Russian businesses hold many tools in their hands, including digital currency, to evade sanctions from the US.
After Russia annexed Crimea in 2014, the US banned its citizens from doing business with Russian banks, oil and gas companies and other businesses. Economists estimate that Western sanctions cost Russia $50 billion a year.
Since then, the global cryptocurrency and digital asset market has also exploded. This is bad news for embargo countries and good news for Russia.
On February 22, 2022, the administration of US President Joe Biden announced that it had imposed a new round of sanctions on Russia over the conflict in Ukraine with the goal of blocking Russia’s access to foreign capital. However, experts predict that legal entities in Russia are prepared for this. They can use cryptocurrencies to bypass the control points that governments often rely on – primarily bank transfers – to prevent the transaction from happening.
|The data center of BitRiver, a company providing services for cryptocurrency mining in Russia. (Photo: Reuters)|
Michael Parker, a former US federal prosecutor who is in charge of anti-money laundering activities at the law firm Ferrari & Associates, commented: “Russia has had plenty of time to think about concrete consequences. It is naive to assume that they have not exactly ruled out this scenario.”
Banks, an important link for an effective embargo
Sanctions are among the most powerful tools the United States and Europe must have in order to influence countries they do not see as allies. In particular, the US also uses it as a diplomatic tool because the US dollar is the world’s reserve currency and is used in global payments. Even so, US officials are increasingly eyeing the impact of virtual currencies on sanctions and increased scrutiny of digital assets.
To impose an embargo, the government will make a list of individuals and organizations whose citizens are prohibited from trading. Anyone who opposes will face severe punishment. The financial system is at the heart of any effective sanctions program. Banks play a big role in enforcement: They track money coming and going, money laundering laws force them to block transactions with individuals/organizations on the sanctions list and report them to the authorities. But if banks are the “eyes and ears” of the government, cryptocurrencies are blocking their view.
Banks must comply with “Know your customer” regulations, including customer identity verification. But exchanges and trading platforms for cryptocurrencies and digital assets are not as good at tracing as banks, even if they should be. In October 2021, the US Treasury Department warned that virtual currencies pose a threat and an increasing risk to the US embargo program and that US authorities need to learn about cryptocurrencies themselves.
To “evade” the embargo, Russia has many tools related to cryptocurrencies. All they need is to trade without using USD.
Bypassing the embargo with cryptocurrencies
The Russian government is developing a Central Bank-issued digital currency (CBDC) or a digital ruble. They hope to be able to use it to trade directly with countries willing to accept it without having to change it to USD. In addition, although cryptocurrency transactions are recorded on the blockchain to increase transparency, tools created in Russia can conceal the origin of such transactions, allowing businesses to do business with Russian businesses without was discovered.
There is precedent for this. Iran and North Korea are among the countries that use cryptocurrencies to mitigate the impact of Western sanctions. Reuters news agency cited an unpublished United Nations report showing that North Korea used ransomware to steal cryptocurrency to fund its nuclear and ballistic missile programs. In May 2021, consulting firm Elliptic detailed how Iran used revenue from Bitcoin mining to offset losses from oil sales embargoes.
In October 2020, a representative of the Central Bank of Russia told a domestic newspaper that the electronic ruble will help Russia reduce its dependence on the US and better cope with sanctions. It helps legal entities in Russia to conduct transactions outside the international banking system with any country willing.
According to the New York Times, Russia can find partners in countries also under US sanctions, including Iran. China – Russia’s largest import-export partner according to World Banks – has issued its own CBDC. Chinese President Xi Jinping recently described Russia-China relations as “without limits”.
Still according to the New York Times, embargoed legal entities can deploy their own circumvention strategy by hacking and demanding ransom. Accordingly, a hacker breaks into a computer network and locks all information until the victim pays, usually in digital currency.
Russia is at the center of the ransomware industry. According to a February 14 report by blockchain tracker Chainalysis, in 2021, about 74% of global ransomware revenue — or $400 million in digital currency — will fall into the pockets of legal entities possibly linked to Russia. Illegal funds also entered Russia through the Hydra dark web market and processed more than $1 billion in transactions in 2020, according to Chainalysis. Hydra’s tight regulation makes it very difficult for researchers to track cash flow. Even so, experts are certain that cross-border transactions are taking place.
All cryptocurrencies use blockchain technology. This ledger keeps track of all cryptocurrency transactions, so authorities could theoretically track transactions and prevent embargoed individuals and organizations from completing transactions. However, the technology behind Hydra hides that, providing a potential tool for Russian users to transfer money abroad.
There are signs that the US is increasing its scrutiny of cryptocurrency activity. On February 17, the US Department of Justice announced the creation of a dedicated cryptocurrency group as a tacit warning that federal prosecutors are paying more attention to user behavior. According to Mr. Parker, the arrest of the Manhattan couple on February 8 for stealing $3.6 billion in Bitcoin from the Bitfinex exchange (Hong Kong) is a living example that the government is doing a great job and very much. Quick to trace.
Authorities also urged the cryptocurrency industry to enforce internal controls to prevent bad actors from using their services. In October 2021, the US Treasury Department published a 30-page embargo compliance guide, recommending that crypto companies use geolocation tools to exclude customers in embargoed areas.
Typically, it takes a crypto business months or even years to implement the compliance process. However, this could change as the industry matures. Chainalysis introduces “know your transaction” tool, which alerts companies when blacklisted individuals/organizations use their services. In 2021, Chainalysis’s private client base will double.
Of course, locating a digital wallet is not without its flaws. It is completely possible for an individual/organization to open a new wallet somewhere that is not in the embargo area easily.
Du Lam (According to NYT)
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