When the United States barred Americans from doing business with Russian banks, oil and gas developers and other companies in 2014, after the country’s invasion of Crimea, the hit to Russia’s economy was swift and immense. Economists estimated that sanctions imposed by Western nations cost Russia $50 billion a year.
Since then, the global market for cryptocurrencies and other digital assets has ballooned. That’s bad news for enforcers of sanctions, and good news for Russia.
On Tuesday, the Biden administration enacted fresh sanctions on Russia over the conflict in Ukraine, aiming to thwart its access to foreign capital. But Russian entities are preparing to blunt some of the worst effects by making deals with anyone around the world willing to work with them, experts said. And, they say, those entities can then use digital currencies to bypass the control points that governments rely on — mainly transfers of money by banks — to block deal execution.
Banks have to abide by “know your customer” rules, which include verifying their clients’ identities. But exchanges and other platforms that facilitate the buying and selling of cryptocurrencies and digital assets are rarely as good at tracking their customers as banks are, even though they are supposed to follow the same rules. In October, the U.S. Treasury Department warned that cryptocurrencies posed an increasingly serious threat to the American sanctions program and that U.S. authorities needed to educate themselves about the technology.
The Russian government is developing its own central bank digital currency, a so-called digital ruble that it hopes to use to trade directly with other countries willing to accept it without first converting it into dollars.
In October 2020, representatives of Russia’s central bank told a Moscow newspaper that the new “digital ruble” would make the country less dependent on the United States and better able to resist sanctions. It would let Russian entities conduct transactions outside the international banking system with any country willing to trade in digital currency.
Russia could find willing partners in other nations targeted by U.S. sanctions, including Iran, that are also developing government-backed digital currencies. China, Russia’s largest trading partner in both imports and exports according to the World Bank, has already launched its own central bank digital currency. The country’s leader, Xi Jinping, recently described China’s relationship with Russia as having “no limits.”
In early February, independent sanctions monitors told the United Nations Security Council that North Korea was using cryptocurrencies to fund its nuclear and ballistic missile program, according to Reuters. (A spokesman for Norway’s permanent mission to the U.N. confirmed the existence of the report, which has not yet been made public.) Last May, the consulting firm Elliptic described how Iran was using revenue from Bitcoin mining to make up for the limitations on its ability to sell oil because of sanctions.
Mr. Parker, the former prosecutor, said that the Feb. 8 arrests of a Manhattan couple for stealing $3.6 billion in Bitcoin from the Hong Kong cryptocurrency exchange Bitfinex is “a tangible example of the government getting very good and up to speed on what they need to do to be able to trace this.”
Administration officials are also urging the cryptocurrency industry to implement internal controls that prevent bad actors from using their services. In October, the Treasury Department published a 30-page sanctions-compliance manual recommending that cryptocurrency companies use geolocation tools to weed out customers in sanctioned jurisdictions. In many cases, the report said, crypto companies have taken months or years to implement such compliance procedures.
But savvy cryptocurrency users can find ways around a blacklist.