Russia’s Access To Dollars In Jeopardy; Can Bitcoin Make A Difference?
The Russian government’s access to dollar financing and transactions were placed in grave jeopardy on Saturday. This is the first time the threat to remove Russia from the SWIFT banking communications system was met with action as both Europe and the U.S. tag team their punishment for Russia’s incursion into Ukraine this week.
Who could have guessed that the intelligence reports about a pending invasion were true? After years of dropping the ball and misdirection, they got it right: Russia really did attack Ukraine.
This is more than the usual Kremlin support of separatists in the Donbas of eastern Ukraine. This is armored vehicles, fighter jets, missiles, and boots on the ground belonging to the actual Russian flagged military. Judging by this weekend in Washington and Brussels, things are about to get worse in Russia and Ukraine.
Certain banks (the big ones: Sberbank, VTB, others) will be banned from using SWIFT. The West will also make it harder to Russia’s Central Bank to deploy the roughly $500 billion it has in international currency reserves to shore up damages to the economy caused by sanctions.
The White House released the news on Saturday.
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Crypto enthusiasts have wondered if Bitcoin can save Russia. Judging by what we saw go down in Canada some 10 days ago now, the decentralization aspect of Bitcoin has been dented big time by the centralization powers of government.
In an article published on The Street on Saturday, writer Luc Olinga posited that Bitcoin could be an end-around financial sanctions. I disagree. Bitcoin won’t save Russia. I’m simply using Canada as a guide at this point. This is what could be behind the Bitcoin slide: the use case of BTC being a decentralized currency is dead if centralization can shut it down or make using it as easy to use as completing the Rubik’s Cube.
Moreover, Russia has been anti-Bitcoin for years. The Central Bank believes it is used by criminals and as a way to take money out of the country. It is also obvious competition for the ruble.
But as Russia is being blacklisted from the euro and dollar market, Bitcoin may become a third currency and it remains to be seen how that will be blocked next. If it is blocked, Bitcoin prices will crumble into the $20,000s is my guess.
“As far as I am aware, the Russian central bank has a firm position on this question of Bitcoin: no services of any kind may be rendered on Russian territory unless it is the Russian ruble, or in the future the digital ruble,” says Sergey Dzhurinskiy, Founder and Managing Director of Warp Capital, a DeFi hedge fund. “There have been no hints that wider acceptance of Bitcoin or Ether or any other cryptocurrencies in Russia is in the works.”
Soon after the Dzhurinskiy interview earlier this month, before the launch of missile strikes into Kyiv, the Finance Minister submitted a proposal to allow for BTC to be a legal investment, but not legal tender.
(Russians have been investing in Bitcoin for years, though most of the funds that do this are registered offshore. The exchanges are all overseas.)
Worth noting, in January the Central Bank of Russia requested the banning of BTC and other cryptocurrencies, considering them a threat to the stability of the Russian financial system and a risk to the monetary policy and economic well-being of Russians. The mood is shifting.
“Russia’s actions are logical for a country that is in the top-10 crypto economies. This is a pragmatic approach to make more use of Bitcoin,” says Stepan Sergeev, CEO of OneWayBlock.com and Blockchain Games Studio based out of Russia and Ukraine.
According to recent reports from the Russian government, Russians supposedly own more than $214 billion worth of cryptocurrencies.
“I’m not sure about this figure, but even if it is reduced by a factor of 10, these are very significant funds,” says Sergeev.
The level of public confidence in the state government is low in Russia. The level of financial literacy is also low. But the amount of cash in Russian hands is huge and in that one instance, if they need cash and cannot get dollars, they probably have Bitcoin (though if they are sanctioned individuals, you may need to have a very good lawyer, or “know a guy” in Dubai).
The beneficiaries of all these transactions will be the large, poorly regulated Chinese exchanges, which are used by the majority of Russian cryptocurrency owners.
“Russia cannot afford to (think of Bitcoin) like China, especially given this backdrop of foreign policy uncertainty,” says Serge about the government’s mostly anti-Bitcoin position.
One of the main reasons why Bitcoin won’t be unleashed to protect the Russian government from sanctions is because the Kremlin already knows what sanctions are like, but no government knows what a Bitcoin would be like as a foreign currency reserve, or as a means to pay for imported goods from parties who agree to do so. Does China want Bitcoin? The big corporations lorded over by the Chinese Communist Party probably do not, but smaller companies are a different story.
From the top, the Russian Central Bank “is uniquely coordinated with Chinese regulators on their stance regarding BTC,” says Andrey Diyakonov, CCO of fintech start up Crypterium. “Their proposals are all about pushing for digital ruble or a digital yuan. So their prohibiting the use of crypto as means of payment in Russia to this day is all about not allowing dollar surrogates such as stablecoins more than it is about Bitcoin,” he says.
But from below, smaller Chinese companies have become highly active in using cryptocurrencies and stablecoins to circumvent excessively tight control over cross-border transactions. For example, three years ago, the media noted that many Russian and Chinese companies were using the Tether stablecoin for mutual settlements. This is like a digital dollar. The value is almost identical. At the time, the volume of purchases was estimated at $30 million per day.
I can picture dollar-pegged stablecoins getting whacked with sanctions somehow.
None of this bodes well for the decentralized finance theme. The decentralized theme is a three-legged table since Canada’s government banned BTC wallets being used to fund a protest movement led by truckers there. At the moment, developers and crypto advocates are trying to carve out the fourth leg before central bankers cut off another one.
Russia’s government is not moving fast on Bitcoin. But Saturday’s announcement from the White House could change that next week.
Bitcoin investors will be watching what that does to the world’s leading digital asset, already down more than 50% from the fall of 2021.
“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,” thinks Daniel Monchar, advisor of the Meta DAO Guild, a decentralized autonomous organization that provides a wide range of services for NFT and GameFi retail investors and blockchain game players. “At best, Russia will allow you to buy bitcoin as an investment asset,” Monchar says.
According to the latest proposals from the Ministry of Finance, it is clear that there are plans to severely limit this ability – to set a ceiling of 50,000 rubles (about $800) for unqualified retail investors, and around $8,000 for the rich. Hardly enough to move money around if sanctioned. “This is a ridiculous amount,” Monchar says.
Also this weekend, in trying to avoid sanctions, the owner of the Chelsea football club in the U.K., Roman Abramovich, relinquished control of his team. It is now with a charitable foundation in hopes that if he gets whacked with financial sanctions against dollar and euro transactions, the club will remain solvent.
Maybe the Russian billionaire still has some cryptocurrency holdings in the Blackmoon Financial Group.
Saturday’s sanctions against Russian banks and bans on the Russian central bank (RCB) from dollar transactions from its reserves will require some fancy footwork to get around.
It is unlikely Bitcoin will save them, not only because the RCB is not BTC-friendly, but because recent examples of centralized powers tearing into Bitcoin might not make it feasible. And if Russia did try that, overtly, and it was blocked, Bitcoin’s crash into the $20,000s would be imminent as investors begin doubting the use case for decentralization.
Bitcoin didn’t react too violently yet to the latest Russia sanctions, falling slightly under $40,000 as of early Saturday evening.
***The author of this article owns Bitcoin and other cryptocurrencies not mentioned here.***