Russias Cryptocurrency Pivot: Can Digital Coins Circumvent Western Sanctions?

Russia has increasingly embraced cryptocurrencies to tackle issues related to ruble transactions, including difficulties with convertibility, payment delays due to Western sanctions, and fluctuations in exchange rates.

Although crypto can help Russia fund illicit activities or facilitate limited trade, its widespread use in international commerce is still uncertain due to the reluctance of Moscow’s trading partners and increased scrutiny from Western governments.

**What is Russia’s position on digital currencies?**

Following Russia’s extensive invasion of Ukraine, authorities have made significant strides in promoting and regulating cryptocurrencies after years of uncertainty.

New legislation implemented in November 2024 legitimizes cryptocurrency mining and permits crypto payments for international transactions, although domestic transactions remain prohibited.

The regulations mandate that large-scale crypto miners—those who earn cryptocurrency as rewards for contributing computational power to blockchain networks—register with tax authorities.

Furthermore, in late 2024, Russia initiated its first international cryptocurrency transactions under a confidentiality agreement. Central Bank Governor Elvira Nabiullina stated that this pilot program would extend for up to three years.

**Why is Russia pursuing this path?**

One of Russia’s primary goals is to exploit its low energy costs to boost its cryptocurrency mining sector.

As of 2023, Russia emerged as the world’s second-largest cryptocurrency miner and is poised to take the lead globally, according to Bitriver, the country’s largest bitcoin mining operation.

The Russian government has also launched several initiatives related to cryptocurrency involving major state-owned enterprises.

For instance, Gazprom Neft has revealed plans to utilize flare gas—excess gas flared off during oil extraction—for crypto mining, mirroring practices from countries like Oman.

Improved regulation is also aimed at enhancing tax collection and managing energy resources. The new laws allow the government to impose restrictions on mining in regions facing energy shortages, a measure already enacted in several areas to avert blackouts.

More importantly, Russia aims to use cryptocurrency for international payments that evade Western regulatory oversight.

“What matters is not just the budget revenue from mining, but that the cryptocurrency obtained from this mining becomes a legally accepted basis for mutual settlements… for goods and services we procure from our partner countries,” stated Russian Finance Minister Anton Siluanov while announcing changes in legislation concerning digital currencies.

Cryptocurrencies may provide greater international convertibility and, especially in the case of stablecoins linked to established currencies like the U.S. dollar, exhibit less volatility compared to the Russian ruble or other currencies. They also function with reduced oversight from Western authorities compared to conventional financial transactions.

Recent reports indicate that Russia has started accepting cryptocurrencies through intermediaries for oil sales to China and India.

Russian oil firms are allegedly utilizing bitcoin and the U.S. dollar-pegged stablecoin Tether (USDT) for these deals. Unlike bitcoin, stablecoins such as USDT cannot be mined but can be obtained through the exchange of other cryptocurrencies.

To enhance domestic cryptocurrency circulation, Russia has proposed regulations that allow «highly qualified» investors to trade cryptocurrencies within a controlled experimental framework.

**Can Western regulators bridge the crypto oversight gap?**

Western governments have heightened scrutiny of cryptocurrency use, particularly as adversaries like Iran and North Korea have increased their involvement in this sector.

Recently, the U.S. imposed sanctions on the Garantex crypto exchange for alleged money laundering activities, resulting in the arrest of a Russian resident, Aleksej Besciokov, in India. U.S. authorities confiscated $27 million worth of stablecoins tied to Garantex.

The cryptocurrency landscape provides avenues for illicit or grey area activities, with malicious actors sometimes using obscure or disreputable exchanges like Garantex, peer-to-peer platforms, or methods to conceal their identities, according to sanctions analyst George Voloshin.

“These challenges complicate efforts to prevent crypto-related crime, leading to mostly reactive investigations. However, Western governments, along with industry professionals, have become adept at tracking and seizing illicit assets,” Voloshin stated.

He cited the Garantex case as an instance of successful cooperation between U.S. authorities and the blockchain intelligence firm Elliptic.

While governments may struggle to detect criminal activity swiftly, cryptocurrency exchanges are increasingly adopting rigorous compliance measures as the industry gains mainstream acceptance, he added.

Martin Chorzempa, a senior fellow at the Peterson Institute for International Economics, noted that blockchain monitoring tools enable regulators to trace transactions on public ledgers for major cryptocurrencies like bitcoin.

“The key would be identifying a wallet used by either Russia or its counterpart, which would then make it relatively straightforward to trace other wallets associated with it to understand the broader network,” Chorzempa commented.

However, he cautioned that crypto mixing services—which obscure transaction histories—could complicate enforcement efforts.

**Are Russia’s trading partners open to crypto transactions?**

A crucial question remains whether Russia’s principal trading partners will agree to settle commercial contracts using cryptocurrency.

Countries such as India and China may be more receptive to increasing crypto-based payments for Russian exports.

Reports suggest that Chinese companies can transfer yuan to intermediaries who convert these funds into cryptocurrencies before sending them to Russia.

However, persuading foreign enterprises to accept cryptocurrencies for standard, large-scale transactions is more challenging. Many of Russia’s trading partners, including regional ally Kyrgyzstan and key trading partner China, enforce strict limitations on the use of cryptocurrencies.

In fact, China is one of the least accommodating countries regarding cryptocurrencies, having banned all exchanges and mining activities, Chorzempa highlighted.

“China is concerned that its citizens might circumvent foreign exchange controls and engage in untraceable transactions if they have access to crypto,” he explained. “It seems that China has discovered alternative bartering methods to continue trade with Russia despite sanctions.”

Meanwhile, sanctions seem to cause more difficulties for Russian importers, who must rely on expensive intermediaries for international payments, rather than exporters.

There are no reliable statistics estimating the extent to which Russia’s trade with other countries is conducted in cryptocurrency. However, based on available reports, it appears to currently be a marginal but growing trend, according to Voloshin.

Beyond the oil trade, cryptocurrency is also being utilized to acquire civilian and military electronics for Russia. Nonetheless, most of this trade continues to rely on traditional banking channels, Voloshin observed.

«Transactions between large state-owned enterprises, such as Russia’s Rosneft selling oil to China’s CNPC, would still involve the state banks of both parties and direct conversions between the ruble, yuan, and rupee, which are facilitated by central banks, rather than utilizing cryptocurrency as a means of exchange,” he noted.