How Russia is turning Crimea into a military base by changing its economy and society
The occupiers widely advertised the Kerch Bridge they opened in Ma y2018 as a symbol of political, administrative and economic “unification” with Russia. The problem is that the peninsula’s economy will not be rescued by such projects — its biggest troubles are caused primarily by Moscow’s policy, not infrastructure issues or international sanctions. The developments in Crimea after 2014 show that the occupiers are returning it into the 18-19th centuries when it was nothing more than a southern military outpost of the empire.
This is bad news for the Crimeans – anything that does not serve Russia’s military or administrative needs will inevitably stagnate and gradually decline. Nothing short of external interference will be able to change this.
The great depression
The occupational authorities are not trying to conceal Crimea’s economic dependence. According to their data, Crimea’s 2017-2018 budget has a deficit of RUB 2bn [current exchange rate is RUB67.18 per US dollar] with there venues amounting toRUB 172.2bn and spending toRUB 174.7bn. The actual shortage may be far higher: Vitaliy Nakhlupin, the “first vice-premier” of Crimea, has said that the deficit of the 2017-2018 budget exceeds RUB 20bn. The major source of this is the economic isolation resulting from the sanctions, shunned by investors. Just two weeks ago, American Best Western Hotels & Resorts closed down in Crimea – this was the last Western hotel chain operating there. According to current data, some companies, such as Volkswagen, Adidas, PumaandDHL,still work there as the EU sanctions only concern some sectors of the economy. But this does not change the overall result dramatically. Russian statistics estimated total foreign investment in Crimea at 7.2% in 2014, 3.3% in 2015, 3.4% in 2016 and 1.2% in 2017.
The Russian business, too, is losing interest in the peninsula. Back in 2014, Russia accounted for 45% and 43.9% of the total investments and budget transfers in Crimea. Over 2016-2017, private investments collapsed from 33.4% to 14.2%. Fear of international sanctions played a role in this after they hit some Russian companies involved in the construction of the Kerch Bridge. Overall, 44 Russian and Crimean companies and 155 individuals are currently under international sanctions.
Sanctions are not the sole source of Crimea’s troubles. The occupational authorities publish their statistics selectively. They conceal the figures for some industries, including the extraction of minerals, water supply, administration and a number of others. Still, the data that is available provides a good enough diagnosis of systemic troubles in Crimea’s economy.
Crimean businesses involved in agriculture, forestry and fishery, transportation and storage, ended 2017 with losses. Hotels and restaurants ended up in the same category. The total number of loss-making businesses in the region ranged between 35% and 45% in 2017. These include public enterprises. The Crimean Seaports state-owned company reported RUB 13.8mn of losses in 2014. In 2017, its losses rose to RUB 97mn. Crimean Autotransport, another state-owned company, generated profits in 2016 but ended 2017 with a deficit of RUB 228mn. The losses of Crimean Power Generating Systems grew from RUB 1.6mn to RUB 19.2mn between 2015 and 2016.
The occupational authorities declared multiple plans of a privatization campaign but never carried them out. What’s worse, private business in Crimea is in a more dire position after the assault of the occupational authorities against it: while 54,000 private companies and 135,000 individual entrepreneurs were registered in Crimea in 2014, two years later the Russian statistics counted 22,000 private companies and under 40,000 individual entrepreneurs. According to estimates by the experts of the Maidan of Foreign Affairs, a Kyiv-based NGO, small businesses generated 31.2% of jobs in the region in 2011. Over the years of occupation, this indicator has fallen to 19.5%.
Crimean exports offer another interesting case. The region is seeing an increasing trade deficit, its exports going down from US $79.5mn in 2015 and US $47.7mn in 2016 to US $29.8mn in 2017. Its imports are far higher, albeit shrinking as well from US $100.1mn in 2015 down to US $63.4mn in 2017. It therefore comes as no surprise that Crimea’s “Council of Ministers” published a budget forecast in the winter of 2018 claiming that the region will have to be subsidized at least through 2030. The authors of the forecast claim that any improvements will come from “revenues from Russia’s budget system”, i.e. subsidies. Crimea is already heavily dependent on them as 82.5% of all investments in the peninsula are the funds from the federal budget, while the share of subsidies in the revenue section of the budget is as high as 67%.
Where exactly the subsidy money is going is a big question. Over the years of the annexation, Russian investment in the region has amounted to nearly US $6bn. These are the figures from reports and statements by the occupational authorities. What they don’t indicate is the depreciation of Crimea’s capital assets, including buildings and constructions, machinery and equipment, transportation and so on — numbers on these barely change in the statics over the years of the occupation. The “official” statistics estimated it at 70.5% in 2014 and at 69.8% in 2016. No serious military projects, other than the Kerch Bridge, have been implemented in the region. Promises have been floating around to remodel Belbek, a military airport, into a civilian one, but the latest delay rescheduled it to 2020. Another project for 2020 is to complete Tavrida, the federal highway between Sevatstopol and Kerch. Meanwhile, Moscow seems to be busy with military projects of scales that leave anyone guessing. The funding that remains after that is not a resource for the development of Crimea’s economy, but the life support therapy that keeps the region from ultimate degradation by merely slowing down the process.
The illusion of thriving
The issue of the quality of life in Crimea has been sidelined meanwhile. According to Russian statistics, average monthly income per capita was RUB 15.600 in 2014, RUB 18.000 in 2016, and RUB 21.300 in 2017, and RUB 24.000 for Sevastopol in 2017. The same figure for the Southern Federal District of Russia was RUB 27.200, and RUB 31.400 across Russia. Apparently, the annexed Crimea is not among Russia’s most affluent regions. Still, even these figures are to be interpreted with caution.
Firstly, official statistics are hardly reliable -- the real wages of Crimeans are significantly below the nominal numbers. The occupational administration reports the average wage in finance and insurance at RUB 65.200. But databases of vacancies across Russia rarely list such offerings: only two out of 201 full-time job offerings in this segment start at RUB 50,000, while the rest normally range between RUB 12,000 and 20,000. The same goes for the mining industry. Statistics list the average wage there at RUB 58,000 while the database of vacancies offers such figures for one in every four jobs only. The officially declared wage for doctors is at RUB 50,000 but the real offering is at RUB 20-25,000 with extra bonuses for administrative positions. More generally, only 11% of job offerings in the database of vacancies for Simferopol pay over RUB 30,000. 17% offer RUB 25-29,000, and the rest offer less than that.
Secondly, the income statistics is affected by the militarization of Crimea. According to the Russian Defense Ministry, the wages for Russian contract servicemen range between RUB 20,000 for a rank-and-file soldier and RUB 67,600 for a platooncommander. Civilian personnel at military units and organizations within the Russian MoD framework is paid between RUB 11,000 and 40,000. High wages are also typically paid to the functionaries of the occupational regime. All this results in a serious gap between the earnings of most Crimeans and the military and bureaucrats. The same disproportion exists between the pensioners who make up 31.5% of Crimea’s population or nearly 0.7 million people. According to the occupational administration, the average pension in Crimea is RUB 12,000 and RUB 13,000 in Sevastopol. The gap lies between normal pensions and those paid to the retired military who preferred to retire in Crimea back in the soviet days.
Thirdly, the question is who exactly receives high wages? The annexation of Crimea was followed by the inflow of Russians to the peninsula. According to Ukraine’s State Statistics Bureau, the population of Crimea was 2.3 million people before January 1, 2014, including 386,000 in Sevastopol. According to the official Russian statistics now – however reliable it is – Crimea’s population shrank to 2.2 million by January 1, 2018, including to 362,000 in Sevastopol. The highest inflow of immigrants to Crimea is from Russia. Over 2015-2017, 52,500 people left Crimea and 88,200 arrived to the peninsula (this does not take into account Sevastopol). 54.5% of the new residents have come from Russia. Sevastopol has seen an even higher inflow of the Russians: 21,700 people arrived in the city over 2016-2017, 62.6% of them Russians. It is therefore reasonable to assume that most of the widely advertised “high Russian wages” are not of the Crimeans, but of the Russians who have settled in the peninsula in the past few years.
The architecture of loyalty
Emine Dzheparova, Deputy Minister of Information Policy, believes that the real number of Russian immigrants in Crimea can be double or triple the official number. Experts of Information Resistance, a volunteer intelligence and analytical group, assume that the population of Crimea has changed by 17-25% over the years of occupation. Whatever the actual numbers are, this demographic Russification of Crimea is cementing the occupational authorities.
This is aggravated by the fact that many people loyal to Ukraine have left Crimea after 2014. If they had stayed at home, these people could have become domestic opposition to the occupational regime. By and large, Crimean Tatars remain the one local group most loyal to Ukraine, but their influence is weakened by relatively small numbers. According to Ukrainian statistics, Crimean Tatars accounted for 11% of the peninsula’s population in the early 2014, i.e. 232,000 people. By contrast, the immigrants from Russia – especially the military and the bureaucrats – are both comfortable with the status quo and extremely loyal to Russia and Vladimir Putin who has given them the opportunity to migrate to the peninsula. Crimean pensioners, too, are loyal to Russia as many of them served in the soviet army or special services and underwent the respective ideological preparation.
Thirdly, Moscow’s cadre policy for Crimea ensures that it stays under its tight control. After the annexation, the “government”, “parliament” and “Supreme Court” of Crimea were chaired by the locals as before – Sergei Aksionov, Vladimir Konstantinov and Igor Radionov. In the Russian system, however, these position are quite nominal since the institutions of parliamentarism are virtually defunct in Russia while regional self-governance is cemented within the power hierarchy. The rest of the key positions in Crimea were taken by the tried and tested cadres from Russia. The “Prosecutor’s Office” of Crimea is chaired by Oleg Kamshilov, ex-first deputy prosecutor of Moscow. Chief of the “police” is Pavel Karanda, ex-deputy head of the Russian Interior Ministry’s Department in Vologda Oblast. Viktor Palagin was transferred from Bashkorostan to head Crimean FSB. Even the “Ministry of Emergencies” in Crimea is chaired by Aleksandr Yeremeyev who was transferred from Siberia. Before the annexation, all these position had been occupied by people from the Party of Regions. Russian ex-deputy minister of industry and trade Dmitriy Osviannikov was “elected” as “Governor of Sevastopol” at a pseudo-referendum. A group of “Crimeans” is now present in the Russian State Duma. But they will hardly spoil their careers in Moscow to help their distant compatriots. Otherwise, Crimea has no representatives of its own to lobby for its regional interests in Russia. Even if the local elite incorporated within the occupational structures dares to rebel against the bureaucrats imported from Russia, it will have no chance of success as the region is entirely dependent on transfers from the Russian budget.
All this makes the consequences of the annexation for Crimea far deeper than mere political subordination to Moscow and international sanctions. First and foremost, the annexation is changing its economy. Far from investing into the development of the territory it has occupied, Russia is quietly transforming Crimea from the “resort of the entire Soviet Union” into its military outpost. It is difficult to say how strategically important it is for Russia. But the effect of this militarization is already obvious. The industries that could have become the foundation of the regional economy, including tourism, are not developing. As a result, the peninsula is tumbling into an every deeper dependence on subsidies from the federal budget. In their propaganda, the occupiers present this as the challenges of the transitional period. But some destructive processes are looking ever more irreversible.
This is especially true for the state of the environment. Ukraine’s Ministry for the Temporarily Occupied Territory reports that 70% of Crimea’s green steppe has either dried up or has been more damaged compared to the pre-annexation period. Deputy Minister Yuriy Hrymchak says that the peninsula is returning to the state in which it was returned to the Ukrainian SSR in the mid-1950s and the revitalization of Crimea was launched with the mainland’s resources. If this trend persists, Crimea will turn into a supplement of Russian military bases, not the window of the Russian World as many in Russia had claimed.
Similar processes are taking place in the socio-political field. Russia’s policy of cadre colonization, militarization and integration within Putin’s authoritarian regime has virtually killed all of the region’s status as a player in the political process. The most Crimean elite can hope to get now is small rent from the subsidies controlled by the curators in Moscow.
At the same time, Moscow does not price Crimea’s loyalty too dearly. Chechnia will receive RUB 27bn in subsidies in 2018 and Dagestan will get RUB 59bn. Yakutia will receive RUB 43.9bn, followed by RUB 39.3bn for Kamchatka Krai and RUB 27.1bn for Altai. Crimea will receive a mere RUB 17.1bn in subsidies.
Crimea’s integration into the Russian system is changing the way its resources and power are distributed – these are concentrated more and more in the hands of “the president’s men”, primarily officials and siloviki, the law enforcement bloc. Being part of these structures in Russian opens some good prospects in terms of career, status and income. Mainly, however, it protects the individual from other bureaucrats and siloviki. Those who live on subsidies and donations, including pensioners, public sector employees and recipients of all kinds of privileges can provide some stability as well – their loyalty reinforces Putin’s hierarchy during the periods of the growing public frustration in Russia.
The one class that will have a hard time in Crimea is the middle class. The attack against the local business which the occupiers launched after the aggression may well just be an introduction. While in 2014 Russia guaranteed the owners that their property would remain intact based on Ukrainian documents, in the spring of 2018 Russia’s Ministry of Economy drafted amendments to this. They abolish guarantees for the objects with ownership rights acquired after January 1, 2008. If these amendments are enacted, this will open endless opportunities for confiscating people’s property.
Moreover, the redistribution of property was launched in Crimea in 2014 before any amendments. The Crimean society seems to have got the message: Crimeans are no longer the masters of their peninsula. The new masters have their own plans for the region and have no intention of getting consent from the locals.