On February 25, 2022, the Russian government decided to shut the Moscow stock exchange following an “incredibly volatile trade”. The Russian shelling hadn’t just shaken Ukraine, it had hit the economy back home in Moscow as well. One of its causes was the tough sanctions the west and its global allies had imposed on Russia to protest its invasion of Ukraine. It immediately seemed like the Russian economy would crumble fast as the ruble’s value was plummeting to new lows.
However, to everyone’s surprise, the Russian stock market is back within a month. Tradings were reported higher than usual, and it seems like the toughest of sanctions haven’t done enough to deter Russia or damage its economy. Some believe Russia has been able to fend off the global sanctions with the help of cryptocurrency. Some suggest it will take time before the sanctions actually start working.
Nevertheless, there is a reason why some people have named the Russia-Ukraine conflict “the first crypto war.” The question is, how a country with tough cryptocurrency regulations possibly benefit from crypto itself? In this article, we discuss how Russia is using cryptocurrency to fight global sanctions and what it means for the crypto industry. Let’s discuss sanctions first.
What sanctions have been imposed on Russia so far?
Here’s the list of sanctions imposed on Russia:
- Ban on military goods and machinery. UK, EU, and the US have imposed a ban on the export of dual-use goods, such as vehicle parts, lasers, and chemicals. The UK has also banned Russia's Wagner Group, a private military firm believed to supply military equipment to the Russian army.
- Ban on flights. US, UK, EU, and Canada have banned all Russian flights in their airspace. The UK has further stepped up and banned private jets chartered by Russians.
- Ban on luxury goods. The EU has already banned its export of luxury goods to Russia, including vehicles, high-end fashion, and art. The UK is soon following in its footsteps. Additionally, the UK will soon put a 35% tax on imports from Russia, including vodka.
- Ban on individuals and businesses. The US, EU, and the UK have sanctioned over 1,000 Russian individuals and businesses. It includes the freezing of assets belonging to the Russian president Vladimir Putin and his foreign minister Sergei Lavrov.
- Ban on oil and gas. The US has decided to ban all Russian oil and gas imports, and the UK has decided to wee-out Russian oil imports by 2022. The EU is also planning to switch to alternative supplies to make Europe independent of Russian energy before 2030.
- Financial bans. Western countries and allies have frozen the assets of Russia's central bank in an attempt to restrict it from using its $630bn of foreign currency reserves. Some Russian banks have been removed from the international financial messaging system Swift, which is used to transfer money around the world. In the UK, major Russian banks have been excluded from the UK financial system. Furthermore, the country has frozen the assets of Russian banks. Russian state and major companies are not able to raise finance or borrow money in the UK. The EU has also targeted 70% of the Russian banking market, banning them from transactions. EU has also banned major Russian state-owned firms.
What are the effects of the sanctions on the Russian economy?
As of the end of February 2022, Russia is the most sanctioned country in the world. The sanctions have caused a few apparent damages to Russia. The Russian manufacturers are reportedly facing trouble and the banking system in Russia is experiencing a tough time. Furthermore, the cost of basic products is rising and there’s a looming risk of job losses as most international companies have already halted their operations in Russia.
A forecasted 14% rise in inflation and shrinkage of the economy by 8% is not a good sign for Russia and the people living there. However, Russia has yet to experience the level of impact the west claims.
Is Ruble falling?
The value of the ruble took a 70% dive within a month of the Russian invasion of Ukraine. The global community has been noting its fall carefully. To everyone’s surprise, however, the value of the ruble seems to be climbing in recent days.
On March 22, 2022, the ruble gained about 7% against the US dollar. It was the highest gain in the value of the Ruble in years. One of the reasons for this could be Russian President Vladimir Putin's announcement demanding that hostile states pay for Russian energy purchases in rubles.However, looking at the weaker-than-expected impact of sanctions, suspicion of the growing adoption of digital currency by the Russian government and Russian companies is growing.
Could it be possible? Let’s find out. First, let’s take a look at Russia's cryptocurrency regulation.
Russia cryptocurrency regulation
Historically, Russia has been unfriendly territory for cryptocurrencies. However, to everyone’s surprise, in February, the Russian ministry of finance came up with a draft bill on cryptocurrency regulation, proposing new crypto trading and mining guidelines in Russia.
The bill, however, treats cryptocurrency as an investment tool only. It says cryptocurrencies may not be used to pay for goods and services. It also explains regulations for crypto exchanges and over-the-counter desks. To provide services in Russia, foreign crypto exchanges must register as legal businesses.
Furthermore, the bill requires all cryptocurrency-to-fiat transactions made through bank accounts, and users must go through KYC (know-your-customer) checks with both cryptocurrency exchanges and banks.
Has the Russia-Ukraine conflict helped raise cryptocurrency value
There hasn’t been favorable news for crypto investors for at least some time as the global economy is still recovering from the effects of the pandemic which is still not under control. And in the final weeks of February 2022, another incident happened—the Russian invasion of Ukraine. Unfortunately, the world economy is now facing another hurdle as inflation is going off the roof.
But on the contrary, the global crypto market has risen to over a $2 trillion market cap, and the Bitcoin price has soared to $47,524 as of the 29th of March 2022. It was just a little over a month ago the value of Bitcoin had slumped to $34,904.
Experts credit the rising value of cryptocurrency to its emergence as an alternative to the traditional financial system. People are relying more on it during hard times when the traditional monetary system hasn’t been able to help.
Russians are adopting crypto in huge numbers. According to Kaiko, a Paris-based cryptocurrency research provider, the trading volumes between Bitcoin and the ruble reached 9-month highs in late February.
As people from Russia and Ukraine are relying on crypto in the wake of uncertainty, it has also helped to strengthen the value of crypto coins.
How the Russian government is leveraging cryptocurrency
When it comes to sanctions, Russia is no stranger to them. The west had already imposed tough sanctions on Russia since it annexed Crimea in 2014. Though there have been claims about the serious effect of sanctions on Russia, global economic experts have pointed out the negligible effect of sanctions on the Russian economy. However, Russians trying to fight sanctions with the help of digital currency is not a new topic.
Apart from planning for a crypto-friendly regulation, the Russian government is also working on its own central bank digital currency, dubbed the "digital ruble." It may help Russia to deal directly with foreign countries, without the requirement of converting any currency to dollars. Moreover, Russia is reportedly considering accepting Bitcoin as payment for its oil and gas exports. If it’s realized, billions of dollars of global transactions would not require traditional international banking infrastructure and would be free from the reliance on the US dollar.
Representatives from Russia's central bank had already mentioned in September 2020 that the newly introduced Russian "digital ruble" would help reduce the country's reliance on US dollars and improve its ability to resist western sanctions. It was built to help Russian entities trade with any country looking to trade in digital currency without the need for the traditional banking system.
Russia is still the biggest global exporter of fossil fuels and the fact that it could use cryptocurrency for its trade could have positive effects on its economy as well as the volume of the cryptocurrency trade.
How has the crypto industry reacted to the Russian sanctions
Coinbase and FTX, two of the largest crypto-trading platforms, insist they are complying with sanctions on Russia. They say they have been following the same rules as traditional financial institutions when it comes to collecting data on consumers and detecting suspicious behavior. However, the major crypto exchanges have rejected to block Russian users from their platforms, claiming banning ordinary citizens from the crypto platforms contradicts its core value—a true democratized distribution of money.
How crypto might shape the Russian economy’s future
Experts believe that a $2 trillion crypto market is still “too small” for Russia to be able to evade global sanctions and move ahead with its motives. However, as Russia is making a huge effort toward creating and leveraging the power of the digital currency, including its own currency, the Russian economy could rely more on crypto in the future.
According to TripleA, a Singapore-based crypto-payments company, more than 17 million Russians already own cryptocurrency. That’s almost 12 percent of its total population. With Russia making new crypto-friendly regulations and people exchanging their fiat currency for crypto, more people may soon be attracted to crypto. It may help stabilize the value of the ruble and also free the Russian economy from the global banking system that has been limiting the country’s ability to trade globally.