Could Putin be exploring cryptocurrencies to
bypass western sanctions?
Debate rages over whether Russian banks could use
crypto such as bitcoin as an alternative currency exchange
Vladimir Putin might row back on Russia’s planned
embargo of cryptocurrencies such as bitcoin given western sanctions.
Dan Milmo
Global technology editor
Tue 1 Mar
2022 12.43 GMT
As many
people do when discussing the complex world of cryptocurrencies, Vladimir Putin
kept it simple: “Of course, we also have certain competitive advantages here,
especially in the so-called mining.” After events this weekend, when Russia was
hit by severe financial sanctions, the Russian president might be considering
capitalising on those advantages.
Putin was
speaking in January, days after the country’s central bank proposed a blanket
ban on cryptocurrency trading and mining. In the case of bitcoin, the
cornerstone cryptocurrency, mining is the energy-intensive process by which
computers verify new bitcoin transactions – putting them on a virtual ledger
known as a blockchain – and generate new bitcoins as a reward for that work.
The Bank of
Russia was emphatic in its warning, saying that cryptocurrency mining entailed
“significant risks for the economy and financial stability.”. One week later,
Putin appeared to be less sure, pointing that Russia had advantages in
cryptocurrency mining due to its huge energy wealth and expertise in the field.
Putin’s
doubts about a full crypto-embargo might well have deepened after the west
applied massive pressure to Russia’s financial system with new sanctions. The
EU, US, UK and Canada have targeted the country’s $640bn (£478bn) in foreign
currency reserves – a financial buffer held as a back-up to deal with
emergencies and provide financial stability – by agreeing to “prevent the
Russian central bank from deploying its international reserves in ways that
undermine the impact of our sanctions”.
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The same
group have also announced that unnamed Russian banks will be expelled from
Swift, the main global payments messaging system used by banks to make
cross-border money transfers.
Russia and
its banks could be looking at cryptocurrencies more closely because they could
represent an alternative medium of international exchange to the dollar.
Cryptocurrencies could also bypass the international banking system that is key
to enforcing sanctions as a listening post for financial transactions worldwide
(a characteristic of cryptocurrencies that watchdogs and central banks
dislike), by offering an alternative way to make irreversible cross-border
transactions.
“We’re at a
watershed moment in global history where central banks of nation-states are no
longer in direct control of the financial instruments once used to impose
global regulations. With cryptocurrency in its infancy, these decentralised
currencies lack the agency and infrastructure needed for the ability to
regulate institutions as large as Russia,” says Eric Michaud, co-founder of Off
The Chain, a blockchain security conference.
Other
crypto experts argue, however, that the transparent nature of blockchains makes
it difficult for sanctioned entities to use cryptocurrencies to bypass
sanctions.
Nonetheless,
some nation states have turned to bitcoin for an escape. Iran, heavily
sanctioned by the US but with substantial fossil-fuel reserves, effectively
converts its excess energy into cash by acquiring bitcoins off Iran-based
bitcoin miners (powered by fossil-fuel generated electricity) and using the
currency to buy imports.
“The
Iranian state is … effectively selling its energy reserves on the global
markets, using the Bitcoin mining process to bypass trade embargoes,” said
Elliptic, a blockchain consultancy that helps clients combat crypto-related
crime, in a blog post last year.
Elliptic’s
director of policy and regulatory affairs, David Carlisle, says crypto mining
is “one of the most feasible options” for Russia, which is already the
third-largest country for bitcoin mining according to data from the University
of Cambridge.
“In
addition to actually minting crypto that can be used to trade with governments,
Russia can tax the underlying money activity as well. They can license and tax
the activity itself,” says Carlisle. Elliptic estimates that the Iranian
government could make about $1bn a year from Bitcoin mining. Carlisle adds:
“Once it’s in possession of large amounts of bitcoin that it’s mined, Russia
can then use that Bitcoin to pay for imports of goods and services that it
might otherwise struggle to access, owing to US and European restrictions.”
However,
the Wall Street Journal reported last week that the US is considering imposing
sanctions on Russia’s cryptocurrency market. Companies such as Elliptic offer
software that lets businesses spot illegal crypto transactions.
According
to Chainalysis, a blockchain analysis firm, the transparent nature of
blockchains makes it difficult to use cryptocurrencies as a basis for
cloak-and-dagger sanctions dodging. “Sanctions evasion activity is captured on
public, permanent, immutable blockchain ledgers,” says Caroline Malcolm, head
of international public policy and research at Chainalysis.
Yesterday,
the U.S. Treasury Department announced extensive sanctions against Russian
businesses and elites following the country’s invasion of Ukraine. This has
prompted many to ask Chainalysis how Russia may attempt to use cryptocurrency
to evade sanctions.
—
Chainalysis (@chainalysis) February 25, 2022
There
remain other paths that Russian actors could use, including the North Korean
route of hacking cryptocurrency platforms, which raised $400m for Kim Jong-un’s
state last year alone, according to Chainalysis.
There are
also ransomware attacks, where criminal groups encrypt a target’s computers and
demand cryptocurrency in exchange for unfreezing them, although Russia’s FSB
security agency recently claimed to have dismantled the REvil ransomware group.
Last year, the US treasury department sanctioned two Russian-owned
cryptocurrency exchanges, SUEX OTC and Chatex, for allegedly helping launder
ransomware proceeds. On Monday, crypto exchange Binance said it was blocking
the accounts of any Russian clients targeted by sanctions.
According
to Elliptic’s Carlisle, the Russian state could use a network of exchanges to
conceal crypto ownership. “If the Russian government or Russian entities wanted
to look to ways to evade sanctions using crypto, they could try to develop a
network of complicit exchange services that would help them do that,” he says.
There are also cryptocurrencies that are difficult to trace, such as the
privacy-focused Monero.
But
Carlisle adds that the sheer scale of the financial restrictions facing Russia
is such that cryptocurrencies will not suffice. “Crypto alone will never enable
Russia to circumvent financial restrictions at the scale it needs to mitigate
the full impact of restrictions; Russia’s total banking sector assets are
$1.4tn – nearly the size of the entire crypto market.”
There are
also alternatives to cryptocurrency. Ejecting Russian banks from Swift could
encourage China to strengthen its own nascent payment network, Cross-Border
International Payments System. Alexi Drew, a senior analyst at RAND Europe, a
research institute, says: “It would not be beyond the bounds of belief that
China takes the Russian line on sanctions being unfair and provide a means to
alleviate them by giving Russia the use of CIPS.”
Or the
answer might be even closer to home. The Bank of Russia is developing its own
digital rouble too.
Putin’s errors over Ukraine could herald big
change for global finance
Jim O'Neill
The inventor of the Brics acronym says sanctions
against Russia have exposed nations’ dependence on the western economic system
Leading western nations have removed key Russian banks
from the Swift network behind the global financial system.
Tue 1 Mar 2022
11.40 GMT
During the
brief heyday of Russia as a “Bric”, the acronym I dreamed up in 2001 to
describe the possible future largest emerging economies in the world – Brazil,
Russia, India and China – I would go to Russia reasonably frequently.
In 2008, I
was asked by the organisers to give a special presentation on where Russia’s
economy might be, by 2020, to the St Petersburg Summit, Russia’s own version of
Davos. To my slight embarrassment, I hadn’t really appreciated that they would
be quite irritated if I didn’t suggest that Russia was likely to be in the top
five largest economies of the world by 2020, which I did realise afterwards,
when my presentation and comments caused a bit of stir in the post-event coffee
areas and media.
Essentially
I suggested that given Russia’s challenging demographics, and that crude oil
prices were unlikely to continue the one-way rise that had characterised the
decade to date, Russia’s potential growth rate was probably not much more than
2%. And if they really wanted to have the powerful economic growth that had
been experienced in (those) recent years, they needed to undertake significant
reforms to boost productivity.
The
reaction to my presentation among officialdom was my first real suspicion that
Russia might have challenges ahead, which of course, was without realising the
scale of chaos that was about to unfold in the global financial system and the
subsequent economic collapse around much of the world. That set of
circumstances contributed to a major multi-year peaking in oil prices, and much
of what happened since, which for Russia, has been persistent economic
disappointment.
I have no
great expertise at geopolitics but I have broadly assumed in the past decade or
so that Vladimir Putin had decided that his huge domestic popularity would
decline because he couldn’t achieve the growth that had taken place pre-crisis.
Nor could he really reform, because much of his personal financial benefit and
those of some close to him depended on the status quo, so he had to shift to
another platform, which was loosely based around the idea of making Russia
great.
During
those years, I got to know several senior technocrats in the policy world,
primarily from the central bank and finance ministry, and leading economic
influencers, and I was often struck by how widely the belief was about Putin’s
excellence as a strategist.
I had for
some years been expecting some great era of big reforms to be unleashed due to
these views but alas, they never came, and instead, this game of playing on his
perception of western weakness dominated his apparent strategic thinking.
Well, after
the weekend just passed, and the western financial sanctions announced, it
seems to me that Putin isn’t such a great strategist after all.
I don’t know where the idea of freezing the
central bank’s foreign exchange reserves originated, but whoever thought of it
has come up with a cracker, alongside the bold move by leading western nations
to agree to remove key Russian banks from the Swift plumbing network of the
financial system.
In one fell
swoop, that announcement has essentially eradicated the relevance of Russia’s
massive official foreign exchange reserves, and with it, sowed the seeds for
big problems for the Russian economy. I had been thinking throughout recent
weeks: how can a country that is no longer in the top 10 largest of the world’s
economy (barely 2% of global GDP now) have such apparent military importance
around the world? After the further collapse of the currency, the ability of
Russia to remain anywhere near as important globally is starting to rapidly
fade. Based on the exchange rate on Monday, Russia could at the end of 2022
rank no higher than 15th.
While the
background to recent awful events had included a picture of increasing
closeness between Beijing and Moscow, I suspect the Chinese leadership might be
scathing about what Putin has provoked as a response from the west. Now any
country thinking of using its supposed military might to pick on a small
neighbour to the dislike of the western democratic alliance will have to
calculate the consequences for their own central bank being frozen out of the
system, and with it, economic warfare being used in such speedy form as a much
more powerful form of influence.
Of course,
there are many other aspects that go along in parallel, not least the
remarkable shift in German policy on its own defence spending, its decision to
pay for some weapons for Ukraine, and, of course, its sudden opposition to the
previously agreed deal for a pipeline for more Russian gas. And with this,
there has been a much more joined-up and robust EU policy response.
It is now
likely the case that some thinkers around the large emerging economies will
have to, once again, rethink their happy dependency on the western-dominated
financial system, and it is not impossible that current events sow the seeds
for a big reform of the global financial system. There is no way that is going
to happen unless such countries, China included, shift their approach to the
use of their currency, and with it, many aspects of their economic and related
systems. As for Russia, some huge reflection on its leadership must surely soon
occur.
Jim O’Neill is a former chairman of Goldman
Sachs Asset Management, a former UK Treasury minister and a senior adviser to
Chatham House
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