Cryptocurrencies, Russia's protective shield to mitigate Western sanctions

Cryptocurrencies, Russia's protective shield to mitigate Western sanctions

Vladimir Putin's military invasion of Ukraine has triggered a cascade of sanctions to strangle the Russian economy and isolate the country from the global financial system. Among the measures with the greatest impact is the
decision to remove seven Russian banks from the Swift international interbank communications system
, in which an average of 32 million messages are exchanged every day. In practice, the expulsion means that the affected entities cannot collect or receive payments from abroad, which makes it difficult for all kinds of transactions with the country and from abroad. The punishment package includes a ban on the Russian Central Bank accessing its reserves in

dollars in the world – some 630,000 million – or the freezing of assets to oligarchs with strong ties to the Kremlin.

Western powers redouble pressure on Putin for
the attack on the sovereignty of Ukraine
, although experts warn that Russia could mitigate the impact of sanctions if it turns to cryptocurrencies. The reason is that these virtual currencies are difficult to trace, they are beyond the reach of central authorities and, therefore, operations carried out with them cannot be prevented. "Swift's exclusion restricts international transactions, but cryptocurrencies can be transferred in a non-transparent way, so I think it's a good way to avoid being expelled from the system," says Ricardo Zion, Professor of Finance at EAE Business School.

Russia was already a prominent player in the 'crypto' universe. According to a report from the country's own government, its citizens have about 214,000 million dollars in virtual currencies, which is equivalent to 12% of the total and, according to a 2021 Chainalysis study, it ranks 18th out of 154 in the world in adoption level. Zion thinks that Russia also contemplated this alternative in its roadmap as a protective shield against sanctions: «With the occupation of Crimea in 2014, Swift's expulsion was on the table, so I am convinced that on this occasion , when he studied possible retaliation, it was one of those that he had raised and surely he had a plan B ».

Cryptocurrencies emerge as an escape route to erode the effectiveness of international isolation measures. “Yes, sanctions could be avoided. Venezuela, for example, tried to get around US sanctions by operating in bitcoin and even its own cryptocurrency," recalls Nereida González, senior analyst at Afi's market analysis department. Getting around the economic deadlock with these assets poses some challenges, but experts don't think they're insurmountable.

Zion defends that the limitations are very small. "If anything, registering a platform could cause problems because it comes from Russia, but there are no instructions in this regard," he says. There are more doubts about whether they will really be accepted in the business world. Gloria Hérnandez Aler, partner of the regulatory consulting firm finReg 360º, says that "today cryptocurrencies are used more at the user level than at the company level, although it is not ruled out that the conflict will accelerate certain changes."

Javier Collado, professor of Economics at Udima and inspector of the State Treasury, believes that “if Russia tries to work with cryptocurrencies and all the companies or organizations that are related to it accept payment or collection in this way as compensation, there will be no no problem".

For its part,
Russian oligarchs close to the Kremlin who appear on the EU blacklist
could move to cryptocurrencies to protect themselves from the
crash that the ruble is suffering
. “Their use between companies can become more compromised, but they could save the ballot for the oligarchs who are being personally sanctioned to prevent their funds from being frozen or to get them out of Russia directly,” says González. They would have to do it, yes, in Russian exchange houses or in geographies with little regulation, since entities from certain jurisdictions would block their operations, as Fernández Aler explains: «The 'exchanges' of Europe, the US, The United Kingdom and other countries are implementing, like banks, measures to identify these people and block any type of movement because, as they are obligated subjects in terms of money laundering prevention, they have to comply with the regulations.

Ukraine, with great ties to the crypto world – it is the fourth country with the highest adoption of cryptocurrencies, according to Chainalysis – has pushed for the sanctions to be extended to any Russian citizen. However, for the moment platforms such as Binance or Coinbase have rejected the request.

Under the European magnifying glass

The EU, for its part, has announced that it is studying measures to prevent cryptocurrencies from helping Russia escape
financial sanctions imposed by Member States
, although it has not advanced what specific initiatives it is preparing. Nereida González, from Afi, warns of the complexity that this poses: «They have to prohibit platform by platform that operate with this country in a market that is not regulated, therefore, it is possible that they put some obstacle so that it cannot skip the sanctions via cryptocurrencies, but it will be practically impossible to connect all the dots ». The expert also highlights that Russia is working on its own digital currency: "It is still in a proof of concept, but if it sees a possibility of escaping sanctions, it is not ruled out that it can hurry up and get it out now."

Cryptocurrencies could also be used by Russia to counteract some of the economic effects of sanctions, as other countries are doing. North Korea, for example, would have carried out computer attacks to steal cryptocurrencies that would have served to finance its nuclear programs, according to a UN report to which Reuters has had access. And Iran, under US restrictions, is selling its energy reserves on global markets using the bitcoin mining process to circumvent trade embargoes, according to British blockchain firm Elliptic. "A significant investment is needed for computer equipment, but it is very profitable," says Collado, from Udima.

Beyond cryptocurrencies, experts agree that Russia would have other outlets to face the global strangulation. Collado recalls that Moscow has been preparing its own financial messaging system, SPFS, for some time. Initially intended for home users, in April 2021 more than 20 Belarusian banks, the Armenian Arshidbank and the Kyrgyz Bank of Asia were connected to it. Subsidiaries of large Russian financial institutions in Germany and Switzerland have access to it and negotiations on agreements on SPFS with China are underway, according to the official TASS agency.

Russia also has the option of opting for the China International Interbank Payment System (CIPS), created in 2015 and to which some Russian banks already joined in 2019. "It is the one that everyone thinks is going to stay in the future because the technology that Swift uses is quite obsolete. Many Asian banks already participate in the Chinese system and the 300 Russian financial institutions that are Swift users, responsible for 80% of foreign transactions, could join, with which Russia would mitigate the damage of the sanctions quite a lot, " indicates the teacher.
The Western bloc is willing to continue its economic offensive
for Russia to pay a high price for the war, but now, unlike any other time, a new actor threatens to enter the scene: cryptocurrencies.

The other side: solidarity donations

The Russian invasion of Ukraine has highlighted the usefulness of cryptocurrencies for international fundraising, as Professor Zion highlights. “They are being used a lot for donations, especially bitcoin. It is a growing trend », he comments. The advantage is that they allow fast cross-border transactions and are not subject to the control of any central authority that can block the operations. It should be remembered that the official Ukrainian Twitter account shared last Saturday the addresses of the digital wallets to which people could send different virtual currencies (bitcoin, ethereum and USDT) and have already received more than 23 million dollars, according to the British blockchain firm Elliptic. The Ukrainian NGO Come Back Alive, which supports the military, has also raised several million dollars in cryptocurrencies.

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