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.
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.