Even if the crisis in Ukraine is resolved, Crimea becomes peaceful and the threat of a 21st century economic Cold War dissolves, there is still a huge problem to tackle.
The Ukrainian economic growth has fallen far behind it’s Eastern European peers since the collapse of the U.S.S.R. The turmoil in recent years, in particular the last several months, has put the country on the verge of becoming a failed state.
Crimea has been along for the ride the whole time. It’s GDP is just over $4 billion, a mere 2% of Ukraine’s in spite of accounting for 4% of Ukraine’s population.
To make matters worse, it is heavily dependent on the Ukrainian mainland for vital resources. 90% of water, 80% of electricity and 60% of primary goods are imported.
Russia Today put together this useful graphic to sum up the major economic factors in the region:
While some economic exchange is bound to continue with Ukraine, there are going to be major changes taking place.
Ending dependence on Ukrainian electricity and water would require long-term projects, but Russia will not want to situation to persist.
Then there is the problem with tourism. 70% of the region’s 6 million visitors are Ukrainian, and tourism is by far the most important driver of GDP. Estimates put the drop in tourism this year at 30%.
If fervent solidarity between mainland Russians and Crimeans persist, an influx of an additional 1.8 million Russian tourists would offset the drop.
However, per capita income in Russia is more than triple that of Ukraine. It’s probable that it would take far fewer Russian tourists to generate enough revenue to cover any economic losses – assuming that they spend more since they have more.
However, for the next several years or decades, the big source of economic growth in the region come from something the region has desperately needed for years: Infrastructure development and oil and gas exploitation.
ExxonMobil and Shell currently have a $1 billion investment on hold. With the change in national allegiance, Russian petrogiant Gazprom is virtually guaranteed to take over.
Then there are jobs and spending associated with severing fresh water and electrical dependence and building a massive bridge across the Kerch Strait.
Many jobs could go to Russians outside the region, but it would create an influx of indirect spending nonetheless. Overall, $5 billion in Russian investments are predicted in the next three to five years.
For perspective, this would be proportionately equivalent to adding $6.2 trillion over three years, or $3.7 trillion over five years, to the U.S. economy.
Add in the possibility of a special economic zone for the region that would reduce taxes and financial regulation and the economic future for Crimeans is looking a whole lot better after annexation than before.
The full Russia Today article may be found here.
