Kremlin’s Growing Interest in Digital Currencies: Can Putin evade sanctions?
[객원 에디터 3기 / 장석현 기자] A month has passed since Putin’s troops first invaded Ukraine. Global allies have, in response, imposed firm economic sanctions against Russia, withdrawing its membership from the Society for Worldwide Interbank Financial Telecommunications (SWIFT), freezing its foreign currency reserves, and excluding multiple Russian companies from global markets. These measures have proven effective, inducing the Russian ruble to fall below 0.043 AED. As a result, the Kremlin has begun rapidly investing large influxes of cash from undeclared sources into digital currencies, raising suspicions that Putin is attempting to bypass Western sanctions by replacing the depreciated Ruble with crypto.
SWIFT is a member-owned cooperative network of countries that allows safe and quick cross-national transactions. While making an international transfer is technically impossible, membership allows individuals and businesses of member states to transfer money across different banks. Today, there are over 200 participating countries and 11,000 SWIFT member institutions globally. Using this platform, the United States, Canada, European Union, and United Kingdom have removed over 70% of Russian banks from the SWIFT network by February 28th, making it difficult for these institutions to find legal and viable channels to exchange money with foreign importers to maintain their energy exports.
In addition, over 630 billion USD worth of Russian foreign currency reserves have been frozen in the West, causing the ruble to drop by over 22% in value and inflation to rise by 24% in Russia. Panic buying spread throughout the country, producing shortages of over 80 medicines and black markets for currency conversion. More than 500 multinationals—including McDonalds, Coca-Cola, and Starbucks—have also withdrawn operations from Russia.
As a result, Russia is increasingly turning to cryptocurrency as the primary source of payments for oil and gas exports. As cryptocurrencies are not centrally controlled, it could enable effective saving of assets. Nonetheless, analysts have expressed concerns regarding considerable risks caused by the “market liquidity of cryptocurrencies.” Senior research fellow at the Energy Studies Institute in Singapore, David Broadstock, noted that Bitcoin showed a 30% fluctuation rate compared to the US dollars while remaining within a 5% swing rate against the Euro. Moreover, China, a trading partner to Russia amid the war, outlaws crypto transactions, which could limit crypto’s usefulness for Russia as a payment method.
Alternatively, Russia could adopt the Chinese Digital Yuan or the Cross-border interbank payment system (CIPS), which are both forecasted to provide a bypass. The Digital Yuan and CIPS were first built to enable wider usage than traditional currencies and redefine the traditional dollar-denominated financial system. Economists have estimated that once Russia transitions from SWIFT to CIPS, it could prevent incurring at least 50% of total estimated losses. Indeed, Russia has increased the percentage of Yuan in its foreign reserves since its 2014 annexation of Crimea, after which Russia’s dollar reserves have gradually decreased to 16% while the Yuan rose to 13.1% by 2021.
Russia’s growing interest in digital currencies powerfully depict the Kremlin’s lack of intent to stop the war. Rather than seeking diplomatic solutions to prevent more casualties, it is continuously searching for new ways to bypass Western sanctions, all the while making non-credible commitments to withdraw its occupying forces from Ukraine.
Sources: Investopedia, Delaware Valley Journal, BBC News, DailyMAIL, Nasdaq, JoongAng Economics
