Russia's Crypto Experiment: Will It Bypass Sanctions or Invite Tighter Scrutiny?

Russia’s new law allowing cross-border crypto payments may challenge global sanctions, but experts are skeptical of its success.

Russia is set to begin trialing cross-border payments using cryptocurrency next week, in what appears to be an effort to circumvent the international sanctions that have crippled its economy since the invasion of Ukraine. However, experts caution that this move may face significant challenges and could even lead to tougher sanctions.

In late July, Russian President Vladimir Putin swiftly signed into law new legislation allowing the use of cryptocurrencies for cross-border payments. This law does not overturn the existing ban on using cryptocurrencies as legal tender within Russia, but instead, it creates an "experimental" regime for international transactions, overseen by Russia’s central bank.

The exact mechanics of how these payments will be facilitated remain unclear, as the law delegates significant authority to the central bank to define the rules and select participants for the experiment. This ambiguity has raised questions about the effectiveness and transparency of the initiative.

Russia’s economy has been severely impacted by a series of sanctions imposed by the U.S., U.K., EU, and other nations in response to its actions in Ukraine. The sanctions have frozen around 300 billion euros of Russia’s foreign currency reserves and disconnected several Russian banks from the SWIFT interbank messaging system. These measures have made it increasingly difficult for Russia to engage in international trade and finance.

According to Valerie Kennedy, director of investigations at blockchain analytics firm Chainalysis, the new law signals Russia’s continued efforts to evade these sanctions. However, the decentralized nature of cryptocurrencies, combined with the transparency of blockchain technology, could make such attempts more challenging than anticipated. "While crypto assets may live and move outside the traditional financial system, the activity will be traceable and trackable, allowing Western governments to follow and investigate transactions in new and innovative ways," said Isabella Chase, Senior Policy Advisor at blockchain analytics firm TRM Labs.

Bloomberg reported that Russia might use its National Payment Card System for converting between rubles and cryptocurrencies during the trial phase. This system is fully regulated by the central bank and is already used for interbank settlements. If the trials are successful, Russia could allow the Moscow and St. Petersburg exchanges to set up crypto platforms as early as next year.

Despite the potential of this experimental regime, experts remain skeptical. Kennedy pointed out that the cryptocurrency markets may lack the liquidity to support large-scale evasion of sanctions without significantly affecting crypto asset prices or drawing attention from blockchain observers. "This could lead to more aggressive enforcement measures or new forms of sanctions from the West," she noted.

The central bank’s ability to make dynamic rule changes at any time adds to the uncertainty. Jim Mignano, an assistant policy researcher at RAND, remarked that this centralization of control could result in unpredictable changes in how the law is implemented, potentially responding to geopolitical shifts or new sanctions.

Svetlana London, managing partner at CIS London, also expressed concerns about the law’s vague and unprecedented nature, making it difficult to predict its real-world application. "It's quite difficult to decipher, just based on the label, how exactly it will work," she said.

As Russia prepares to launch its crypto experiment, the global community is watching closely. The success or failure of this initiative could have significant implications for international trade, finance, and the ongoing efforts to enforce sanctions against Russia.

photo source / Blockonome