Putin Paradise Becomes Economic No-Go Zone Where Cash Rules

Simferopol's main market in Crimrea.

Simferopol's main market in Crimrea.

Photographer: Filippo Monteforte/AFP via Getty Images

Nearly a year after Russia annexed Crimea, Moscow’s man here, Oleg Saveliev, is struggling with a seemingly mundane task: paying bills.

Like everyone on this disputed Black Sea peninsula, the minister for Crimea is living in an economic no man’s land.

International banks like UniCredit SpA, credit cards like MasterCard and Visa, global brands like McDonald’s -- all vanished with Russia’s adventurism in Ukraine and seizure of Crimea. In their place has come a cash-only society of runaway inflation, chronic shortages and growing anxiety over the conflict. Even Russian companies are staying away.

Before Saveliev flies in, he packs wads of ruble notes to pay for his hotel. Everyone, even ministers, must pay cash.

“It’s astonishing,” says Saveliev, 49, sitting at a table in a government office beside the local parliament building, where a year ago this month masked gunmen raised a Russian flag. Like many here, he blames Ukraine and its U.S. and European allies for Crimea’s dire economic straits.

Crimea, summer retreat of the czars, has fallen on hard times in ways unlike anywhere else in Vladimir Putin’s Russia. But the region offers a glimpse at what the rest of the nation’s economy might look like should the U.S. and the European Union impose more sanctions on Russia if the latest attempt at a cease-fire in eastern Ukraine collapses.

Economic Babel

This time last year, the 2 million residents of the peninsula, including those here in the capital, Simferopol, were living in Ukraine. Today, after voting overwhelming in a referendum branded illegal by Ukraine and its allies, they are living in Russia -- and what seems like a state of economic babel.

Crimea may consider itself part of Russia, but many of its traffic signs are still written in Ukrainian. Land telephone lines still use the Ukraine country code, 380. The clocks, however, have changed: Last March, Crimea formally switched time zones, aligning itself with Moscow. Crimea went through much of this in reverse in 1991, when Ukraine left the Soviet Union, taking the peninsula with it.

Many international businesses have pulled out, but few Russian companies have pulled in. Most want to avoid possible penalties elsewhere for operating in Crimea, which the U.S. and the EU view as occupied territory, said Nikolai Petrov, a political science professor at the Higher School of Economics in Moscow.

Empty Shelves

For many people, the biggest economic worry is the spiraling cost of food. Many products used to be imported from Ukraine, but the government in Kiev’s refusal to recognize the border means its companies can’t legally export to Crimea directly. The blockade has choked off all but small sales of fresh fruits and vegetables. What little business gets done is conducted on a cash basis, according to the Crimean Trade Association. Most supplies come via ferry from Russia. Bad weather can delay shipments for days.

On the outskirts of Simferopol, at a supermarket owned by Groupe Auchan SA of France, the entire fresh meat department on a recent day consisted of three packages of beef. Chicken and pork were unavailable. Elsewhere shelves were stocked with identical products like plastic bottles of milk and fermented yogurt.

At Furshet, a Ukrainian-owned supermarket chain, most shelves held Russian goods. Not a single Russian supermarket chain has come to Crimea, however. Nor have big Russian banks, including state-run OAO Sberbank and VTB Group.

Price Spikes

“The Crimean government would like to receive supplies from Ukraine to avoid social tensions, but politics is trumping business in Ukraine,” said Sergei Makeyev, head of the Crimean Trade Association.

After annexing Crimea, Putin, the Russian president, moved to reward his new constituents by doubling payments to about 560,000 pensioners and 200,000 public workers. But with prices skyrocketing, those increases are being eaten away. Inflation jumped 38 percent and the cost of food increased by almost half from March through December, regional government data show.

As a result, the 681 billion rubles ($10.9 billion) that Russia has agreed to spend on Crimea between now and 2020, including on infrastructure, may not be enough to meet the region’s needs, according to Saveliev, the Russian minister.

Where that money will come from is unclear. The government in Moscow is being forced to cut spending in the face of what most economist predict will be a nasty recession.

Patriotic Tourism

International sanctions are hitting Crimea particularly hard, said Alexander Lebedev, a Russian investor who owns a hotel in the Crimean resort city of Alushta. “They are even tougher for Crimea than for Russia.”

Still, 82 percent of Crimeans remain “fully” behind joining Russia and more than half say they’re better off financially because of it, according to a poll of 800 residents conducted by GFK Ukraine in the week ended Jan. 22.

The industry that may be hardest hit is also one of the biggest -- tourism, which one in three families depend on. The number of visitors to what Catherine the Great’s lover, Grigory Potemkin, called Russia’s “paradise,” declined by a third last year to 4 million, government data show.

Eighty percent of all tourists last year were Russians, up from 25 percent in 2013, while Ukrainians, who accounted for 70 percent before annexation, have largely vanished.

The decline would have been even steeper if Russia hadn’t undertaken an extensive marketing campaign and subsidy program to encourage officials and employees of state companies to visit with their families, according to Alexander Trofimov, head of the Association of Crimean Resorts.

“A lot of people came for patriotic reasons,” Trofimov said in his basement office in a nondescript building.

‘We’re Afraid’

Business may get worse before it gets better, now that Ukraine has halted rail and bus services to the peninsula. That leaves Russian tourists two ways to travel -- by plane, which cost as much as $1,400 per person last summer, or by the unreliable ferry across the Kerch Strait.

Ukraine is also squeezing the agriculture industry, which employs 10 percent of the population. A cut in supplies through the Northern Crimean Canal in April left the peninsula with only enough water to irrigate 12 percent of its farmland, according to the local Association of Farmers and Landowners.

This forced most farmers to stop planting water-intensive rice and soya, abandon crop rotation and switch to large-scale cultivation of sunflowers, which is more damaging to the soil, the head of the association, Sergei Tur, said at his farm.

“We’re afraid,” Tur said, pointing to his fields and the German machines used to harvest them. “This took years to build up. I have to feed my family.”

Siege Mentality

The siege mentality is palpable at the mile-wide buffer zone between Crimea and Ukraine proper, which is manned by guards on both sides.

Valentina, a 62-year-old pensioner in the northern Crimean town of Armyansk, said she used to take the bus to visit her mother across what is now a border every week for 15 years. But now that there’s no bus service, she has to take a taxi to the divide and wait for a guard to walk her to the mainland, where she has to get another taxi to reach her destination.

It’s strange and frightening, Valentina said, declining to give her last name.

Leningrad Siege

Local authorities say they’re working to alleviate the growing sense of isolation by upgrading the Simferopol airport and the Kerch ferry line. Crimea suffered frequent blackouts at the end of last year until Russia agreed to sell power to Ukraine, which supplies the bulk of the peninsula’s elecricity, at domestic rates.

Crimea’s real salvation, though, won’t come until it’s reunited with Russia physically, by bridge, Mikhail Sheremet, the region’s deputy premier, said. For that, Crimeans will have to wait years: construction of the 19-kilometer (12-mile) span over the Kerch isn’t expected to be completed until the end of 2018 at the earliest. The wait will be well worth it, he said.

“It will be for Crimea what the ‘Road of Life’ was for Leningrad,” Sheremet said, referring to the only way in and out of what is now St. Petersburg during the 872-day Nazi siege in World War II. “It will mean we will always be linked to the rest of Russia.”

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