For having attacked Ukraine, Russia is targeted by a whole battery of economic sanctions, coming from the United States, the European Union and several other nations. But cryptocurrencies could allow the country to alleviate their consequences.
Freezing of the assets of Vladimir Putin and his Foreign Minister, Sergei Lavrov, in Europe, heavy ripostes against Russian banks, exclusion of Russia and certain large companies from international financial markets, restriction of the export of technological products intended for to the defense and aeronautics sectors…
Day by day, the list of sanctions against Russia grows longer. Since the beginning of the invasion of Ukraine, the United States and the Europeans have tried to confront and impose as many restrictions as possible on the Russian regime – without going so far as to take the decision to remove from Russia of the Swift international banking network.
But for the moment, all these sanctions, which could become even tougher in the days to come, have not been enough to make the Russian army retreat, or even to slow down the attacks. Anatoly Antonov, the Russian ambassador to the USA, had also assured that they would not work. In a Facebook post on February 23, the day before the start of the Ukrainian invasion, he explained that "sanctions [against Russia] cannot solve anything", and that he did not think "that a single person in Washington genuinely expects Russia to change its foreign policy under the threat of sanctions".
Besides the fact that Russia is accustomed to reprisals (the country has suffered them since 2014 and the annexation of Crimea), if the government is not panicking about restrictions, it is because it has a strategy to avoid their consequences — of which cryptocurrencies are a part.
Cryptocurrencies to avoid European sanctions
It was Alexander Shokhin, the chairman of the lobbying group "Russian Union of Industrialists and Entrepreneurs", who first raised the idea in June 2021. During a meeting on the consequences of the new sanctions imposed on Russia after the poisoning of opponent Alexei Navalny, Alexander Shokhin suggested using bitcoin and other similar currencies as a means of escaping Western maneuvers. And since the beginning of the invasion in Ukraine, the idea is raised again.
The track is not new: in 2019, Iranian Internet users organized a call for crypto-currency donations after being hit by violent floods – while the country is under severe economic measures. And in 2020, Venezuelan President Nicolás Maduro described cryptocurrencies as a way to circumvent restrictions on his country.
Indeed, economic sanctions are imposed by States, but they are in most cases executed by banks and banking institutions. Banks must verify transactions, and have a duty to block them and notify the authorities if the exchanges seem suspicious to them, or if they involve groups, companies or countries subject to prohibitions.
By operating outside of the traditional banking system, cryptocurrencies allow wallet-minted entities to continue transacting. There is no need to go through banking intermediaries, as for traditional transactions: everything is done on the blockchain. Going through digital currencies would therefore allow Russian institutions to avoid the majority of the sanctions that concern them.
Blockchain exchanges are public, but hard to track
In addition to escaping the control of the banks, they have another advantage. People in possession of cryptocurrencies can indeed own many digital wallets, and these wallets hide the identity of the owners quite well. This means that, although transactions on the blockchain are public, it is easy to hide your identity through several accounts – you can certainly end up finding someone, but it is difficult for the authorities to track the transactions, and to link them to a particular individual or institution.
It is also possible to use crypto exchanges registered in countries that do not impose sanctions, as noted by Bloomberg; or to use "private" currencies, such as Monero, which ensures that transactions are untraceable.
Above all, Russia has tools to allow its transactions on the blockchain to be highly untraceable, as the New York Times explains. The newspaper indicates that such tools would have been used by the Iranian and North Korean regimes, two states targeted by severe economic measures, in order to circumvent them. North Korea would have used it to finance nuclear research programs.
The digital ruble is in the test phase
The only real problem that cryptocurrency users would encounter would be when converting to fiat currencies i.e. coins and bills. Many crypto exchanges switch, at one time or another, to the dollar — but, as soon as American currency is used, American laws and sanctions apply. It could therefore be very difficult for Russian players to convert their bitcoin to ruble. But, precisely, Russia should very soon acquire a tool that would eliminate the need to go through exchange platforms: the digital rouble.
The digital ruble is a digital currency project: it is therefore not a cryptocurrency. The “e-roubles” are issued by the Russian central bank, which makes it a centralized project. The site of the Central Bank of Russia is also clear on this: “the bank is responsible for the digital roubles; and they are not related to cryptocurrencies”. The site is however much less precise on the technical specificities of the e-ruble: it is only indicated that they will be deployed “thanks to digital technologies”.
Cryptocurrencies are not yet regulated
And it is precisely this aspect that could allow Russians to convert their cryptocurrencies into rubles. The Russian central bank announced on February 16, 2022 that the first tests with the digital ruble would begin.
The conditions therefore seem ready for cryptocurrencies to allow the Russian authorities not to worry too much about European sanctions. Except that there remains a major obstacle: they are not yet regulated in Russia. The situation is even more delicate than that: Elvira Nabiullina, the president of the Russian central bank, is fiercely opposed to it, which she would like to see banned purely and simply.
For his part, the Minister of Finance hopes to pass a new law by the end of the year to better regulate cryptos and which would give them legal status. For now, no one can say who, the finance minister or the central bank president, will have the final say on the matter — or how it will impact how Russia deals with sanctions.