Western sanctions on Russian businesses and banks in response to armed conflict between Russia and Ukraine have created an unexpected support for cryptocurrencies markets. It is easy to see how Russian businesses and citizens scramble to secure alternative payment means and preserve their foreign currency assets as Western nations on Saturday unveiled harsh sanctions including blocking some banks from the SWIFT international payments system.
Crypto currencies are attractive candidates for alternative payments schemes to circumvent sanctions - cryptocurrencies can be sent from one person directly to another without moving them through third-party institutions that could track, freeze or block them. And owners of crypto assets like Bitcoin and Ethereum can avoid tracking of their transactions by using a net of wallets with different addresses across several exchanges.
Russian sanctions - recent precedents
These workarounds to sanctions to allow payments to willing Western businesses will not be without cost though for Russian businesses. Western counterparts will look for ways to convert crypto currency payments into their own currencies which is done usually on crypto exchanges. But centralized exchanges keep track of transactions and are subject to compliance and reporting requirements of their jurisdictions. So Western businesses will have to find ways to make conversions look legitimate. The necessity to apparently comply with regulation will be a cost that Russian side of transactions will have to cover.
How Russian sanctions affect cryptocurrencies
Sanctions will likely increase both the number of crypto investors and the average size of crypto currency holdings. Russian government estimates over 17 million Russians hold crypto, according to an official from a department that oversees the digital economy. And they own more than $214 billion worth of cryptocurrencies, according to an estimate the Kremlin and government officials are using to draft a cryptocurrency law.
The US announced last Thursday it would immediately freeze all assets from second largest Russia’s bank – VTB, held at US financial institutions. US forbids companies and individuals from dealing with the Russian bank. US banks were also ordered to close any correspondent or payable-through accounts they have with Sberbank, the largest Russian bank. State-controlled Sberbank and VTB together hold roughly half of all of Russia’s banking system’s assets. Western banks now have a month or more to comply with the new sanctions.
Russian banks conduct about $46 billion worth of foreign exchange transactions globally each day, 80% of which are in US dollars, according to the US Treasury. And the two banks are major financial intermediaries for Russia’s main exports to the world, arranging financing for customers and their foreign partners.
While Sberbank and VTB said they were prepared to handle the sanctions, the sheer volume of daily foreign exchange transactions globally points to importance of a functioning access to Western financial market for Russia’s economy.
It is not difficult to imagine the urgency of finding sanctions workarounds for Russia’s state enterprises and wealthy individuals given that sanctions basically block Russia’s two biggest banks from the US dollar. Establishing a cryptocurrency payment scheme must be a high priority for Russia’s state services right now.
What will the impact be?
Crypto currencies stand to gain from boosted Russian demand in light of above mentioned difficulties for Russia’s enterprise to finance import-export operations after sanctions. So the impact of Western sanctions on cryptocurrencies market, particularly Bitcoin demand, is far from one-sided. It will be interesting to track changes in Bitcoin demand in Russia in near future.
