The re­turn of soviet Crimea

What’s hap­pen­ing with the Ukrainian penin­sula’s econ­omy these days?

The Ukrainian Week - - CONTENTS - An­driy Kly­menko and Te­tiana Huchakova, Yalta and Kyiv, Crimean Depart­ment of the Maidan of For­eign Af­fairs

What's hap­pen­ing with the Ukrainian penin­sula's econ­omy these days?

Whether peo­ple want them to be or not, their im­pres­sions of re­gions even within their own coun­tries are of­ten shaped by myths — and Crimea is no ex­cep­tion. Most Ukraini­ans tended to think of the penin­sula — with the ex­cep­tion of Sev­astopol — as a beach re­sort and wine-mak­ing re­gion, even dur­ing soviet times. In fact, it was not quite like that un­der the sovi­ets. The myth about the “all-union health cure re­sort” was orig­i­nally started as pro­pa­ganda to cover the truth the real na­ture of the econ­omy of Crimea. Based on how its res­i­dents were em­ployed, how its ter­ri­tory was uti­lized, what the state in­vested in it, and the vol­ume of man­u­fac­tur­ing pro­duced on the penin­sula from af­ter WWII un­til the USSR col­lapsed, it was:

● firstly, a huge army, navy and air base — and even­tu­ally a nu­clear and space base — that all en­sured the Soviet Union’s do­min­ion in the Black Sea re­gion and its ac­cess to the Mediter­ranean and in the Mid­dle East;

● se­condly, a ma­jor in­dus­trial R&D cen­ter in the Union for mak­ing mil­i­tary in­stru­men­ta­tion and ship­build­ing;

● thirdly, one of the food-pro­cess­ing cen­ters of the USSR spe­cial­iz­ing in pro­cess­ing fish caught in the oceans — most of the com­mer­cial ocean-go­ing fleet of the Ukrainian SSR was based in Sev­astopol and Kerch — as well as veg­eta­bles, fruit, grapes and wine.

Crimean in­dus­try was based on dozens of en­ter­prises mak­ing mil­i­tary in­stru­ments, build­ing ships and re­pair­ing sea-go­ing ves­sels. That’s where ships for the Soviet Navy, guided tor­pe­does, mis­sile con­trol sys­tems, nav­i­ga­tional and ra­dio equip­ment, tank sights, com­pli­cated para­chute sys­tems, in­clud­ing for space rock­ets and for land­ing tanks, and so on.

Prior to the 1990s, for­eign tourists were for­bid­den to leave Sim­fer­opol to go any­where ex­cept Yalta and Alushta. Sev­astopol was off lim­its even to those who lived in Crimea un­less they had a spe­cial per­mit, while even res­i­dents of Sev­astopol could only en­ter Bala­clava, where the Black Sea Fleet was based, with spe­cial per­mits. Soviet re­sorts were not a flour­ish­ing sec­tor of the econ­omy but, on the con­trary, a costly state-funded so­cial pro­gram of the Soviet Union.

POST-SOVIET DE­MIL­I­TA­RIZA­TION

With the end of the Cold War, dur­ing the per­e­stroika pe­riod and af­ter the USSR col­lapsed, the mil­i­tary spe­cial­iza­tions of the Crimean econ­omy were com­pletely lost. But de­fense it­self was not the only vic­tim: light in­dus­try dis­ap­peared al­most com­pletely dur­ing the 1990s. With the ex­cep­tion of grains, sun­flower, vine­yards and poul­try, farm­ing re­verted to small house­hold hold­ings. The re­source base for pro­duc­ing fruits and veg­eta­bles was lost Crimean or­chards shrank by more than 80%. Un­der mar­ket con­di­tions, Crimean dairy pro­duc­tion pretty much dis­ap­peared, as did canned fruit and veg­etable and juices. The num­ber of tourists shrank col­lapsed from 7.9-8.3 mil­lion in the mid-1980s to only 2.3mn in the mid-1990s. The job­less work­force was slowly taken up by small en­ter­prises that were not a prod­uct of the mid­dle class but sim­ply a means for the lo­cal pop­u­la­tion to sur­vive.

Slowly Crimea’s econ­omy took on a new shape and by 2001, go­ing through 2010, the main driver was the chem­i­cal in­dus­try based on the North Crimean chem­i­cal com­plex where ti­ta­nium diox­ide and sodium car­bon­ate were pro­duced, and the ex­trac­tion of oil and nat­u­ral gas on the marine shelf. Af­ter the start of the land boom in the mid 2000s, hous­ing also be­came a ma­jor busi­ness. The rel­a­tive weight of farm­ing con­tin­ued to shrink as trade and ser­vices grew stronger.

Fol­low­ing the 1998 fi­nan­cial cri­sis, Crimea’s econ­omy picked up pace again over 2001-2008, but tourism, at only 7-8% of the penin­sula’s econ­omy, trailed be­hind in­dus­try, trade, trans­port, farm­ing and con­struc­tion. But this is when re­sorts and tourism, ini­tially through grow­ing aware­ness among Ukraini­ans and of­fi­cially start­ing in 2010, be­came a strate­gic pri­or­ity for the Crimean econ­omy. Over 2011-2013, tourism grew vis­i­bly, as did the ser­vices re­lated to it. As small en­ter­prises quickly grew in this busi­ness, ma­jor in­vest­ment pro­jects be­gan to come to the penin­sula. At this point, some 6 mil­lion tourists were vis­it­ing Crimea ev­ery year and by the end of 2013, tourism and re­cre­ation were gen­er­at­ing at least 25% of the au­ton­o­mous repub­lic’s con­sol­i­dated bud­get. Three main re­gions where re­sorts formed a mono-econ­omy served more than 75% of all vis­i­tors — Yalta with 38%, Alushta with 19% and Yev­pa­to­ria with 19% — and brought

In 2013, the penin­sula's ports had re­ceived 187 for­eign cruise lin­ers, adding up to nearly 105,000 pas­sen­gers. These were record num­bers, not just for in­de­pen­dent Ukraine but also for all of Crimean his­tory. By 2014, growth was up to 70-80%

in over 20% of con­sol­i­dated bud­get rev­enues be­tween them.

A ma­jor in­di­ca­tor of the suc­cess of this shift was the fact that Crimea had be­come the main cen­ter for in­ter­na­tional tourism in the Black Sea: in 2013, the penin­sula’s ports had re­ceived 187 for­eign cruise lin­ers, adding up to nearly 105,000 pas­sen­gers. These were record num­bers, not just for in­de­pen­dent Ukraine but also for all of Crimean his­tory. By 2014, growth was up to 70-80% (be­fore the takover). By 2010-2013, grain-grow­ing was al­most at soviet lev­els, with more than a mil­lion tonnes per year, as was wine-mak­ing. In­deed, the pro­duc­tion of co­gnacs was 5-6 times more than it had been in the 1980s.

In short, at the point when Rus­sia in­vaded, Crimea’s econ­omy was demil­i­ta­rized and a com­pletely new fo­cus on tourism and ser­vices had be­come its strate­gic pri­or­ity.

“A NEW SHOW­CASE FOR RUS­SIA” — FAIL

Al­though the main pur­pose for oc­cu­py­ing the penin­sula was mil­i­tary and strate­gic, the idea of Crimea as a “new show­case for Rus­sia” gained enor­mous pop­u­lar­ity in 2014, sim­i­lar to the Olympics in Sochi, but based on tourism and in­no­va­tion rather than sports, com­plete with its own Sil­i­con Val­ley, gam­bling re­sorts, free eco­nomic zone, cut­ting-edge tech­nolo­gies, 7-star ho­tels, just like the Emi­rates. There was a brief eu­phoric boom of

ideas for de­vel­op­ing the penin­sula and vis­i­tors ga­lore from ma­jor Rus­sian busi­nesses. In­deed, two weeks af­ter the an­nex­a­tion, on March 31, 2014, the Rus­sian Fed­er­a­tion even es­tab­lished a new Min­istry of Crimean Af­fairs.

But by the be­gin­ning of 2015, Moscow un­der­stood how im­pos­si­ble its ini­tially am­bi­tious plans for eco­nomic de­vel­op­ment on the ter­ri­tory were and be­gan to fo­cus on ab­sorb­ing Crimea mil­i­tar­ily with­out tourism to pro­vide a cover. On July 15, 2015, the Min­istry was dis­solved as well. At that point, the cu­mu­la­tive ef­fect of trans­for­ma­tions tak­ing place be­gan turn­ing the penin­sula into the Is­land of Crimea and a grey zone be­cause of a trans­porta­tion and later en­ergy block­ade by main­land Ukraine, and in­ter­na­tional sanc­tions. Clearly, Moscow had not ex­pected such a re­sponse from the West and was forced to ad­just its plans on the run.

In 2016, Moscow’s re­jec­tion of plans to turn Crimea into a “new show­case for Rus­sia” was fi­nal. On July 28, 2016, it re­duced the sta­tus of both Crimea and Sev­astopol within the RF: Putin’s de­cree dis­solved the Crimean Fed­eral District, which had been formed right af­ter the an­nex­a­tion on March 21, 2014. The “fed­eral sub­jects” known as the Repub­lic of Crimea and the City of Sev­astopol were amal­ga­mated into the South­ern Fed­eral District, with its cap­i­tal at Ros­tov-on-Don. With this step, Crimea’s ad­min­is­tra­tive func­tions were uni­fied with the mil­i­tary ones, as Rus­sia’s Armed Forces in Crimea are part of the South­ern Mil­i­tary District with its head­quar­ters in Ros­tov-on-Don as well.

Among the gen­eral pop­u­la­tion in Rus­sia, eu­pho­ria was re­placed by an­noy­ance at the “enor­mous de­mands” of the res­i­dents of Crimea re­lated to all the huge prom­ises that had been made in the run-up to the “ref­er­en­dum.” A mere three years af­ter the an­nex­a­tion, 84% of Rus­sians thought that fed­eral bud­get­ing for Crimea and Sev­astopol should be the same as it is for any other ter­ri­to­rial en­tity in Rus­sia. In short, even pub­lic opin­ion was against the no­tion of a “new show­case for Rus­sia” in Crimea.

THE REAL SUC­CESS STORY OF OC­CU­PIED CRIMEA

Once it had no cover, the mil­i­ta­riza­tion of Crimea be­came ob­vi­ous in 2015, not only as the main fo­cus of the Krem­lin’s Crimea pol­icy but also the main driver of the re­gion’s econ­omy. The mil­i­tary “takeover” of this ter­ri­tory had now be­come Rus­sia’s “big­gest suc­cess story” in Crimea.

One of the signs of this “change of course” was the in­tro­duc­tion of large-scale an­nual mil­i­tary ex­er­cises just as the penin­sula’s tourist sec­tor is pre­par­ing for vis­i­tors and right through the height of tourist sea­son, com­plete with ar­tillery fire and bom­bard­ment on the Kerch penin­sula, right next to the only high­way that vis­i­tors can take from Rus­sia to the penin­sula, as well as the only road bring­ing in sup­plies from the de­liv­er­ies from the Kerch ferry, and from the Kerch Bridge May 2018.

Rus­sia’s mil­i­tary “takeover” has led to the ex­pan­sion and equip­ment of a gi­gan­tic mil­i­tary base that is larger nu­mer­i­cally than the big­gest US base in the world. In con­nec­tion with this, the nec­es­sary dual-use trans­port, en­ergy and other in­fra­struc­ture has been es­tab­lished to join the penin­sula to the Rus­sian main­land: the Kerch Bridge, an un­der­wa­ter power link, and an un­der­wa­ter nat­u­ral gas pipe line across the Kerch Strait.

The RF Armed Forces have also been rapidly build­ing up the big­gest Joint Task Force in Europe. Crimea is now the pri-

or­ity lo­ca­tion for only the lat­est in weapons, espe­cially mis­siles. All 11 of the old soviet airfields in Crimea are rapidly be­ing up­graded, to­gether with mis­sile launch sites, anti-air­craft bat­ter­ies, radar sys­tems, and nu­clear weapons stor­age bases. A new for­ti­fi­ca­tion zone has been set up in north­ern Crimea. New mil­i­tary towns are be­ing built and ex­ist­ing ones re­con­structed for armed forces to be de­ployed, along with hous­ing for ser­vice per­son­nel. The num­ber of dif­fer­ent spe­cial forces has been dra­mat­i­cally ex­panded. The RF AF con­tin­gent in Crimea has been ex­panded to 60,000 sol­diers and of­fi­cers with prospects of grow­ing to 100,000 over the next few years.

At this point, all other as­pects of life in Crimea have been sub­or­di­nated to the ide­ol­ogy of a mil­i­tary bridge­head: the civil­ian econ­omy, the so­cial sphere, ed­u­ca­tion and the up­bring­ing of chil­dren and teens, hu­man rights, the in­for­ma­tion sphere, and national pol­i­tics. In­deed, the de­vel­op­ment of the mil­i­tary base de­ter­mines the pri­or­i­ties of the penin­sula’s econ­omy. This means, firstly, the re­vival of the de­fense in­dus­try and ev­ery­thing con­nected to mil­i­tary in­fra­struc­ture by en­sur­ing that Crimean en­ter­prises get de­fense con­tracts and through state in­vest­ment in in­fra­struc­ture.

In 2014 alone, man­u­fac­tur­ing in Sev­astopol grew 372.9%. By the end of 2015, Crimea was de­clared the leader for growth of in­dus­trial out­put in Rus­sia, at 12.4%. The in­dex for in­dus­trial out­put in the South­ern Fed­eral District of the Rus­sian Fed­er­a­tion was at 106.4% in 2016, within which Sev­astopol once again had the high­est in­di­ca­tor at 121.8%. By mid-2018, the of­fi­cial pace of in­dus­trial out­put in Sev­astopol re­mained very high at 110%.

No­tably, Rus­sian sta­tis­tics on Crimea do not re­flect in­di­ca­tors re­lated to the De­fense Min­istry, the MIC or the power sec­tor, sim­i­lar to soviet times. In ad­di­tion, the huge vol­umes of de­fense man­u­fac­tur­ing, such as at the ship­build­ing plants in Feo­dosia and Kerch that were taken over by Rus­sia, are now in­cluded in the in­di­ca­tors for their new Rus­sian “own­ers.”

The Pella Ship­build­ing Plant of Len­ingrad is one of these “cu­ra­tors,” and then lessee of the More Ship­build­ing Plant in Feo­dosia, which ac­tu­ally be­longs to the state of Ukraine but was “handed over” to the fed­eral gov­ern­ment of Rus­sia af­ter the lat­ter took over Crimea. On Novem­ber 15, 2016, the More Com­pany was of­fi­cially leased out to this Rus­sian plant un­til the end of 2020. Later, it be­came part of the Kalash­nikov Con­cern. The More plant is build­ing three new Karkurt-class mis­sile corvettes in the nearby marine zone. This corvette has 8 Cal­i­bre-NK winged mis­siles, which are widely used by the Black Sea and Caspian Sea Fleets of the Rus­sian Fed­er­a­tion to at­tack tar­gets in Syria, which is 2,500 kilo­me­ters away. On Fe­bru­ary 7, 2017, the plant also be­gan pro­duc­tion for the main border pa­trol hov­er­craft, the A25PS for the Border Ser­vice of Rus­sia’s FSB. Plans are to pro­duce 20 such craft.

Over the next few years, at least 9 new mis­sile corvettes will be built at the taken over Crimean plants, with a to­tal of 72 winged mis­siles of the Cal­i­bre-NK class on board. This rep­re­sents a threat, not only to Ukraine, but also to EU coun­tries and the Mediter­ranean re­gion as a whole. In the sec­ond half of 2018, Rus­sia’s BSF will be­gin adding ves­sels pro­duced, not by Rus­sian plants, but by plants that were seized from Ukraine. All told, de­fense pro­duc­tion in Crimea and Sev­astopol grew 430.8% in 2017 com­pared to 2015 and 227.6% com­pared to 2016.

MOSCOW’S REAL PRI­OR­I­TIES

On Au­gust 11, 2014, the Rus­sian Fed­er­a­tion ap­proved a tar­geted pro­gram called “So­cio-Eco­nomic De­vel­op­ment in the Repub­lic of Crimea and the City of Sev­astopol to 2020,” with a bud­get of RUB 669,594,630,000 or US $9.8bn, 95.9% of which was com­ing from the fed­eral bud­get. Clearly, the im­ple­men­ta­tion of this pro­gram has deter­mined the eco­nomic life of Crimea. Still, an­tic­i­pa­tion among Crimean col­lab­o­ra­tors that they would en­joy a “shower of gold” from Rus­sia as a re­sult of this was un­founded. By early 2018, more than 1,000 con­tracts had been signed un­der the pro­gram with the main ex­ecu­tors worth nearly RUB 600bn. About half of these were with Crimean con­trac­tors, but their to­tal value was only RUB 28bn, or 3.5% of the ac­tual amount al­lo­cated by the pro­gram at that point. The lion’s share of the golden shower went to Rus­sian firms, espe­cially in terms of job gen­er­a­tion.

Even in 2014, the al­lo­ca­tion of funds from the fed­eral tar­geted pro­gram (FTP) was very elo­quent: more than 80% of the ex­pen­di­tures were in­tended for three gi­gan­tic pro­jects — the Kerch Bridge, the Tavrida High­way from the Kerch Strait to Sev­astopol, and two new power sta­tions. 10% was left for so­cial ser­vices about 5% for tourism, and 1.5% to “en­sure in­ter-eth­nic unity.” This il­lus­trated Moscow’s pri­or­i­ties very vis­i­bly: de­vel­op­ing the crit­i­cal lo­gis­tics and en­ergy in­fra­struc­ture for a huge mil­i­tary base.

No­tably, the con­struc­tion of the Kerch Bridge stopped con­struc­tion of nearly all new road­ways and bridges in Rus­sia. In 2017, only 10 new road­ways were built across Rus­sia, other than

this bridge and the Tavrida high­way. There sim­ply wasn’t enough money for any­thing more.

At the be­gin­ning of 2018, the to­tal fi­nanc­ing for this fed­eral pro­gram was up to RUB 837,174,19,000, of which RUB 770,192,94 was cap­i­tal in­vest­ment. Based on Moscow’s pri­or­i­ties, the money is cur­rently be­ing al­lo­cated thus.

What’s im­por­tant to also re­mem­ber is that in­vest­ments in MIC en­ter­prises in Crimea are be­ing un­der­taken by Rus­sian cor­po­ra­tions out­side of this pro­gram. The con­struc­tion and re­con­struc­tion of de­fense fa­cil­i­ties is also tak­ing place out­side the FTP as this comes from the Rus­sian De­fense Min­istry bud­get.

The FTP fund­ing is be­ing ex­panded for a num­ber of rea­sons, start­ing with the ru­ble’s nose­dive against the US dol­lar. In ad­di­tion, the FTP was orig­i­nally drafted in a hurry and dur­ing its im­ple­men­ta­tion, many as­pects spe­cific to Crimea be­came vis­i­ble. For in­stance, the cost of the Tavrida high­way grew from RUB 41.8bn to RUB 144.0bn.

From the very be­gin­ning, the im­ple­men­ta­tion of the FTP was com­pli­cated, dead­lines were missed, end­less cor­rup­tion scan­dals plagued it, and crit­i­cism from top of­fi­cials in Moscow grew harsher. This led to a grad­ual re­place­ment of the Ak­sionov pup­pet Crimean Gov­ern­ment with ad­min­is­tra­tors from Rus­sia. By the end of July 2018, a propo­si­tion had been drafted up in Moscow to ex­tend the FTP through 2022 and in­crease fund­ing by RUB 37bn, to cover 55 fa­cil­i­ties in Sev­astopol and a fur­ther 85 in the rest of Crimea. The au­thors of the pro­posal pre­dicted that the FTP would be ex­tended at least another 3-4 years with fund­ing in­creas­ing in line with this. The most se­ri­ous and long-term is­sue that needs to be re­solved, both tech­no­log­i­cally and fi­nan­cially, is wa­ter sup­ply.

THE KERCH BRIDGE: CON­SOL­I­DAT­ING OC­CU­PA­TION

When the Kerch Bridge is com­pletely open for traf­fic (trucks by the end of 2018 and trains at the end of 2019), it will un­doubt­edly have se­ri­ous mil­i­tary, po­lit­i­cal and eco­nomic con­se­quences for Crimea. For starters, mil­i­tary lo­gis­tics will be im­mensely sim­pler be­cause trucks car­ry­ing men and ma­teriel will be able to drive right in. Af­ter it fin­ishes con­struct­ing the bridge, Rus­sia will most likely be tempted to either close ac­cess from the penin­sula to main­land Ukraine al­to­gether — or make it as dif­fi­cult as pos­si­ble.

Over 2019-2019, the need for fer­ries to carry freight from Rus­sia to Crimea will grad­u­ally dis­ap­pear. But the re­main­ing Crimean ports will con­tinue to op­er­ate the way they do now, as an over­flow sys­tem han­dling marine de­liv­er­ies that don’t in­volve fer­ry­ing: grain, scrap metal and sodium car­bon­ate to Syria, Le­banon, Libya, Egypt, North­ern Cyprus, as well as glass, build­ing ma­te­ri­als and petroleum prod­ucts from the Rus­sian Fed­er­a­tion, and ce­ment and il­menite from Turkey. Pas­sen­ger traf­fic through Sim­fer­opol Air­port will con­tinue to shrink, the new ter­mi­nals de­signed to han­dle over 7 mil­lion pas­sen­gers a year will re­main un­der­used, and the in­vest­ments made in them will not bring any re­turns.

Sim­pli­fied road ac­cess could lead to grow­ing flows of tourists to Crimea if the cost of va­ca­tion­ing on the penin­sula be­comes com­pet­i­tive for tourists from Rus­sia. In any case, this is en­cour­ag­ing Moscow to­wards a pol­icy of or­ga­niz­ing va­ca­tions for low­in­come Rus­sian cit­i­zens at Ukrainian sana­to­ria in Crimea that were ex­pro­pri­ated by Moscow like so many spoils of war. RF civil ser­vants, who are ef­fec­tively pro­hib­ited to travel out­side Rus­sia, will also be en­cour­aged to va­ca­tion in Crimea.

BANK­ING

Prior to Rus­sia’s takeover, Crimea and Sev­astopol en­joyed a solid net­work of com­mer­cial banks, as 69 Ukrainian banks had branches on the penin­sula. The RF planned to take ad­van­tage of Ukrainian fi­nan­cial in­sti­tu­tions to ease the pain of the tran­si­tion pe­riod, but none of Ukraine’s banks agreed to con­tinue op­er­a­tions un­der the oc­cu­pa­tion. Ma­jor Rus­sian banks that were al­ready op­er­at­ing in Crimea prior to this, such as Sber­bank, Alfa Bank and VTB, also stopped op­er­a­tions be­cause of the fear of sanc­tions. This added another fac­tor for cer­tain for­eign busi­ness­men who, af­ter vis­it­ing Crimea to test the in­vest­ment waters, went into wait­ing mode.

Since the Rus­sian oc­cu­pa­tion be­gan, 34 Rus­sian banks have launched op­er­a­tions in Crimea and two Crimean banks were trans­ferred to Rus­sian jurisdiction: Morskiy Bank, which be­longs to Rus­sian ty­coon Alek­sandr An­nenkov, and the Black Sea [Chornomorskiy] Bank for Re­con­struc­tion and De­vel­op­ment, which was “trans­ferred” to the “Repub­lic of Crimea” in Septem­ber 2014. These are rel­a­tively small banks that have lit­tle im­por­tance for the Rus­sian fi­nan­cial sys­tem. In­deed, 19 have al­ready lost their li­censes, one bank went bust and one is in bank­ruptcy pro­ce­dures. Four banks left the Crimean mar­ket on their own. As of Au­gust 1, 2018, 8 Rus­sian banks were still op­er­at­ing on the penin­sula, all of which are sub­ject to in­ter­na­tional sanc­tions.

TOURISM: RAPIDLY SHRINK­ING NUM­BERS

Af­ter it was an­nexed, Crimea turned into a re­sort only for Rus­sian tourists. and the qual­ity of tourists changed dra­mat­i­cally as well. Pre­vi­ously, Rus­sian tourists tended to be from the mid­dle or wealth­ier classes. Over 2014-2017, low-in­come Rus­sians be­gan to travel to the penin­sula on dis­counted tours or­ga­nized by their em­ploy­ers. Well-known sana­to­ria be­long­ing to agen­cies such as the De­fense Min­istry, the SBU, the Gen­eral Ad­min­is­tra­tion, the State Fis­cal Ser­vice, the Pres­i­den­tial Ad­min­is­tra­tion, the Verkhovna Rada, and so on, were treated like mil­i­tary tro­phies and passed on to their Rus­sian coun­ter­parts, which pro­ceeded to send their staff on hol­i­days there.

Over 2010-2013, ev­ery tourist in a Crimean sana­to­rium was matched by four tourists in mini-ho­tels and rental apart­ments. Be­cause of this growth, the tourism in­dus­try gen­er­ated a sub­stan­tial mul­ti­plier ef­fect, as much as 3.5-4.0, in other branches of Crimea’s econ­omy. In other words, for ev­ery UAH 1 in taxes paid di­rectly by sana­to­ria, B&Bs and ho­tels led to UAH 4 in taxes paid by shops, ser­vices, en­ter­tain­ment places,

trans­port, and by lo­cals who served the tourists. Over 20142017, this cor­re­la­tion be­tween tourists in ma­jor ho­tels and in the pri­vate sec­tor shifted to 1:1.5.

In ad­di­tion, the Ukrainian gov­ern­ment’s easy ap­proach to small tourist busi­nesses to grad­u­ally bring them out of the shad­ows was re­placed by threats and fines. Much higher taxes on land and prop­erty forces many hote­liers to quit the busi­ness as manda­tory con­tri­bu­tions to the Rus­sian bud­get grew ten­fold over the last four years.

In fact, re­sorts have al­ready stopped be­ing one of the pri­or­ity ar­eas of the Crimean econ­omy, both in terms of bud­get rev­enues and in the so­cial sense. Any of­fi­cial quan­ti­ta­tive as­sess­ments of tourism in Crimea to­day are not worth pay­ing at­ten­tion to, as they are largely pro­pa­ganda. Ac­cord­ing to our es­ti­mates, state­ments that there are 5.2-5.5mn tourists a year now are two to three times larger than re­al­ity.

SMALL BUSI­NESS IN DE­CLINE

Over 2014-2018, Crimean SMEs shrank con­sid­er­ably in num­ber. At the be­gin­ning of 2014, there had been 15,553 work­ing small pri­vate en­ter­prises and 116,200 pri­vate en­trepreneurs. As of July 1, 2018, there were 1,382 pri­vate en­ter­prises, a more than ten­fold de­cline, and 55,328 pri­vate en­trepreneurs, less than half.

Un­like Ukraine, say Crimean en­trepreneurs, Rus­sia doesn’t have a sim­pli­fied tax re­port­ing sys­tem and has not re­duced the num­ber of in­spec­tions. Small busi­ness in Crimea has seen re­port­ing re­quire­ments mul­ti­ply, along with a huge num­ber of in­spec­tions and an un­for­giv­ing sys­tem of enor­mous fines for the least vi­o­la­tion. Prior to 2014, small busi­nesses ac­counted for more than 35% of em­ploy­ment on the penin­sula and this in­di­ca­tor was grow­ing steadily. To­day, they ac­count for only 19.5%.

The de­cline of small busi­ness in Crimea is likely to con­tinue. Prac­tice has shown that en­trepreneur­ship, free think­ing and in­de­pen­dent con­scious­ness are an­tag­o­nis­tic to the model of re­la­tions that oper­ates in modern-day Rus­sia.

CON­SUMERS: BIG WAGES FOR SELECT SEC­TORS ONLY

One of the main slo­gans prior to the Crimean pseudo-ref­er­en­dum on March 19, 2014, was that wages, pen­sions and so­cial ben­e­fits would rise con­sid­er­ably. Among those Crimeans who were drawn to Rus­sia, the im­age of the stan­dard of liv­ing in Rus­sia was shaped by watch­ing TV shows based in Moscow and St. Peters­burg, and by the ser­vice­men in the Black Sea Fleet in Sev­astopol, whose salaries were like per diems on in­ter­na­tional busi­ness trips.

Ini­tially, these prom­ises were held: start­ing in March 2014, salaries for gov­ern­ment em­ploy­ees were paid in rubles at a higher-than-nor­mal ex­change rate. The co­ef­fi­cient used for cal­cu­lat­ing the ex­change dif­fer­ence was 3.0 for com­mer­cial en­ti­ties, which was the ac­tual ex­change rate then, but pub­lic sec­tor salaries and pen­sions were cal­cu­lated at RUB 3.80 to the UAH, a kind of “re­ward for be­trayal.”

In 2014, food prod­ucts on the shelves of Crimean stores were still mostly Ukrainian-made, in­ex­pen­sive and of good qual­ity, so the first year, pen­sion­ers, of­fi­cials, teach­ers and doc­tors saw their buy­ing power go up. But by the be­gin­ning of 2015, the Rus­sian sys­tem be­gan to be used to cal­cu­late wages and pen­sions. Mean­while, Ukrainian goods be­gan to dis­ap­pear from shelves, to be re­placed by costlier Rus­sian equiv­a­lents, and even­tu­ally de­liv­er­ies from the main­land stopped al­to­gether when ac­tivists set up a block­ade at the end of 2015 and the Gov­ern­ment of Ukraine changed its poli­cies.

By 2016 it was ob­vi­ous that Rus­sian salaries and pen­sions were ac­tu­ally a lot smaller than “ad­ver­tised” in 2014. Be­tween the higher prices for Rus­sian goods and the steep de­cline of the ru­ble in the af­ter­math of Rus­sia’s ag­gres­sion against Ukraine com­pletely wiped out the il­lu­sory ef­fects of 2014. An ad­di­tional com­pli­ca­tion af­fect­ing the so­cial sta­tus of Crimeans was a de­cline in the real num­ber of jobs avail­able to lo­cals be­cause of an in­flux of work­ers from nearby Rus­sian prov­inces.

A look at dis­cus­sions about salary lev­els in Crimean fo­rums sug­gests that the aver­age nom­i­nal salary in Crimea in 20162017 was in the range of RUB 10,000-15,000, al­though of­fi­cial sta­tis­tics say it was close to RUB 25,000. Many pub­lic sec­tor em­ploy­ees get around RUB 8,00-12,000. The ex­cep­tions are of­fi­cials in gov­ern­ment of­fices, po­lice, mil­i­tary per­son­nel, and work­ers in pros­e­cu­tors’ of­fices, the ju­di­ciary and the mil­i­taryin­dus­trial com­plex, whose salaries are 5-10 times higher than the aver­age in Crimea. Mean­while, the aver­age pen­sion was RUB 11,000-12,000 in 2016-2017. In fact, most pen­sion­ers get only RUB 10,000.

Our anal­y­sis also showed that, com­pared to 2014, the con­sumer bas­ket had in­flated by 75.16% in ru­ble terms by 2017 and 154.79% in hryv­nia terms based on the ex­change rate. All told, the buy­ing power of the Crimean mon­e­tary unit in re­la­tion to the con­sumer bas­ket has shrunk eight­fold since the penin­sula was oc­cu­pied.

Based on salaries and pen­sions, Crimea has turned into an or­di­nary Rus­sian back­wa­ter with a low stan­dard and qual­ity of life. As nom­i­nal salaries go down while pri­or­ity sec­tors, as Rus­sia de­fines them, see their salaries go up and up, Crimean so­ci­ety will po­lar­ize more and more be­tween highly-paid Rus­sian work­ers and the orig­i­nal res­i­dents of the penin­sula, who will watch their ca­pac­ity to pur­chase sys­tem­at­i­cally shrink.

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