The cost to Russia of annexing Ukraine

The cost to Russia of annexing Ukraine

The annexation of the Donbass region, a territory centered around Ukraine’s second largest city, Donetsk, would add some eight million people to the Russian Federation. (Crimea adds two million). It would add a depressed rust belt of low quality coal and ore and high-cost metal products, whose exports are made possible only by exceptionally low local wages. (Russia’s own Kusbass metallurgy center in Kemerovo produces higher quality metals at much lower cost). Of the eight million new Russian citizens, about one third are retired or approaching retirement and they are overwhelmingly female. Another twenty percent work for the state. In other words, nearly half live from and are paid by the state budget.

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The latest IMF statistics show Russia’s per capita GDP $10,000 above Ukraine’s. This $10,000 gap reflects the Petrostate’s higher pensions, salaries, and wages. To fully meet its implicit annexation promise to the eight million new citizens from Donbass, Russia would have to budget an incremental $80 billion ($10,000 per person times 8 million people). If Russia raised only pensions and public-employee salaries to Russian levels, leaving the industrial workers at their current level, the incremental cost could be limited to $40 billion, but at the expense of restive and agitated mine and metal workers. (No one wants to take on inflamed miners, not even Putin). If Russia narrowed mining and metal worker wages to half of the gap, the annual incremental cost to the Russian budget would be $60 billion, rather than $80 billion. Most likely the outcome would be between $60 and $80 billion, or one quarter to one third of annual oil and gas export earnings.

With a Russian budget of 38 percent of GDP, or slightly less than one trillion dollars (Moscow’s Gaidar Institute), the annexation of just the Donbass region of eastern Ukraine would eat up between 6 and 8 percent of the Russian budget each year – as compared with 12 percent for the military. This is $60 to $80 billion less for investment, military expenditures, modernization, and other state activities.

If Putin were to annex the whole of east Ukraine (about 15 million population), the cost would double to $120 to $160 billion – to an untenable share of the budget.