Putin’s folly: Crimea is a money pit by Cyrus Sanati @FortuneMagazine March 19, 2014, 6:12 PM EST E-mail Tweet Facebook Google Plus Linkedin Share icons Russian President Vladimir Putin addresses a joint session of Russia’s parliament on Crimea FORTUNE — Ukraine is better off without Crimea. Indeed, if Ukraine really wants to stick it to Russian President Vladimir Putin, it should hand over a few more of its southern and eastern provinces to Moscow, in addition to the backwater peninsula. While the way in which the Crimea was ripped away from Ukraine was understandably traumatic, the country will be far better off without it in the long run. The markets rallied Tuesday as Putin signed documents formally annexing the Crimean peninsula from Ukraine. Meanwhile, in Kiev, Ukraine’s capital, there were little, if any, major demonstrations protesting the illegal territorial seizure. Sure, politicians voiced outrage and spoke of further Russian incursions on the horizon, but there was no real anger in the streets, at least not to the extent that led to the popular uprising in recent weeks. Meanwhile, Ukraine’s military has largely stayed in their barracks and is set to peacefully withdraw to the mainland. MORE: Shareholder research firms are not the enemy A territorial grab like the one Russia just pulled in Crimea would have normally led to a major conflict with the Russian military machine — if not with Ukraine, then with some competing power in the region, as they would want to cap Russian expansionism before it got out of hand. Crimea, in particular, has been the focus of many international squabbles over the years, most of which began and ended with some sort of bloody conflict. But the markets have rightly understood that fighting over land is so last millennium. No one, not even the United States, is willing to send troops to defend Ukraine’s territorial sovereignty. Indeed, the U.S. and its allies haven’t even been willing to impose economic sanctions on Russia. After all, it’s not like Crimea is resource rich — or even rich at all. It has a naval base, controlled by Russia, and some beaches. That’s pretty much it. Much of the commentary so far has focused on the political and social aspects of what a divided Ukraine would mean for Kiev, but there is also an economic angle as well. In short, Ukraine really needs to downsize. The bloated country has a third of the population of its Russian overlords but only a fraction of its GDP. Much of that is due to the fact that Ukraine lacks foreign investment and abundant natural resources. The country is an agrarian paradise, but food is cheap and the benefits that come from exporting wheat isn’t the same as it is with oil or natural gas. Crimea, in particular, is an economic loser. The territory was on course to transfer around 1.9 billion Hryvnia ($200 million) in taxes and other government revenue in 2013 and receive around 5.7 billion Hryvnia ($600 million) from the central government. That equates to a net loss of 3.8 billion Hryvnia ($400 million) for Kiev, forcing the government to redistribute funds from its more productive regions in the center of the country to keep Crimea in the black. As for resources, well, Crimea really doesn’t have any. As Vivienne Walt wrote in Fortune last week, Crimea is mostly an arid place with none of the lush forests or black soil that characterize the rest of Ukraine’s abundant agricultural land. It makes most of its cash from beachgoers in the summertime — with the vast majority of tourists, some 70%, coming from Ukraine. Now, the loss of all those Ukrainian tourists will be an economic disaster for Crimea this summer. As such, Russia will probably need to transfer at least half a billion dollars per year for the foreseeable future to keep the province afloat. That’s in addition to the $5 billion to $6 billion Moscow says it will pump into the region to bring its infrastructure and services up to snuff. MORE: Bitcoin hedge fund launches with Silicon Valley and Wall St. support But that $5-6 billion figure seems low, especially when you figure in the cost of corruption. After all, Russia just spent around $50 billion on infrastructure to host the Winter Olympics in Sochi this year. Of that $50 billion, it spent around $9 billion to build a 25-mile rail and road link connecting Sochi to the winter ski events in the Caucasus Mountains. That equates to some $360 million per mile. Say the government spent half that Sochi rate to build a fancy new rail and road link 170 miles from Sevastopol to the Russian border. This would be imperative if it wanted to bring Russian goods and tourists into Crimea. Such an adventure would cost the Russian government a cool $30 billion. Russia would then need to build the bridge connecting Crimea to the Russian mainland over the Kerch Strait — a project that Putin is apparently very excited about. The government estimates the bridge alone would cost around $3 billion. Now, multiply that by three (cost of corruption) and it will probably end up being around $9 billion. That’s $39 billion for a rail and road link — and we haven’t even gotten to the billions of dollars that would be needed to pay for everything from schools to bureaucracy. Ukraine has a golden opportunity here to make Russia feel some pain. It won’t be by hurling bombs but by just giving away territory. As Ukraine elects a new government, it should also draft a new constitution and rethink its borders to maximize revenue and minimize cost. Who should stay and who should go? Apparently, the eastern provinces of Ukraine pump out the most pro-Russian and reactionary government officials, most of whom come from the old Communist Party. Losing those folks would make life much easier for whoever takes power in Ukraine. Those provinces are also some of the poorest in the country. If Ukraine would just jettison the four provinces that hug its eastern border with Russia (including Crimea) — Donetsk, Luhansk, Kherson and Zaporizhzhya — it could save another $2 billion a year. Absorbing all of those money-losing provinces would deliver a major financial blow to Russia, while lightening the load for Ukraine. Russia is already expected to post a $12 billion budget shortfall for the year before factoring in the cost of the Crimean annexation. With its economic growth rate stuck at around 2.5% for the next few years, that deficit will just grow larger and larger over time. Having to absorb millions of people, who are mostly poor, will just make things worse. As such, if Ukraine can’t win this little skirmish with Russia along military grounds, it should do the next best thing and just bankrupt them.