Can Russia Use Cryptocurrency to Evade U. S. Sanctions?

Following Russia’s invasion of Ukraine, Russia was hit with a series of U.S. and E.U. sanctions, including sanctions on cryptocurrency in Russia. Other countries, such as Iran and North Korea, have previously used cryptocurrency to evade sanctions. Is Russia doing the same? Possibly, but the Russian government has a complicated crypto policy and is creating its own crypto exchange that it can control.

What you will learn from this article:

• Why Does Russia Need to Use Cryptocurrency to Evade U. S. Sanctions?
• How Does Cryptocurrency Allow Foreign Governments to Evade Sanctions?
• What Other Countries Have Used Cryptocurrency to Evade U. S. Sanctions?
• Can Cryptocurrency Really Help Russia Evade Sanctions?
• Is Cryptocurrency Legal in Russia?
• What is Russia’s Own Digital Currency?
• What Can the U.S. and E.U. Do to Prevent the Use of Cryptocurrency to Evade Sanctions?

Why Does Russia Need to Use Cryptocurrency to Evade U. S. Sanctions?

Following Russia’s invasion of Ukraine in February 2022, the United States and European Union, joined by the United Kingdom and Canada, responded with a number of sanctions to punish Russia and hurt its economy.

These sanctions have included:

• U.S. and E.U. bans on Russian oil imports
• A U.S. ban on Russian gas imports
• Freezing the assets of Russian leaders and oligarchs, including Russian President Vladimir Putin and, famously, former Chelsea owner Roman Abramovich
• Seizing superyachts owned by sanctioned Russians
• Sanctions on Russian businesses
• A ban on Russian flights from U.S., E.U., U.K., and Canadian airspace
• The E.U. banned crypto wallet services to Russia

This is just a short list of some of the most newsworthy ways the U.S. and other countries have responded to the invasion with a series of sanctions. Although Russia’s economy can profit by turning to Asian and Middle Eastern markets instead, which it has, these sanctions severely hurt its ability to do business in Western markets.

The sanctions have continued, as the EU commission sanctioned Russia again in October with its 8th sanctioned package, giving Russia more reasons to find ways to evade these repercussions.

How Does Cryptocurrency Allow Foreign Governments to Evade Sanctions?

Anonymity

Cryptocurrency traders are identified by their public key address. Unlike normal bank accounts, the owners are not identified by their real names. This makes it easier for foreign nationals to disguise their identities and purchase anonymously. So it makes cryptocurrency an attractive option for those who want to evade government actions.

Chain-hopping, Mixers, and Wallets

Some methods which experts think foreign nationals might use to evade sanctions include chain-hopping, mixer accounts and tumbling services, and unhosted wallets. Chain-hopping is a process by which one cryptocurrency is converted into another to hide its origin. Mixer accounts combine cryptocurrencies from several users, making each individual user harder to trace. Unhosted wallets give users control over their funds rather than entrusting them to a third party.

Cyrptocurrency has been used by Russian-speakers to funnel money illegally. In April 2022, the U.S. Justice Department announced the shutdown of an darknet market.

According to the press release, Hydra Market “was an online criminal marketplace that enabled users in mainly Russian-speaking countries to buy and sell illicit goods and services, including illegal drugs, stolen financial information, fraudulent identification documents, and money laundering and mixing services, anonymously and outside the reach of law enforcement. Transactions on Hydra were conducted in cryptocurrency…” In this instance, illegal services were sold using cryptocurrency in Russian-speaking countries.

What Other Countries Have Used Cryptocurrency to Evade U. S. Sanctions?

Both Iran and North Korea have previously used this strategy to evade sanctions.

We have already detailed how Iran used cryptocurrency to evade sanctions. Basically, in the wake of U.S. sanctions against oil from Iran, the country turned its oil reserves to fuel electricity instead. They used the electricity to engage in Bitcoin mining. The Bitcoin can then be sold instead of the oil, bringing in a profit for Iran while evading the sanctions.

In 2020, North Korea was caught using cryptocurrency to evade sanctions. The country hacked cryptocurrency accounts and laundered the money, stealing millions of dollars in cryptocurrency.

North Korea has used these cyber-attacks to fund its missile program. Despite sanctions meant to stop North Korea from carrying out missile and nuclear tests, the country has continued these programs in part due to stolen cryptocurrency.

By the end of 2022, North Korean hackers had stolen an estimated $1.2 billion in crypto and virtual assets since sanctions were imposed in 2017.

Since other countries have successfully evaded sanctions using cryptocurrency, it is a reasonable worry that Russia could do the same – or perhaps already is.

Can Cryptocurrency Really Help Russia Evade Sanctions?

Theoretically, yes.

However, although cryptocurrency trading spiked immediately following Russia’s invasion of Ukraine in early March, the trend has not continued over time. CoinDesk reports that although “In April, the Wall Street Journal reported that daily ruble trading in cryptocurrencies spiked to 6.6 billion (US$46 million) in the days after Russia’s invasion, before quickly plummeting to 1 billion rubles ($7 million).”

So, there was an immediate increase in Russian cryptocurrency as a reaction to the news and fear of sanctions. However, it is not obvious that Russians have turned to cryptocurrency as a long term strategy.

Instead, it seems that Russia has been pouring its resources into its alternative financial systems, SPFS and Mir. Russia has been creating its own alternative to financial messaging system SWIFT. Russia’s version of this is called SPFS.

The country has also developed an alternative to credit card systems like Visa and Mastercard with its own network called MIR. Russia has been marking these systems to countries outside of the U.S. and E.U. to create its own alternative financial system that does not rely on Western technology.

These strategies to create an independent economy mean that Russia has other way of evading sanctions by using traditional banking structures.

Is Cryptocurrency Legal in Russia?

Russia’s attitudes toward crypto over the past year had been a roller-coaster of confusing and frequently changing policies.

In January 2022, Russian leaders discussed bans on cryptocurrency. Then, in July 2022, Vladimir Putin signed a bill that banned its use within the country. So, Russians are not allowed to use cryptocurrency to pay for Russian goods or Russian services.

But what about imports or international transactions? That’s where things get more complicated. The ban does not apply to imports or international transactions. This means that crypto could still be used in these contexts and, potentially, to evade foreign sanctions.

Russia has also recently started to encourage crypto mining. The country is beginning to supply electricity to Kazakhstan’s crypto mining farms.

However, Russia has an even bigger projects in the works that will affect its use of cryptocurrency. Russia has begun plans to launch its own Russian crypto exchange using its own currency, and creating the CryptoRuble. The Russian crypto ban encourages crypto traders to turn towards the cryptocurrency that Russia itself will produce.

What is Russia’s Own Digital Currency?

Russia’s CryptoRuble has been in development since at least 2017, long before Russia invaded Ukraine in February 2022.

Unlike other forms of cryptocurrency, the CryptoRuble will be issued by the government, tied to the value of the Ruble, and will not involve mining.

The Russian government dislikes that crypto operates outside of its control, potentially costing them in lost tax income. The government sees the crypto ruble as a means of overseeing the use of crypto in its borders. While the anonyminity of cryptocurrency makes it an attractive way to evade sanctions, this same quality makes it a wildcard that the Russian government wants to control within its own borders.

What Can the U.S. and E.U. Do to Prevent the Use of Cryptocurrency to Evade Sanctions?

Sanctions against Russia have already included bans on crypto wallet services. Another way to prevent the use of crypto to evade sanctions is by careful monitoring of blockchains.

Conclusion

Although other countries, such as Iran and North Korea, have used cryptocurrency to evade sanctions, it is not obvious that this is Russia’s main strategy.

Although Russian crypto trading initially skyrocketed following its invasion of Ukraine and the sanctions imposed against it, this trading soon began to decrease.

Russia has instead invested in alternate financial services – its SPFS and MIR – to create an alternate banking system which it can market to countries outside of the control of the U.S. and E.U.

However, Russia is creating its own cryptocurrency – the CryptoRuble – which will allow it to oversee crypto trading in its borders. It’s possible that this new currency will play a role in its evasion of sanctions.

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