War & Cryptocurrency - Russia’s Options to Use It in Ukraine Appear Limited (2024)

Before invading Ukraine, Russia was on its way to becoming a cryptocurrency powerhouse. But, as with so much related to the war, the Kremlin apparently gave little forethought to the flexibility that digital currencies might offer it. So far, Russia is finding them of limited use, on the battlefield and off.

Despite all the hype around cryptocurrencies, the size of the global crypto market remains small (approximately $1.7 billion in 2021). However, forecasters expect strong annual growth over the next few years (11.1% CAGR) and Russia would seem well poised to take advantage. The country’s massive energy reserves and cool climate make it an excellent location for cryptocurrency mining.

Russian cryptocurrency usage has also risen over the years, with a pre-war number indicating that Russians possessed 12% of the world’s total cryptocurrency, or about $240 billion. While Bitcoin is the most popular cryptocurrency in Russia, the country has spawned a number of successful currencies from Ethereum (the world’s number two crypto) to Golos.

“My favorite is the one [established] by the owner of the Moscow Burger King franchise who created ‘Whopper Coin,” says James Andrew Lewis, director of the Center for Strategic and International Studies’ (CSIS) strategic technologies program.

Lewis has been watching the cryptocurrency landscape in Ukraine and Russia since the West imposed far-reaching sanctions in late February. He says signs that Russia is deftly using crypto to subvert sanctions are few at present. “It doesn’t look like they made any preparation before the war. I think they were caught off-guard by the scope of the sanctions. This wasn’t the world’s best planned invasion on any level.”

That dovetails with expert testimony given before the Senate Banking Committee in March which asserted that the crypto market is too limited for economies as large as Russia to carry out widescale evasion via digital assets.

But as the ruble plunged 30% in March (recently, it has rebounded) and Russia’s gross domestic product is projected to shrink 15%, the Kremlin may be more seriously looking at crypto. Earlier this year, the Russian Finance Ministry unveiled a new draft law on cryptocurrencies which prohibited the use of cryptocurrencies as a means of payment. But the Ministry has since amended the bill to include cryptocurrency mining provisions.

This may represent a slow move to cryptocurrencies as a centrally recognized means of payment in Russia. Sergey Katyrin, president of the Chamber of Commerce and Industry of Russia, recently proposed crypto as an alternative payment means for transactions with African countries.

“I’m sure they’re thinking about it,” Lewis affirms. “They might have even talked to the Chinese about it. They are looking at cryptocurrencies as a way to evade sanctions.”

But thinking about using cryptocurrency is easier than actually finding someone who will accept it as payment Lewis adds.

Ukraine watchers have suggested the possibility that cash-strapped Russia could use Bitcoin, Ethereum or even Sbercoin (recently launched by Russia’s largest private bank) as payment for arms or mercenaries to be used on the battlefield in Ukraine. However, the black market for such things isn’t large enough yet to make this practical.

“I saw one estimate that said cryptocurrency transactions [represented] about $1 million a year in arms sales, mostly for criminal purposes,” Lewis says. “It’s not enough to sustain a war. The mercenaries that they are using in Ukraine are mainly Russian or Chechen so they haven’t had a currency problem yet.”

The possibility that Russian forces could wield crypto as a medium to buy improvised supplies in Ukraine or to bribe Ukrainians, including Ukrainian organized crime, has also been raised.

“The potential [to use crypto] is there but it’s complicated,” Lewis opines. “It’s a lot easier to just slip them a lot of bills. The Russians are probably using dollars or euros. So far [Ukrainian organized crime] hasn’t been a factor. It seems they’ve made the political choice to be patriotic.”

Cryptocurrency use in the black market for electronics, parts or other components that Russian forces are clearly short on is possible if difficult Lewis acknowledges. “The Russians will do whatever is easiest and if that turns out to be cryptocurrency, that’s what they’ll use.”

On the other hand, paying in cryptocurrency for offensive cyber services for use in Ukraine or against the West in general is certainly possible. Hackers have set precedent for unlocking ransomeware via crypto payments for nearly a decade. The emergence of “ransomware as a service” out of Russia is an example. Even as the ruble has deflated, the Russian security services have been able to motivate Russians they don’t employ directly with payment in crypto.

“Russia has the most skillful cybercriminals in ransomeware and other exploits,” Lewis affirms. “They are experts at using cryptocurrencies to transfer wealth without leaving fingerprints. They also have close relations with the Russian domestic security service, the FSB.”

The fuel that powers the Russian economy and its forces in Ukraine is the country’s huge base of natural gas, oil and metals. Western officials have suggested it’s unlikely that cryptocurrencies could play a role in helping Russia export its resources to countries willing to bypass standard global energy market mechanisms and risk U.S. and European ire.

But late last month, Russian Gas Company President Pavel Zavalny suggested that it may be possible to accept Bitcoin as a means of payment for oil and natural gas exports to counter international sanctions and resulting inflation.

“If the Russians can’t get money for their oil or whatever they have left to sell, they will use cryptocurrency,” Lewis says. “I’m sure there are people in the Kremlin now who are studying how to do that.”

While Russia’s options to use cryptocurrency to pay for services in Ukraine or its bills in international markets may be limited, the existence of stateless digital currencies may already have indirectly helped it buffer global sanctions.

In the immediate aftermath of the Ukrainian invasion, cryptocurrency purchases in rubles hit an annual high as individual Russians bought out of the ruble to maintain their wealth. While many did so as part of an exodus from Russia, the majority remain in the country.

That reality is likely part motivation for sanctions announced by the Treasury Department on Wednesday against the largest cryptocurrency miners in Europe and Asia—marking the first time the U.S. has targeted such firms including Russian controlled Bitriver AG.

“One of the things the sanctions have accelerated is that people are actively looking for ways to operate outside of the traditional financial system, outside of the reach of the U.S.,” Lewis observes. “Cryptocurrencies offer the Russian people a way around sanctions. I don’t think it’s been that useful to the Russian government yet but if the Russians chose to use it, they could.”