Written by: Aiying
Just the day before yesterday, on August 8, Russian President Vladimir Putin signed a bill to officially legalize cryptocurrency mining in Russia. This bill introduces new concepts such as digital currency mining, mining pools, and mining infrastructure operators. At a previous economic conference, Putin clearly pointed out that digital currency is an economic field with great potential, and Russia must seize the opportunity to quickly establish a legal framework and regulatory mechanism.
Rather than understanding it as a vision of the grand narrative of the Russian authorities, Aiying would rather believe that Russia is looking for a way to break through the economic blockade under the heavy pressure of international sanctions.
1. Difficulties in cross-border payment and settlement in trade between Chinese and Russian enterprises
In early 2024, as the West stepped up its enforcement of sanctions, China’s large banks began to feel greater pressure from the United States, especially when their position in financial markets and the dollar clearing system was threatened, and banks had to take more cautious measures. Several large Chinese banks began to restrict dollar transactions related to Russia, especially those involving cross-border settlements of dollars. Banks significantly reduced or completely stopped providing credit services to companies doing business with Russia.
According to Aiying, as the United States expanded its secondary sanctions against Russia on June 12, some small and medium-sized banks with good relations with Russia have stopped accepting cross-border remittances and account openings. Even corporate accounts that have already been opened cannot receive payments normally. VTB has been included in the sanctions list by the U.S. Treasury Department's Office of Foreign Assets Control (OFAC). Executives of three Russian commodity exporters also said in an interview with Bloomberg that after the United States implemented a new round of sanctions, it has become very difficult or even impossible to make direct payments from China to Russia, even if they are paid in RMB.
Payment issues are affecting not only commodities like metals and agriculture, but other industries as well. Aiying also learned from some companies that Chinese goods such as auto parts and agricultural equipment are often delayed due to payment issues. Payments used to arrive in a day or two at most, but now the various procedures and inspections required delay payments by one to three months. Questions about whether certain products are dual-use for military and civilian purposes still lead to longer delays, and in some cases, it is common for deals to fail due to incomplete documentation. The Russian Automobile Dealers Association warned last week that imports of cars and auto parts from China could be suspended due to settlement problems.
According to a recent report released by Renmin University of China Chongyang Institute for Financial Studies, "Creating a New Channel - Current Situation, Challenges and Suggestions for China-Russia Bilateral Investment", it is mentioned that from February to March 2024, due to the threat of secondary sanctions from the West, both SPFS and CIPS RMB-ruble transactions were stopped; as of March this year, 80% of transactions were blocked. This is consistent with what Aiying has learned from companies: Chinese funds cannot be deposited into Russian accounts, and Russia itself cannot pay.
2. Cross-border payment and settlement of Sino-Russian trade is a big problem
China accounted for about 28% of Russia’s total trade last year, up from 19% in 2021, according to statistics compiled by Bloomberg. By contrast, the European Union’s share of Russian trade fell to 17% from 36% over the same period.
In May, the yuan accounted for only 53.6% of the Russian exchange’s trading volume, but the latest U.S. sanctions imposed in mid-June forced the exchange to suspend dollar and euro trading. The sanctions caused the yuan’s share of Russia’s foreign exchange market to rise to 99.6%, with almost all transactions settled in yuan.
In the over-the-counter market, the US dollar and the euro are still traded. In June, the over-the-counter trading volume fell slightly to 13 trillion rubles, and the share of the renminbi rose slightly by 0.8 percentage points to 40%. Sales of major exporters remained high, reaching US$14.6 billion (about S$19.7 billion) last month.
Judging from the above data, if China and Russia do not have a suitable solution to the problem of financial settlement, it will have a very large negative impact and economic losses on Chinese companies.
The problem of cross-border payment and settlement in China-Russia trade is now more like a financial traffic jam. This traffic jam is actually more troublesome than the traffic jam at the logistics level. After all, payment and settlement are the basis of the blood circulation of bilateral trade.
3. The breakthrough of cross-border payment of cryptocurrency
In this context, China and Russia began to explore new payment methods to break through the barriers brought by sanctions. Aiying has learned that some domestic companies active in the field of Sino-Russian trade initially focused on importing Chinese-made consumer goods into the Russian market. These consumer goods mainly include daily necessities, electronic products, clothing, and household goods. They have established a complete logistics and distribution network in Russia, enabling Chinese consumer goods to quickly enter the Russian market. However, sanctions in recent years have led to settlement difficulties and a decline in trade volume.
In the early stage, the company found that many small regional Chinese banks were able to handle payment business with Russia more flexibly because of their small size and not being within the direct target range of international sanctions. These banks usually operate at the local level and have a limited business scope, so they can still maintain their daily business needs relatively smoothly under the "radar" of international sanctions. However, as the sanctions deepened, these methods began to be restricted, so they began to try in a more innovative direction - cross-border payments of virtual currencies. After some practice, digital assets and cryptocurrencies were used for settlement, bypassing the limitations of the traditional banking system. By using Tether (USDT), settlement can be completed within one day, which greatly simplifies the process and reduces the overall payment cost.
4. Russia launches a policy bill to support cross-border payments of cryptocurrencies
1. Anatoly Aksakov, Chairman of the State Duma Financial Market Committee, predicted that Russian citizens will be able to exchange Bitcoin for digital rubles in the future
2. Russia is also actively promoting the application of digital ruble. , the digital ruble has made significant progress in the pilot phase, and President Putin has expressed strong support for it and hopes to accelerate its integration in the economic system.
3. Elvira Nabiullina, Governor of the Central Bank of Russia, said in an interview, “By 2031, CBDC will become part of daily life. The digital ruble has the advantage of free or low transaction fees, which will promote the adoption of CBDC.”
4. The Russian Duma passed a law in the second and third readings, allowing cross-border settlement and exchange transactions of digital currencies within the framework of the Experimental Legal Regime (EPR) from September 1, 2024. For details, please read: [Crypto Payment] Russia will allow virtual currency to be used for cross-border transactions from September
According to a report by Izvestia citing the Russian Central Bank, the Russian government is actively considering legalizing stablecoins in international transactions to simplify and facilitate cross-border payments for Russian companies. For more information, please read: Russia considers permanent legalization of stablecoins for cross-border payments to promote a new situation in international trade.
It should be noted that before 2017, the Russian government and central bank were very cautious about cryptocurrencies. Cryptocurrencies and mining are considered to be extremely risky, and the main concern is that they will be used for illegal activities such as money laundering and terrorist financing. The central bank has repeatedly warned the public not to invest in cryptocurrencies such as Bitcoin, pointing out that their prices fluctuate greatly and there are high financial risks. In 2020, Russia passed the "Law on Digital Financial Assets", which recognizes cryptocurrencies as property but prohibits them from being used to pay for goods and services. In just a few months, Russia's policy has taken a 180-degree turn, promulgating various bills and policies and stating that digital currency is a highly promising economic field, and Russia must seize the opportunity to quickly establish a legal framework and regulatory mechanism. In my personal subjective judgment, this should be an adjustment made by Russia because virtual currency has achieved considerable results as one of the solutions to break through.
5. Can encrypted cross-border payment solutions perfectly break through sanctions?
This question must be a compliance question that everyone asks regularly. After all, the rules of the game in this world, especially in the financial field. Everyone needs to comply with FATA's anti-money laundering regulations and the Banking Protection Act. So is it not necessary in the crypto field? If it is necessary, then can this solution still work?
This involves a deep study of the practical details of specific execution cases. Since the space is far from enough to elaborate, I can only use a question that Foresight asked Aiying last week to dialectically answer: Is the fate of cryptocurrency increasingly tied to politics? On the one hand, the decentralization of cryptocurrency represented by Bitcoin, and on the other hand, the deepening of political participation is also pulling it back to the centralized power center. In the cross-border payment of virtual currency, the centralized game rule makers will try every means, whether it is technical means, establishing bills to pass licenses, anti-money laundering regulations, etc., to pull it back to the scope of their own sanctions, so that their sanctions tools still retain deterrence. This is something that people who yearn for "free innovation" may feel more frustrated.
Aiying Aiying understands that the relationship between the two can be described as "love and hate". On the one hand, the starting point of the crypto industry is decentralization and a revolution, but the body of capital is honest. They don't care what revolution you have. It's my goal to make me get a hundred times the profit. Therefore, the pursuit of capital will naturally make them do more political lobbying, so that the game of power will inevitably participate in it, protect them and formulate game rules that are beneficial to them. Is this process a bad thing for the crypto industry? Not necessarily, or it is more like a Trojan horse, gradually infiltrating and reforming the current financial system. The system and rules. Take cross-border payments as an example. Not from the perspective of ethics and politics, take USDC and USDT as examples. They represent the US dollar and exercise the right to settle games in US dollars, but on the other hand, they have also become one of the most effective ways for sanctioned countries to break through "sanctions" and become a countermeasure or backlash against the original rules. After the cryptocurrency mixer Tornado Cash was sanctioned by the U.S. government two years ago, the platform's activity dropped significantly, but in 2024, according to blockchain analysis company Flipside Crypto, the protocol received more than $1.8 billion in deposits in the first half of 2024 alone, about 45% higher than the deposits for the whole of last year. To some extent, it can be regarded as a "breakthrough" under the sanctions of centralized power departments.
Therefore, will the "unbridled wild horses" of Bitcoin and stablecoins derived from the blockchain decentralization technology be truly tamed? Who is changing whom, and who needs to be forced to change? This is a question worth exploring in depth. Back to the question itself, this is a dynamic question. The emergence of encrypted payments has given the original currency settlement system a new variable. Combined with the cyclical changes of time, place and country, this variable has a more comprehensive game with the official launch of the Bretton Woods system and the international monetary system dominated by the US dollar, so the current plan is also the result of the game.
6. Keep the right path and be surprising
Of course, the principle of adhering to the right path is the starting point of all things. While crypto payments are breaking through, they also provide shelter for some criminals. This was mentioned in a previous case of Aiying, "Huione, Cambodia: A Billion-Dollar Money Laundering Platform for Internet Fraudsters". Therefore, when using digital currency as a settlement solution in normal trade, it is necessary to improve anti-money laundering capabilities and comply with local laws and regulations to avoid being used by some criminals as a channel for money laundering using corporate accounts, which is not worth the loss.
We look forward to using new technologies to introduce encrypted payments to innovate the traditional outdated settlement system and reshape the original unreasonable rules of the game. Aiying will also continue to pay attention to changes in global encrypted payments and existing settlement systems, and welcome everyone to communicate on WeChat.
