How Cryptocurrencies Could Save Russia From Sanctions
Updated: May 8
Now that I have your attention, let's begin with the story without wasting any time.
Sanctions are some of the most powerful tools the United States and European countries have to influence the behavior of nations they don’t consider allies. The United States in particular is able to use sanctions as a diplomatic tool because the dollar is the world’s reserve currency and is used in payments worldwide.
But American government officials are increasingly aware of the potential for cryptocurrencies to lessen the impact of sanctions and are stepping up their scrutiny of digital assets. But can Russia really use cryptocurrencies to evade sanctions?
The answer is unfortunately a yes. According to experts, Russia already has multiple cryptocurrency-related tools at its disposal that it can use to evade sanctions. All it needs is to find ways to trade without touching the dollar. The Russian government is also developing digital rubles in hopes of using them to trade directly with other countries without using American dollars. Hacking techniques like ransomware could help Russian actors steal digital currencies and makeup revenue lost to sanctions. And while cryptocurrency transactions are recorded on the underlying blockchain, the new tools developed in Russia can help them mask the origin of such transactions. This would allow businesses to trade with Russian entities without detection.
But What Are The Challenges That Are Stopping Russia From Doing It?
Evading sanctions isn't as easy as turning all your dollars into bitcoin (as you might have guessed). That’s because it’s hard to actually buy anything with cryptocurrencies, which fluctuate wildly. What’s more, the oil trade, which accounts for a huge share of Russia’s economy, is dominated by US dollars. This is far from a perfect solution.
Can Russia Use the Iranian Way To Mitigate This Pain?
There are ways Russia could theoretically mitigate the pain of sanctions. One is by copying what Iran (another oil exporter) has done. The country, which has been under a near-total US embargo for decades, has figured out how to take some of the bites out of sanctions by turning to bitcoin mining. A report estimates that 4.5% of all bitcoin mining takes place in Iran (as of May 2021). This allows the country to circumvent trade embargoes to some degree. Iran’s state-controlled power generation company revealed in January 2021 that up to 600 MW of electricity was being consumed by bitcoin miners. However, this is no better than a temporary solution for an economy like Russia.
All of the above-discussed ways can do more harm than good, if not dealt with carefully. Russia has surely looked at all of this deeply. Only time will tell if this is a viable option for Russia to save its crippling economy.