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08KYIV2259, UKRAINE: A CLOSER LOOK AT THE CRIMEAN ECONOMY,

November 17, 2008

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Reference ID Created Released Classification Origin
08KYIV2259 2008-11-17 15:02 2011-08-30 01:44 CONFIDENTIAL Embassy Kyiv

VZCZCXYZ0005
RR RUEHWEB

DE RUEHKV #2259/01 3221502
ZNY CCCCC ZZH
R 171502Z NOV 08
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC 6735
INFO RUCNCIS/CIS COLLECTIVE
RUEHZG/NATO EU COLLECTIVE
RUEHMO/AMEMBASSY MOSCOW 0402

C O N F I D E N T I A L KYIV 002259 
 
SIPDIS 
 
STATE FOR EUR/UMB 
 
E.O. 12958: DECL: 11/16/2018 
TAGS: ECON EINV PGOV PINR RS UP
SUBJECT: UKRAINE: A CLOSER LOOK AT THE CRIMEAN ECONOMY, 
PART I 
 
REF: KYIV 2172 
 
Classified By: Economic Counselor Edward Kaska 
for Reasons 1.4 (b) and (d) 
 
1. (U) This is the first of two cables on the economy in 
Crimea.  The second cable will focus on Russia's influence 
on the Crimean economy and will examine the city of 
Sevastopol. 
 
2. (SBU) Summary: Economic development in Crimea has fallen 
behind other parts of Ukraine despite great potential, 
particularly in the tourist sector.  A poor business 
climate, including a burdensome and corrupt government 
bureaucracy, is a major culprit.  Basic infrastructure like 
drinking water, heating, and roads is old and crumbling.  A 
new highway between Simferopol airport and Yalta, a major 
project meant to increase tourism, has not gotten off the 
ground.  Dzhankoy, a depressed city in northern Crimea, is 
slowly getting back on its feet and trying to remodel 
itself as a transportation hub.  End Summary. 
 
3. (U) Following the Ambassador's participation in a local 
investment conference and meetings with Crimean political 
leaders (reftel), Econoff stayed on for a more in-depth 
look at the Crimean economy.  Econoff visited the cities of 
Simferopol, Yalta, Sevastopol, and Dzhankoy October 20-24. 
Below is Part I of a two-part report summarizing the main 
topics of discussion during that trip and highlighting two 
of the peninsula's cities. 
 
Economic Overview 
----------------- 
 
4. (U) Crimea forms the southern-most region of Ukraine, 
and its location atop the Black Sea gives Crimea strategic 
and economic advantages sought after since the Greek 
colonists first began settling along its coast in the 5th 
century BC.  The Crimean economy is divided sharply along 
geographical lines, with tourism dominating along the 
southern and western coast, agriculture supporting much of 
the rest of the peninsula, and heavy industry surviving in 
only a handful of cities.  Disposable income per capita in 
2007 in Crimea was only UAH 8,526 ($1,688), or 86 percent 
of the Ukrainian average, and 47 percent of the figure for 
the city of Kyiv.  Crimean Prime Minister Viktor Plakida 
told participants at the October 20 investment forum that, 
while Crimea would always be known as a tourist destination, 
he hoped the peninsula could become a transport hub, and 
saw overloaded ports in nearby parts of Russia as an 
indication of excess demand.  The agricultural sector, 
notably wine and cognac producers, has grown consistently 
in recent years. 
 
Tourism - Lost Opportunities 
---------------------------- 
 
5. (U) Crimea is home to some of Ukraine's most picturesque 
natural surroundings and miles of beachfront that should 
rival other Black Sea destinations.  The region also boasts 
genuinely interesting tourist sites from ancient Greek 
ruins to the site of World War II's famous Yalta conference. 
On the whole, however, Crimea's resorts, including Yalta, 
have failed to transform themselves into modern, western 
destinations that can attract serious tourist dollars. 
There is a lack of modern hotels, the service sector is 
seriously underdeveloped, and transportation infrastructure 
is old and hard to navigate. 
 
6. (C) Journalist Larissa Shipico, a stringer for the BBC, 
noted that Crimea's tax system, which allowed hefty tax 
breaks for small tourist operations, actually discouraged 
businesses in the tourist sector from growing.  Alexander 
Basov, Director of Business Support Affairs at the Chamber 
of Commerce of Crimea, also noted that there were still 
many state-owned tourist facilities in Crimea, lessening 
the competition necessary to modernize the industry. 
Valeriy Prokopenko, deputy head of the Simferopol regional 
administration, pointed to the undeveloped resort town of 
Nikolayevka on Crimea's western coast as an area of 
potential growth, but lamented that no serious investors 
appeared interested in the Simferopol regional 
administration's roughly $200 million project to expand the 
town's tourist infrastructure. 
 
7. (C) Alexander Balanin, Deputy Minister of Economy of the 
Crimean government, told Econoff that the tourist season 
was too short, preventing potential entrepreneurs from 
 
developing sophisticated tourist operations and forcing 
them instead to live hand-to-mouth for many months of the 
year.  Crimean Prime Minister Plakida told investment forum 
participants that Yalta should become a major destination 
for business conferences to help cope with the short 
tourist season.  (Comment: Plakida made his remarks from 
the Hotel Yalta conference facility, Yalta's largest, a 
Soviet-era monstrosity not well suited to the needs of 
modern businesses.  End Comment.) 
 
Poor Business Climate Holding Economy Back 
------------------------------------------ 
 
8. (SBU) Basov, from the Chamber of Commerce of Crimea, 
lamented that Crimea's poor business climate ten
ded to 
choke small and medium-sized enterprises (SMEs), which 
should be the driving force of the Crimean economy. 
Bureaucratic obstacles to opening a business and obtaining 
necessary permits, a burdensome tax system, and government 
corruption, particularly in the areas of land purchases and 
government procurement, all hurt SME development, said 
Basov. 
 
9. (C) Andriy Ishin, deputy head of the Crimean branch of 
the National Institute for Strategic Studies, a think tank 
associated with the President, agreed that Crimea has thus 
far failed to reach its economic potential due to a lack of 
market reforms.  A general lack of transparency, 
particularly surrounding land and property issues, had 
created a hostile investment climate and stifled efforts 
for sustainable development, said Ishin. 
 
Infrastructure - Crimea's Achilles Heal 
--------------------------------------- 
 
10. (SBU) Leaders throughout Crimea usually point to 
infrastructure as the greatest challenge acing their 
communities.  Basic infrastructure, like clean water, 
heating systems, and roads, is a mess.  Prokopenko noted 
that Simferopol region, for example, was constantly at odds 
with the gas company and frequently faced heating cutoffs, 
even at government buildings. 
 
New Simferopol-Yalta Highway - The Tourist Autobahn 
--------------------------------------------- ------ 
 
11. (U) Crimean authorities are currently pursuing a major 
road infrastructure project, a new highway connecting 
Simferopol and Yalta.  The new road would feature tunnels 
through the mountains to cut the drive time from Simferopol 
airport to Yalta from 90 to 30 minutes.  The project would 
obviously boost tourist traffic to Yalta, but at an 
estimated price tag of several billion dollars, and it has 
as yet failed to get off the ground. 
 
Dzhankoy - The Other Crimea 
--------------------------- 
 
12. (SBU) Dzhankoy, a depressed, provincial city of 40,000 
in northern Crimea, is located well beyond the Crimean 
coast where tourism is expected to drive economic growth. 
In Soviet times, Dzhankoy's economy was dominated by a few 
major factories, including a tractor production plant, that 
have since vanished, and conditions in the city are only 
slowly turning around.  Yuriy Nosov, deputy Mayor of 
Dzankoy and longtime businessman and city official, 
remembers the 1990s as a time of economic catastrophe. 
 
13. (SBU) Dzhankoy has witnessed solid economic growth in 
recent years, however -- economic output grew tenfold from 
1998 to 2008 -- and local leaders credit the city's 
strategic economic plan, developed in cooperation with a 
USAID project, with helping to set the ship right. 
Dzhankoy fashions itself as a transport center, as it falls 
at the crossroads of Crimea's two major highways.  (Note: 
The city's slogan is: "All roads lead to Dzhankoy."  End 
note.)  Mayor Valentin Sinitskiy told Econoff that four 
substantial investors had come to the city in recent years. 
Dzhankoy's major project, however, is an industrial park, 
for which a plot of land, with access to the road and rail 
networks, has already been allocated.  Sinitskiy said that 
the city is moving forward with plans to develop the 
industrial park, preparing long-term leases for potential 
investors, although their work is hindered by the lack of a 
national Law on Industrial Parks, which would establish a 
clear set of allowable benefits to be offered investors. 
 
14. (SBU) Sergiy Vybach, local businessman and chairman of 
 
the city Association of Employers, and Maryna Torbunova, 
director of the Dzhankoy Business Center, which provides 
consultative services to local companies, identified an 
unclear tax regime as the greatest obstacle to business in 
Dzhankoy.  Both lamented that the city council, with whom 
business associations have constructive relations, did not 
have more control over tax inspectors, who are controlled 
by the GOU. 
 
TAYLOR

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