“The bloom will come off of the Crimean rose as people begin to understand that this was not for free,” said Deputy National Security Adviser Antony Blinken at a Brookings event today, describing the economic costs to Russia for forcibly taking over the peninsula from Ukraine. As he explained:
I am absolutely convinced that Russia’s actions in Ukraine are a strategic loser for Russia going into the future. First, yes, you can say Russia “won Crimea” but in so doing it is losing and probably lost Ukraine. Ukraine is more united in its western orientation than it’s ever been. And its sense of national identity is deeper than it’s ever been.
And then there’s Crimea itself. It’s true that in the short term, the actions Russia took in Crimea produced a political bounce for Putin. But I think that’s going to change in a significant way. Russia is spending about $7 billion this year just in the direct costs, budgetary and pension support, for Crimea. Over the next several years most experts estimate it will have to spend between $50-60 billion for critical infrastructure, rail and vehicle bridges, electricity and water connections, to make up for what Crimea has lost as a result of Russia’s actions in Ukraine.
This puts an incredible downward pressure on defense and discretionary spending to improve the lives of the Russian people, to modernize the economy. In short, the bloom will come off of the Crimean rose as people begin to understand that this was not for free. There are real costs involved.
Broad Economic Implications for Russia
“Across a whole host of measures,” Blinken said, “we can see the dramatic impact that the economic isolation has already had on Russia.” These include pressures on the financial markets and ruble, higher borrowing costs and a decrease in the value of savings, downgrading Russia’s credit to junk bond status, and zero economic growth estimated. “Maybe more significant and even more compelling,” he said, is:
Capital flight. Fifty-one billion dollars in the first quarter of the year alone, which was more than all of 2013. And going forward the IMF, the World Bank, and private experts now estimate that for 2014, capital flight from Russia is expected to be between $100 and $200 billion. Foreign investors have been pulling back or staying on the fence. They look for stability, they look for countries that keep their commitments, they look for a country that is connected internationally. And in all of those areas, Russia’s actions have sent a message to investors that that’s not the kind of environment they want to be investing in.
“Some of this was happening before the crisis, and before the sanctions as a result of the downturn in the Russian economy,” he added, “but virtually every expert and every analyst that we have makes it very clear that everything we did in response to what Russia did in Ukraine accelerated and deepened this process.”
Russia’s Suspension from G-8 Matters
He also pushed back against those who are saying that actions to politically isolate Russia and Vladimir Putin, like expelling Russia from the G-8, are not significant. “It matters,” he said:
because one way President Putin and Russia define power is by the geopolitical influence that Russia is able to obtain. And undermining Russia politically in the international community and isolating it politically diminishes that power.
“Ironically,” Blinken concluded, “the very things that President Putin claims to fear are likely to be precipitated by the actions that Russia has taken. They risk becoming Putin-fulfilling prophecies.”
Blinken made his remarks at a conference hosted by the Center on the United States and Europe at Brookings and King’s College London featuring experts and top officials to look at Europe’s shaky position in an ever-evolving world. The conference panelists reflected on Europe’s economic and strategic future in the wake of the European parliamentary elections.
Elina Saxena contributed to this post.