How Russia's Annexation Of Crimea Could Hurt Its Economy

By Chris Arnold

Published March 26, 2014 at 5:21 PM EDT

A street vendor in Simferopol, Crimea, sells eggs with the dual currency price tags in Russian rubles and Ukrainian hryvnias. Russia's annexation of Crimea mean it will now have to prop up the peninsula's weak economy.

Russian President Vladimir Putin's swift move to annex Crimea is seen as a sign of strength by many Russians, and it has boosted Putin's popularity at home. But when it comes to Russia's economy, many analysts think Russia's prospects are looking weaker.

In recent days, we've seen Russians rallying in the streets, waving flags and celebrating Putin's move to reclaim Crimea as part of Russia.

And before that, Putin has been active on the world stage, hosting the Olympics and standing up for Russia's interests in Syria. Forbes recently named Putin the "most powerful man" in the world.

Putin rides a horse in the mountains of Siberia in 2009. The annexation of Crimea has made him popular at home, but Russia is facing economic problems that could be exacerbated by the Crimea crisis.

Then there's the macho outdoor sportsman. Putin enjoys inviting the press to witness his physical exploits: shooting darts at whales with a crossbow, riding a horse with his shirt off, playing volleyball, skiing, fishing, even blacksmithing by pounding metal with a big hammer.

Professor Angela Stent, who studies Russia at Georgetown University, says many Russians believe that Putin, who came to power in 2000, has brought order out of the chaos that followed the 1991 Soviet breakup.

"I think what you see with Putin is a reassertion of this traditional great power, flexing military muscles, literally flexing his own muscles, as we've seen him riding horses and motorbikes and things like that," she says.

A Different Reality

But Stent says that while all this may create the image of a strong, resurgent Russia, there's a big difference between the image and the reality of its economy.

The biggest part of Russia's economy is oil and gas. Energy products make up more than 70 percent of Russia's exports. And for a while, that was helping Putin and ordinary Russians.

"Between 2000 and 2008, Putin was very lucky," Stent says. "Oil prices were rising so they got windfall profits from their energy sales."

Russia put some of this money into various stabilization and national welfare funds, which helped get the country back on its feet. Per capita income in Russia rose from $1,700 a year to $10,000, according to the World Bank.

Oligarchs soaked up a lot of the oil and gas profits, and corruption is an endemic problem. Still, life for many Russians got better, and this made Putin popular.

This is exactly where many economists say Putin could have been a much stronger leader. They say during this boom, he squandered an opportunity.

"What Putin never did was to undertake modernizing reforms," says Stent. "So this is an oil and gas exporting economy, but it's not a modern economy because it doesn't manufacture things that other countries want to buy."

A man works in a fruit warehouse at a market in Bakhchisaray, Crimea, on March 16. One of Crimea's few strong industries has been tourism, and it is likely to be weakened by the recent turmoil in the region.

Russia's Economic Stagnation

Jim O'Neill, a prominent economist who coined the term "BRIC" to describe the emerging markets of Brazil, Russia, India and China, says Russia wasted a big chance during the boom years.

"It's very disturbing," he says. "They've got lazy 'cause of oil."

And now that's coming back to haunt Russia. In the past couple of years, Russia's economy has been stagnating. Growth is anemic, and inflation is high. O'Neill says Russia is ever more reliant on higher oil and gas prices.

"And that is never a good place to be because oil prices might go down," he says.

Before the Olympics and Crimea, Putin's popularity had faltered along with the economy. Now he's riding high again.

But what sort of economic price will Russia pay for Crimea?

"The need for them to do more international trade is huge, and what they're doing here is not helpful," O'Neill says.

Russia needs to help its businesses become competitive, sell more products around the world and attract foreign investors. Instead, it is now facing sanctions from the U.S. and Europe.

That said, the sanctions have been limited so far. The Russian stock market took an initial hit but has stabilized for now. As O'Neill says, "If you look at how Russian markets have traded after that first day, it's not been that bad, so far."

Now that Putin is popular again at home, O'Neill says there's another opportunity to push through economic reforms, limit corruption and try to overcome economic inefficiencies that date back generations. That might be the best test of strong leadership. But Vladimir Putin hasn't ridden his horse into that battle.