Russia: Cost of Victory

Conventional wisdom emphasized the political prowess of Russia's Putin. Popular imagery had the US playing checkers, while Russia played chess. We argued that having to use military means to secure what was a client state was a sign of weakness not strength.

We also rejected the idea that Russia was responding to US weakness. Instead, we noted that the US did not use military force in 1956 when the Soviet Union invaded Hungary, and it was not that General Eisenhower was a weak President. Nor was there a military response when the Soviet Union invaded Czechoslovakia in 1968. The US and Europe did not confront Russia militarily when it invaded Georgia in 2008, and in which it still occupies some territory.

Yesterday, the president of Abkhazia, a break-away region of Georgia supported by Russia, resigned amid popular unrest. Demonstrators had reportedly stormed the presidential administrative building. On Saturday May 31, the local parliament had voted to oust President Ankvab. The head of the parliament (Bganba) was designated the successor. Initially, Ankvab resisted the parliament's action, but later capitulated.

The opposition to Ankvab reportedly stemmed from corruption in the government and the government's failure to boost the economy. Abkhazia is heavily dependent on Russia economic aid and security. Russia helped foster Abkhazia's independence from Georgia in 2008. It is one of the few countries that recognize it as a sovereign state.

The ousting of Ankvab is not necessarily an anti-Russia move. Russia's Foreign Minister Lavrov was quoted in the press indicating that the political crisis was an internal affair. This would seem to suggest that Russia does not intend to send in troops to help secure a friendly government.

Separately, reports suggest Russia's annexation of Crimea is producing a great deal of social and economic dislocation. This too does not mean that Crimea is having second thoughts; rather the cost of securing Crimea may be greater than initially anticipated, although economic considerations were likely tertiary for Putin.

First, Ukrainian banks operating in Crimea froze their business there. This was highly disruptive. For example, 40% of the Crimean population had accounts at Privatbank, which also was patronized by local government entities and many businesses. This has resulted in many workers not being paid, and many residents risk losing their savings. Russia has promised to reimburse up to $20k, according to reports.

Second, residents have to queue up for new passports and bank accounts. ATMs have strict daily withdrawal limits. Reports suggest the hotels are an economic bright spot as Russian officials and journalists swarm to Crimea.

Third, the annexation by Russia has further implications for Crimea. Russia's accounting standards are different and will have to be adopted. Book-keepers and accountants need to take new courses to continue to practice. Law firms are advertising services to help obtain new Russian passports, re-register property and re-register companies. Russia's environmental laws are reportedly different, and companies have to learn the new rules in order to comply.

Fourth, over the next few years, annexing Crimea may cost Russia more than $22 bln, according to some estimates. About 10% will go to the 25% of the Crimean population drawing a pension. Another 10% will be needed to fund Crimea and Sevastopol's 2014 budget shortfalls. There is also a bill for the bridge project to link Crimea with Russia's mainland. This was initially projected to cost $3 bln, but a leaked document puts the cost closer to $6 bln.