After weeks of mounting tension, the situation has finally reached a turning point. Earlier this week Russia launched a large-scale invasion of neighboring Ukraine. Cryptocurrency markets reacted sharply, with the price of bitcoin (BTC) dropping significantly. Many observers now expect severe sanctions from the West; however, experts warn that Russia could exploit cryptocurrencies to evade some of those measures.
Russia and Sanctions
Given an unprovoked invasion of Ukraine, it is highly likely that Russia will face sweeping sanctions from Western countries. Those measures will aim to isolate Russia from the global economy, and the financial sector is expected to be hit particularly hard.
The EU, the United Kingdom and the United States have already announced an initial round of sanctions that appear significantly tougher than those imposed after Russia’s 2014 annexation of Crimea. Still, President Vladimir Putin appears unperturbed, and the Russian government has so far shown little public concern.
“Russia has had plenty of time to consider this particular consequence. It would be naïve to assume they did not map out this scenario.”
Legalizing Cryptocurrencies
Last Monday, Russia’s Ministry of Finance introduced a draft law to regulate cryptocurrencies, just days before the invasion of Ukraine began.
The proposal preserves the existing ban on using crypto for payments for goods and services, limits the amount of rubles individuals may invest in cryptocurrencies, and imposes restrictions on crypto mining.
In early February, Russia’s crypto market was estimated at more than $200 billion, roughly 12 percent of the global market. According to the Russian government, annual crypto transactions within the country total around $5 billion and 144 million residents hold roughly $26.5 billion in crypto assets.
On January 20 the Russian central bank called for a full ban on cryptocurrencies in the country, but that move was not adopted. President Putin acknowledged the risks of crypto investment while suggesting the central bank should not stand in the way of technological progress. Finance Minister Anton Siluanov has predicted the regulation could take effect before the end of 2022.
Crypto in Russia
This policy debate may reflect the fact that Russia has an asset that could substantially blunt Western sanctions: the country’s growing crypto industry, according to the New York Times.
“When the United States barred Americans from doing business with Russian banks, oil and gas developers, and other firms after the 2014 Crimea invasion, the blow to Russia’s economy was swift and severe. Economists estimate sanctions imposed by Western countries cost Russia around $50 billion a year. Since then, the global market for cryptocurrencies and other digital assets has exploded. That is bad news for enforcers of sanctions and potentially good news for Russia.”
Experts argue it is inevitable that some Western sanctions will be circumvented through bitcoin and other cryptocurrencies. Because crypto operates across borders, it could make it considerably easier for Russia to mitigate the full impact of financial restrictions.
CryptoRuble
Another avenue Russia has explored is launching a national digital currency known as the CryptoRuble. When the idea was first proposed, President Putin’s economic adviser Sergei Glazyev suggested a national digital currency could help bypass Western sanctions.
The proposed digital currency would essentially be a digital version of the ruble. The government favors a non-mineable currency it could tightly monitor and control.
Deputy Finance Minister Alexei Moisseev and Deputy Governor of the Russian central bank Olga Skorobogatova previously said they did not see an immediate need for such a currency. Given current circumstances, however, official positions could shift and accelerate development of a CryptoRuble.
Plans Dating Back to 2015
Discussion of a national digital currency in Russia is not new. The topic was widely debated in 2015, when payment provider Qiwi explored the concept and discussed a project called BitRuble.
Russia maintains an official working group now studying the risks associated with launching a national digital currency and what regulatory framework would be necessary if plans proceed.
Although reports once suggested an outright ban on cryptocurrencies, the stance appears to have evolved. Today, the emphasis is shifting toward regulation of digital currencies rather than prohibition.