What annexing Crimea will cost Russia's government

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What annexing Crimea will cost Russia's government
Russia's President Vladimir Putin addresses the Federation Council in Moscow's Kremlin on Tuesday, March 18, 2014. Putin defended Russia?s move to annex Crimea, saying that the rights of ethnic Russians have been abused by the Ukrainian government. He pointed at the example of Kosovo?s independence bid supported by the West, and said that Crimea?s secession from Ukraine repeated Ukraine?s own secession from the Soviet Union in 1991. (AP Photo/Alexander Zemlianichenko)
Russian President Vladimir Putin, second right, Speaker of Crimean legislature Vladimir Konstantinov, second left, Crimean Premier Sergei Aksyonov, left, and Sevastopol mayor Alexei Chalyi, right, shake hands after signing a treaty for Crimea to join Russia in the Kremlin in Moscow, Tuesday, March 18, 2014. President Vladimir Putin on Tuesday signed a treaty to incorporate Crimea into Russia, describing the move as the restoration of historic injustice and a necessary response to what he called the Western encroachment on Russia?s vital interests. (AP Photo/Sergei Ilnitsky, Pool)
Russia's President Vladimir Putin addresses the Federation Council in Moscow's Kremlin on Tuesday, March 18, 2014. Putin defended Russia?s move to annex Crimea, saying that the rights of ethnic Russians have been abused by the Ukrainian government. He pointed at the example of Kosovo?s independence bid supported by the West, and said that Crimea?s secession from Ukraine repeated Ukraine?s own secession from the Soviet Union in 1991. (AP Photo/Alexander Zemlianichenko)
ALTERNATIVE CROP Russian President Vladimir Putin signs a treaty for Crimea to join Russia during a signing ceremony after addressing the Federal Assembly in the Kremlin in Moscow, Tuesday, March 18, 2014. President Vladimir Putin on Tuesday signed a treaty to incorporate Crimea into Russia, describing the move as the restoration of historic injustice and a necessary response to what he called the Western encroachment on Russia?s vital interests.(AP Photo/Alexander Zemlianichenko)
Russian President Vladimir Putin, second right, shakes hands with Crimean leaders, Speaker of Crimean legislature Vladimir Konstantinov, second left, Crimean Premier Sergei Aksyonov, left, and Sevastopol mayor Alexei Chalyi, right, after signing a treaty for Crimea to join Russia in the Kremlin in Moscow, Tuesday, March 18, 2014. President Vladimir Putin on Tuesday signed a treaty to incorporate Crimea into Russia, describing the move as the restoration of historic injustice and a necessary response to what he called the Western encroachment on Russia?s vital interests. (AP Photo/Sergei Ilnitsky, Pool)
Russian President Vladimir Putin, second right, and Crimean leaders, Speaker of Crimean legislature Vladimir Konstantinov, second left, Crimean Premier Sergei Aksyonov, left, and Sevastopol mayor Alexei Chalyi, right, sign a treaty for Crimea to join Russia in the Kremlin in Moscow, Tuesday, March 18, 2014. President Vladimir Putin on Tuesday signed a treaty to incorporate Crimea into Russia, describing the move as the restoration of historic injustice and a necessary response to what he called the Western encroachment on Russia?s vital interests. (AP Photo/Sergei Ilnitsky, Pool)
A boy holds a Russian flag as he gathers with others at a square to watch a televised address by Russian President Vladimir Putin to the Federation Council, in Sevastopol, Ukraine, Tuesday, March 18, 2014. Putin on Tuesday fiercely defended Russia's move to annex Crimea saying Crimea's vote on Sunday to join Russia was in line with "democratic norms and international law." (AP Photo/Andrew Lubimov)
Russian President Vladimir Putin drinks water as he addresses the Federal Assembly in the Kremlin in Moscow, Tuesday, March 18, 2014. With a sweep of his pen, President Vladimir Putin added Crimea to the map of Russia on Tuesday, describing the move as correcting past injustice and a response to what he called Western encroachment upon Russia's vital interests. (AP Photo/Alexander Zemlianichenko)
Russian President Vladimir Putin, second right, Speaker of Crimean parliament Vladimir Konstantinov, second left, Crimean Premier Sergei Aksyonov, left, and Sevastopol mayor Alexei Chalyi, right, sit during a signing ceremony for the treaty to join Crimea with Russia in the Kremlin, Moscow, Tuesday, March 18, 2014. President Vladimir Putin on Tuesday signed a treaty to incorporate Crimea into Russia, describing the move as the restoration of historic injustice and a necessary response to what he called the Western encroachment on Russia?s vital interests. (AP Photo/Alexander Zemlianichenko)
Russian President Vladimir Putin, right, Speaker of Crimean legislature Vladimir Konstantinov, center, and Crimean Premier Sergei Aksyonov stand after signing a treaty to incorporate Crimea into Russia in the Kremlin in Moscow, Tuesday, March 18, 2014. President Vladimir Putin on Tuesday signed a treaty to incorporate Crimea into Russia, describing the move as the restoration of historic injustice and a necessary response to what he called the Western encroachment on Russia?s vital interests. (AP Photo/Alexander Zemlianichenko)
Crimean Premier Sergei Aksyonov, right, receives congratulations from Chechnya's regional leader Ramzan Kadyrov, left, and State Duma Speaker Sergei Naryshkin, center, after signing a treaty for Crimea to join Russia in the Kremlin in Moscow, Tuesday, March 18, 2014. President Vladimir Putin on Tuesday signed a treaty to incorporate Crimea into Russia, describing the move as the restoration of historic injustice and a necessary response to what he called the Western encroachment on Russia?s vital interests. (AP Photo/Sergei Ilnitsky, Pool)
Russian President Vladimir Putin enters the hall to address the Federal Assembly in the Kremlin in Moscow, Tuesday, March 18, 2014. President Vladimir Putin on Tuesday signed a treaty to incorporate Crimea into Russia, describing the move as the restoration of historic injustice and a necessary response to what he called the Western encroachment on Russia's vital interests. (AP Photo/Sergei Ilnitsky, pool)
Russia's President Vladimir Putin addresses the Federation Council in Moscow's Kremlin on Tuesday, March 18, 2014. President Vladimir Putin defended Russia?s move to annex Crimea, saying that the rights of ethnic Russians have been abused by the Ukrainian government. He pointed at the example of Kosovo?s independence bid supported by the West, and said that Crimea?s secession from Ukraine repeated Ukraine?s own secession from the Soviet Union in 1991. (AP Photo/Sergei Ilnitsky, pool)
An elderly woman holding a calendar depicting Soviet leader Josef Stalin celebrates after watching a broadcast of Russian President Vladimir Putin's speech on Crimea in Sevastopol, Crimea, Tuesday, March 18, 2014 as thousands of pro-Russian people gathered to watch the address . Fiercely defending Russia's move to annex Crimea, Putin said Russia had to respond to what he described as a western plot to take Ukraine into its influence. (AP Photo/Vadim Ghirda)
People cast shadows as they wave flags as they gather at a square to watch a televised address by Russian President Vladimir Putin to the Federation Council, in Sevastopol, Ukraine, Tuesday, March 18, 2014. Putin on Tuesday fiercely defended Russia's move to annex Crimea saying Crimea's vote on Sunday to join Russia was in line with "democratic norms and international law." (AP Photo/Andrew Lubimov)
People gather at a square to watch a televised address by Russian President Vladimir Putin to the Federation Council, in Sevastopol, Ukraine, Tuesday, March 18, 2014. Putin on Tuesday fiercely defended Russia's move to annex Crimea saying Crimea's vote on Sunday to join Russia was in line with "democratic norms and international law." (AP Photo/Andrew Lubimov)
SIMFEROPOL, UKRAINE - MARCH 17: Couples dance in Lenin Square on March 17, 2014 in Simferopol, Ukraine. Voters on the autonomous Ukrainian peninsular of Crimea voted overwhelmingly yesterday to secede from their country and join Russia. Crimea will seek to adopt the Russian Ruble as its official currency. (Photo by Spencer Platt/Getty Images)
People hold their Ukrainian national flags and a poster featuring Russian President Vladimir Putin and reading 'Stop Putin' as they demonstrate in front of the Russian Ambassy in Berlin on March 17, 2014. Crimea declared independence on March 17 and applied to join Russia while the Kremlin braced for sanctions after the flashpoint peninsula voted to leave Ukraine in a ballot that will likely fan the worst East-West tensions since the Cold War. AFP PHOTO / DPA / KAY NIETFELD +++ GERMANY OUT (Photo credit should read KAY NIETFELD/AFP/Getty Images)
SIMFEROPOL, UKRAINE - MARCH 17: In this photo illustration, Ukrainian historical figures are viewed on Ukrainian bank notes on March 17, 2014 in Simferopol, Ukraine. Voters on the autonomous Ukrainian peninsular of Crimea voted overwhelmingly yesterday to secede from their country and join Russia. Crimea will seek to adopt the Russian Ruble as its official currency. (Photo by Spencer Platt/Getty Images)
SIMFEROPOL, UKRAINE - MARCH 17: Couples dance in Lenin Square on March 17, 2014 in Simferopol, Ukraine. Voters on the autonomous Ukrainian peninsular of Crimea voted overwhelmingly yesterday to secede from their country and join Russia. Crimea will seek to adopt the Russian Ruble as its official currency. (Photo by Spencer Platt/Getty Images)
SIMFEROPOL, UKRAINE - MARCH 17: A woman walks by grafitti on a wall on March 17, 2014 in Simferopol, Ukraine. Voters on the autonomous Ukrainian peninsular of Crimea voted overwhelmingly yesterday to secede from their country and join Russia. Crimea will seek to adopt the Russian Ruble as its official currency. (Photo by Spencer Platt/Getty Images)
Armed men, believed to be Russian servicemen, patrol outside an Ukrainian military base in Perevalnoye on March 17, 2014. The United States and Europe aimed sanctions directly at Vladmir Putin's inner circle Monday to punish Russia's move to annex Crimea, deepening the worst East-West rift since the Cold War. The move came hours after the Ukrainian regime voted to join Russia in a referendum the West deems illegitimate and as Crimea embarked on the next political steps to embrace Kremlin rule. AFP PHOTO/ VASILY MAXIMOV (Photo credit should read VASILY MAXIMOV/AFP/Getty Images)
Armed men, believed to be Russian servicemen, patrol outside an Ukrainian military base in Perevalnoye on March 17, 2014. The United States and Europe aimed sanctions directly at Vladmir Putin's inner circle Monday to punish Russia's move to annex Crimea, deepening the worst East-West rift since the Cold War. The move came hours after the Ukrainian regime voted to join Russia in a referendum the West deems illegitimate and as Crimea embarked on the next political steps to embrace Kremlin rule. AFP PHOTO/ VASILY MAXIMOV (Photo credit should read VASILY MAXIMOV/AFP/Getty Images)
Cossacks, pro-Russian activists, march to take part in a rally outside the regional state administration building in Donetsk, eastern Ukraine, on March 17, 2014. The United States on March 17 imposed financial sanctions on seven top Russian government officials and lawmakers to punish Russia's incursion into Crimea. The list of officials who will see any property, assets and interests blocked in the United States includes Dmitry Rogozin, deputy prime minister, and several senior members of the Duma and advisors to President Vladimir Putin. AFP PHOTO / ALEXANDER KHUDOTEPLY (Photo credit should read Alexander KHUDOTEPLY/AFP/Getty Images)
A pro-Russian activist holds a flag during a rally as police forces stand guard in front of the regional state administration building in Donetsk, eastern Ukraine, on March 17, 2014. The United States on March 17 imposed financial sanctions on seven top Russian government officials and lawmakers to punish Russia's incursion into Crimea. The list of officials who will see any property, assets and interests blocked in the United States includes Dmitry Rogozin, deputy prime minister, and several senior members of the Duma and advisors to President Vladimir Putin. AFP PHOTO / ALEXANDER KHUDOTEPLY (Photo credit should read Alexander KHUDOTEPLY/AFP/Getty Images)
PEREVEVALNE, UKRAINE - MARCH 17: Armed soldiers without identifying insignia keep guard outside of a Ukrainian military base in the town of Perevevalne near the Crimean city of Simferopol on March 17, 2014 in Perevevalne, Ukraine. Voters on the autonomous Ukrainian peninsular of Crimea voted overwhelmingly yesterday to secede from their country and join Russia. (Photo by Spencer Platt/Getty Images)
Pro-Russian activists stage a rally as police forces stand guard in front of the regional state administration building in Donetsk, eastern Ukraine, on March 17, 2014. The United States on March 17 imposed financial sanctions on seven top Russian government officials and lawmakers to punish Russia's incursion into Crimea. The list of officials who will see any property, assets and interests blocked in the United States includes Dmitry Rogozin, deputy prime minister, and several senior members of the Duma and advisors to President Vladimir Putin. AFP PHOTO / ALEXANDER KHUDOTEPLY (Photo credit should read Alexander KHUDOTEPLY/AFP/Getty Images)
Pro-Russian activists stage a rally as police forces stand guard in front of the regional state administration building in Donetsk, eastern Ukraine, on March 17, 2014. The United States on March 17 imposed financial sanctions on seven top Russian government officials and lawmakers to punish Russia's incursion into Crimea. The list of officials who will see any property, assets and interests blocked in the United States includes Dmitry Rogozin, deputy prime minister, and several senior members of the Duma and advisors to President Vladimir Putin. AFP PHOTO / ALEXANDER KHUDOTEPLY (Photo credit should read Alexander KHUDOTEPLY/AFP/Getty Images)
Pro-Russian activists stage a rally as police forces stand guard in front of the regional state administration building in Donetsk, eastern Ukraine, on March 17, 2014. The United States on March 17 imposed financial sanctions on seven top Russian government officials and lawmakers to punish Russia's incursion into Crimea. The list of officials who will see any property, assets and interests blocked in the United States includes Dmitry Rogozin, deputy prime minister, and several senior members of the Duma and advisors to President Vladimir Putin. AFP PHOTO / ALEXANDER KHUDOTEPLY (Photo credit should read Alexander KHUDOTEPLY/AFP/Getty Images)
PEREVEVALNE, UKRAINE - MARCH 17: A man fixes the Crimean flag near groups of armed soldiers without identifying insignia who are keep guard outside of a Ukrainian military base in the town of Perevevalne near the Crimean city of Simferopol on March 17, 2014 in Perevevalne, Ukraine. Voters on the autonomous Ukrainian peninsular of Crimea voted overwhelmingly yesterday to secede from their country and join Russia. (Photo by Spencer Platt/Getty Images)
PEREVEVALNE, UKRAINE - MARCH 17: Armed soldiers without identifying insignia keep guard outside of a Ukrainian military base in the town of Perevevalne near the Crimean city of Simferopol on March 17, 2014 in Perevevalne, Ukraine. Voters on the autonomous Ukrainian peninsular of Crimea voted overwhelmingly yesterday to secede from their country and join Russia. (Photo by Spencer Platt/Getty Images)
PEREVEVALNE, UKRAINE - MARCH 17: Armed soldiers without identifying insignia keep guard outside of a Ukrainian military base in the town of Perevevalne near the Crimean city of Simferopol on March 17, 2014 in Perevevalne, Ukraine. Voters on the autonomous Ukrainian peninsular of Crimea voted overwhelmingly yesterday to secede from their country and join Russia. (Photo by Spencer Platt/Getty Images)
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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."

SMALL CHANGE FOR RUSSIA

Even if all of these projects add up to billions of dollars, it may still be small change to the Russian government.

"For Russia's budget this is not a big deal," said Nataliya Orlova, chief economist at Alfa Bank. "Even if you spend $5 billion or $10 billion, this is not money that dramatically changes things."

Russia had a total of over $170 billion stashed in two rainy day funds as of late February. It tapped into this money to try to shore up the regime of ousted Ukrainian President Viktor Yanukovych, who fled to Russia last month.

CORRUPTION

Orlova argued that Crimea's annexation could in fact turn out to be positive for Russia's economy in the short term, because investment could spur a consumption boom in Crimea.

But Crimea has long been known as an organized crime hub, and the Kiev government's longstanding reluctance to meddle in the autonomous region has meant that a culture of corruption has been tacitly allowed to flourish in the region since the Soviet collapse.
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