On August 8th, Russian President Vladimir Putin signed a bill officially legalizing cryptocurrency mining in Russia. This bill introduces new concepts such as digital currency mining, mining pools, and mining infrastructure operators. In a previous economic conference, Putin explicitly pointed out that digital currency is an area of great potential in the economy, and Russia must seize the opportunity to quickly establish a legal framework and regulatory mechanism.
Rather than interpreting it as a grand narrative of Russian authorities, Aiying Payment Compliance is more inclined to believe that Russia, under the heavy pressure of international sanctions, is seeking a way out for its economy.
I. Challenges in cross-border payment settlement for Sino-Russian trade
In early 2024, as the West intensified its enforcement of sanctions, large Chinese banks began to feel greater pressure from the United States, especially when their position in the financial market and the US dollar clearing system was threatened. Banks had to take more cautious measures. Several large Chinese banks began to restrict US dollar transactions related to Russia, especially cross-border settlements involving the US dollar. These banks significantly reduced or completely stopped providing credit services to companies conducting business with Russia.
According to Aiying Payment Compliance, as of June 12th, some small and medium-sized banks in China, such as Hunchun Rural Commercial Bank and VTB Bank, have stopped accepting cross-border remittances and suspended account opening due to the expansion of US secondary sanctions against Russia. Even accounts that have already been opened cannot receive payments normally. VTB Bank has been listed by the Office of Foreign Assets Control (OFAC) of the US Treasury Department for sanctions. Executives of three major Russian commodity exporters mentioned in an interview with Bloomberg that it has become very difficult, if not impossible, to make direct payments from China to Russia after the implementation of the new round of US sanctions, even if payments are made in Chinese yuan.
The payment issue not only affects major commodities such as metals and agriculture but also other industries. Aiying Payment Compliance has learned from some companies that Chinese automotive parts and agricultural machinery often get stuck due to payment problems. In the past, payment could be received within one or two days, but now various procedures and checks required have caused delays of one to three months. Doubts about whether certain products have dual military and civilian uses can also lead to longer delays, and transaction failures due to incomplete documents are also common. The Russian Automobile Dealers Association warned last week that it may suspend imports of cars and auto parts from China due to settlement issues.
According to a recent report by the National Institute of Financial Research, during the period of February to March 2024, threatened by secondary sanctions from the West, both SPFS and CIPS, the renminbi-ruble trading systems, were suspended. As of March this year, 80% of transactions were blocked. This is consistent with the feedback Aiying Payment Compliance received from companies: Chinese funds cannot enter Russian accounts, and Russia cannot make payments.
II. Cross-border payment settlement between China and Russia is a major problem
According to statistics compiled by Bloomberg, China accounted for about 28% of Russia’s total trade last year, higher than the 19% in 2021. In contrast, the EU’s share in Russia’s trade decreased from 36% to 17% during the same period.
In May, the renminbi accounted for only 53.6% of the trading volume on the Moscow Exchange, but the latest US sanctions implemented in mid-June forced the exchange to suspend US dollar and euro transactions. As a result, the renminbi’s share in the Russian foreign exchange market rose to 99.6% and almost all settlements were made in renminbi.
In the over-the-counter market, the US dollar and euro are still traded. In June, the OTC trading volume slightly decreased to 13 trillion rubles, and the renminbi’s share increased by 0.8 percentage points to 40%. Sales by major exporters remain high, reaching $14.6 billion (about 19.7 billion new yuan) last month.
Based on the above data, if the problem of fund settlement between China and Russia is not properly resolved, it will have a significant negative impact and economic losses on Chinese companies.
In the current situation, cross-border payment settlement between China and Russia is like a traffic jam in the financial field, which is more troublesome than logistics-related traffic jams. After all, payment settlement is the foundation of bilateral trade circulation.
III. Cryptocurrency as a breakthrough for cross-border payments
In this context, China and Russia have begun to explore new payment methods to overcome the obstacles brought by sanctions. According to Aiying Payment Compliance’s understanding of some Chinese companies active in Sino-Russian trade, their initial focus was to import Chinese consumer goods into the Russian market. These consumer goods mainly include daily necessities, electronic products, clothing, and home goods. They have established a sound logistics and distribution network in Russia, allowing Chinese consumer goods to enter the Russian market quickly. However, in recent years, the sanctions have caused difficulties in settlement and a decline in trade volume.
Initially, companies found that many small regional Chinese banks, due to their small scale and not being direct targets of international sanctions, were able to handle payment transactions with Russia more flexibly. These banks usually operate at the local level with limited business scope, so they can still maintain their daily business relatively smoothly under the radar of international sanctions. However, as the sanctions deepened, these methods also became restricted. As a result, companies began to explore more innovative approaches—cross-border payment with virtual currencies. Through the use of Tether (USDT), settlements can be completed within one day, greatly simplifying the process and reducing overall payment costs.
IV. Russia introduces supporting policy bill for cross-border cryptocurrency payments
1. Anatoly Aksakov, Chairman of the State Duma Financial Market Committee, predicted that in the future, Russian citizens will be able to exchange Bitcoin for digital rubles.
2. Russia is also actively promoting the application of digital ruble. The digital ruble has made significant progress in the pilot stage and has received strong support from President Putin, who hopes to accelerate its integration into the economic system.
3. Elvira Nabiullina, the governor of the Russian Central Bank, said in an interview, “By 2031, CBDC will become part of daily life. The advantages of digital ruble, such as free or low transaction fees, will drive the adoption of CBDC.”
4. The Russian State Duma passed a law in the second and third readings, allowing cross-border settlement of digital currencies and exchange trading within the framework of the Experimental Legal Regime (EPR) from September 1, 2024.
According to a report cited by the Russian Central Bank in the “Messenger” newspaper, the Russian government is actively considering legalizing stablecoins in international transactions to simplify and promote cross-border payments by Russian companies.
Before 2017, the Russian government and the central bank had a very cautious attitude towards cryptocurrencies. Cryptocurrencies and mining were considered to have high risks, mainly due to concerns about their use in illegal activities such as money laundering and terrorist financing. The central bank repeatedly warned the public not to invest in cryptocurrencies such as Bitcoin, pointing out their high price volatility and significant financial risks. In 2020, Russia passed the “Digital Financial Assets Act,” which recognized cryptocurrency as property but prohibited its use for payment of goods and services. However, in the past few months, Russia’s policies have made a 180-degree turn, issuing various bills, policies, and statements that recognize digital currency as an area of great potential in the economy. Putin emphasized the need to seize the opportunity and quickly establish a legal framework and regulatory mechanism. It is a personal judgment that Russia has achieved some results and made adjustments by considering virtual currency as one of the solutions to break through the sanctions.
V. Can cross-border cryptocurrency payments provide a perfect solution to bypass sanctions?
This question is undoubtedly a compliance issue that everyone commonly asks, especially in the field of finance where the rules of the game in this world need to be followed. Everyone needs to comply with FATF’s anti-money laundering regulations and the “Bank Protection Law.” Does this not apply to the cryptocurrency field? If it does, can this solution still work?
This involves delving into the details of specific case execution. Due to the limited space, it is impossible to elaborate on it. We can only use a question that Foresight asked Aiying Payment Compliance last week to answer dialectically: the closer the fate of cryptocurrency is tied to politics, is it good or bad? On the one hand, cryptocurrencies, represented by Bitcoin, are decentralized, but on the other hand, political involvement deepens, pulling them back into the center of centralized power. In the case of cross-border payments using virtual currencies, the game rule makers of centralization will do everything possible, whether it is technical means, establishing licensed regulations, anti-money laundering regulations, etc., to bring them back within the scope of their sanctioning power, so that the tools they sanction still have deterrent power. This can be frustrating for those who long for “free innovation.”
Aiying Payment Compliance understands the relationship between the two can be described as a “love-hate” relationship. On the one hand, the starting point of the cryptocurrency industry is decentralization and revolution. On the other hand, the capital’s body is honest. They don’t care about your revolution. Their goal is to make a hundredfold return. Therefore, the pursuit of profit will naturally make them engage in more political lobbying, influencing the game rules in favor of them. This process may not necessarily be a bad thing for the cryptocurrency industry. It is more like a Trojan horse that silently infiltrates and reforms the current financial system’s institutions and rules. Taking cross-border payments as an example, regardless of ethical and political considerations, using USDC and USDT as examples, they represent the US dollar and exercise the game rights of settling in US dollars. However, on the other hand, they have also become one of the most effective ways for sanctioned countries to break through “sanctions” and counter or retaliate against the existing rules. Two years ago, after being sanctioned by the US government, the activity of the cryptocurrency mixer Tornado Cash decreased significantly. However, according to Flipside Crypto, a blockchain analytics company, the protocol received deposits of over $1.8 billion in the first half of 2024 alone, about 45% higher than the total deposits in the previous year. In a sense, it is considered a “breakthrough” under the sanction of centralized power.
Therefore, whether the blockchain, which is derived from the technology of decentralization, and the “wild horses” of Bitcoin and stablecoins, will be truly tamed and who is changing whom, who needs to be forced to change, is a question worthy of in-depth exploration. Returning to the question itself, it is a dynamic question. The emergence of cryptocurrency payments has provided new variables to the original currency settlement system, and combined with the changing cycles of timing, advantages, and national interests, this variable has had a more comprehensive game with the current international monetary system dominated by the US dollar, the Bretton Woods system. Therefore, the current solution is also the result of this game.
VI. Adhering to principles while being innovative
Of course, adhering to principles is the starting point for everything, and while cryptocurrency payments provide a breakthrough, they also provide a haven for some criminals. Therefore, when using digital currencies as a settlement solution in normal trade, it is necessary to enhance anti-money laundering capabilities and comply with local regulations to avoid companies’ accounts being used as channels for money laundering by some criminals, which is not worth the loss.
