- Crypto and crypto mining can’t protect Russia on a state level, but may help some individuals, experts say.
- The digital yuan “isn’t a viable” way for Moscow to dodge sanctions.
- The West is lagging behind Beijing, Moscow in the CBDCs race.
The West can not open fire on Russia in the battlefields of Ukraine, but it has certainly not held back in the economic sector, begging some to question whether World War III might be fought on balance sheets and across banking networks.
But just how heavily will Moscow suffer under a Swift ban – and could bitcoin, crypto mining, a digital ruble, or even a foreign CBDC help it overcome the coming economic maelstrom? Leading experts helped us to learn more.
The Swift Ban: A Swift Path to Economic Ruin?
Observers have warned that key Russian banks’ removal from the Swift network will hit the nation’s largest exporters, particularly those in the oil and gas sector, the hardest.
Alon Rajic, the Managing Director of MoneyTransferComparison.com, told FX Empire that without Swift access, banks “will have to rely on manual processes which are likely to result in severe delays on payments to and from Russia.”
He added: “These increased barriers to international trade will make Russian exporters less appealing on the international stage.”
And such delays could hit the Russian economy hard, he warned:
With large delays seen in payments, Russian exporters are likely to experience significant interruptions to their cash flow cycles. This could lead to increased borrowing at a time the Russian Central Bank has doubled its base rate to 20%, which has explosive potential for the Russian economy.
Kene Ezeji-Okoye, the Co-Founder and President of the UK-based digital finance infrastructure builder Millicent, explained that Swift bans can be highly effective – but suggested that there could be consequences for the countries issuing them.
He noted that a Swift ban was “largely regarded as being the key bargaining chip that led to the 2015 Iran nuclear agreement” but called “blocking key Russian banks from accessing Swift” a highly-effective short-term tactic, “in that it negatively affects everyday Russian citizens.” And this, he suggested, “makes the war more unpalatable to the Russian populace than it may have otherwise been.”
However, Ezeji-Okoye remarked:
It appears that the ‘financial nuclear option’, is working well. But nuclear bombs entail fallout, and this situation is no different – these sanctions may well result in unintended consequences for the West, including increased de-dollarization via the acceleration of CBDC issuance.
Ezeji-Okoye added that an “unintended effect” of previous Swift sanctions “was the opening of the world’s eyes to the economic sword of Damocles hovering above their heads.”
This economic sword did not go unnoticed in Beijing and Moscow, who have been quietly working on their own Swift alternatives in the shape of the Chinese Cross Border Inter-Bank Payments System (CIPS) and the Russian Financial Message Transfer System (SPFS).
The latter debuted in 2014, the year Russia annexed Crimea. The platform became fully operational in 2017. Although it has some 400 banking members, only a small fraction of these are foreign institutions.
However, as sanctions were announced, the Russian Central Bank’s governor last week reminded foreign banks that the SPFS is up and running, and open to overseas banks. This has not gone unnoticed in the few nations that have chosen to side with Russia over the conflict.
Andras Toth-Czifra, a Senior Analyst at Flashpoint Intelligence who specializes in European and Russian security and cybersecurity issues, claimed that both SPFS and China’s equivalent “have far less capacity than Swift” noting that “SPFS only operates on working days” for instance.
But the question remains: Will economic sanctions cripple or strengthen the resolve of those who feel the brunt of them?
This new volley of Swift sanctions only serves to remind the nations of the world that finance is now firmly in the domain of modern warfare, and that having an alternative to the Swift system is now a matter of national security.
Can Crypto Come the Kremlin’s Rescue?
Russians have reportedly been panic-buying crypto in a bid to ditch their ruble savings, but for some, crypto could provide more than a simple safe-have asset.
Rajic, the MoneyTransferComparison.com chief, claimed that “trading a major currency like BTC, ETH or the digital ruble could provide Moscow with “possible workarounds” to sanctions.”
But, Rajic conceded, this would require a major change in policy as Russia has been sending “mixed messages” on crypto adoption. Indeed, prior to the Ukraine crisis, the nation’s Central Bank had been at loggerheads with the Ministry of Finance over the issue. The latter favors “legalizing” cryptocurrencies, but wants to regulate them strictly. It also wants to legally recognize mining – and, crucially, tax the sector.
Putin has attempted to personally intervene in the standoff, and earlier this year noted that Russia’s surplus energy and its abundance of crypto and blockchain developers were assets that could aid adoption.
However, the only existing crypto-specific piece of legislation currently in existence explicitly bans the use of crypto as a form of payment. Moscow, thus, would need to enact a volte-face on this law to start allowing firms to pay using crypto.
Putin’s mention of Russia’s energy reserves has led some to consider Moscow’s possible pivot toward crypto mining as a source of income.
Jorge Pesok, the General Counsel for the United States-based compliance software company, Tacen, told FX Empire:
It’s certainly possible that mining could provide a taxable source of revenue for Russia – essentially limiting the intended effects of sanctions, although likely not to an extent that would make up for any of the severe economic impacts the country currently faces.
But with a diminishing customer base for its vast oil and gas reserves, could Russia put its energy resources to use by providing miners with more power to mine tokens, which could then be taxed?
Other states have previously gone further. The Venezuelan army, for instance, converted certain military facilities during 2020 into crypto mining data centers in a bid to boost the Treasury’s coffers.
Crypto adoption drives have led to the Venezuelan state, which has also been heavily sanctioned by Washington, reportedly amassing a vast stash of BTC and Ethereum.
Could the Kremlin follow Venezuela’s lead?
Pesok was skeptical, stating that he did not “foresee the unlikely strategy” of using Russian energy reserves otherwise earmarked for export to mine tokens. He added:
I expect the country to look to source income from taxing crypto platforms such as exchanges, intermediaries and over-the-counter desks, or other taxes on investments and income from crypto.
Toth-Czifra of Flashpoint Intelligence, concurred, explaining:
Even considering that the Russian government could legalize, tax and then ramp up this capacity, even with a tax rate close to 100%, even if the energy costs are disregarded and even assuming that Russia is still able to import equipment necessary for mining in the future, revenues from this would account for a negligible fraction of what the Russian economy is losing with the present sanctions regime.
A Russian decision to tax crypto mining, he added “would not make any tangible difference at all.”
What about the digital yuan?
Desperate times call for desperate measures. And while the digital ruble may only exist on the drawing board at this stage, one notable CBDC is much closer to rollout: the digital yuan.
Beijing, which has blamed the Western allies for the conflict, is in the latter stages of its own pilot. Onboarding the Russians would allow both nations to ditch the USD in their cross-border trade.
Rajic, meanwhile, added: “Questions would have to be raised as to whether importers would be willing to trade with Russia through a digital reserve currency from China. And it is not likely the idea would be appealing to most businesses and financial organizations.”
Pesok agreed, noting that even “short-term workarounds, such as cryptocurrencies and digital payment solutions for small amounts of sanctions evasion” were more appealing.
While Beijing may well welcome the idea of putting its digital token to the test on the international stage, it may think twice about the idea of debuting it in such a divisive manner. Already, the Asian Infrastructure Investment Bank, which is heavily backed by Beijing, has announced that it will freeze both Russian and Belarus lending. The bank claimed that it was acting in its “best interests.”
Toth-Czifra agreed that Beijing would likely back away from cozying up to Russia on the economic front for fear of a backlash, stating:
China has already signaled that it is wary of secondary sanctions. Chinese banks have already blocked the financing of Russian commodities sales. It is doubtful that Chinese entities would readily lend a helping hand to the Russian financial system, especially when the official position of the Chinese government is that Russia should revert to negotiations with Ukraine.
How about a digital ruble?
Rajic opined that a CBDC, and “the centralized control this would bring” was “likely to be much more appealing to the Kremlin” The Russian Central Bank is indeed working on a digital ruble, but this has not even appeared in pilot form. Rajic stated:
If the conflict was to end in a matter of weeks or months, I don’t think we’d see a Russian CBDC fast-tracked to this extent, but a couple of years down the line and this could be possible.
Although a digital ruble is unlikely to roll out in time to save Russia from the full force of Western and allied sanctions, the long-term effects of these moves could well end up changing the economic landscape – beyond recognition.
Ezeji-Okoye claimed that for many countries “diminishing the power of the dollar is an overt goal” even for nations such as Cambodia, which listed de-dollarization as one of its reasons for releasing its own CBDC, one of the world’s first digital bank tokens.
El Salvador’s President Nayib Bukele won’t admit that his own Bitcoin adoption drive was motivated by de-dollarization ambitions, but it has certainly emboldened him to effectively flip the bird at the global financial establishment.
And, Ezeji-Okoye remarked, the latest sanctions on Russia are “likely to have other central banks and governments thinking along the same lines” as countries that are trying to purge themselves of the dollar.
Russia itself has spoken openly about its desire to de-dollarize its economy and cross-border trade, with senior decision-makers repeatedly stating that removing the greenback is a “long-term strategy”.
Last year, Anatoly Aksakov, the Chairman of the Parliamentary Committee on Financial Markets and also the Chairman of the Council of the Association of Banks of Russia, called attempts to “phase out the dollar” part of Russia’s “long-term economic plan.”
Back in March last year, the Russian Foreign Minister Sergei Lavrov called on Moscow and Beijing to “reduce sanctions risks by bolstering our technological independence.” He urged that they prioritize “switching to payments in our national currencies and global currencies that serve as an alternative to the dollar.”
Lavrov added, “We need to move away from using international payment systems controlled by the West.”
For some, tools like crypto and CBDCs, both real-world tokens and early prototypes could provide nations with tools that could eventually allow them to break free from the constraints of the Washington-led financial system.
Kene Ezeji-Okoye summed the situation up thusly:
CBDCs aren’t inherently designed to be adversarial. But, much like SWIFT, they can be used as such, and will soon become increasingly important pieces in the geostrategic game of chess. The world has witnessed East vs West races for power in the past, but in this case, the East is years ahead of the West.
The bottom line
As the United States, the UK, and EU-led sanctions continue to pile up on Russia, the question of whether CBDCs, crypto and the like can come to Moscow’s immediate aid, the short answer appears to be “no.”
But in the longer term, both the Kremlin and its uneasy allies in Beijing will almost certainly look to speed up the rate of their digital currency progress. In the wake of the Russia-Ukraine conflict, most countries will likely look for digital ways to exit a Swift paradigm that allows Washington and its allies to pull the plug on national economies in a matter of days.