Kremlin Subsidies Keeping Crimea Afloat

by Eurasianet

Crimea is becoming a growing financial burden for the Russian government. Under a three-year budget plan set to start in 2018, Moscow is covering over three-quarters of the peninsula’s operating costs.

The de-facto State Council of the Republic of Crimea recently passed the territory’s budget for 2018-2020. That plan, along with relevant legislation, states the peninsula should be financially independent. Yet, the budget numbers indicate that the region’s dependence on the Kremlin is set to keep growing.

Under the 2018 budget, 77 percent of Crimea’s expenditures are projected to be covered by funds from Russia’s federal budget; the Kremlin will also pay for 60 percent of Sevastopol’s 2018 budget. The city, home to the Black Sea Fleet, is administered directly by the federal government.

In 2019-20, Moscow is expected to provide almost 79 percent of the Crimean government’s operating expenses. For Sevastopol, the share is expected to grow to 65 percent.

Russian and Ukrainian analysts both say that the annexed territory’s financial woes, and its increasing budgetary reliance on Moscow, are not surprising. But they tend to differ about the peninsula’s financial future.

For Dmitry Solonnikov, head of Russia’s Institute for Modern National Development, there is little cause for concern. “Everyone understands that for Crimea’s social infrastructure to start working… for investments to start flowing in… money from [Russia’s] federal budget must first be invested,” he said. “It is a logical situation at the current stage of Crimea’s development.”

Taras Zagorodny, a managing partner of Ukraine-based National Anti-Crisis Group, asserted that the territory was on its way to becoming a financial sink hole. “Crimea’s economy has practically collapsed. Ports do not work; agriculture is dying; there are no tourists for many different reasons,” he said. “Up to 90 percent of tourists used to come from Ukraine.”

Not too long after Crimea’s annexation by Russia in 2014, the peninsula’s new de-facto government pledged to become financially self-sustainable. “We intend to become a donor region. We are sure that in the next five to six years, we will break the trend, and end the dependence on [Russia’s] federal budget,” Crimea’s de-facto president Sergei Aksenov said that year. Local authorities said at the time that potential drivers of growth would be its tourism and defense industries, as well as oil and gas extraction in the Black and Azov seas.

Aksenov’s prediction has proven illusory. Moscow’s subsidization of the Crimean government has followed a steady upward trajectory, skyrocketing from 64.3 billion rubles in 2015 to 107 billion in 2017, an amount that was roughly two-thirds of the territory’s budget this year. During this timeframe, the ruble exchange rate remained relatively stable.

The situation in Sevastopol, in terms of financial dependence on the Kremlin, is not much better. In 2018, Moscow will fork out 21.5 billion rubles to cover 60 percent of the city’s 35.7 billion ruble budget. And despite Kremlin assistance, the Sevastopol budget is projected to run a 3.8 billion-ruble deficit next year.

Crimea’s revenue, while rising, cannot keep pace with ever-growing expenses. In 2018, the peninsular government is expected to take in 38.4 billion rubles, compared with 25.6 billion rubles in 2015.

According to Crimea’s 2018-2020 budget, key expense items include infrastructure development, education, welfare, utilities, healthcare and culture. Notably, only 0.4 percent of the peninsula’s budget (or 1.2 billion rubles) is earmarked for “defense, security and law enforcement.” This suggests that the bulk of security-related costs will be covered by Russia’s federal budget.

Republished, with permission, from Eurasianet.org.