Can Russia use cryptocurrencies to circumvent sanctions?

As the Russian invasion of Ukraine continues and Western economic sanctions against Vladimir Putin's regime mount, many observers are concerned about the possible use of cryptocurrencies to circumvent them.

Cryptocurrency purchase volumes in ruble are at record highs and bitcoin prices are climbing in recent days (+15% since Sunday to nearly US$44,000), galvanized by the idea that the Ukrainian crisis proves the usefulness of a decentralized, non-government controlled currency.
Why are cryptocurrencies tempting the Russians?

To put Russia under pressure, its banking and financial institutions have been excluded from the international interbank system Swift and both the European Union and the United States have announced to block the assets of its Central Bank.

As a result, the ruble has collapsed (-27% since the beginning of 2022) and is trading at more than 100 rubles to the dollar, a level never seen before.
Cryptoassets like bitcoin, on the other hand, operate on a decentralized network: no central entity can be sanctioned and prevent user access.

As a result, Russians have flocked to bitcoin, with record volumes of ruble purchases, according to Kaiko.

Another cryptocurrency with the wind in its sails in Russia is Tether, a "stablecoin," a cryptocurrency issued by a private company that guarantees to hold assets equivalent to its issuance to ensure that one Tether is worth one dollar.

Stablecoins, which have been heavily criticized by Western regulators, are popular in countries where the local currency is suffering from severe devaluation.

To assess whether Russian purchases are coming from a few particularly wealthy accounts or a larger segment of the population, Kaiko looks at the average transaction amount.

"We have been able to observe an average transaction for Tether that has increased but remains relatively low, which shows a shared interest between institutional investors and small buyers," Clara Medalie, head of research at Kaiko, tells AFP.

The crypto, a long-term solution against sanctions?

Governments can initially ask platforms to limit access to certain users, as Ukraine recently did regarding Russian accounts, and as the US authorities are considering imposing.

The firm Chainalysis says it is "optimistic about the ability of the cryptocurrency industry to counter Russian actions to use cryptos to evade sanctions" and points out that the analysis of blockchains ("blockchains"), these registers that validate all transactions in cryptocurrencies, also allows Western governments to identify possible violations.

Countries such as North Korea and Iran have used cryptocurrencies to resist economic sanctions: the former through computer attacks that have earned it billions of dollars; the latter by using its low-cost energy to "mine" bitcoin, reports Caroline Malcolm of Chainalysis.

But a direct use of cryptocurrencies, for example to sell wheat, oil or gas, of which Russia is a major exporter, is unlikely: while the cryptocurrency market has grown tenfold in size, volumes remain insufficient, judges a bitcoin broker, who has long worked in the commodities industry.

What effect on the cryptocurrency market?

Since Monday, the price of bitcoin has jumped, prompting some cryptocurrency enthusiasts to see the Ukrainian crisis as proof of their usefulness.

The role of cryptocurrencies is not limited to the Russian camp: in Ukraine, the government opened addresses on Saturday to receive donations, and received more than $ 17.1 million, according to the analysis firm Elliptic.

"We didn't choose when or how our little industry became geopolitically crucial, but we're there," Nic Carter, a partner at the specialist fund Castle Island, ventured on Twitter.

In any case, bitcoin's jump is not attributable to Russian purchases alone, as "it's a small market without much influence," warns Kaiko's Medalie.

"The risk of cryptocurrencies is worth taking for the Russians," but "Western authorities might not tolerate this interference from bitcoin, which increases the risk of stricter regulation," and could weigh on the price going forward, warns Ipek Ozkardeskaya, a market analyst at SwissQuote.