Due to the sanctions that prohibit Russian businesses from making international settlements in US dollars, companies and individuals are now turning to crypto as an alternative.
Cryptocurrency activity in both Russia and Ukraine has spiked since Russian forces invaded on 24 February.
In March, Ukrainian hryvnia-denominated (UAH=X) crypto trade volume rose 121% to $307m (£278.6m), while Russian ruble-denominated crypto trade volume rose 35% to $805, according to a new report from blockchain analysis company Chainalysis.
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There has been an increase in ruble for crypto trades on over 100 cryptocurrency exchanges that serve Russia.
Chen Limin, CFO and head of trading operations at the ICB Fund, told Russian media outlet Izvestia that stablecoins are the preferred digital asset for Russians exchanging ruble for crypto.
Unlike bitcoin (BTC-USD) and ethereum (ETH-USD), which are too volatile to conduct cross-border trade, stablecoins pegged to the dollar can be used and the entry and exit points of the trade disguised using crypto "mixer" technology.
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"Mixer" applications have also been used by North Korea to circumvent sanctions and facilitate the development of their nuclear arsenal.
Settlements in digital assets can now also be carried out with countries that act as hubs for parallel imports, such as Kazakhstan, Georgia, the United Arab Emirates and Turkey, Limin added.
In March, stablecoins made up 67% of transaction volume on primarily Russian crypto exchanges, compared to 55% in February and 42% in January, before the invasion, the Chainalysis data showed.
"While some of that may be due to businesses embracing cryptocurrency for international transactions, it’s also likely that some of the increase is due to ordinary Russian citizens trading for stablecoins in order to protect their assets’ value," Chainalysis said.
Russians using crypto for cross-border payments
After the SWIFT international payments ban, "the major question not just for oligarchs but also ordinary Russians became, 'how do you get money out of Russia?'", a money laundering expert who spoke to Chainalysis said.
Since Russia recently agreed to legalise the use of cryptocurrency for cross-border payments, Russian companies have begun to execute crypto-transactions overseas with, for example, Iran and China.
In late August, Iran’s Trade Ministry decreed that Iranian businesses could carry out cryptocurrency payments to circumvent sanctions and settle import and export trade.
Crypto is also being used for transactions with countries that have sanctioned Russia, Vladimir Gamza, head of the Council of the Russian Chamber of Commerce and Industry for Industrial, Financial and Investment Policy, told Russian newspaper Izvestia.
He added that these transactions are primarily for the supply of Russian export goods and the import of components for the Russian manufacturing sector.
The use of crypto for cross-border payments is "probably already happening on a small and medium scale, but it could become more widespread", the money laundering source speaking to Chainalysis, who asked to remain anonymous, said.
He added that many Russians are looking for new places to cash out their crypto, such as UAE, Turkey, Kazakhstan and Georgia, where web traffic for crypto exchanges primarily serving Russian users have all spiked.
Over the past year, the volume of cross-border transactions from Russia using crypto has reached between $5bn to $10bn, according to Leonid Delitsyn, analyst at Moscow-based investment banking service FG Finam.
The analyst told Izvestia that after legislation is passed to make crypto transactions for cross-border payments legal, this figure may rise to $15bn to $20bn.
Russia legalises cross-border crypto payments
As a result of the sanctions levied against Moscow after the invasion of Ukraine, The Bank of Russia has made arrangements with the Russian Ministry of Finance to legitimise the use of cryptocurrencies for international payments.
The move is a major U-turn after legislators in Moscow enacted a crypto regulation called “On Digital Financial Assets” that outlawed the use of cryptocurrencies like bitcoin as payment methods in 2020.
However, as a result of the economic sanctions from the West and the termination of most Russian banks from the global SWIFT network, the Russian Ministry of Industry and Trade declared in May 2022 that Russia would legalise crypto payments “sooner or later”.
This was followed by an early September announcement by The Bank of Russia stating that cross-border payments made via cryptocurrency transfers are to be legalised.
A bill to regulate cryptocurrency payments will be submitted to the Russian State Duma this month.
According to Russian politician and economist Anatoly Aksakov, the option of using the Moscow Exchange or the St Petersburg Exchange as service centres for cryptocurrency transactions is being discussed.
Difficulties in achieving mass-scale sanctions evasion with crypto
However, Chainalysis told Yahoo Finance that their research showed that current cryptocurrency markets are likely not liquid enough to support mass-scale, systematic sanctions evasion.
Chainalysis added that sanctioned Russian individuals and entities could leverage crypto to evade sanctions, but it would be very difficult for them to do this undetected at scale for two reasons: liquidity and transparency.
Chainalysis added: "The transparency of cryptocurrency combined with blockchain analysis tools could provide opportunities to identify and shut down Russian sanctions evasion, which traditionally involved more opaque laundering methods like networks of shell companies."
Crypto-activity spiked in Russia and Ukraine
There has also been a steady increase in cryptocurrency transfers within Ukraine since the outset of the war, according to the Chainalysis data.
Ukraine's currency, the hryvnia (UAH=X), started to face steep inflationary pressure due to the Russian occupation disrupting supply chains and product output.
In Moscow the ruble crashed, prompting Russians to seek safe havens for their wealth.
The largely unregulated crypto-market has been utilised by both Ukrainians and Russians to either hedge against their depreciating national currencies or circumvent sanctions.
Tatiana Dmytrenko, an adviser at Ukraine’s Ministry of Finance, told Chainalysis: “Due to the introduction of martial law in Ukraine, the Ukrainian Central Bank imposed restrictions on currency cash transactions, such as buying dollars or euros (EURUSD=X)."
She added that this may have driven Ukrainians to swap the Ukrainian currency for cryptocurrency on crypto exchanges.
OFAC hits Russian entities using crypto for sanctions evasion
The US Office of Foreign Assets Control (OFAC) claimed in September that it has identified entities and individuals within Russia who have been using cryptocurrency channels to circumvent economic sanctions.
The regulatory body singled out 40 individuals, including Russian oligarch Konstantin Malofeyevthe and Russian commercial bank Transkapitalbank as facilitating sanctions evasion.
According to OFAC, the wide range of financial services offered to sanctioned Russian companies who wish to conduct international trade, also includes cryptocurrency channels.
Moscow-based financial company MarGlo, which is included on the OFAC sanctions list, has reportedly used digital currencies to help other Russian entities circumvent sanctions.
EU ban transactions with Russia-based crypto-wallets
Many Russians use international sites to create cryptocurrency wallets. However, this week the European Union banned all Russian crypto wallets and payments in a new sanctions crackdown.
The ban comes after reports of a surge in Russian businesses using crypto to get around existing sanctions.
A statement from the EU said: “The existing prohibitions on crypto assets have been tightened by banning all crypto-asset wallets, accounts, or custody services, irrespective of the amount of the wallet (previously up to €10,000 was allowed).
“The package widens the scope of services that can no longer be provided to the government of Russia or legal persons established in Russia: these now include IT consultancy, legal advisory, architecture, and engineering services.
"These are significant as they will potentially weaken Russia’s industrial capacity because it is highly dependent on importing these services.”