The Kremlin only allows settlements for cross-border transactions using cryptocurrency.
Author: Yaroslav Vinokurov, Ukrainska Pravda
Translator: 0xjs, Golden Finance
There is only a fine line between love and hate, especially when it comes to the Russian government's attitude towards cryptocurrency.
Elvira Nabiullina, the head of the Russian Central Bank, stated in December 2021: "We cannot welcome investments in such assets. We believe that Russia's financial infrastructure should not be used for cryptocurrency transactions."
In July 2024, she said the complete opposite: "We expect the first cryptocurrency payment to be completed by the end of this year."
The Kremlin initially viewed cryptocurrencies as a threat. They were initially created to replace the traditional financial system, so for the authorities, they seemed like an uncontrollable tool.
However, the Western world has now designated Russia as a state supporting terrorism, and cryptocurrencies have become one of the last few ways to ensure payment for export and import contracts.
In the summer of 2024, the Russian State Duma (the lower house of the Russian parliament) legalized cryptocurrencies and crypto mining. The Kremlin did not hide the fact that this was a consequence of the sanctions since the end of 2023, which made trade with friendly countries difficult. Can cryptocurrencies save the Russian economy?
Forced to find alternative methods
In 2024, Russia's foreign trade began to decline due to problems with international settlements under export and import contracts. Foreign banks, fearing secondary sanctions from the United States, refused to accept payments from Russia.
The National Bank of Ukraine, which participated in formulating sanctions against Russia, stated: "Payments in dollars and euros through SWIFT are easily subject to sanctions. Almost every day, there are reports that banks in China, Turkey, and the UAE are delaying or returning payments for certain categories of products and services, confirming the difficulties Russia faces in traditional payment channels."
This problem has become so widespread that Russian President Vladimir Putin dedicated himself to solving it in May of this year, "ensuring that trade between the two parties is not negatively affected by a third country."
However, the situation for Russian companies has not improved since then. Perhaps the only positive economic impact of Putin's visit to China was the simplification of Russian exports of veal cartilage and ginger to China.
As a result, in the first half of 2024, Russia's imports were one-third lower than expected by Russian analysts. According to their calculations, imports were supposed to grow by 13%, but in reality, they decreased by 14% compared to the same period in 2023.
The payment issue has prompted Russian companies to seek alternative methods. Some companies began to trade payments through intermediary organizations registered in "friendly" countries such as Serbia, Belarus, and Kazakhstan. However, this was also ineffective, as trading partners became more cautious when reaching settlements in jurisdictions suspected of evading sanctions.
Another option is to make payments through the Shanghai branch of the Russian Foreign Trade Bank. However, due to the bank's inability to handle a large number of clients wishing to conduct transactions through it, the waiting list for opening an account at the Shanghai branch of the Foreign Trade Bank has been several months long.
In addition to being inconvenient, alternative methods also require additional money and time, and cannot guarantee success. Many companies are disappointed with the traditional financial system and are looking for unconventional payment methods. For example, traders are using barter trade to conduct trade with India, exchanging petroleum products for aluminum.
Cryptocurrency payments are also becoming popular. The Russian authorities have decided to expand and develop this method nationwide.
Trading with cryptocurrency
Vladimir Chistyukhin, Deputy Chairman of the Russian Central Bank, stated in July 2024: "If unwanted payment mechanisms are not developed under sanctions, export-oriented economies may perish."
Cryptocurrencies, which the Russian Central Bank wanted to ban two and a half years ago, have now become one of these mechanisms. In the summer of 2024, the State Duma passed two laws legalizing cryptocurrencies in Russia.
The first law legalized cryptocurrency mining, which was not actually prohibited in Russia before the new law came into effect. From November 1, cryptocurrency mining will be officially included in Russia's regulatory framework. The law sets requirements for individuals involved in mining, requiring them to register with the Ministry of Digital Transformation and provide information about the cryptocurrencies they mine to the Federal Financial Monitoring Service of the Russian Federation (Rosfinmonitoring).
The second law legalized the circulation of crypto assets, making Russia one of the few jurisdictions in the world to recognize cryptocurrencies at the national level. However, unlike countries like El Salvador, which have adopted Bitcoin as an official currency, Russia will not accept cryptocurrencies as a means of payment.
The Kremlin only allows settlements for cross-border transactions using cryptocurrency.
Cryptocurrencies have been used for these transactions before, but only informally. "Now customs will be able to identify these payments: companies will be able to prove that the goods were paid for with cryptocurrency," said Vladyslav Vlasiuk, a sanctions policy commissioner from Ukraine.
Cryptocurrency payments in Russia are currently mediated by agents: Russian importers transfer rubles to agents, who purchase crypto assets from exchange operators and make payments to the recipients.
Russians typically use stablecoins (tokens pegged to traditional currencies such as the US dollar) for these transactions. USDT and USDC are the most popular stablecoins. Vlasiuk stated that they are at the core of the Kremlin's legalization of cryptocurrencies.
Using intermediaries will increase the cost of cryptocurrency transactions for Russian importers. This is also one of the reasons why cryptocurrency payments have not yet provided a viable alternative to traditional payment methods for Russians, despite the difficulties in making payments in dollars or euros through the banking system. The legalization of cryptocurrencies should make cryptocurrency payments cheaper and easier—at least in theory.
How does it work?
There is very little information about how cryptocurrency payments work in Russia: the new laws do not set requirements for those wishing to use cryptocurrency for payments. The Russian State Duma has instructed the Russian Central Bank to draft rules for regulating cryptocurrency transactions. The bank has been fully authorized to design a cryptocurrency transaction system and draft rules for managing the payment process and the parties involved.
As early as 2021, Elvira Nabiullina, the head of the Russian Central Bank, was skeptical about legalizing cryptocurrencies, but Russia has undergone significant changes over the past three years.
The Russian Central Bank will be able to establish experimental legal regimes (ELR) in various sectors of the economy, select participants, and define their roles. ELR participants will not be bound by certain laws of the Russian Federation.
It is expected that cross-border transactions will take place within the ELR of the financial market. The central bank will also create an organized cryptocurrency trading ELR. Russia may establish an official cryptocurrency exchange or grant cryptocurrency trading rights to existing exchanges. The largest exchange in Russia, the Moscow Stock Exchange, has refused to participate in this experiment.
The Russian Central Bank must also integrate cryptocurrency payments with the national payment system, which consists of the national payment card system, the fast payment system, the central bank payment system, the deposit system, and the financial information system.
The Russian Central Bank may achieve the first cross-border cryptocurrency payment by the end of 2024. However, to achieve this goal, Russia not only needs to design appropriate technical systems but also needs to figure out where and how to obtain enough cryptocurrency to service billions of dollars in foreign trade turnover.
Can this bypass sanctions?
If Russia's plan to bypass the Western financial system using cryptocurrencies is to succeed, legalizing cryptocurrency payments in Russia alone is not enough. Its trading partners must also accept such payments, which may still be difficult.
For example, in China, cryptocurrencies have been banned since 2021. (This ban does not apply to Hong Kong.) In order to use cryptocurrencies in transactions with Russia's largest trading partner, Moscow will have to use a series of intermediary organizations, which will increase transaction costs.
Russia's other BRICS partners—Brazil, India, and South Africa—do not seem eager to legalize cryptocurrencies for international payments.
The cryptocurrency market is no longer an unregulated area free from rules or government oversight. Cryptocurrency exchanges operate according to financial monitoring standards and must comply with Western sanctions to avoid secondary restrictions.
Ukrainian cryptocurrency analysts believe that Russia's new plan is essentially shooting itself in the foot. Cryptocurrency transactions may make it easier for Western governments to expand the scope of sanctions.
"Tracking all participants in blockchain transactions is easy because they are recorded in the blocks. There are many companies around the world that can analyze these things. Once Russian companies start using cryptocurrencies, it will be much easier to find their trading partners," said Nataliia Drik, President of the Ukrainian Blockchain Association.
In addition, using stablecoins in international trade will make Russian companies more susceptible to further restrictions, which seems inevitable.
The National Bank of Ukraine stated: "Pressure from sanctions on individuals (especially participants in the Russian Central Bank's cryptocurrency pilot project) and new areas of the Russian economy will increase, such as the adoption of additional measures to restrict Russian customers' access to the stablecoin market pegged to the US dollar, which, according to several news investigations, Russian companies use for settlements."
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