How Russia tries to evade sanctions with crypto and CBDC

The U.S. Office of Sanctions Coordination has calculated that by 2030 the Russian economy will shrink by 20%. The Russian Central Bank is looking for any opportunity to circumvent Western restrictions on financial activity.

For a long time, the Central Bank of Russia was extremely wary of cryptocurrencies. At the same time, the sanctions forced ordinary Russians to become active participants in the crypto market. Local experts argue that small entrepreneurs have used stablecoins for cross-border settlements with counterparties for a long time. Now the Russian Central Bank has also begun to look toward crypto. In December, the regulator said it would test the use of cryptocurrencies in international settlements as part of an experimental legal regime.

In addition, the Central Bank of the Russian Federation wants to use the digital ruble for cross-border settlements. So far, two scenarios are being considered. First scenario: Russia has bilateral agreements with partner countries on integrating CBDC systems and harmonizing protocols and standards. Per them, the platforms of each of the nations will ensure the conversion and transfer of assets. This plan is relatively simple to implement in Russia. China is the most likely partner for a bilateral scheme.

Second scenario: creating an international digital hub that will ensure transactions between the Russian Federation and CBDC platforms of other countries based on common protocols and standards. We are talking about organizing a supra-country payment system. Here, the Russians see a problem in synchronizing the development of digital currencies in the countries that are ready to join the project. By the way, the Russian Central Bank completed the creation of a prototype CBDC platform at the end of 2021.

Thus, the Russian Central Bank wants to bypass the classical scheme of correspondent relations between banks. This is an attempt to form a neutral banking space, "unaffected" by the Western sanctions.

Despite the external optimism of Russian bankers, there are severe flaws in the Russian plan to evade financial sanctions. So, the state has yet to decide on the requirements for information protection in new digital projects. Raising their level could lead to additional billions of investments, which are difficult to attract.

There are also concerns that the banking system will not pull the hardware of future CBDC platforms. For example, local manufacturers will not be able to satisfy the need for a significant increase in the server park. And most of the world's technological giants left the Russian market shortly after the start of Russia's large-scale invasion of Ukraine.

According to Bloomberg, the Russian Federation has already lost:

Conclusion: The sanctions against Russia really work. And neither crypto nor CBDC will likely be able to completely neutralize their destructive impact on the aggressor's economy.