How globalism increases costs of territory annexion

We live in a world that is far more complicated than it was in 1950s. I don’t remember any significant territory of one country being annexed by another country since then. However, in 2014 it has happened with Ukrainian autonomous region of Crimea that has been taken over by force of Russian military. And I am not really here to take sides and discuss whether it was “a right thing to do” or not, I am here to tell about a little thought I had a couple days ago after I read some Crimea-related story.

Let’s examine the value of physical stuff and actual assets that belong to a region of one country (say Crimea). In a modern world it seems that a large share of such value exists due to complex interconnections between these assets and other regions of the country and other parts of the world. And this is some side effect of globalization. Let me explain.

Let’s take a look at some bank that operates in Ukraine. It has a number of offices in Crimea, it has some ATM machines there, a number of local people work there every day. Suddenly the region is “no longer Ukraine”. What happens next? Well, this bank stops all operations in Crimea. Why? Not because it goes bust, but because the connection is broken. Ukrainian government insists to halt all operations of Ukrainian banks in Crimea because “it cannot regulate Crimean business any longer”. Since these banks have large shares of business in other parts of Ukraine or their owners are Ukrainian citizens they have no other option but to cooperate and withdraw from Crimea. You might say that Russian banks will step in and open their branches in Crimea. Well, some of them will, but not major ones. Even Alfabank and Sberbank, two major Russian banks that operate in Ukraine have rapidly left the Crimea region. They don’t want to be held hostage for operating in Crimea region and put at risk their business in other regions.

Let’s consider some major corporation that owns some industrial facilities in Crimea. The corporation is registered in say Kiev and its Crimean facilities are now subject to Russian law, they should operate in Russian currency while Ukrainian government thinks otherwise. To make matters worse, say the major shareholders of this corporations are citizens in Ukraine and have major financial interests in other parts of the world including Ukraine. Do they want to risk their well-being and break some Ukrainian laws for sake of these Crimean facilities? Probably not… While the facility is not being destroyed, it has lost its investor. Are some new investors lining up to put their money in these facilities? I don’t know, probably not right now.

Let’s consider some hotel. Last year it has accommodated a number of tourists from Ukraine and Russia. Now Ukrainians are reluctant to go to Crimea for a vacation. The hotel is almost empty and makes losses. What hotel management is going to do? Probably scale down their operations and lay some personnel off… Let’s say this hotel belongs to some big network that pays taxes to Kiev. Does Kiev want to willingly lose this tax payments? I don’t think so. They will insist on tax payments by this hotel network and guess what.. Now Russia also demands taxes being paid, but to Russian tax authorities. I imagine what a headache it creates for businessmen…

Finally let’s say there is a factory in the Crimea region. The factory that supplies other regions with its products loses the distribution network in other parts of the country because distribution is still being owned by Kiev. Its competitors are already there to take its market share before all complicated legal issues are finally resolved.

In many other cases the situation is replicated in one form or another. Physical office space or physical assets are not destroyed, but their value is significantly diminished because many established links are now broken and legal problems arise all over the place. Very soon it becomes clear that the violent takeover brings more losses than profits and the valuable assets… have suddenly gone junk. The only types of assets that hold their value are ones that are highly localized like bakeries, beauty salons, mining industry etc. But who would ever take over a region for a beauty salon? 🙂

I believe that such phenomenon is due to an increasingly global nature of modern business. A few decades ago many things were local. Local factory was only dependent on supplies, it did not depend of some giant global or national corporation that operates in a number of jurisdictions. Now it all depends on everything. And once a piece is taken from the system it becomes if not worthless, but rather worth much much less while costs of establishing new order pile up.

Does this mean that Crimean calamity is one of the last conflicts over territory? I hope so.

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6 Responses to How globalism increases costs of territory annexion

  1. I think nobody in Russian government gives a shit about Crimean branches of some banks, or other small businesses like hotels and stores.

    As far as I know there are no big production plants or fabrics in Crimea. So not much to loose there.

    On the positive side, there might be some substantial natural resources in the sea near the shore. Gas pipe “South stream” Russia is building now will be cheaper because they do not have to get round of Crimea (the goal of the “South Stream” was not to depend on Ukraine for transit).

    Crimean economy was small compared with other regions of Ukraine, now it will be even smaller compared with Russian regions. Note that I do not believe that annexation of Crimea will bring any economic gains next 20 years (only additional expenses…)

    P.S. I would not worry much about hotel occupancy… with millions of Russian people who are prohibited to leave Russia and have not much of a choice where to spend their vacation

    • There are few large plants in Crimea actually. But I don’t think this industry was a reason for taking over Crimea. I just point out that the value of what exists in Crimea significantly went down. I agree that some people in power probably don’t care, but this doesn’t change economic reality.

      P.S. I would not worry much about hotel occupancy… with millions of Russian people who are prohibited to leave Russia and have not much of a choice where to spend their vacation

      I don’t think this will work and I don’t think there will be significantly more people prohibited to travel abroad from Russia.

      • I agree that in today’s global and interconnected world it does not make sense to start a war over a territory. If someone annexes California they will not get Google and Facebook, all these companies and their employees will move to some other region very fast.

      • I don’t think there will be significantly more people prohibited to travel abroad from Russia.

        I’m talking about the new rule for Russian police, military, and FSB employees. They are not allowed to visit more that 100 countries (like Turkey, all European countries) since this April. Combined it is about 2-3 million, 10 million with families.

        I think this rule is going to be applied to all government and science workers soon. Officially this is a “recommendation” but people are fired if they violate it.

        • Well, remember, that Crimea is not the only place in Russia to catch some sun on a beach. So those people who want to go for vacation in summer are distributed among number of places. For instance, I hardly see any reason to go to Crimea from Vladivostok and other remote parts of Russia. So actual numbers are smaller.

          I think this rule is going to be applied to all government and science workers soon. Officially this is a “recommendation” but people are fired if they violate it.

          I don’t think we’re moving towards this scenario, especially for science workers.

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