agreement between Ukraine and the EU.

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