Russian Aggression in Ukraine Has A Price: Is it Too High to Pay?

Russian Aggression in Ukraine Has A Price: Is it Too High to Pay?
March 13, 2014.

Kyiv, March 13, 2014. In late 2013 experts predicted that the Russian economy would suffer due to lower gas and oil prices, an outflow of capital, a deep crisis in the country’s financial system, and unreasonably high costs for hosting the Olympics, according to Therefore, it was expected that Russia should have a “calm” spring that would allow it to catch its breath. However, President Putin seems to have decided otherwise. By de facto declaring war on Ukraine, in the process he also declared war on his own country’s economy.

On March 1 the Russian Federation Council authorized the President Vladimir Putin to send troops to Ukraine; two days later during the first minutes of trading, the euro rose by more than a ruble and the dollar – by 80 kopecks. Even though the Central Bank of Russia undertook massive currency interventions (spending USD 10-11 billion) it could barely slow down the dynamics of the ruble’s fall. The same day large Russian companies’ stocks lost 13 percent in price.  On March 3 the Russian stock market lost 15 percent of its overall value.

Obozrevatel compares such damage to the losses Russia faced in its 2008 during the war with Georgia:  in 2008 the market lost 10 percent, however, this happened in a week, while in the current situation the 15 percent was lost in several hours. In the week when Russia’s occupation of Crimea began, the ruble went down 10.5 percent against the U.S. dollar. Russia’s GDP is expected to drop below the projected growth rate in the first half of 2014.

In terms of hard numbers – the cost of Russian intervention in Ukrainian Crimea so far has been estimated at USD 50-70 billion (according to different sources). Should the U.S. and the EU follow up on their statements and employ political and economic sanctions against Russia and targeted sanctions against persons responsible for occupying Crimea, these numbers will grow dramatically.

Reportedly, despite such a dangerous economic situation, the Russian government is preparing to allocate 35 billion rubles (USD 900 million) worth of immediate financial support to Crimea. Still, if Russia succeeds in breaking Crimea away from Ukraine, in the following three years the Russian Federation will have to provide USD 20 billion (USD 6 billion annually for energy, water and food supply, and building a bridge between Kerch and Taman peninsula). Moreover, Crimea contributed only 34 percent of its budget, while the rest was covered by Ukrainian state budget disbursements. Therefore, Russia’s economic conditions are likely to further worsen as it will have to prop up Crimea’s worsening economy.

The Crimean outlook is very similar to that of 2008 Abkhazia (Georgia’s breakaway territory): in the first few years Russia granted financial support to Abkhazia, provided for 70 percent of its budget, and invested in its infrastructure. Then, financial support dwindled, and so did tourists and profits from the region’s wine industry. Around half of funds allocated to the region were lost to corruption and stolen by local authorities.