Costs to Russia for Crimea seizure far beyond pinprick sanctions

More than two decades of building foreign investor confidence in Russia as a reliable business partner -- over.

Reliable customers in Western Europe for the oil and gas exports on which Russia’s economy is heavily dependent -- now in doubt.

Rising prices for imported food, clothing, cars and financing of private and government building projects -- a given.

The costs to Russia of its internationally condemned seizure of Ukraine’s Crimean peninsula extend far beyond the symbolic sanctions adopted in Washington and Brussels a day after Crimeans, under armed Russian occupation, voted to secede from Ukraine and appealed for induction into the Russian Federation.

From an economic standpoint, Russia’s recovery of Crimea 60 years after its inter-Soviet transfer to Ukraine makes no sense at all for the Kremlin or the Russian people.

But Russian President Vladimir Putin’s strategy in what might be the most destabilizing development in post-Cold War Europe appears to have little to do with economic logic, Kremlin analysts say, and everything to do with his single-minded campaign to project the image of Russia as a resurgent superpower.

So far, the Russian population appears to have made little connection between the Kremlin’s military intervention in Crimea and the eroded buying power of its rubles. U.S. and European sanctions are even less likely to be felt by the average Russian, as they have targeted about two dozen individuals identified as being behind the military takeover of Ukrainian territory.

The impacts will be felt first among the oligarchs who control Russian production and trade, whose businesses depend on favoritism from the Kremlin and access to affordable credit on international markets. Whether they will begin pushing back against Putin’s geopolitical gambit remains uncertain, as does the unpredictable KGB-agent-turned-world leader’s next step in the crisis, which is also unsettling markets and nerves elsewhere in the world.

The Obama administration and the European Union followed through Monday with their threats to impose sanctions on Russia for its Crimea incursion and for stoking the sentiments that led to Sunday’s referendum, in which more than 97% of those who voted backed secession from Ukraine.

The U.S. sanctions apply to seven Russian and four Ukrainian individuals seen as instigators of the referendum, which the West calls provocative and lacking any legal force. The EU targeted 21 people, in what it warned was just a first step toward putting pressure on the Kremlin to roll back its land grab.

In spite of the costs, recovering Crimea is “something very dear to Russian conservatives, who believe it is more important than leading a comfortable life that we build a strong state,” said Sergei Utkin, department head at the Center for Situation Analysis at the Russian Academy of Sciences. The Kremlin is “trying to show that Russia is back again on the world stage as a superpower,” Utkin said in a phone interview from Moscow, a strategy he said he strongly disagreed with.

Western sanctions will not move Putin to change course, Utkin said. In fact, he said, the U.S. and EU actions fuel the Kremlin’s story line that the West is Russia’s enemy and reflect a general view in the Russian leadership that “sanctions are acceptable collateral damage” in the quest to recover Crimea.

Utkin said it was difficult to overstate the level of “patriotic hysteria” generated by Russia’s state-controlled media over the expected reunion with Crimea, passions the Kremlin can hardly ignore.

Putin probably calculates that Ukraine is too weak to go to war against Russia over the lost territory and that by the time a new leader is installed in the Kremlin -- Putin could serve another 13 years under the constitutional revisions he has engineered -- so much will have been invested on the peninsula that it would be politically impossible for Russia to return the territory to Ukraine, Utkin said.

Putin issued a decree last year advising Russian oligarchs to divest themselves of real estate and bank holdings abroad, a move that is now serving as fair warning to those likely to be affected by the visa bans and asset freezes ordered by Western governments.

“That strategy has a huge chance of backfiring,” said Jane Harmon, the former California congresswoman who is now president of the Woodrow Wilson International Center for Scholars.

Russia’s industrial kingpins with assets in the West are likely to feel their money is more secure there than in the newly dubious financial environment prevailing in Russia, Harmon said, calling the repatriation order Putin’s “first true strategic miscalculation.”

Russian magnates have long been wary of investing in their own country, leaving the government to depend on collaborative projects with foreign companies to build the major infrastructure and manufacturing projects needed to boost the economy, said Keith Crane, head of Rand Corp.’s environment, energy and economic development program.

“Can you imagine going to a board of directors today and saying, ‘We’d like to invest our money in Russia?’ ” Crane said of the precarious state of the gambles U.S. and European companies have taken to renovate Russia’s automaking, food-processing, energy transport and other major industries. “Anybody with big equity investments in Russia really has to be rethinking that strategy now.”

Keith Savard, senior managing economist at the Milken Institute, wonders whether Putin’s snatching of Crimea is the first step on an “irrational” course toward taking over other areas of Ukraine important to the Russian economy and national psyche or if the Kremlin will be sated by recovery of its historic Crimean territory and securing its vital warm-water ports.

“Crimea is a net drain on the resources of Ukraine, and now Russia has to assume those responsibilities,” Savard said of the deliveries of water and electricity from the Ukrainian mainland to the peninsula. The region also comes with a heavy social welfare burden due to the large number of retirees, including former military personnel.

Beyond Putin’s vision of empire-building, Savard said, “I don’t think economically there is a significant amount to be gained from all this. And if he continues along this path, I don’t think the West has any other option than to escalate the tensions” on Moscow with tougher sanctions that will be felt in the pocketbooks of average citizens as well as oligarchs.

A foreign correspondent for 25 years, Carol J. Williams traveled to and reported from more than 80 countries in Europe, Asia, the Middle East and Latin America.