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Putin's Ukraine adventure may hurt Russian economy

As tensions in eastern Ukraine heat up, the rhetoric coming out of Russia is starting to sound similar to what it was saying before Russian troops descended upon Crimea.

Talk of Ukrainian "radicals and terrorists" is once again filling Russian airwaves, as state-sanctioned news reports focus on the region of Donetsk, which says it will hold its own independence referendum no later than May 11.

But before Russia can think about absorbing more breakaway Ukrainian provinces, President Vladimir Putin may have to consider the costs Russia has already taken on by annexing Crimea.

With the annexation of Crimea, Russia faces fresh questions about how it will continue to pay for a massive Russian pension system that even former Finance Minister Alexei Kudrin has called unsustainable, despite recent attempts at reform.

Read MoreUkraine: Russia and NATO's war of words escalates

The average Russian pensioner receives between $250-$300 per month, though some retirees get as much as $1,000 a month. Pensions increase as recipients age, and some groups such as World War II veterans receive extra.

At a recent cabinet meeting, Prime Minister Dmitry Medvedev said that boosting Crimean pensions to current Russian levels would cost Russia about $1 billion this year.

"To the extent the entire Russian state budget is heavily dependent on energy, and those resources are finite, then adding several hundred thousand pension obligations would make the situation worse from the Kremlin's perspective," Matthew Rojansky, director of the Kennan Institute at the Wilson Center, told CNBC.

Read MoreUkraine situation and world's gas supply

Rojansky said some of those costs could be offset by Crimea's significant tax base, shipping industry and tourism economy if the Russian government is able to efficiently integrate those into its own tax base.

"What it probably cannot pay for is the massive new infrastructure that will be needed to connect Crimea with mainland Russia, the new defense expenditures and of course the high level of corruption which will be inevitable in all transactions," Rojansky said.

Pro-Russian activists hold red flags with the communist hammer and sickle during a rally in the eastern Ukrainian city of Kharkiv on April 7, 2014.
Sergey Bobok | AFP | Getty Images
Pro-Russian activists hold red flags with the communist hammer and sickle during a rally in the eastern Ukrainian city of Kharkiv on April 7, 2014.

A major businessman in Russia who requested anonymity told CNBC that Russia will spend money on Crimea at the expense of domestic programs, which will further drain the budget.

"The economy will continue to falter. There will most likely be a recession this year," the source said.

Russia could find itself in a situation where it's squeezed from both ends, with higher domestic expenditures along with a more difficult market for its natural gas exports.

Read MoreUkraine: What next for battered economy?

"I'm not as concerned about the pension system as I am Russia's reliance on oil and gas exports," Edward Mermelstein, an attorney and adviser on cross-border investment in Russia, told CNBC. "If America sets up the proper infrastructure within two to three years to export natural gas to Europe, it could wreak havoc on the Russian economy."

Ian Brzezinski, a senior fellow at the Atlantic Council who focuses on trans-Atlantic security, said he believes that the Russian economy can probably handle absorbing Crimea, adding that Putin is less concerned with economic priorities than he is with projecting an air of Russian strength.

"Putin is not concerned about costs, but about Russian national greatness," Brzezinski said.

—By CNBC's Dina Gusovsky

Contact World Economy

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