Article The World We Want In partnership with the UNDP

Costing Crimea

Russia has just inherited well over a million new dependents.

That number may provide a quick and unintentional fix to the country’s demographic problems, but its unlikely to solve its growing financial ones.

It must now keep those people sweet, if life isn’t better under Moscow’s rule, then more than just ethnic Tatars and Ukrainians may long for Kiev.

Beyond Western sanctions and a growing tide of capital flight this may prove expensive, Russia has already earmarked $7 billion for Crimean’s in 2014.

For a country with GDP around $2 trillion this may not appear much- but it comes at a time when Russia’s purse strings are facing a major squeeze- over time voters struggling with poverty within Russia’s borders, may struggle to comprehend why such large amounts are being spent overseas

State at Play

During a period when austerity and fiscal conservatism have been the choice words worldwide, over the past few years Russia has spent beyond its means.

Putin needed to overcome unprecedented discontent and win a presidential election in 2012. He did- buying forgiveness for any undemocratic leanings with a flurry of social benefits, including raising the rate of pensions and extending a popular child bonus policy. The elderly, state workers and rural poor became centrepieces of his campaign- with incentives to boot, dubbed his ‘May Decrees’.

But with victory also came an unbalanced budget- and with that the only real signs of open discontent within Moscow’s corridors of power. Two senior officials were dismissed in late 2012 amidst criticism of the president’s tranche of spending. One of his most trusted lieutenants, ex-Finance Minister Alexei Kudrin, had earlier left government citing military overspend- only to later appear on Moscow’s streets alongside anti-government campaigners. The Kremlin’s financial clout has already been questioned from within, but if Russia’s poor growth continues, discontent may be heard outside its walls.

By 2015 Russia’s Finance Ministry estimates its budget deficit will double to 1% of GDP. To European eyes familiar with far larger sums of debt, such an amount may seem minimal, but for Russia’s economy, memories of a 1998 default are still fresh.

The government forecasts that worrying trend will curtail somewhat by 2016, but those predictions are based on fluctuating oil prices.

Furthermore, a recent study by geopolitical intelligence firm Stratfor suggested that when combined with the local debt levels of Russia’s regions, national debt is far higher.

Using figures from ratings agency Standard and Poor, they conclude that most regions debt has risen around 100% since 2010, putting overall Russian debt at $300 billion or 14% of GDP.

Their analysis goes onto conclude that of the 83 regional budgets, only 20 are likely to keep a surplus or moderate level of debt by 2015- posing the risk of federal bailouts and local debt default.

All this came before Prime Minister Dmitri Medvedev promised billions to aid Crimea.

Since, Standard and Poor has revised down Russia’s credit status to near-junk, making it more costly to borrow.

In light of sanctions set to limit Russian firms access to foreign debt markets, some companies may see profits affected- this ultimately could impact job security- making the issue far more politically explosive.

The backdrop to this is increasingly poor output from industrial production- a key area in Russia’s economy and also an important employer, especially in regional, industry based towns.

Borderline relief

Following Crimea, Putin’s popularity is greater than ever.

Within the country the move has undoubtedly restored some sense of national pride or identity- this is a country that often struggled to find such things after the collapse of the USSR.

But just a few months ago Putin was experiencing wholesale discontent, with similar opinion polls showing his lowest ratings yet.

An upsurge in nationalism has masked the ballooning dissatisfaction originally spurred by a faltering economy, which made the Kremlin’s clampdown harder to swallow.

For now Russia’s leadership may be riding a crest of patriotism, but once geographical gains lose their sparkle, financial losses may become more of an issue.

This is no more acute than in how people’s pockets are affected. In a country where the Communist Party remains the second greatest force, social security, pensions and welfare are paramount.

It is in this particular area the bill for Crimea opens the door to future criticism.

Moscow has pledged to bring the regions pensions and public sector pay up to Russian standards. In practice that means doubling the pensions of around 600,000 pensioners, Russian officials have put the price tag at $1 billion per year- that excludes military veterans, the high concentration of whom on the peninsula will likely see costs soar further.

Put in context, this figure amounts to around the level of state coffers spent fighting tuberculosis in Russia, a persistent and perennial blight on the state of national health - in 2012 alone the country registered 97, 542 cases of the infection according to World Health Organisation statistics.

Another Kremlin promise to Crimean counterparts has been to cover the annual costs of increasing state workers pay, Reuters analysis has the price tag at $840 million per year.

All this may appear small fry to the tide of cash set to flow in order to secure energy and water independence from Ukraine, the Crimean peninsula has relied on Kiev for 80% of such necessities. Crimea has also come to rely on Kiev for much of its budget, now that charge falls to Moscow.

Developing greater transport links and major infrastructure projects are also on the cards, with Prime Minister Dmitri Medvedev recently announcing plans for a bridge to be built linking Crimea with mainland Russia.

State of Play

This comes at a time that many Russians are being warned of a coming pinch.

In 2013, before a raft of sanctions hit the country, Finance Minster, Anton Siluanov warned “we see big problems in 2016 and 2017” a gloomy referral to severe funding gaps in the budget and overall economic stagnation.

Since then growth forecasts have been drastically revised down and tens of billions of dollars have left the country. Politicians are yet to identify where those cuts will come, but the current trajectory of social spending, branded Putin’s ‘May Decrees’ following his 2012 election, may be harder to safeguard in a future Russia- something will likely need to give.

During a period of state spending that has come at the price of deficit and an unbalanced budget, you might expect healthcare to be receiving its proportional share- but it hasn’t.

Since 2013 the state has reduced the amount it contributes to healthcare by 8.7 percent, with plans to further lower this come 2015 by 17.8%. In context, the last OECD figures available for 2011 show Russia was already spending well under the organisations average. In terms of health expenditure per capita Russia forked out $1,316, compared to the average of $3,339.

Russia does offer healthcare for all, but more and more services deemed non-life threatening will be priced.

It is depicted by many as an increasingly two-tier system whereby the rich, centred around Moscow’s powerbase, can access private healthcare, whilst those in the regions must rely on often under resourced and overstretched care that is questionable in quality.

It is such conditions that mean Russia is hounded by one of the worst infection rates for tuberculosis in the world, including mutli-drug resistant strains. In the past the problem has appeared most acute in prisons, with overcrowding sourcing the spread.

Dr Dara Masoud, tuberculosis programme manager for the World Health Organisation’s Europe division noted that this is something also seen in hospitals; “transmission of TB due to poor infection controls in hospitals is a public health problem that has been addressed, but there are still gaps.”

The Russian government has spent big in recent years to tackle this problem- to the recognition of groups such as the WHO- but the sick may wonder if more could have been spared. This is just one of the more headline grabbing problems.

All this comes at a time that Moscow has greatly increased the amount of the country’s budget spent on the military.

In 2013 Russia surpassed the UK in terms of military spending, shelling out $68.9 billion, according to IHS Jane’s annual defence budgets review.

Currently only bested by China and the U.S, that figure is set to rise, the same survey finds that spending will increase 44 percent over the next three years, by 2015 the armed forces will account for 20% of Russia’s budget.

Such expenditure has been long anticipated, with a modernisation drive coming in at over $700 billion slated to reform equipment, training and a reliance on conscription.

But speaking to Dmitry Gorenberg, a senior research scientist for analysis firm CNA, he noted:

“The expenditures are expected to increase significantly in the second half, post 2015, in the ten year programme around 39% of expenditures were in the first five years, whereas it will be 61% in the second five years.”

That means without a major shift in Kremlin policy, Russia will only bolster the military’s share of the budget.

The essence of this spending spree has been to mould Russia into a 21st century fighting force, more confident on the global stage. With Putin’s actions in Crimea and on Ukraine’s border with an elite, mobile force, the world has seen that increased clout come to fruition.

Thanks, but no tanks

Russia as a state can afford Crimea.

Whilst the Kremlin has prioritised domestic political gains over economic ones, the peninsula also offers the potential for highly lucrative gas and oil exploration.

Indeed, the country’s general oil reserves make expenditure in Crimea comparatively paltry- despite the mix of sanctions and capital flight, economists are not yet warning of a Russia on it’s knees.

But just because Russia can afford to, doesn’t mean Putin and his administration can.

Putin took a gamble with his actions in Crimea, chancing his hand amidst an opportune moment- risking isolation from the West.

But he’s also bet that Russians buy into his longer-term vision for the country.

Crimea is in many respects the embodiment and indeed consequence of that vision.

Crimea represents a choice to have the international presence of a top world power, without its financial clout- to bolster the former even at the expense of the latter.

It defines Russian nationhood as what’s built beyond its borders rather than developing within, to above all yield a strong military hand, even when conditions at home appear increasingly weak.

Over the coming years, perhaps decades, the question of Crimea’s cost will be better answered by what price Russians were ever prepared to pay for it.

More to the point, whether the resurgent Russia Putin markets with his actions in Crimea, is one voters see as progress.

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