Five Years Later, Putin Is Paying for Crimea

(Bloomberg Opinion) -- Five years ago, on March 16, 2014, the Kremlin held a fake referendum in Crimea to justify after the fact the peninsula’s annexation from Ukraine. It changed the course of history, luring Russian President Vladimir Putin into a trap from which Russia may still break loose. But Putin himself can’t.

The Crimea operation itself went well for Putin, considerations of international law and human decency aside. There were few casualties during the annexation. (The exact number is difficult to determine, but even Ukrainian sources mention fewer than a dozen dead or missing servicemen and activists.) The U.S. and its European allies, according to contemporaneous minutes from the Ukrainian National Security and Defense Council published in 2016, urged the Kiev government not to resist the Russian takeover with armed force. Sanctions against Russia, introduced by the U.S. and the European Union between March and June, were toothless. A Russian-backed secession attempt in eastern Ukraine proceeded. 

Time has also shown that the direct cost of absorbing Crimea and the naval port city of Sevastopol, which were poorer in terms of per capita gross regional product than all other Russian regions in 2014, has been easily bearable for Russia. The subsidies poured into Crimea have varied between $1 billion and $2.7 billion a year, a manageable amount for the $1.6 trillion Russian economy. 

Five Years Later, Putin Is Paying for Crimea

These subsidies and other investments — a $3.7 billion bridge, new power generation and transmission facilities, money spent beefing up the Russian military presence, and some private capital inflows to the region’s tourism and wine-making industries — have helped drive up the gross regional product by 23 percent in dollar terms since 2014. Crimea and Sevastopol are no longer the country’s poorest regions, though they’re still close to the bottom of the ranking table.

Crimeans, especially indigenous Tatars, have paid for this with harsh restrictions of their basic rights and the loss of access to Western and Russian network brands, which have avoided the peninsula because of the fear of sanctions. But for the majority, life under Russian occupation isn’t worse than before. Intermittent attempts at independent polling — constrained, of course, by the fact they were conducted under a repressive regime — show that while Crimeans may not be overwhelmingly happy, they’re largely comfortable with being Russian citizens.

In exchange for the relatively small drain on Russia’s public finances and the contained Western outrage, Putin’s regime received a rare treasure: A genuine, emotional, vigorous jump in public support. According to Levada Center, the last remaining independent national pollster in Russia, Putin’s support stood at 65 percent in January 2014 — and at 82 percent two months later. It was a blanket mandate to do anything he wanted domestically or internationally.

I don’t want to go into the reasons for the majority of Russians issuing Putin this mandate, if only because I vehemently disagree with that majority to this day; the Crimea annexation drove me out of Russia, where I was being called a traitor because of what I wrote about it. Regardless of those reasons, the popular enthusiasm for the “Crimea Is Ours” cause and the near-absence of economic, political or military cost to the annexation lulled Putin into a sense of invincibility familiar to any gambler on a remarkable roll.

The annexation was a crime; what followed was, from a realpolitik point of view, an error of judgment. Putin, egged on by military and intelligence analysts who believed Ukraine was divided into politically incompatible Russian-speaking and Ukrainian-speaking areas, decided to try splitting off eastern Ukraine. He did it both as revenge for the 2014 “Revolution of Dignity,” which he considered a U.S.-inspired coup, and as an additional buffer against the new Ukrainian government’s ambition to join the North Atlantic Treaty Organization.

It was meant to be another low-cost operation: Send in some weapons and instructors, the Kremlin thinking went, and local rebels and their helpers from the Russian ultranationalist movement would split off Ukraine’s majority Russian-speaking east and south. The West would present no serious opposition, as it hadn’t with Crimea. Economic costs, too, would be minimal: Ukraine’s industrial might was concentrated in the Russian-speaking regions.

This time, though, the Ukrainian government put up a fight. A feeble one, to be sure, given that the country’s military never believed it would actually have to fight a war. But it soon transpired that the ragtag bands of local goons and Russian military reconstructors faced defeat without more Russian help. Russia sent troops to defeat the Ukrainian military at key junctions in 2014 and 2015 — and, crucially, it also sent the missile launcher that accidentally downed a passenger plane, Malaysia Airlines Flight 17, on July 17, 2014. The death of the 298 passengers and crew made sure Putin’s second Ukraine gamble would not be low cost.

I’m not even talking about the sanctions, which grew more serious once the eastern Ukraine adventure began and again after the MH17 tragedy. Some recent research attempting to isolate the effect of these restrictions from other factors, such as the oil price, has found no noticeable effect on economic growth; most economists agree that if the sanctions did cause any damage to Russia, it was smaller than that from the oil price shock. The sanctions limited Russian state banks’ and corporations’ access to capital, scared off foreign investors and forced the competent economic managers in the Russian government and central bank into a holding pattern of fiscal tightness and reserve accumulation — not the best position for economic growth — but they also helped Putin sail through all this, and the oil prices, on the back of popular support for him as Russia’s champion against a hostile West. 

Nor did the biggest price paid come from shrinking trade with Ukraine — even though it’s been estimated that the Russian defense industry needed $10 billion to get Ukraine out of its supply chains, and Russia lost a large export market for industrial goods it has difficulty selling elsewhere.

No, the highest cost to Putin came in bargaining power rather than in cash. Immediately after Crimea, geopolitical bargains were still possible for Putin. In a recent interview, former Georgian President Mikheil Saakashvili recounted how in 2014, Petro Poroshenko, then not yet president of Ukraine, told him Crimea could be traded for Ukraine’s eventual membership in NATO and the European Union (something Poroshenko himself will never confirm). Whatever the truth of that, Putin could have wrangled a post-Crimea bargain with reluctant Western leaders, especially European ones; after the eastern Ukraine adventure, and especially after the downing of Flight MH17 and all the laughable Russian denials that followed, his credibility was shot. Nobody knew if he would keep his end of any bargain. 

That doesn’t just include Western leaders. Putin’s lack of credibility is an important reason he can’t build any alliances at all, even with China and other major emerging economies. Even if Russia, as a rather large and relatively open economy, has proved difficult to isolate, Putin’s isolation is evident in Russia’s shrinking share of global arms sales, his inability to broker a political solution in Syria, his failure to persuade Belarussian dictator Alexander Lukashenko to move toward a closer union, the near-lack of Chinese direct investment in Russia. Literally all deals are elusive.

At the same time, Russians’ post-Crimea enthusiasm is gone, eroded by six years of falling incomes. Now, Putin’s financial costs are coming, too: Increased social and infrastructure spending are necessary to keep his support from sliding further, and, judging by the lack of reaction in the polls to Putin’s recent promises, as well as pronounced apathy during recent elections, Russians don’t trust him, either.

If the Crimea operation was a flash of evil brilliance and daredevil’s luck, Putin’s later overconfidence ended up trapping him in this limbo of mistrust. Russia, the world and, likely, parts of the Russian establishment are waiting for Putin to go, even if no one can make him leave. Perhaps, with him out of the picture, deals, bargains, mutual concessions and all kinds of realpolitik games will be possible again, as they still were in the spring of 2014. Meanwhile, Fortress Russia is locked and no one’s coming to parley.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Leonid Bershidsky is Bloomberg Opinion's Europe columnist. He was the founding editor of the Russian business daily Vedomosti and founded the opinion website Slon.ru.

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