Russia Could Use Cryptocurrency to Blunt the Force of U.S. Sanctions

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Russia Could Use Cryptocurrency to Blunt the Force of U.S. Sanctions

Russian companies have many cryptocurrency tools at their disposal to evade sanctions, including a so-called digital ruble and ransomware.

 

When the United States barred Americans from doing business with Russian banks, oil and gas developers and other companies in 2014, after the country’s invasion of Crimea, the hit to Russia’s economy was swift and immense. Economists estimated that sanctions imposed by Western nations cost Russia $50 billion a year.

Since then, the global market for cryptocurrencies and other digital assets has ballooned. That’s bad news for enforcers of sanctions, and good news for Russia.

On Tuesday, the Biden administration enacted fresh sanctions on Russia over the conflict in Ukraine, aiming to thwart its access to foreign capital. But Russian entities are preparing to blunt some of the worst effects by making deals with anyone around the world willing to work with them, experts said. And, they say, those entities can then use digital currencies to bypass the control points that governments rely on — mainly transfers of money by banks — to block deal execution.

“Russia has had a lot of time to think about this specific consequence,” said Michael Parker, a former federal prosecutor who now heads the anti-money-laundering and sanctions practice at the Washington law firm Ferrari & Associates. “It would be naïve to think that they haven’t gamed out exactly this scenario.”

Sanctions are some of the most powerful tools the United States and European countries have to influence the behavior of nations they don’t consider allies. The United States in particular is able to use sanctions as a diplomatic tool because the dollar is the world’s reserve currency and used in payments worldwide. But American government officials are increasingly aware of the potential for cryptocurrencies to lessen the impact of sanctions and are stepping up their scrutiny of digital assets.

To apply sanctions, a government makes a list of people and businesses its citizens must avoid. Anyone caught engaging with a member of the list faces heavy fines. But the real key to any effective sanctions program is the global financial system. Banks around the world play a major role in enforcement: They see where money comes from and where it’s bound, and anti-money-laundering laws require them to block transactions with entities that are under sanctions and report what they see to authorities. But if banks are the eyes and ears of governments in this space, the explosion of digital currencies is blinding them.

Banks have to abide by “know your customer” rules, which include verifying their clients’ identities. But exchanges and other platforms that facilitate the buying and selling of cryptocurrencies and digital assets are rarely as good at tracking their customers as banks are, even though they are supposed to follow the same rules. In October, the U.S. Treasury Department warned that cryptocurrencies posed an increasingly serious threat to the American sanctions program and that U.S. authorities needed to educate themselves about the technology.

Should it choose to evade sanctions, Russia has multiple cryptocurrency-related tools at its disposal, experts said. All it needs is to find ways to trade without touching the dollar.

The Russian government is developing its own central bank digital currency, a so-called digital ruble that it hopes to use to trade directly with other countries willing to accept it without first converting it into dollars. Hacking techniques like ransomware could help Russians steal digital currencies and make up revenue lost to sanctions.

And while cryptocurrency transactions are recorded on the underlying blockchain, making them transparent, new tools developed in Russia can help mask the origin of such transactions. That would allow businesses to trade with Russian entities without detection.

There is a precedent for these kinds of workarounds. Iran and North Korea are among countries that have used digital currencies to mitigate the effects of Western sanctions, a trend that U.S. and United Nations officials have recently observed. North Korea, for instance, has used ransomware to steal cryptocurrency to fund its nuclear program, according to a U.N. report.

 

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