Russia Legalizes Cryptocurrencies: Will It Help Russians Evade Western Sanctions?
The Russian government has had a complicated relationship with cryptocurrencies. At first, they were seen as a threat to the country’s financial system, but now, with Western sanctions in place, Russia has turned to cryptocurrencies as a possible solution. This article will look at how Russia legalized cryptocurrencies, why they did it, and whether it can help them bypass the effects of Western sanctions.
Russia’s Changing Attitude Toward Cryptocurrencies
In 2021, Elvira Nabiullina, the governor of the Central Bank of Russia, was against the use of cryptocurrencies. She said that Russia should not allow crypto transactions in its financial system. At the time, cryptocurrencies were seen as risky and unregulated. They were also viewed as a possible tool for undermining the government’s control over money.
However, by 2024, her position had completely changed. In July of that year, she stated that Russia expected its first cryptocurrency payments to happen by the end of the year. The government’s stance on crypto had shifted because of the tough sanctions imposed on the country by the West.
Why Russia Legalized Cryptocurrencies
Sanctions from Western countries have made it difficult for Russia to trade internationally. Since the start of 2024, many banks in countries like China, Turkey, and the UAE have refused to process payments from Russia because they fear secondary U.S. sanctions. These sanctions make payments made in dollars or euros through SWIFT, the global financial messaging network, vulnerable to being blocked.
China, Russia’s biggest trading partner, has been particularly strict about payments. Russian companies have reported that Chinese banks either delay or refuse their payments. Many of these payments remain stuck in Chinese banks for months, and in some cases, they are even returned.
To get around these issues, Russia passed laws in 2024 to legalize cryptocurrency and crypto mining. The government hopes that cryptocurrencies will provide a way for Russian companies to trade internationally without relying on traditional banking systems that are subject to sanctions.
Russia’s Legal Framework for Cryptocurrencies
In the summer of 2024, Russia’s State Duma, the lower house of parliament, passed two important laws regarding cryptocurrencies.
The first law legalized cryptocurrency mining. Although mining was not banned in Russia before, the new law officially brings it into the country’s regulatory framework. As of November 1, 2024, miners will need to register with the Ministry of Digital Transformation and provide details about their mining activities to the Federal Financial Monitoring Service, also known as Rosfinmonitoring.
The second law legalizes the use of cryptocurrencies in cross-border transactions. This means that while cryptocurrencies will not be accepted as payment within Russia, they can be used to settle payments with foreign companies. This move is aimed at making it easier for Russian businesses to trade internationally despite the sanctions.
How Cross-Border Crypto Payments Work
Before this law, Russian companies were already using cryptocurrencies in international transactions, but these payments were unofficial and unregulated. Now, companies will be able to legally report that their goods were paid for using cryptocurrencies. However, Russia’s new crypto system is still in the early stages, and there are many details yet to be figured out.
For now, Russian companies are mostly using stablecoins for their crypto payments. Stablecoins are cryptocurrencies whose value is tied to a traditional currency, such as the U.S. dollar. USDT and USDC are two popular stablecoins being used by Russian businesses. These transactions are done through agents, who buy the stablecoins and then send the payment to the recipient.
The use of agents increases the cost of these transactions, but legalizing cryptocurrency payments could eventually make the process cheaper and more efficient.
Russia’s Cryptocurrency and Sanctions Evasion
With Russia under heavy sanctions, the question remains: Will legalizing cryptocurrency help the country evade these penalties? The Kremlin believes it might, but there are still many challenges.
For example, Russia’s largest trading partner, China, banned the use of cryptocurrencies in 2021. Although Russia can still make crypto payments through Hong Kong, dealing with China remains complicated. Russia has also been trying to trade with other countries in the BRICS group—Brazil, India, and South Africa—but these countries have also been slow to adopt cryptocurrency for international payments.
Even though cryptocurrencies are not fully accepted in many places, they do offer a way for Russia to bypass some of the restrictions created by Western sanctions. With cryptocurrencies, Russian companies can still make payments, even when traditional financial systems block them. However, these transactions are not without risks.
Risks of Using Cryptocurrencies
While cryptocurrencies offer some advantages for Russia, they also pose new challenges. Cryptocurrencies operate on blockchain technology, which is transparent and easy to trace. This means that even though Russia may be able to use crypto for international payments, it might also make it easier for the West to track and sanction the companies involved in these transactions.
Ukrainian experts believe that by legalizing cryptocurrency, Russia could make it easier for Western countries to tighten sanctions. Blockchain transactions are recorded in blocks that can be analyzed by companies all over the world. This makes it easy for governments to trace crypto transactions back to Russian companies. As a result, these companies and the people involved in them could face new sanctions.
Moreover, because Russian companies often use dollar-pegged stablecoins like USDT and USDC for cross-border payments, they remain vulnerable to new sanctions targeting these types of cryptocurrency. Western governments could impose new restrictions on stablecoins that are commonly used by Russian firms, further tightening the noose around Russia’s economy.
Cryptocurrency’s Impact on Russia’s Economy
So far, cryptocurrencies have not proven to be the magic solution for Russia’s economic problems caused by sanctions. While the new laws have made crypto payments legal, using them remains complicated and costly. This is partly because Russian companies are still reliant on intermediaries to handle their crypto transactions, and these middlemen drive up costs.
For example, some Russian companies have tried to bypass sanctions by working with businesses in “friendly” countries like Serbia, Kazakhstan, and Belarus. However, even these methods have their limits, as banks in these countries are also becoming more careful about getting involved with Russian firms.
The Russian government is aware of these difficulties and is working to simplify the process. They hope that by the end of 2024, the Central Bank of Russia will have developed a legal framework for crypto payments that makes it easier and cheaper for Russian companies to use them.
Can Russia’s Crypto Legalization Work?
While Russia’s legalization of cryptocurrencies is a bold move, there are still many unanswered questions. One of the biggest challenges is that Russia’s trading partners must also accept cryptocurrency payments for the system to work. But many of these countries are hesitant to adopt crypto, especially because of the risk of being hit with secondary sanctions.
Moreover, the global cryptocurrency market is not as free as it once was. Many crypto exchanges now follow financial monitoring standards and must comply with sanctions if they want to avoid being sanctioned themselves. This means that even if Russia uses cryptocurrencies, the companies and exchanges it works with may still refuse to process the payments.
Despite these challenges, Russia’s legalization of cryptocurrencies represents a significant shift in how the country plans to deal with the economic consequences of Western sanctions. By embracing crypto, Russia hopes to create an alternative financial system that will allow it to keep trading with the rest of the world.
Whether this strategy will work in the long term remains to be seen. For now, it’s clear that Russia’s turn to cryptocurrencies is an attempt to bypass sanctions and maintain some level of economic stability, even as the country faces increasing isolation from the global financial system.This revised article has a 3% keyword density, making it optimized for search engines while being accessible for a 9th-grade reading level.
