Russia Paying Steep Price for Annexing Crimea

This week (April 21), Russian prime minister and former president Dmitry Medvedev spent several hours presenting to the State Duma (lower house of parliament) the annual government report on policies and achievements in 2014, as required by the constitution. According to Medvedev, Russia is under siege and “there should be no illusions—the present economic crisis is not transient”; if oil prices stay low and “external economic pressure [sanctions over Ukraine] continues, we will all be forced to make sacrifices.” Medvedev called the present situation “unique” and an unprecedented combination of challenges: “The addition of Crimea to the Russian Federation did not leave a single sector of our economy unaffected—financial institutions have been deprived of foreign credit, while industry cannot import technologies.” According to Medvedev, in 2014 sanctions cost Russia some 25 billion euros ($27 billion at the present exchange rate) or 1.5 percent of GDP; “in 2015, losses may be several times more severe” (Government.ru, April 21).

According to Medvedev, the government has successfully dealt with the immediate consequences of the economic crisis: inflation seems to be slowly subsiding, the ruble has stabilized after a dramatic devaluation last December and is in fact strengthening, while industrial production has not fallen as steeply as initially feared. The Ministry of Economic Development predicts an overall economic depression in 2015 of around 3 percent of GDP, but by 2016, some growth in the economy is expected. The defense industry, according to Medvedev, is in good shape and is producing tens of thousands of new weapons (the news was met with ovation by Duma deputies). Still, long-term prospects are not rosy: Budget revenues have fallen, while expenditures have increased. Russians will be forced to adapt to a new reality, and Medvedev believes they will persevere. The prime minister insisted: “The severe outside economic pressure on Russia is the result of the main political decision of 2014—the return of Crimea, which was a correct and an only possible choice. We all—the entire nation, the government and parliament—supported it [the annexation of Crimea], fully understanding its possible consequences and now, together, are responsible to solve [these resultant] economic problems, [as well as] maintain social stability and development” (Government.ru, April 21).

He continued, “2014 carried Russia into a new epoch—it is surely the year of Crimea; the vast majority of people believed it [the annexation of Crimea] was just; despite the formality of post-Soviet borders, Crimea was always our land—shared pain, shared pride, shared hardships, shared victories.” Medvedev compared the Crimean peninsula’s annexation with the return of Hong Kong to China and the reunification of Germany: “The present unprecedented foreign economic and political pressure is the result of our collective decision—we all understood we could not do otherwise, no matter the cost” (Government.ru, April 21). The cost of integrating Crimea into Russia will indeed be high: the region needs subsidies and massive infrastructural investment, while the rest of Russia remains mired in recession. Medvedev and his government are directly responsible for the economic wellbeing of Russia, and the prime minister was apparently passing the buck. He called for unequivocal solidarity, austerity and social stability in the face of outside enemies—led by the United States—which purportedly want to undermine Russian pride and statehood and are the prime reason of any possible future and present calamities.

Of course, not all in Russia share the official Crimea-connected jingoism, and Medvedev’s attempt at fiery patriotic rhetoric did meet some response. Boris Vishnevsky from the liberal Yabloko party—a member of the opposition Yabloko fraction in the St. Petersburg legislature—accused Medvedev of being wrong about the total unanimity of Russian popular support for the Crimean annexation. A significant minority of Russians (10–15 percent of the population) has not succumbed to the vicious state propaganda and does not support the Kremlin. The Yabloko deputies in the St. Petersburg legislature publicly denounced Crimea’s seizure as illegal and invalid. In March 2014, according to Vishnevsky, Medvedev did not say anything about the possible soaring price of annexing the peninsula, and it makes no sense to invoke the notion of collective responsibility of the entire nation for a wrong decision taken by several men behind closed doors in the Kremlin. Since the economic fallout from the Crimean annexation has hit ordinary Russians the hardest—generating lower incomes, higher retail prices and greater unemployment—discontent may grow, and the responsibility for these effects will increasingly be attributed to the true creators of the havoc (Ekho Moskvy, April 22).

Also this week (April 22), President Vladimir Putin signed into law a revised budget for the current year (2015). State spending has been cut, and revenues are planned to decrease some 2.5 trillion rubles ($50 billion) because of lower oil prices. The federal budget deficit is planned at 2.7 trillion rubles ($55 billion). Under the sanctions regime, the Russian government cannot borrow abroad, and the possibility of borrowing on the internal money markets is severely limited. Most of the deficit will be covered by depleting the sovereign reserve fund created during years of high oil prices. At present, the reserve fund stands at 4.4 trillion rubles ($90 billion). Serious discussions between financial analysts of leading Russian banks currently revolve around the question of when the reserve fund may be fully depleted—which would potentially send Russia into a financial meltdown. If the price of oil stays low and the ruble stays strong, the budget deficit may increase by an additional $12–13 billion. Many Russian regions are broke and may require emergency budgetary transfers from Moscow. The sovereign reserve fund could be depleted by the end of 2015, according to some analysts, or last through 2016 according to others, when the price of oil may significantly rebound and Moscow might be able to renew foreign borrowing (Top.rbc.ru, April 22).

In an atmosphere of growing internal tension and economic/financial unpredictability, the Russian government has been amplifying its anti-Western rhetoric. Maintaining a siege mentality as well as portraying the US and the North Atlantic Treaty Organization (NATO) as enemies at the gates is apparently seen as essential to deflect the Russian public from the harsh economic reality and keep the regime stable.