Business Magazine

Business in Crimea Faces Economic Uncertainty

Posted on the 02 May 2014 by Center For International Private Enterprise @CIPEglobal

McDonalds, along with some other international firms, closed its stores in Crimea shortly after the Russian annexation. (Photo: Newsweek)

By Iryna Fedets

Recent events have brought uncertainty to the business community of Crimea, particularly with the approach of summer for a region where the economy depends heavily on Black Sea tourism.

A year ago, businesses in Crimea were active, and optimistic. A report on the investment climate in the regions of Ukraine published by the Institute for Economic Research and Policy Consulting in April 2013 placed Crimea in 4th place among the 27 regions of the country according to their attractiveness for investors.

While corruption and extensive business regulations have been the problems for the whole country,  Crimea showed better results than most regions of Ukraine in many aspects. In the sub-category “Absence of corruption,” Crimea held the 4th place nationally, and the 3rd place in the “Administrative procedures” sub-rating. Moreover, business there proved to be the most optimistic in Ukraine as Crimea took the 1st position in the “Business optimism” sub-category.

Now, Crimean businesses are looking to the future with anxiety, not optimism. Some international companies like McDonalds are closing their venues in the region, and local entrepreneurs are left with the limited options of either continuing in uncertainty or selling their business.

A woman of Crimean Tatar origin, who asked not to disclose her name owns, an impressive hotel complex in a small Crimean town at the seaside. She told me that she had been approached with offers from Russian firms to sell her business. Having invested much in the hotel, which is a prominent tourist attraction dedicated to the Crimean Tatar culture and even has its own museum, she says she cannot accept such an offer.

Moreover, after the UN’s rejection of the March 16 Crimean referendum, the tourism business is likely to experience further losses. Mobility to Ukraine and abroad is very limited. Simferopol airport, which accepted more than a million of passengers in 2013, is now closed to international air traffic. The only planes that arrive there are from Moscow. The Ukrainian railroad company announced that starting in May it would suspended trains to Crimea, the month when tourist season normally begins in the region..

The region’s economic isolation is heightened by the fact that the government of Ukraine in Kyiv considers Crimea a “temporarily occupied territory,” and has undertaken special measures to regulate the region that could force some businesses in Crimea or dealing with Crimea to close. The Ukrainian parliament is considering a law that may prohibit business activity subject to “government regulation, including licensing, permits, certifications, etc.” in the region. The proposed legislation also includes sanctions for “affiliated persons” – those who cooperate economically with the region.

Volodymyr, a business owner in Crimea who asked not to use his last name, told me that local business currently finds itself in a situation where it is searching for ways to adapt to these economic uncertainties. Among others, trade with mainland Ukraine is an urgent issue. Meanwhile, Russia has promised special investment opportunities for the annexed region. Yet with the introduction of the Russian ruble due, inflation is already causing difficulties for local residents.

Many observers believe that the government of Ukraine needs to do endeavor to maintain economic ties with Crimea, and that the law regulating economic activity in the region should not isolate  the region. Rather, some have argued for legislation to create opportunities for business in the peninsula and facilitate trade between enterprises in Crimea and the rest of Ukraine.

The CIPE-Atlas Corps Think Tank LINKS Fellowship brings talented young professionals with strong research backgrounds to shadow researchers and experts at leading U.S. think tanks for six months.  Iryna Fedets is a CIPE-Atlas Corps Think Tank LINKS Fellow at the Heritage FoundationThe opinions of Ms. Fedets do not necessarily represent those of CIPE.

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