Why annexing Crimea may prove costly for Russia

Crimeans voted to break off from Ukraine and join Russia. Their vote represents the re-establishment of a historic cultural relationship.

But take away the emotional side of the Crimean referendum and reality hits home – the economic challenges that are yet to knock on their door.

The peninsula only produces one-tenth of the energy it consumes. Ninety percent of its water, 80% of its electricity, and roughly 65% of its gas come from the rest of Ukraine.

And while Russia has enough energy to supply power to Crimea, it’s lacking the infrastructure – there are not even any underwater cables though the Strait of Kerch, which separates Russia and Crimea.

Crimean authorities set out their plan to nationalize the oil and gas company Chernomorneftegaz, but according to Lilit Gevorgyan, Senior Economist at IHS, that may not be enough to “solve fully their energy problems and … become independent of Ukraine.”

And the costs don’t end there.

Crimea depends heavily on the Ukrainian mainland to balance its books. Around 70% of Crimea’s $1.2 billion budget comes directly from Kiev.

Annexation of Crimea would be costly for Russia too because Crimea will need similar support, if not more, from Moscow. And while Russia’s economy is stable, it is not growing.

Moscow recently announced it will invest between $5 billion and $6 billion in Crimea, according to Helena Yakovlev Golani at the University of Toronto. The costs begin to add up – and that’s not including the challenges of integrating the banking system and currency and validating land titles.

For the Crimeans, the most noticeable change could be the lack of tourists this season, with many expecting visitors to cancel tours because of the crisis.

This will be damaging for Crimea, according to Ukraine’s Tourism Board, given that Crimea attracted 6 million tourists last year. Seventy percent of holiday makers in the region are domestic visitors from mainland Ukraine.

The crisis has been portrayed as a ge