The Russia Ukraine Conflict has taken a very ugly turn now. As per media reports, Russian forces today morning started missile strikes on Ukrainian infrastructure and the country’s border guards. God knows where this war crisis will take the world. But, as a quick measure by the US and EU to contain Russia, we are going to see imposition of US sanctions. This may or may not stop the war but will impact Russia for a long time.
How is the US reacting to Russia’s actions?
US President Joe Biden condemned Russia’s military actions in Ukraine, calling it “unprovoked and unjustified”. He said the United States and its allies will impose “severe sanctions” on Russia.
This is not the first time US would impose sanctions on Russia. The US has imposed a number of economic sanctions on Russia over the last few years as a form of retaliation against perceived disruptive activity on the world stage.
Countries adopting Bitcoin and Other Cryptocurrencies to counter US economic might
US sanctions work by placing bans on dealings and transactions with persons, nations, and companies. These prohibitions are often enforced with the help of mainstream financial institutions.
Cryptocurrency emerges as an ideal way to transfer money around the world and can easily bypass traditional banking systems. It can be used by countries to transact freely outside of the international banking network.
Bitcoin and other cryptocurrencies has emerged as a useful solution for countries like Russia to get around the issue of economic restrictions. Iran, North Korea, Russia, and Venezuela are all allowing cryptocurrencies in an attempt to counter US economic might.
Russia has already announced its plans to recognize Bitcoin and other cryptocurrencies similar to currency. Moreover, Russia has started replacing the U.S. dollar reserves with other currencies and plans to include cryptocurrencies also in its reserves. Last year, Russian President Vladimir Putin also advocated for cryptocurrency by saying “Crypto has the right to exist and can be used as a means of payment”.
Russia has been under pressure from US sanctions due to its alleged involvement in a number of provocative incidents over the last five years. Russia was embroiled in the Crimea crisis in 2015 before providing support for the Syrian government in the recent civil war that has ravaged the country. The US has also accused Russia of damaging cyberattacks and even meddling in the recent US presidential election.
Innocent Russian citizens suffer from the US sanctions, and the Russian government does not want to be dependent on the United States. The country wants to develop its own economy by driving local production and supporting businesses and agriculture. While the Russian government understands that cryptocurrency can be the solution to this problem, it has still been very slow to accept official regulation.
After the US disconnected Russia from the globally accepted SWIFT banking network, the government started to develop a national digital currency referred to as the CryptoRuble to avoid being financially cut off from the rest of the world.
It is understood that Vladimir Putin himself has ordered teams of experts to create a cryptocurrency that will allow the Russian leader to bypass international sanctions and keep many of his country’s huge intercontinental transactions under the radar.
Currently, Crimea is suffering the most from US sanctions. Visa and Mastercard both temporarily stopped working in this region, causing a significant financial crisis. The ability to transact freely with cryptocurrencies in this region will therefore greatly help citizens and businesses.
Iran has been using Bitcoin mining to neutralize US sanctions
Iran has been using cryptocurrency mining as a tool to swerve around US sanctions. According to blockchain analytics firm Elliptic, around 4.5% of all Bitcoin mining takes place in Iran, allowing it to earn close to $1 billon a year from cryptocurrencies that can be used to lessen the impact of U.S. sanctions.
Iran’s economy has been hit hard since 2018, when former President Donald Trump exited Tehran’s 2015 nuclear deal with six powers and reimposed sanctions. U.S. President Joe Biden’s administration and other global powers have been in talks with Iran to revive the deal.
Iran allowed crypto mining in recent years, offering cheap power and requiring miners to sell their bitcoins to the central bank. Tehran allows cryptocurrencies mined in Iran to be used to pay for imports of authorised goods. Iran is looking to regulate cryptocurrency as soon as possible.
Can Bitcoin or any other cryptocurrency help Russia overcome the impacts of sanctions completely?
While cryptocurrency would improve the overall financial situation, even if Russia adopts Bitcoin or other cryptocurrencies or introduces its own digital currency in the near future, the country will not be able to bypass US sanctions completely. The Office of Foreign Assets Control (OFAC) uses a very simple sanction mechanism whereby all companies and persons on the sanctions list are not allowed to conduct business with foreign financial institutions and receive assistance from them.
Today, it does not matter what kind of money (fiat or crypto) countries under sanctions use, as everyone who cooperates with them will be subjected to harsh repercussions by the US. The Biden administration is putting new sanctions on Russia over the current Ukraine conflict, trying to cut off foreign capital.
As expected Russian entities are looking to bypass these sanctions by making deals with any global actors willing to work with them — and using Bitcoin and other cryptocurrencies to minimize the impact.
The New York Times reported that the Russian entities will be able to use cryptocurrencies to bypass control points from other governments, including transfers of money by banks.
Sanctions have hit the Russian economy badly. Economists estimated that sanctions imposed by Western countries costs Russia’s economic growth by 2.5% –3% a year; that is, about $50 billion per year.
The adoption of Bitcoin and other cryptocurrencies has increased significantly in the past 3 years. That’s bad news for enforcers of sanctions, and good news for Russia.
To enforce economic sanctions, a government creates a list of people and businesses that its citizens must avoid. Anyone caught interacting with a member of the list will be fined severely.
The global banking system, however, is the essential key to any effective sanctions policy. Banks play an important role in anti-money laundering enforcement because they observe where money comes from and goes, and anti-money laundering regulations require them to prevent transactions with sanctioned companies and report what they see to authorities. However, if banks are governments’ eyes and ears in this arena, the proliferation of Bitcoin and other cryptocurrencies has blinded them.
Sanctions are really a powerful tool to create economic pressure. For the U.S. it’s particularly more powerful, as the U.S. dollar is the world’s reserve currency, used in international payments all over the globe. The widespread adoption and growing acceptance of Bitcoin and other cryptocurrencies seems to soften the blow from sanctions. This may be one of the reasons Russia did not stop its military action against Ukraine despite sanctions looking eminent.
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