Russia Is About to Try Using Crypto to Get Around Sanctions

As a legal and financial professional with over two decades of experience in Russian law, I find myself intrigued by the recent developments surrounding Russia’s proposed legislation on cryptocurrencies. The experimental nature of this law, which grants unprecedented control to the Central Bank, presents a unique challenge in predicting its practical implementation.

Next week, Russia is set to initiate trials for cross-border cryptocurrency transactions as a potential means of bypassing international sanctions. However, according to some financial and legal analysts who spoke with CoinDesk, this strategy might not prove successful.

A legislation approved in late July and subsequently authorized by President Vladimir Putin doesn’t remove the current prohibition on utilizing cryptocurrencies as a standard form of payment within Russia, but it does permit cross-border transactions involving cryptocurrencies.

It’s uncertain how these payments can be made legally since the relevant laws don’t outline guidelines for such transfers. Instead, they’ve given control to Russia’s central bank to manage a “trial” system, according to experts.

As a crypto investor, I’ve noticed that the Russian economy has taken a significant blow due to the sanctions enforced by countries like the U.S. and others, in response to Russia’s actions in Ukraine.

Due to Russia’s military action against Ukraine in February 2022, these countries – the United States, United Kingdom, European Union, Australia, Canada, and Japan – have imposed a total of 16,500 sanctions on Russia.

According to Valerie Kennedy, the director of investigations at Chainalysis, the enactment of these bills by the Russian government indicates a persistent effort by Russia to find ways around Western sanctions using an evolving strategy.

Approximately half of Russia’s overall foreign currency reserves, valued at around 300 billion euros ($332 billion), along with 70% of assets belonging to Russian banks, have been blocked by the EU. Certain Russian banks have also been disconnected from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) system.

She noted that it’s becoming challenging for Russia to steer clear of using the U.S. dollar and euro through the SWIFT system, which in turn heightens the possibility of facing indirect sanctions, also known as secondary sanctions. These types of sanctions are imposed to discourage any uninvolved parties from engaging in trade with a nation subjected to sanctions.

What the law says

Some details have emerged in the days leading up to the Sept. 1 implementation of the law.

According to a translated version of the law, when it comes to the circulation of digital currencies within the Russian Federation, special regulations might be implemented through an experimental legal framework that’s currently being developed. This framework is yet to be finalized, with the central bank taking into account ideas and feedback from domestic parties before its completion.

According to Anti Danilevski, the head of Kick Ecosystem, which offers a range of crypto services, we and other players have presented our own ideas. Whether these align with the central bank’s perspective is yet to be determined. However, he noted that they are acting swiftly, so a decision shouldn’t take long.

According to Bloomberg’s latest report, Russia intends to utilize its National Payment Card System for exchanging rubles with cryptocurrencies during upcoming payment tests. The system was selected due to its existing infrastructure for functions such as interbank settlement and strict oversight by the central bank. If these trials prove successful, it’s possible that Russia could permit the Moscow Exchange and the St. Petersburg Currency Exchange to establish crypto platforms next year, as per the report.

According to Ivan Chuprunov, who is an associate professor at the Research Centre of Private Law in Moscow, the specific details about this new regime are still unclear as no official guidelines have been released yet. However, he anticipates that the central bank may release some clarifying instructions within the next few weeks.

The law also appears to let the central bank change how it oversees these trials at any time.

According to the law, certain sections of the Federal Law can be either removed or modified when it comes to transactions involving digital currencies used in foreign trade activities that are facilitated by an authorized entity.

According to Chuprunov, the system is described as “flexible” since it’s only the central bank that holds the authority to approve it. Details such as whether there will be a single exchange, which currencies will be traded, and how participants can gain access to trading are yet to be determined.

It is unclear at this time what regulations govern crypto entities or businesses looking to trade cryptocurrency, as it’s up to the central bank to decide which companies are eligible for participation in the experimental phase.

Although the law itself does not explicitly state its intention, recent comments from high-ranking Russian officials suggest a potential use of cryptocurrency as a means to bypass or respond to sanctions.

On July 17, 2024, during an economic meeting, Putin suggested that Russia should seize the opportunity and swiftly establish a legal structure for cryptocurrencies. He noted that these digital assets are becoming more prevalent worldwide as a method of payment in international transactions.

Later, one of the authors of the bill expressed Russia’s perspective on cryptocurrencies as primarily being used to bypass sanctions. Subsequently, Central Bank Governor Elvira Nabiullina stated this was the reason behind their recent softening of stance towards cryptocurrencies at a recent event in Moscow.

Centralized implementation uncertainty

It’s still unclear how Russia plans to leverage this fresh legislation to assert greater authority and find ways to bypass the current sanctions.

This experimental setup is unique worldwide as it grants unrestricted rule-making authority to the central bank, allowing them to establish regulations at their discretion and choose any corporation they deem fit for participation in the trial.

According to Jim Mignano, a researcher at RAND, he stated that allowing the Bank of Russia to establish an electronic system for handling digital currency transactions and oversee activities will consolidate control.

Due to the flexibility granted by the law for changing rules on the fly, it’s challenging to foresee how geopolitical shifts or fresh sanctions might prompt Russia’s administration and central bank to alter their laws from time to time.

In her capacity as managing partner at CIS London, a law firm focusing on transactions involving the Commonwealth of Independent States (CIS) such as Russia, Svetlana London stated that she has been practicing Russian law for more than 18 years. She recounted that she can’t recall the term ‘experimental’ in a legal draft, expressing her confusion about how this will be implemented specifically due to its title alone.

As an analyst, I’m sharing my perspective on Danilevski’s statement regarding the Central Bank of Russia’s experimental legal regime (ELR). He suggests that the law grants them the authority to implement this ELR, but he believes that in its current state, it’s not effective. Instead, he emphasizes the need for substantial revision and refinement to make it practical and functional.

The question arises as to whether Russia will disclose its methods for enforcing this law. During a recent event in Moscow, Andrei Kostin, head of VTB (one of Russia’s largest banks), suggested that the enforcement of such laws could be considered a “national secret,” due to the possibility that someone at the U.S. embassy is recording our statements, enabling the West to respond swiftly.

West will respond in “new ways”

Mignano informed CoinDesk that if Russia manages to evade sanctions effectively, it might lead to stronger enforcement actions or even the introduction of new types of sanctions.

One of those growing threats is that of secondary sanctions.

Last month following the passage of the bill, Governor Nabiullina explained to Reuters that the threat of secondary sanctions has increased. These sanctions make it challenging to process payments for imports, which is a concern for a broad array of products.

“Though crypto assets operate independently from conventional banking systems, their actions can still be traced and monitored, enabling Western governments to explore and investigate transactions using advanced methods as per Isabella Chase, Senior Policy Advisor of Europe Middle East and Asia at blockchain analytics firm TRM Labs,” (paraphrased by AI model).

Foreign partners and liquidity

Despite the law’s intent, experts questioned whether foreign partners will engage through crypto.

As a researcher, I’d express Kennedy’s point as follows: I’ve observed that the crypto market lacks sufficient liquidity to facilitate widespread financial evasion without either causing a crash in cryptocurrency prices or attracting scrutiny from blockchain analysts. This type of evasion appears similar to other money laundering schemes, with small amounts of cryptocurrency being gradually transferred to exit points.

According to Mignano, this issue could necessitate Russia exerting extra effort. He suggested that they might have to provide “economic or political rewards” to encourage parties to engage in cryptocurrency deals.