Debunking Russia’s Crypto “Loophole”

Putin's invasion of Ukraine has led Western countries to enact truly unprecedented sanctions. Russia is now under an immense amount of economic pressure, but Putin knew this would happen, and he still decided to invade. So he must have had a plan to evade these sanctions and keep the Russian economy going during the war. Well, the obvious answer is just use crypto. Russian officials are now looking at cryptocurrency. Crypto is looking like it could potentially be an escape hatch. On top of everything else Awful about Putin, he's also into crypto. But the situation isn't quite so simple. Putin's plan to fund his war is extremely complex. After all, he's been planning this invasion for years now. So let's dig into how Russia is dealing with Western sanctions. One step at a time. War is pain. The images coming out of Ukraine right now are horrifying, and I want nothing more than a swift and peaceful end to this conflict. I fully support Ukrainian independence and will be donating the profits from this video to unicef. I also want to be clear that the responsibility for this tragedy lies with Vladimir Putin. Millions of Russian citizens are against this war, and I support anyone who works towards peace. Now, before we get to Putin's crypto strategy, we need to investigate Russia's key economic assets. We live in an increasingly globalized world where countries are deeply interconnected. This interdependence usually acts as a stabilizing factor, since going to war with a trade partner risks destabilizing the entire global economy. But Putin doesn't really care about this because Russia has built up so many strong local industries. They have a reliable agricultural sector that provides food for the population. They also have a significant technology sector that helps with cybersecurity and cyber espionage. And, of course, they have tons of natural resources. This allows Putin to act with more impunity than other leaders because he's less dependent on other countries. Unfortunately, the same can't be said about most European countries, which rely on Russia for natural gas. Putin's energy industry is an incredible source of power. Russian natural gas helps heat European houses during the winter. And there isn't a great alternative at the moment. That's why European countries have been trying to exclude the energy sector from Russian sanctions. They really need Russian natural gas. See, back in 1969, Germany implemented a policy called Ostpolitik, which aimed to intertwine the German and Russian economies by building a network of gas pipelines. Germany and Russia would become reliable trading partners and and be less likely to attack one another. At least that was the plan. The problem is that Europe has become overly dependent on Russian natural gas, and Putin knows that now. Many European countries do have plans to eliminate the use of natural gas, but it's going to take decades. For example, the Netherlands wants to get off of natural gas by 2050, but that won't have a meaningful impact on the current situation in Ukraine. And other efforts to diversify away from natural gas are struggling. In 2011, Germany had 17 nuclear power plants and they were working really well. But after Japan's Fukushima disaster, Germany started shutting them down. Now they only have three in operation, and these are scheduled to shut down by the end of the year. Europe needs natural gas, and Putin's hope is that they will keep buying it from him, no matter how bad the situation gets in Ukraine. But there are still a few ways to fight back. First, Europe could start importing more natural gas from other countries. Poland already gets natural gas from Australia, and the United States is starting to generate enough surplus gas to reliably export it. Solar energy could also provide enough clean energy to Europe to meet the energy shortfall. But installing new solar panels is a slow process. Now, to be clear, solar energy is cleaner than natural gas, but natural gas is still cleaner than oil and coal. And we might not be able to aim for 100% renewable energy in the short term. The crisis is so serious right now that European countries will likely try every possible solution. This will put pressure on Putin in the long term, but in the short term, he'll still have tons of economic sanctions to deal with head on. These economic sanctions typically take one of three forms. First, restrictions on powerful Russian citizens who support Putin. Lots of rich, wealthy Russians have assets in foreign countries, and if sanctions start making it harder for them to live their lives, they might give Putin a call and tell him to back off. Historically, these types of sanctions haven't been very effective, but it is one option. The second option is to stop Russian banks from doing business with Western countries. Preventing these banks from making international payments will slow down economic activity and make it harder for the Russian economy to keep funding the war in Ukraine. Lastly, sanctions on Russia's central bank could hurt the ruble and make it harder for Putin to stabilize inflation in Russia. These sanctions are already rolling out and they're wreaking havoc on Russian financial markets. But Putin has a plan to fight back. And crypto is just one small piece of the puzzle. Putin knows how dependent Europe is on natural gas, so he always has the option of cutting off the supply. But that would probably hurt Russia more than Europe. So that's a bit of a lack. Last resort. Currently, Putin seems focused on stabilizing the Russian economy using internal tools. He's raised interest rates to keep lenders happy, implemented capital control so that citizens can't leave with their money, and announced a backstop so Russian companies don't need to worry about bankruptcy. The world has cut Russia off from the Swift network, which limits their ability to transfer money internationally. But there are alternatives. After all, the Swift network is merely a messaging system that tells banks where to move money. You can still pick up the phone and essentially accomplish the same thing, although it's a lot slower. There are still other payment networks that could replace Swift, like China's CIPS network. And of course, we still need to discuss how crypto fits into all of this. Even though these sanctions have been implemented quickly and are extremely harsh, Putin has been preparing for them for years. He's built a massive war chest worth $650 billion that will keep Russia going even in the face of extreme restrictions. Internationally, $650 billion is a lot of money. But what's more interesting is how Putin has diversified his holdings. See, most countries hold about 60% of their reserve assets in US dollars. The US dollar is widely accepted as the global reserve currency and has been stable for decades, so it makes sense to hold a lot of them. But Putin knew that his relationship with America could sour at any moment and consequently limited his dollar holdings to just 16% of total assets. The rest of his war chest is split across gold, euros, Chinese yuan and other foreign currencies. It took years to build up, but Putin was able to increase the size of his war chest by 70% since 2015. During that time, he had to sacrifice economic growth and hold off on investing in new initiatives. But it put him in a great position to invade a neighboring country. See, back in 2014, Russia annexed Crimea. That was basically a test run for the full Ukrainian invasion of 2022. And Putin learned a lot from his experience. In 2014, the crime conflict led to sanctions, which caused a financial crisis and led to inflation rates of 16%. Putin had built up a reserve of foreign currencies, but it wasn't quite big enough to counteract the international pressures. So the Russian economy still suffered. This time around, Putin knew that he would need absolutely massive foreign currency reserves to defend the ruble from selling pressure. As Russian currency starts to drop, Putin will be able to buy rubles on the open market, using his war chest of foreign currencies to stabilize prices. And having a well stocked currency reserve will also help keep Russian businesses afloat. As these businesses get cut off from international financial markets, they will still be able to conduct business with the Russian Central Bank. This is only possible because Russia now has the fifth largest pile of foreign currency, despite being only the 11th largest economy. Putin is punching way above his weight class. His foreign currency reserves aren't untouchable, though. The new sanctions will make it difficult for Russia to sell foreign assets and internationally. And if any of those assets are stored in foreign banks located in unfriendly countries, those assets could be frozen completely. But it's much harder to freeze assets that are stored in cryptocurrency. And that's why so many people are worried that Putin will leverage crypto to get around these sanctions. What good is kicking Russia out of the swift network if Putin can just use bitcoin to move billions of dollars around the globe? Well, it might actually be harder for Putin to do this than most people think. Let's start with some basics. Putin's war chest is $650 billion. All of the bitcoin in the world is currently valued around $830 billion. So he would effectively have to buy all of it. And I know that there are tons of bitcoin holders out there who will basically never sell. But let's assume that Putin wanted to move into bitcoin and people were willing to sell. Could he actually do it? Bitcoin is really on the global stage right now. Russian leaders may be turning to other approaches, including cryptocurrency. Currency exchanges are seeing a surge in demand out of Russia and Ukraine. Putin might be out of luck for a few reasons. First, the market for turning Russian rubles into bitcoin is extremely thin. Currently, you can only exchange the equivalent of around $200,000 at a time. This is way too low to be meaningful to Putin's operation, which most analysts believe needs around $50 billion per day in liquidity. Then there's the issue of actually using crypto exchanges. Even though Russia can't, can't easily be banned from the bitcoin blockchain unilaterally, they can be restricted from using exchanges that do business in Western countries. See, in order for U.S. sanctions to take effect, they need to be authorized by the president in an executive order or by Congress in legislation. Once the sanctions are approved, the Office of Foreign Assets Control designates specific targets by name. These can be governments, companies, or even individuals. These sanctioned names are then added to a blacklist, which makes it illegal for any US Citizen to transact with them. This is important because even if a cryptocurrency exchange wanted to do business with someone on the blacklist, it would be illegal for them to do so. Now, it's certainly possible that someone would be willing to take that risk and sell cryptocurrency to Putin anyway. But the market for these illegal transactions is much smaller. And interestingly, because the blockchain is public, it's actually fairly easy to track down exactly where money is made moving. Even though bitcoin was infamous for its use by criminals a few years ago, that's changing now. There are now Know youw Transaction tools that let companies know when blacklisted entities try to use their services. You don't have to look hard to see that it's becoming more difficult for criminals to launder large amounts of cryptocurrency. Just a few weeks ago, there was a major story about a pair of influencers who tried to launder billions of dollars worth of bitcoin and couldn't do it. Now, obviously, they didn't have anywhere near the sophistication of the Russian government, but the story demonstrates how it's becoming much more difficult to launder cryptocurrency. So if Putin can't accumulate a meaningful amount of crypto through traditional means, and he also can't build crypto reserves through the black market, what are his options? Well, he could steal it, and this is actually already happening. Ransomware is one of the most common ways for criminals to acquire cryptocurrency. Hackers load up the victim's computer with software that encrypts critical data. Then, in order to unlock the data, the victim victim has to send the hacker Bitcoin. This is becoming more and more of a problem. And Russian hackers were able to capture 74% of global ransomware revenue last year. But this won't solve Putin's problems. Even though Russia leads the world in ransomware attacks, they only generated $400 million, certainly a massive amount of money, but not nearly enough to fund a war effort. Even though it's clear that Putin would love to use crypto to evade sanctions, it doesn't look like he can. And that's why the UK United States Treasury Department said that they weren't overly worried about crypto undermining the effort to choke off Putin's access to capital. The scale of what Russia needs to move is just not compatible with the current crypto markets. And Putin actually said that he wasn't interested in using cryptocurrency for international energy transactions back in 2020. 1. We obviously shouldn't take anything that he says at face value. But if Putin did think that crypto would be his sanctioned escape hatch, wouldn't he have started to accumulate crypto years ago? Crypto is an incredibly controversial issue. There's a lot to love about it, and there's a lot to hate about it. But one thing is crypto probably won't be helping Putin anytime soon, but it can help the people of Ukraine. There are now official Bitcoin and Ethereum addresses where you can send donations. The addresses have been verified, and millions have been donated already. One of the most promising aspects of crypto is how it allows organizations to collect money from all over the world more quickly. It's still early days, so if you want to learn more about how One team raised $47 million in just a few days, watch this video next. Thanks a lot.