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What annexing Crimea will cost Russia's government

Wednesday - 3/19/2014, 12:29pm  ET

FILE - In this Sunday, March 16, 2014 file photo a Tatar man works in a fruit warehouse within a market in Bakhchisaray, Crimea. Despite the pebble beaches and cliff-hanging castles that made Crimea famous as a Soviet resort hub, the Black Sea peninsula has long been a corruption-riddled backwater in economic terms. The Kremlin, which decided to take the region from Ukraine after its residents voted in a referendum to join Russia, has begun calculating exactly what it will cost to support Crimea's shambolic economy, which one Russian minister described as "no better than Palestine." (AP Photo/Manu Brabo, File)

LAURA MILLS
Associated Press

MOSCOW (AP) -- Despite the pebble beaches and cliff-hanging castles that made Crimea famous as a Soviet resort hub, the Black Sea peninsula has long been a corruption-riddled backwater in economic terms. The Kremlin, which decided to take the region from Ukraine after its residents voted in a referendum to join Russia, has begun calculating exactly what it will cost to support Crimea's shambolic economy -- which one Russian minister described as "no better than Palestine."

Here's a look at what Crimea needs most and the economic challenges Russia faces in absorbing it:

GREAT EXPECTATIONS

In the rapid run-up to the referendum in Crimea, voters were bombarded with the message that the grass was a lot greener on the Russian side.

President Vladimir Putin may have fanned such sentiment during Ukraine's anti-government demonstrations that preceded the Russian invasion of Crimea. He sympathized with protesters, casting them as fed up with an economy mismanaged by "one group of crooks" after another. And he extolled the comparative success of the Russian economy -- firing off figures about pensions and wages in both countries to argue that people were better off in Russia.

On Monday, one day after the referendum, Crimean Prime Minister Sergei Aksyonov wrote on his official Twitter account that Moscow had provided 15 billion rubles ($400 million) in aid to the region, which he said had doubled the Crimean budget overnight.

"This is a platform ideal for taking risks ... and for realizing economic miracles," said Russia's business ombudsman Boris Titov.

"NO BETTER THAN PALESTINE"

But as the Russian dream of acquiring Crimea becomes a reality, Moscow is trying to calculate the price tag of bringing in a region that -- in the words of Russian Regional Development Minister Igor Slyunyayev -- has an economy that "looks no better than Palestine."

As part of Ukraine, about 40 percent of Crimea's annual budget of roughly $500 million was propped up by subsidies from Kiev. Russia would be expected to at least match -- and probably far exceed -- the Ukrainian annual contribution to raise living standards in its new territory.

Living standards in Crimea are drastically different from Russia. The GDP per capita in Russia, home to more than a hundred of billionaires, is about $14,000. In Crimea, it's about $5,000.

Demographics are one major hurdle. More than 500,000 people -- about a quarter of the population -- are pensioners. Pensions in Russia are about double what they are in Ukraine, and former Russian tax minister Alexander Pochinok estimated that paying pensions in Crimea alone would cost 70 billion rubles ($1.9 billion) per year.

Many Crimean residents make their living through tourism, although much of that money is kept off official ledgers and therefore difficult to tax. About 70 percent of tourists in recent years have been Ukrainians, in large part because the peninsula's only road and railroad links are to mainland Ukraine. The industry is likely to be hard hit as many Ukrainian travelers stay away this summer, although Russian authorities have pledged to reduce the cost of air travel to the peninsula to bolster travel to the region.

DEPENDENCE ON UKRAINE

Crimea is highly dependent on Ukraine for energy and water, most of which is supplied across the thin strip of land that connects the peninsula to the mainland. About 80 percent of the region's electricity is supplied across the isthmus. The governor of Russia's southern Krasnodar region, which is separated from Crimea by a stretch of water called the Kerch Strait, pledged to provide electricity to the peninsula by building an underwater supply system. Other officials have said Crimea may need to build its own electricity plant -- a project that could come with a price tag of nearly $1.7 billion, analysts say.

Russia has promised to bolster infrastructure in the region. Moscow and Kiev have been talking about building a bridge over the Kerch Strait for more than a decade, but the project has repeatedly stalled. In recent weeks, Russian officials have eagerly revived the project, which is estimated to take years and cost at least 50 billion rubles ($1.4 billion). They also are now discussing building a railroad and underwater tunnel across the strait.

Even as the Crimean government has threatened to nationalize Ukrainian government property, Kiev has promised not to turn off the taps to energy and water.

"(The Kiev government) is eager to be seen as reasonable and moderate through all this; they don't want to give the Russians an excuse for further intervention," said Timothy Ash, an analyst at Standard Bank. "The danger of being obstinate might be that Russians would decide to intervene around Crimea to secure water and utility supplies."

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