Since the ruble plummeted by more than 30 and then being ostracized of the international payment system SWIFT the sanctions imposed by the West due to Russia’s incursion into Ukraine have hit Moscow with a hammer.
The effects of these sanctions is evident as The Russian currency has declined by more than 30 percent over the past few days, and the central bank was forced to suspend execution of all orders made by foreigners to sell securities for a period of time there is a threat of a shortage of many consumable goods and a devaluation of the relations of trade on imports to come.
In 2014 it was reported that the Obama administration had introduced sanctions that prevented Americans from conducting trade with Russian banks or oil and gas producers and Sother firms following the invading Crimea. The sanctions resulted in Russia’s $50 billion per year however, it was a time that digital currencies were not as widely used. Since the time, cryptocurrencies, as well as other digital assets, have grown exponentially and this is certainly not good news for the people who enforce the sanctions.
What is the mechanism for sanctions?
To comprehend how digital currencies and other assets could play a part in aiding Russia to escape some of the sanctions that are imposed upon them, it is important to first know how these sanctions function.
Many of the US, together with European Union sanctions, rely massively on banks to enforce the system. If a sanctioned enterprise or person needs to treat an exchange in common currencies, like those of the US Dollar or Euro, it is the bank’s task to block and flag those businesses. In order to impose sanctions, governments create an inventory of individuals and businesses that its citizens should stay clear of. Anyone found to be in contact with anyone on the list is subject to severe penalties.
The most important element for any effective sanctions program is the financial system worldwide. The world’s banks are a key part of the enforcement of sanctions. How? They know where the money comes from and from where it’s transferred, and anti-money laundering laws require them to stop transactions that involve sanctioned entities and submit what they find to the authorities.
Could cryptocurrencies assist in getting beyond these restrictions?
And that’s the place where cryptocurrencies enter. Digital currencies are outside the boundaries of the standard global banking, and transactions are being recorded on a ledger that is called the blockchain. Banks must adhere to rules of “know the customer” guidelines, which include the verification of their clients’ identities. However, platforms and exchanges that facilitate the purchase and selling of cryptocurrencies, as well as digital assets, aren’t as adept at monitoring their customers as banks are, despite the fact that they’re supposed to adhere to the same guidelines. In October The US Treasury Department warned that the growing use of cryptocurrency was a risk to American sanctions program and that authorities should be educated on the technology.
There are more than 1500 cryptocurrencies available that have a worth of more than $320 billion, as per CoinMarketCap.com. Most notable among them is Bitcoin which accounts for more than 40 percent of their total value. However, new cryptocurrencies can be made and sold without having to involve the banks or regulators who usually oversee market prices for currencies. This is one reason that makes the cryptocurrency attractive to those who are under sanctions.
In order to allow trading without relying on the dollar as per experts could be a fantastic option to avoid sanctions as well, it is believed that the Russian government is presently working on its own central bank’s digital currency, which is known as the Digital Ruble, which it is expecting to use to conduct open trade with other states who agree to accept it, without turning it into dollars. In October, representatives of the central bank in Russia informed a Moscow newspaper that the Digital Ruble would make the country less dependent on its ties with the United States and better able to defy sanctions. It will allow Russian institutions to conduct transactions that are not part of the international banking system, with any nation willing to exchange digital currency.
Additionally, at the heart of this are ransomware attacks and Russia being the center of this sector. In the last year, 74% of all worldwide ransomware revenues, or over $400 million in cryptocurrency, was attributed to companies that are likely to be associated with Russia in some way, as per a study from the firm that tracks blockchains Chainalysis.
websites that are used to facilitate illegal trades known as darknet markets have brought in a record $1.7 billion in cryptocurrency in the year 2020, with the majority of it being Bitcoin. And almost all of the progress in the darknet market that year can be blamed on one distinct Russian-language-only market named Hydra. Hydra is “by far the largest darknet market worldwide with more than 75% of the market for darknet revenues globally in the year 2020.” Chainalysis written in the report.
In spite of the Blockchain ledger, which will help trace digital transactions, however, Hydra’s technology Hydra conceals the source of transactions, providing an opportunity for Russian users to transfer funds out of the country’s borders. In its own terms, Hydra is not big enough to handle the number of transactions Russia could require to avoid sanctions. However, other techniques for avoiding money laundering like nesting where a shady marketplace is hidden within an official structure to conceal its activities — may aid as the report outlined.
Do you have an example?
Iran, North Korea, Venezuela. Russian might have a few the countries of these three countries friendly in the area of trading in digital currencies since they have also been affected by sanctions from the US. China the largest trading partner for both exports and imports as per the World Bank has already established its own central bank’s digital currency, and its president Xi Jinping had recently described China’s relationship with Moscow as being one that has “no restrictions”.
In February the independent sanctions monitors informed the United Nations Security Council that North Korea was making use of cryptocurrency to finance its ballistic and nuclear missile program, as reported by Reuters. A representative of Norway’s permanent representative to the UN confirmed that the report was in fact published but it hasn’t been released to the publicly available.
Similar to the US, Iran, too, is using digital currencies too, if it does not move beyond, reduce the effects of US sanctions. As with Russia, Iran is an oil-exporting nation and is still under a long-running, near-total economic embargo from America which includes the ban on all imports as well as sanctions against Iranian banks. But, according to the consultancy firm Elliptic What Iran did with the excess energy that it cannot export is to turn it into bitcoin mining. Mining is a huge use of electricity, and since the pariah state isn’t exporting much and thus, it is taking some sanctions by generating cryptocurrency. Elliptic estimates that Iranian-based miners make up around 4.5 percent of Bitcoin mining, which could result in annual revenues of around $1 billion.
Venezuela however, is the most direct example of the way Russia could use digital assets to do. An investigation conducted by TIME publication has exposed that the Putin regime utilized the country as a Latin American ally to run their own experiment to mitigate the impact of sanctions by using cryptocurrencies. It is known that the value of Venezuelan currency, called the Bolivar was decimated due to the mismanagement of the government and the effects of US sanctions that were put in place to be a punishment for president Nicolas Maduro for his deepening dictatorship. The Venezuelan government was not only able to help to develop the Petro cryptocurrency created in the name of government officials of the Venezuelan government, but their experiment using the digital currency is closely watched by Moscow. Maduro is hoping to raise $6 billion, but the experts warn that a large portion of the money could go towards supporting his regime as well as enriching his supporters.