Despite the current economic situation in Russia, using cryptocurrencies as an alternative payment option to avoid sanctions would put the country’s economy at risk due to the high volatility of the crypto market.
Cryptocurrencies are gaining traction in Ukraine and Russia. Since the Russian army invaded Ukraine, both economies have been severely affected. Ukraine’s economy is suffering due to the impact of war, with CNBC reporting that Ukraine has received more than $54 million in cryptocurrencies through international donations.
Meanwhile, the Russian economy is suffering due to the sanctions that have been imposed on the country by governments around the world. Economic sanctions continue to be imposed on Russia to limit its ability to finance the war and to isolate it from the rest of the world – similar to the situation prior to the end of the USSR in 1991. Since the beginning of the conflict, Russia has found itself cut off from the international financial system. SWIFT banned key Russian financial institutions from its network, including the Central Bank of the Russian Federation. In addition, Visa, Mastercard, and American Express have all blocked Russian financial institutions from their networks. This ban has prevented affected Russian institutions such as the central bank from executing international transactions.
Crypto use brings risk to Russia
With such restrictions in place, the Russian government, financial institutions, and consumers are all looking for alternative payment sources. Cryptocurrencies are one option, especially as the ruble depreciates. Yet despite the sanctions and the country’s depreciating currency, crypto represents a significant risk. In addition to exposing itself to a volatile market, the Russian government would be surrendering its economy to a decentralized system it has no control over.
Due to the traceability and transparency of cryptocurrency exchange platforms, it would be possible to monitor and spot transfers of large amounts of crypto made by Russian account holders. Coinbase and Binance – two of the world’s largest cryptocurrency exchange platforms – initially reported they were against banning their services in Russia as such a move would also affect Russian consumers. But Coinbase quickly reversed its position, and now reports it has blocked 25,000 accounts identified as belonging to Russian users. With their Know Your Customer processes, crypto exchange platforms can identify specially designated nationals, which includes lists of people and institutions that are affected by the sanctions in Russia. Coinbase may be the first crypto platform to comply with the international sanctions, but it is possible other platforms will follow suit.
Russia is more likely to find a different alternative to cryptocurrencies to continue its international transactions. Linking its payment system to China’s infrastructure seems to be a more tangible solution for the Russian government. UnionPay cards are already issued by several Russian banks, and Reuters reports players may start issuing co-badged Mir and UnionPay cards. Mir is a domestic card payment scheme introduced by the central bank in 2016 to reduce the dependence on Visa and Mastercard. As per GlobalData’s Payment Cards Analytics, Mir accounted for 25.3% of debit cards and 9.2% of credit cards in Russia in 2020. However, Mastercard and Visa dominated the market, accounting for 68.1% of debit cards and 81.7% of credit cards. One side effect of these developments is that Mir’s and UnionPay’s market shares are likely to rise in Russia.
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Through China, Russia would be able to access a more reliable payment system that ensures it can continue to conduct transactions with countries that want to trade with it despite the sanctions. But this will not enable the country to resume transactions with the European Union, which is an important trading partner for Russia