RIA Novosti quoted the head of the Crimean republic as saying the Black Sea peninsula had no foreign investors when it was under Ukraine’s control, pointing to corruption as the reason and highlighting Russia’s success in attracting foreign direct investment (FDI) there despite Western sanctions.
Crimea’s top official, Sergei Aksyonov, told a group of foreign journalists: “Crimea did not have any foreign investors when it was part of Ukraine, in connection with the exceptional corruption of the Ukrainian government; you could count them [foreign investors] on your fingers.”
Crimea, he added, did not suffer much as a result of the annexation, which cut the peninsula’s economic ties to the rest of Ukraine and to foreign investors, because there was no significant investment. He said that a few Italian firms invested in Crimea after the annexation, admitting that Western companies have used loopholes to bypass the sanctions.
Aksyonov’s comment came just after the republic held an international conference on November 6-7 titled “Russia, Crimea, and Contemporary International Relations. Crimea’s Friends Forum.” The event drew former and current officials and political figures from more than 30 countries.
The United States and the European Union imposed economic sanctions on Russia in 2014 in response to its annexation of Crimea -- an act the UN General Assembly denounced as illegal -- after popular protests in Kyiv led to the ouster of then President Victor Yanukovych. The sanctions, among other things, prohibit Western firms from investing Crimea.
Crimea’s annexation and subsequent sanctions have undermined its trade ties with the rest of Ukraine and forced some investors to leave while driving away potential ones, according to media reports from the region and the West.
Multinational corporations and retail brands, such as McDonald’s Corp, Radisson Hotel, and Mobile Telesystems PJSC, among others, ceased operations in Crimea. Foreign banks stopped lending.
In 2015, Crimean real estate prices dropped by 60-70 percent compared to 2013. “No foreign investor will be interested in buying property in the region until it is recognized by the rest of the world,” said Ilya Volodko, head of the Macon Realty Group real estate consultancy.
Crimea’s tourist industry, traditionally a big earner for the peninsula, also suffered. The number of visitors in 2015 dropped by almost half, from an estimated six million in 2013.
Foreign trade turnover has shrunk more than tenfold since 2014, although media reports indicate Crimean traders are “performing some logistical gymnastics to skirt sanctions.”
In 2013, imports stood at $1 billion and exports at $0.9 billion. By mid-2017, imports and exports combined amounted to only $153.5 million.
Ilan Berman, vice president of the American Foreign Policy Council, described the post-annexation situation this way: “Crimea, which experienced comparative prosperity as one of Ukraine’s regions, has seen a near-total reversal of fortune under Russian rule.”
FDI before Annexation
Contrary to Aksyonov’s claim, FDI did flow into Crimea before Russia annexed it – mostly from Cyprus and Russia, but also from Britain, Germany, France, and the United States, among other countries. At the start of 2012, foreign direct investment in the peninsula stood at approximately $1.17 billion.
In 2013, investment from Cyprus amounted to $426 million, or 29% of total FDI, followed by Russia at $369 million, or 25% of total FDI. Investment from Germany and the Netherlands that year amounted to 9.3% and 8.1% of total FDI, respectively.
Some of the investment from Cyprus originated in Russia or Ukraine. How significant that investment was is unclear, but some analysts estimated that up to 60 percent of the investments from Cyprus may have been Russian.
Aksyonov’s claim that extensive corruption in Ukraine impeded foreign direct investment in Crimea appears valid, but overlooks that Crimea faces the same problem under Russian rule.
The 2016 OECD report on Ukraine’s investment climate highlighted the long-standing nature of the challenges facing Ukraine’s economy following Crimea’s annexation: “While the political and security situation has deteriorated in recent years, the problems are long-term and have to do with poor business environment, weak institutions, and widespread corruption.”
The report underlined that while expropriations are rare in most parts of Ukraine, they occurred primarily in Crimea after it was annexed by Russia. According to Ukrainian justice ministry figures cited in the report, 4,000 enterprises faced asset expropriations worth $2.3 billion from March-December 2014, prompting legal action by Ukraine against Russia.
FDI after Annexation
After annexation, FDI in mainland Ukraine and Crimea plummeted. Investment in mainland Ukraine dropped by 45% in 2013 and 81% in 2014 before starting to recover in 2015.
Russia has sought to improve the investment climate in Crimea, but continued corruption, red tape, and sanctions have dampened FDI prospects for the peninsula.
According to Crimean authorities, the value of current investment projects is $2.27 billion.
However, it is unclear what portion of that investment comes from Russia, compared to other countries, and how the Russian investment breaks down between state and private companies.
Russia’s own poor economic conditions following the collapse in oil prices and imposition of sanctions have also undercut Russia’s investment efforts.
Alexander Alikin, a Eurasianet contributor, reported that there is a lack of private investment in Crimea, noting that investors made good on only 123 out 441 proposed investment projects.
According to some sources, Western firms do business and invest in Crimea despite the sanctions, corruption, and red tape. These include the French retail group Auchan.
In 2016, Andrei Melnikov, Crimea’s minister of economic development, claimed that 250 firms operated in Crimea using the capital of investors from Turkey, Ukraine, Germany, Britain and the Virgin Islands, while companies from Saudi Arabia, China, and Germany expressed interest in investing in Crimea.
Yury Rovinsky, a St. Petersburg businessman, said in March that he had passed up an opportunity to invest in Crimea because of “a complete lack of understanding” by Crimean authorities.
“Verbally, they welcome investors, but in fact they serve as a complete stopper,” he said. “I constantly faced hints and suggestions to organize various kinds of corruption schemes. In general, one should wait until everything settles down with the government.”
Ukraine and Russia both ranked 131 out of 176 on the 2016 Corruption Perceptions Index compiled by Transparency International, the Berlin-based international corruption watchdog. Out of 190 countries, the World Bank ranks Russia 35th and Ukraine 76th in terms of “Ease of Doing Business.”