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MARCH 7 — The Crimean parliament's latest moves to become part of Russia raise a question: Has Russian President Vladimir Putin considered how much it will cost to absorb the peninsula and its roughly 2 million inhabitants? As improvised as the de facto invasion may seem, he probably has. The costs are likely to be high but not unbearable.
Europe is looking increasingly unlikely to impose meaningful sanctions on a country that — according to Eurostat data for 2011 — accounts for 7.1 per cent of European exports and 11.8 per cent of its imports. At today's European Union summit, German Chancellor Angela Merkel — whose country depends on Russia for about half its natural gas imports — called for moderation, and she almost certainly was not alone. The UK is loath for London's financial centre to lose Russian money. In Spain, Russian tourists are the biggest spenders at hotels and restaurants.
The US is unlikely to go it alone, so the harshest punishment the West can muster will probably be travel restrictions on Russian officials. Even an asset freeze seems unlikely, given that Russian retaliation could hurt US and European banks and businesses.
Annexing a relatively poor Ukrainian region, though, will be expensive. Crimea is the fifth biggest net recipient of budget subsidies among Ukraine's 26 regions. In the first six months of 2013, it received about US$500 million (RM1.6 billion) in such aid. If it is to keep receiving about US$1 billion a year from the Russian budget, it will be the fourth-largest budget drain among Russian regions in 2014. Subsidies per capita in Crimea will be higher than in the formerly secessionist region of Chechnya, where Moscow is injecting hundreds of millions of dollars a year to quell separatist tendencies.
Crimea's shaky economy depends on a few factories owned by Ukrainian billionaire Dmitri Firtash and on tourism, an industry that flourished in the peninsula in Soviet times. In 2013, tourism revenue, much of it from Russia, drove a positive services trade balance of US$446 million. That number is unlikely to grow after the annexation: Russian tourists have always been able to visit Crimea freely, and the Russian invasion isn't likely to make the region a big draw for tourists from the rest of the world.
About 60 per cent of Crimea's natural gas comes from a Ukrainian company that extracts it in the Black Sea and the Sea of Azov. The peninsula gets 80 per cent of its water and power from Ukrainian territory. These supplies will not be cut off, but Ukraine will probably want to charge more for them. Russia will either have to negotiate with an unfriendly government in Kiev or build parallel infrastructure, which will take years and billions of dollars.
All told, it looks like a good deal for Putin compared with the US$50 billion price for the Winter Olympics that just ended in Sochi. At taxpayer expense, the Russian president is acquiring a priceless resource: an explosion in public support. According to the VTsIOM sociological service, Putin's approval rating has reached new highs in the last two weeks, and is now at 68 per cent. That's worth more to the Russian leader in his 14th year in power than any accolades from the West could ever be. — Bloomberg
* Leonid Bershidsky writes on Russia, Europe and technology for Bloomberg View. Follow him on Twitter at @Bershidsky.
* This is the personal opinion of the columnist.