Russia may use cryptocurrencies to ease US sanctions

When the United States banned Americans from doing business with Russian banks, oil and gas companies and other companies in 2014 after the invasion of Crimea, the impact on the Russian economy was rapid and enormous. Economists estimate that sanctions imposed by Western countries cost Russia $50 billion a year.

Since then, the global market for cryptocurrencies and other digital goods has grown tremendously, which is bad news for sanctioners and good news for Russia.

On Tuesday, the Biden government enacted new sanctions on Russia over the conflict in Ukraine, aimed at preventing its access to foreign capital. But Russian entities are preparing to mitigate some of the worst effects by making deals with anyone around the world who is willing to work with them, experts said. They added that these entities can use digital currencies to bypass checkpoints used by governments to block business, particularly bank money transfers.

“Russia has had a lot of time to think about this particular consequence,” said Michael Parker, a former federal prosecutor who now heads the Washington, DC-based anti-money laundering and sanctions law firm Ferrari & Associates. “It would be naive to think that they didn’t exactly envision this scenario.”

Sanctions are among the most powerful tools the United States and European countries have to influence the behavior of nations they do not consider allies. The United States, in particular, can use sanctions as a diplomatic tool because the dollar is the reserve currency used in payments around the world. But US officials are increasingly aware of the potential for cryptocurrencies to lessen the impact of sanctions, and are intensifying scrutiny of digital assets.

To enforce sanctions, a government makes a list of people and businesses that its citizens must avoid.

Anyone caught getting involved with a member of the list will face hefty fines. But the real key to an effective sanctions program is the global financial system. Banks around the world play an important role in enforcement: they see where the money comes from and where it goes, and anti-money laundering laws require them to block transactions with sanctioned entities and report their findings to authorities. But if banks are the eyes and ears of governments in this environment, the explosion of digital currencies is blinding them.

Banks must follow “know your customer” rules, which include verifying their identity. But exchanges and other platforms that facilitate the buying and selling of cryptocurrencies and digital assets are rarely as efficient at tracking their customers as banks, although they should follow the same rules. In October, the US Treasury Department warned that cryptocurrencies posed an increasingly serious threat to the US sanctions program, and that US officials needed to educate themselves about this technology.

If it chooses to avoid sanctions, Russia has a number of cryptocurrency-related tools at its disposal, experts said. Just find ways to trade without touching the dollar.

The Russian government is developing its own central bank digital currency, the so-called digital ruble, which it hopes to use to trade directly with other countries willing to accept it without first converting it to the dollar. Hacking Techniques Like “Ransomware” [sequestro digital] can help Russian actors steal digital currencies and make up for lost revenue from sanctions.

While cryptocurrency transactions are recorded on the underlying blockchain, making them transparent, new tools developed in Russia can help mask the origin of transactions. This would allow companies to trade with Russian entities undetected.

There is a precedent for these types of workarounds. Iran and North Korea are among the countries that have used digital currencies to ease the effects of Western sanctions, a trend that US and UN officials have recently noted. North Korea, for example, used ransomware to steal cryptocurrencies to fund its nuclear program, according to a UN report.

In October 2020, representatives of Russia’s central bank told a Moscow newspaper that the new “digital ruble” will make the country less dependent on the United States and more resistant to sanctions. It will allow Russian entities to transact outside the international banking system with any country willing to trade in digital currency.

Russia may find willing partners in other countries targeted by US sanctions, including Iran, which are also developing government-backed digital currencies. China, Russia’s biggest trading partner in imports and exports, according to the World Bank, has already launched its own official digital currency. Chinese leader Xi Jinping recently described the country’s relationship with Russia as “unlimited”.

The evolving system of central banks directly exchanging digital currencies creates new risks, said Yaya Fanusie, a fellow at the Center for a New American Security who has studied cryptocurrency’s effects on sanctions. “The waning of US sanctions comes from a system where these nation-states are able to transact without going through the global banking system.”

In early February, independent sanctions monitors told the UN Security Council that North Korea was using cryptocurrencies to fund its nuclear and ballistic missile program, according to Reuters. (A spokesperson for Norway’s permanent mission to the UN confirmed the existence of the report, which has not yet been released.)

In May, consulting firm Elliptic described how Iran was using Bitcoin mining revenue to offset the limitations on its ability to sell oil because of sanctions.
Russian sanctioned entities can deploy their own evasion strategy using ransomware attacks. The playbook is simple: a hacker breaks into computer networks and locks digital information until the victim pays for its release, usually in cryptocurrency.

Russia is at the center of the growing ransomware industry. Last year, about 74% of global ransomware revenue, or more than $400 million in cryptocurrencies, went to entities likely to be affiliated with Russia in some way, according to a 14-year report. of February from blockchain tracking company Chainalysis.

Illegal funds also flowed into Russia through a “dark web” marketplace called Hydra, which is powered by cryptocurrency and has made more than $1 billion in sales in 2020, according to the report. Chain analysis. The platform’s strict rules — sellers can only settle cryptocurrencies through certain regional exchanges — make it difficult for researchers to track money.

“We know there are no questions asked and we know that Hydra operates not only throughout Eastern Europe but also in Western Europe,” said Kim Grauer, Research Director at Chainalysis. “There is definitely cross-border business happening.”

Translated by Luiz Roberto M. Gonçalves