Russia will soon turn to cryptocurrencies as the most convenient method to circumvent the heavy international sanctions that have affected the economy amid its ongoing war efforts in Ukraine.
“We are taking a historic decision in the financial sector,” said Anatoly Aksakov, head of the lower house, according to Reuters.
The State Duma approved the relevant bill on Tuesday, July 30, 2024. The US and Western allies imposed historically unprecedented economic sanctions on Russia after the military operation in Ukraine, including the decision to cut off access of some Russian banks to the SWIFT interbank transaction system.
Legalization of cryptos
Since then, Russia has tried to use the currency of trading partners to try to circumvent sanctions, but the heavy global reliance on dollars and euros has highlighted the limits of this strategy – forcing Moscow to look to alternatives such as digital currencies.
The law-bill will now go to the upper federal council before Russian President Vladimir Putin gives final approval.
The new measures will help regulate the mining industry, which is already growing across the country making Russia one of the largest cryptocurrency mining nations in the world.
Putin has previously tried to curb cryptocurrency mining in Russia due to concerns about the huge demands on the energy grid. The country’s cooler temperatures and cheap electricity costs attract many investors to the mining industry.
However, cryptocurrencies have continued to grow and cannot be ignored. The new bill achieves regulation by limiting large-scale mining to companies on a government-approved list that must provide transaction data to a regulator.
The digital ruble
Russia’s central bank will capitalize on the new regulations with plans for a government-backed “digital ruble” that the bank says will strengthen the country’s financial infrastructure. The law will come into effect in September.
The cryptocurrency will remain inactive for payments within Russia, but will allow the Kremlin to more quickly handle transactions with key trading partners such as China, India and the UAE.
The first Russian official crypto transactions will take place before the end of the year. Payment delays caused an 8% drop in Russian imports this year. The risks of secondary sanctions have increased. They make it difficult to pay for imports and this applies to a wide range of goods.
The consequences of sanctions
The world – according to the opinion of Russian officials –
increasingly away from the dollar.
The more they use sanctions, the more countries look for ways to engage in non-dollar financial transactions.
Confidence in the dollar has recently declined due to the illegal seizure and subsequent seizure of Russian assets by the G7 countries, disrupting the stability of the current global financial system.
More than $288 billion of Russian assets remain in G7 countries, the European Union and Australia, of which €200 billion ($218 billion) are in the EU.
Bonded assets generate about $3 billion in annual interest income. In June 2024, the G7 states used these assets to give Ukraine a $50 billion loan.
This decision is in direct violation of international law, which states that assets belong to the economic jurisdiction from which they were produced and not to the country in which they are deposited.
The consequences of such illegal actions, including the erosion of trust among Western sovereign debt holders in their issuers, are of serious concern to debt buyers, although they have not yet led to panic.
Divestment in the dollar
As a result, countries in the Global South are scrambling to divest from US government bonds and get rid of the superpower’s debt, which recently topped $35 trillion. dollars In April 2024, US Treasuries in the hands of Chinese investors fell from $849 billion a year earlier to $775 billion, the lowest level since 2009.
During the same period, the other BRICS countries also reduced their holdings of US bonds: Brazil by $1.2 billion and Saudi Arabia by $300 million. Earlier this year, Saudi Arabia said it may sell some of its European bond holdings if the G7 decides to seize Russia’s frozen assets. The Kingdom’s finance ministry has communicated its disagreement with the idea to some G7 colleagues, with one person describing it as a veiled threat.
Members of the enlarged BRICS group have expressed concerns about the dominance of the dollar in the global economy and its use as a political weapon.
The BRICS countries, initially consisting of Brazil, Russia, India, China and South Africa, later joined by Egypt, Ethiopia, Iran, Saudi Arabia and the United Arab Emirates, joined to increase the ratio and their influence on the world stage.
The decline in the dollar led to a search for settlement options in local currencies. For example, China and Russia are working together to create alternative payment systems, such as the Cross-Border Interbank Payment System or CIPS, which could be an alternative to the SWIFT system.
Earlier this year, China and the United Arab Emirates made the first cross-border payments between the two states in digital dirhams. This transaction used a newly developed digital platform and marks the beginning of a new phase in the central bank’s digital currency conversion.
Iran has announced that all transactions between Iran and Russia are now done without the use of dollars. Since last year, India and Russia have doubled their payments in national currencies (rupee/ruble).
Saudi Arabia is also seeking to diversify its economic alliances by exploring alternative currency deals with BRICS nations.
If other major oil exporters start accepting payments in alternative currencies, the demand for petrodollars will decrease, reducing their value and influence. But a real major boost to non-dollar trade would be the creation of a unified system for all member countries of the larger BRICS grouping. Obviously, such a solution is not far away.
The BRICS efforts to create a more diversified and resilient financial network of international transactions reflect a strategic desire to reduce dependence on the sovereignty and “politicization” of the US dollar and to mitigate the impact of current and future US sanctions.
The exceptional status of the dollar which meant excessive privileges, and was once considered inviolable, is now increasingly uncertain. As the global economic balance shifts, the strategies and alliances formed today will define tomorrow’s new economic order and financial system.
Reshaping the architecture of the global financial system
The US and its partners must approach this new dynamic carefully, stop using sanctions, and carefully analyze the consequences of its unilateral actions for the sustainability of its future economic and geopolitical position.
It is obvious to all that the misuse of sanctions by the US and other Western countries will accelerate the shift towards a fairer and more multipolar world.
As more countries seek alternatives to the dollar, the world may soon witness a new financial landscape that will forever change international relations, trade, investment, and global economic and geopolitical power dynamics.
