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09KYIV1596, CRIMEAN ECONOMIC DEVELOPMENT CONSTRAINED BY LACK

September 16, 2009

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Reference ID Created Released Classification Origin
09KYIV1596 2009-09-16 14:56 2011-08-30 01:44 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Kyiv

VZCZCXYZ0018
RR RUEHWEB

DE RUEHKV #1596/01 2591456
ZNR UUUUU ZZH (CCY ADB2646E MSI2269-695)
R 161456Z SEP 09
FM AMEMBASSY KYIV
TO RUEHC/SECSTATE WASHDC 8417
INFO RUCNCIS/CIS COLLECTIVE

UNCLAS KYIV 001596 
 
SENSITIVE 
SIPDIS 
C O R R E C T E D COPY CAPTION 
STATE FOR EB/IFD/OIA AND EUR/UMB 
 
E.O. 12958: N/A 
TAGS: EINV ETRD UP XH
SUBJECT: CRIMEAN ECONOMIC DEVELOPMENT CONSTRAINED BY LACK 
OF FUNDS 
1. (U) Summary: The global economic crisis has not spared 
Crimea, where unemployment was at 8% from January through 
March 2009, up from 4.7% in 2008. Local tourism has 
experienced a 14% decline since 2008, and industrial output 
 
dropped 21.6% in that same period, with production at some 
plants dropping up to 90% due to lack of demand. The fortunes 
of Crimea,s agricultural sector remain largely tied to its 
tourism industry, with the majority of local produce consumed 
at the seaside resorts.  The Government of the Autonomous 
Republic of Crimea (GARC) acknowledges that they must improve 
the investment climate and local infrastructure, but many 
local initiatives have been stalled by lack of funds.  Even 
if funding were available, the GARC complains that, in many 
instances, national GOU restrictions limit their ability to 
offer competitive investment incentives.  End Summary. 
---------------- 
Business Climate 
---------------- 
2. (U) Of the 281 large companies operating in Crimea, 80% 
are operating in the agricultural and manufacturing sectors, 
15% in trading, and the remainder are a mix of scientific and 
transportation firms.  The Government of the Autonomous 
Republic of Crimea (GARC) supports entrepreneurship efforts, 
and has authorized the establishment of a network of 15 "one 
stop shops" where government employees assist business owners 
in filling out forms and applying for licenses, but at 
present only one is staffed and providing services, while the 
rest lack operational funds.  USAID is supporting these 
establishments by providing office equipment.  The GARC has 
also authorized the creation of five business incubators, 
where start-up firms can get cheap office space and access to 
office equipment until they become successful enough to move 
into their own premises.  However, as with the one-stop 
shops, only one incubator is presently funded and operating 
due to budget shortfalls. 
3. (U) Despite the GARC's efforts to improve the business 
climate, businesses report numerous problems, including that 
VAT refunds are often delayed for months, if not years, and 
getting certificates for export is an expensive, lengthy 
process. 
---------------------- 
Tourism and Recreation 
---------------------- 
4. (U) Accounting for 7% of the GARC,s budget revenue, 
income from tourism in 2009 is down 20% from 2008 levels, 
according to the Mayor of Yalta and the Ministry of Economy 
of Crimea.  This contrasts with figures from 1998, when 
tourism revenue accounted for one third of the GARC,s 
budget.  Crimea's tourism and recreation industry is 
concentrated on its southern coastline around the city of 
Yalta, where the subtropical climate and Black Sea attract an 
estimated one million visitors per year.  There are forty 
sanatoriums, hotels and resorts, providing roughly 40,000 
guest accommodations, one third of which have been renovated 
to international hospitality standards.  Thirteen airlines 
serve the airport at Simferopol, with direct flights from 
Ukraine, Russia, Germany, Uzbekistan and Turkey. There are 
five main sectors - spa/healing; business conferences; wine 
tourism; cruises; and active tourism (climbing, kite sailing, 
cycling and horseback riding).  The cruise sector has been 
experiencing slight, but steady, growth in recent years.  120 
ships made one-day port calls in Yalta in 2008, with two or 
three ships arriving per day during the high season. 
5. (U) The majority (80%) of Crimea's visitors are 
Ukrainians.  Only 10% of visitors were from foreign countries 
in 1998, rising from 2% in 1992.  Russians make up 26% of 
foreign tourists, followed by Poles (25%), Moldovans (17%) 
and Byelorussians (12%), with 20% coming from other 
countries.  Prior to the economic crisis, the Ukrainian 
middle class made up a large part of Crimea's tourism sector, 
especially during the boom years from 2006 to 2008.  However, 
with the economic crisis, fewer middle-class Ukrainians are 
vacationing and those that are travelling are staying in less 
expensive accommodations.  The number of tourists staying at 
hotels in Crimea dropped 14% since 2008, but GARC analysts 
surmise that the number of tourists may not have actually 
fallen at the same rate.  Crimea,s hotels have responded to 
the crisis by raising room rates, resulting in significant 
vacancy levels as budget-conscious travelers seek alternative 
lodgings, such as unofficial guest rooms or tents on the 
beach.  Many informal tourism service providers, including 
bed and breakfasts and local residents offering spare rooms, 
are not declaring income or paying taxes, preventing the GARC 
from getting an accurate count of visitors.  Yalta, in 
particular, has seen its budget revenue fall 20% since 2008, 
due both to lost tourism revenue and the stoppage of 100 out 
of 120 leisure industry construction projects with the onset 
of the crisis.  Yalta's budget has further been impacted by 
the Government of Ukraine,s (GOU) ban on gambling enacted in 
June 2009, which has cost them more than UAH 5 million (USD 
 
600,000) in lost revenue. 
&#1
82;6. (U) GARC analysts expect that the tourism industry in 
Crimea will remain depressed in 2010, but do not expect the 
downturn to last for long beyond that.  They acknowledge that 
the infrastructure will need to be upgraded significantly, 
additional recreation facilities must be developed (land has 
been set aside for a dinosaur-themed amusement park), and the 
region's reputation for 'Soviet-style' service has to be 
overcome if Crimea is to compete against other tourist 
destinations in the Black Sea region. 
----------- 
Agriculture 
----------- 
7. (U) Although risky in Crimea due to frequent early frosts 
and droughts, agricultural activity makes up 60% of Crimea's 
GDP.  Much of the center of the Crimean peninsula is sown 
with traditional crops - Durham wheat, barley, rapeseed, 
vegetables, apples and grapes - which are frequently planted 
and harvested without the benefit of modern technologies. 
Crimea has found a profitable outlet for its wheat, which is 
exported to Italy for processing, and the amount of acreage 
under grain crops has been increasing at the expense of 
vineyards and fruit orchards.  Almost all of Crimea's food 
crops are consumed locally, with much of the demand coming 
from the tourism industry on the south coast.  Despite the 
decline in tourism, Crimean agricultural output grew 5.5% 
year-on-year from Jan-July 2008 to 2009, with surplus 
production being exported. 
8. (U) Crimean wineries account for the majority of 
Ukraine,s annual production of 1.5 billion liters of wine. 
For its part, foreign demand for Crimean wine has held steady 
at 160-200 thousand liters per year, through the crisis.  90% 
of Crimean wine exports go to Russia, and 5% to Belarus. 
Less than 1% reaches the U.S. markets.  In the 1980s, Crimea 
had 180,000 hectares planted in vineyards, but in 1986, 
Mikhail Gorbachev,s anti-alcoholism campaign saw 80,000 
hectares ripped out, and the production of sweet dessert 
wines and cognac was greatly diminished until the breakup of 
the USSR.  Since independence, 140,000 hectares of vineyards 
have been replanted, and many of the wineries of Crimea have 
switched to making the dry wines that are popular with both 
foreign customers and Kyiv elites. 
------ 
Energy 
------ 
9. (U) Most of Crimea's energy comes from power plants in the 
mainland of Ukraine, coming in across an increasingly 
overburdened electrical grid.  To cut costs and lower the 
load on the power grid, the GARC is promoting energy 
efficiency among the peninsula's industries, building on the 
2001 "Clean Energy for Crimea" exchange program with 
Washington State.  The GARC is working on overcoming 
obstacles to investment in wind energy and promoting a joint 
venture between Crimea and Washington businesses for the 
manufacture and sale of renewable energy equipment.  Local 
thermal power plants produce 6-7% of the electricity used in 
Crimea, although the GARC has expressed interest in investing 
more heavily in alternative energy - solar, wind and 
additional thermal pumps.  However, lack of funding and 
capacity to attract foreign investment has hampered efforts 
in this area. 
------------- 
Manufacturing 
------------- 
10. (U) Crimea,s manufacturing sector is concentrated in the 
chemical and machine building industries, mostly situated in 
the northern part of the peninsula.  The global economic 
crisis and resultant reduction in industrial demand has 
severely impacted Crimea's machine building sector, and the 
lack of customers has led to production cutbacks of up to 90% 
at some firms.  Overall, Crimea,s industrial output fell 
26.1% year-on-year from H1 2008 to H1 2009. 
---------- 
Investment 
---------- 
11. (U) The majority of foreign direct investment (FDI) in 
Crimea goes into agriculture, industry and recreation.  As of 
July 1, 2009, FDI stood at USD 673 million, with annual 
inflow growing from USD 20.9 million in 2002 to USD 51.1 
million in 2008.  The GARC Ministry of Economy estimates that 
one third comes from Russia, one third from the European 
Union, and one third from the rest of the world.  Even in the 
"autonomous" region, Crimean authorities have little freedom 
to offer investment incentives, due to limits set at the 
national level in 2005.  Permitted incentives include 
tax-free import of construction equipment used for 
development, rebates of VAT payments, and a property tax 
holiday during the process of construction.  Due to a 
country-wide ban on the sale of agricultural land, foreign 
firms have adopted the practice of signing 49-year leases. 
 
------- 
Comment 
------- 
12. (SBU) Comment: Crimea,s prospects for economic 
development are limited in the near term.  The GARC has 
created the legal and administrative bases for future 
progress, but their initiatives lack funding and have little 
impact on Crimea,s business and investment climate at the 
present time.  They acknowledge the peninsula,s 
underdeveloped power and transportation infrastructure and 
the difficulties faced by potential entrepreneurs, but the 
GARC lacks the financial resources to address these issues at 
the present time and is further restricted by GOU legislation 
which limits the ability of local governments to offer 
investment incentives.  Widespread tax evasion also 
constrains the GARC,s ability to address the peninsula's 
development.  End comment. 
PETTIT

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