Russian Crypto Sanctions Explored by Biden Admin as Conflict Continues

The world reacted to the Russian invasion of Ukraine by economically isolating the nuclear-armed nation. Economic sanctions are one of the strongest deterrents the global community has, short of participating in the war itself.

However, the US could be willing to take it a step further. According to the Wall Street Journal, the country is “exploring more novel strategies, such as sanctioning Russia’s cryptocurrency market.”

US Economic Sanctions on Russia Powerful but Calibrated So Far

The list of sanctions against Russia, on an individual and institutional level, is a long one. Suffice to say, the biggest financial blow of them all is cutting Russian banks (Sberbank, VTB) from the Society for Worldwide Interbank Financial Communications (SWIFT).

Before the Russia-Ukraine conflict heated up, it was suspected that Russia is legalizing Bitcoin as a cryptocurrency precisely because of the West’s previous SWIFT threats. The cross-border payments system is critical for international trade, affecting Russia’s support for its ruble fiat currency. However, as of yet, the Central Bank of Russia is not cut off from SWIFT.

The Russian ruble dropped by nearly 20% compared to the dollar since the invasion. Image credit: Trading View.

Blocking a country’s central bank is the strongest financial weapon available to another country, and it is one that conflicts collateral damage. Not yet prepared for such an action due to collateral economic damage and the EU’s reliance on Russia’s natural gas and oil, the White House issued a statement proposing a more surgical approach. 

“…we commit to imposing restrictive measures that will prevent the Russian Central Bank from deploying its international reserves in ways that undermine the impact of our sanctions.”

Sanctions Grow as Europe Seeks to Paralyze Russian Central Bank

Furthermore, Ursula von der Leyen, European Commission president, announced the introduction of sanctions to “paralyze the assets of Russia’s central bank” and “freeze its transactions.” In a nutshell, this unprecedented level of weaponized financial deplatforming means the following:

• Russia’s rainy day funds, such as the National Wealth Fund and Ministry of Finance’s, would be rendered inactive.
• The Central Bank of Russia would be unable to intervene in forex (FX) markets to boost its ruble. 
• Limit Russia’s wealthy individuals from becoming citizens in other countries and launch a task force to track their assets.

Needless to say, Russians are in for tough economic times ahead. Possibly a bank run, alongside hyperinflation. There have already been reports of long lines forming to withdraw cash in Russia’s major cities already.

To further illustrate how the world is rushing to sanction Russia, even Switzerland, known for its neutrality, is also adopting the EU’s stringent package of sanctions to freeze their assets.

“At its extraordinary meeting on 28 February, the Federal Council took the decision to adopt the EU sanctions against Russia and thus strengthen their impact.” 

Swiss government’s statement.

Interestingly, even some individual governors in the US have taken it upon themselves to sanction Russia too. Republican Governor Mike DeWine directed Ohio’s commerce agency to prohibit all sales of vodka made by Russian Standard.

Today I directed @OhioCommerce to cease both the purchase & sale of all vodka made by Russian Standard, the only overseas, Russian-owned distillery with vodka sold in Ohio. Russian Standard’s vodka is sold under the brand names of Green Mark Vodka & Russian Standard Vodka.

— Governor Mike DeWine (@GovMikeDeWine) February 26, 2022

Russian Government Unlikely to Use Cryptocurrency as Reserves

Bitcoin is hailed by many as the solution to the problems that come with central banks and financial centralization. Both Ukraine and Russia hold the most cryptos as a percentage of their respective populations, at about 12%. Moreover, over-the-counter (OTC) trading has been thriving. 

Meanwhile, the Central Bank of Russia (CBR) doesn’t like Bitcoin one bit. As early as this January, CBR called for a blanket crypto ban to avoid financial instability. Yet, based on the estimate by the Kremlin, Russians own 16.5 trillion rubles ($214 billion) worth of cryptocurrencies.

Even with Bitcoin on its way to being legalized as an investment in Russia, BTC holders will be required to pass a financial literacy test. Otherwise, the banks would only transact 50,000 rubles (~$800) worth of crypto investments. 

While it may recognize cryptocurrency, it is very unlikely that Russia will make any moves that would unleash Bitcoin as a world reserve currency. While financial sanctions may be gloomy, it is something that is familiar to the country, and not a fundamental monetary shift.

Daniel Monchar of Meta DAO Guild, a decentralized loaning platform for blockchain gamers, seems to agree with this assessment.

“Unfortunately, the rhetoric of the Russian authorities makes it clear that Bitcoin will not be recognized as a legal means of payment in Russia any time soon.”

Some Russian crypto exchanges are already blacklisted by the Office of Foreign Assets Control (OFAC), such as Chatex Telegram bot and SUEX. If Russian crypto activity increases indicating the bypass of sanctions, OFAC could simply extend the blacklisting to major Russian crypto exchanges.

However, this would disrupt the entire crypto market in the country as well.

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Cryptocurrency Exchanges Will Not Block User Accounts without Legal Notice

Binance, one of the most popular centralized exchanges in Russia, has stated that it will only block individuals who are on the official sanctions list.

Likewise, Kraken exchange doesn’t want to make a precedent of willingly deplatforming user accounts without an explicit legal requirement. Kraken’s CEO Jesse Powell explained why in greater detail.

In the end, on both sides of the equation, one should not count on cryptos to make much of an impact in either direction. Nonetheless, what one should be wary of is for governments to use the Russia-Ukraine conflict as an excuse to introduce measures that would in some way sabotage crypto markets.

Do you think it is possible to add cryptocurrency to economic sanctions? Let us know in the comments below.