The most ardent proponents of cryptocurrencies claim that, among their many supposed advantages over fiat money, crypto is very challenging if not impossible to regulate by governments. That’s because Bitcoin and other currencies like it are transacted over a peer-to-peer network. The decentralized nature of Bitcoin means that a centralized authority like the US government cannot control financial transactions, and users are free to exchange their tokens with anyone on the network, no matter their geographical location as long as they have an internet connection.
With the recent unprecedented financial sanctions that were imposed on Russia, chiefly by the United States and the European Union, many have wondered if Putin’s administration and his cronies could simply circumvent these rules using a clever laundering scheme involving cryptocurrencies.
Some of the harsh sanctions enacted upon Russia include banning a number of select banks from SWIFT, an international bank-to-bank transfer system, as well as freezing hundreds of billions in foreign currency held by Russia’s central bank overseas. These are the most important economic sanctions, and together they isolate Russia from the global financial system.
In the case of the US sanctions, it becomes illegal for American nationals and businesses to do business with Russia and individuals connected to the Kremlin regime in ways the U.S. government considers material — and foreign individuals can face sanctions of their own if they don’t comply.
Key to enforcing these sanctions are the banks, which can see who is transferring money through their system, where it’s coming from, and where it’s heading. In order not to get hit by heavy fines or shut down, banks are careful to monitor and block any transactions linked to entities on a black list.
In this heavily restricted environment, cryptocurrency seems like a safe haven and the obvious choice for a sanctioned entity to continue running its business. After all, before the crypto space ballooned a few years ago, Bitcoin was widely used by criminal groups to receive payments for their illegal activities with great success. Why would it be different for a petrol state like Russia?
While Russian criminal organizations, some of which are suspected to receive the Kremlin’s blessing, have made hundreds of millions using hacking techniques like ransomware, it seems unlikely that such tactics could help fill the very deep pockets that a huge state like Russia needs filled.
In a twitter thread, Jake Chervinsky, head of policy at the Blockchain Association, makes his case clear: crypto won’t save Putin.
Chervinsky adds that many huge businesses across the world, not just in the US, are barred from dealing in any way with sanctioned Russian entities, and there’s no reason to convince them that crypto would help them do business without getting caught. While it may be technically possible to launder money and route it to Russia, the risks are huge. Besides, the last sanctions Russia faced when it annexed Crimea in 2014 led to losses amounting to at least $50 billion. That’s peanuts compared to the debacle they’ve gotten themselves into, and that’s not counting the cash they’re bleeding to sustain their war effort, estimated at €20 billion per day.
To support their shambling economy, Russia would need to launder crypto potentially in the hundreds of billions. This kind of liquidity is simply not available on any crypto market at the moment. Then you run into the trouble of somehow converting that crypto asset into fiat (i.e. US dollars, euros, yuan, etc.) in order to sustain your day to day operations. Printing more rouble that nobody wants anyway is obviously not a solution, unless Putin wants to mirror another infamous petrostate, Venezuela.
Another important point is that, contrary to popular belief, crypto transactions are very difficult to mask, even for sophisticated state actors. All crypto transactions are public on a digital ledger, which cannot be doctored or destroyed since the records are stored on the P2P network. You might erase the data on a computer in London, but there are millions more that have the original record. Crypto forensics have also gotten very good at spoofing laundering techniques. For instance, the Justice Department seized $3.6 billion worth of stolen Bitcoin from hackers who had stolen the lot more than six years ago from the Hong Kong-based Bitfinex, one of the world’s largest virtual currency exchanges.
Crypto is likely part of Putin’s plan to evade sanctions and cushion some of the blow dealt by the West — but it’s not the main tool. The Kremlin will probably unleash unprecedented ransomware attacks in order to attract foreign capital, but they can hope for a few billion at most in revenue. That’s woefully insufficient to keep them afloat.
Instead, Russia will likely count on its foreign reserves held in China as well as more trade in the future with its eastern ally. The price of oil is at its highest it’s been in more than a decade, currently around $111 a barrel, which will help a lot. Russia also has a super solid debt-to-GDP ratio of only 18% (the figure is 133% for the US) and a current account surplus, which could help keep the country stable even if it borrows money — for instance, from China — at exorbitant interest rates.
Although Putin seems unstable — he certainly looks that way to me — this invasion has been planned for years most likely. This gave them plenty of time to plan for sanctions, although they may have been much more severe than they bargained for. I don’t know what Plan B looks like, but they most certainly have one and they look prepared to wait this out for years if they have to. It’s just that crypto won’t play a major role in this plan.