Almost one in six new Bitcoins last year originated in Russia. The financially sanctioned country welcomes the influx of foreign currency.

Sergei Nazdelov, Director of the Russian Association for Industrial Mining, stated at the Eastern Economic Forum on September 7 that 54,000 Bitcoins were generated in Russia in 2023.

This amounts to nearly one-sixth of the total coins generated this year. At current prices, the Bitcoins mined by Russia would be worth between 2.5 and 3 billion euros.

Nazdelov believes that this could generate tax revenues of 50 billion rubles, which is about 500 million euros. Thanks to a law passed in August, the state now also has the legal basis to collect these taxes.

This figure, 50 billion rubles, aligns with estimates given by industry representatives during the discussion of the law in July: from around 2026, Bitcoin mining will generate 50 billion rubles in tax revenue annually.

Additionally, power suppliers hope to gain additional revenue of around 44 billion rubles through special electricity tariffs for miners. Whether and to what extent this will impact the profitability of mining—and thus the tax revenue—remains to be clarified.

There are also concerns that uncontrolled mining in regions with the cheapest electricity could jeopardize the power supply. In mid-August, the eastern part of the country experienced massive blackouts. However, according to authorities, these were related to scheduled maintenance work.

Dozens of Billions of Dollars in Limbo

The country’s economy welcomes cryptocurrencies like Bitcoin as a relief from the increasing pain caused by sanctions on Russia.

Alexander Shokhin, President of the Russian Union of Industrialists and Entrepreneurs, also spoke at the Eastern Economic Forum. He urged the government to allow digital currencies for foreign trade as soon as possible. Business associations proposed lifting various legal restrictions to make this possible. This is urgently needed, as the Russian economy faces increasing difficulties in executing international payments.

In fact, the law passed in August and set to come into effect in November is supposed to enable exactly that. However, it appears not to have eliminated all uncertainties.

The issue is becoming increasingly acute for many companies. At the end of August, Reuters reported that „delays and rising costs“ were straining trade between Russia and China. Tens of billions of yuan were „in limbo.“

Secondary Sanctions

For months, Russian companies and officials have been pointing to the increasing transactional problems as Chinese banks strive to avoid secondary sanctions. These sanctions not only target Russian companies on the sanctions list but also their business partners.

Foreign banks risk being cut off from dollar markets if they deal with sanctioned Russian companies. Therefore, they must at least take stricter measures to vet their partners. This costs money and time, and often it’s easier and less risky for banks to simply refuse business with Russian clients outright.

According to Reuters, these problems have intensified in the past month. An anonymous government source said Chinese banks were rejecting transactions with Russia „en masse.“ Temporarily, all payments had come to a halt.

Similar reports are coming from Kyrgyzstan. In the former Soviet republic, more and more banks are halting money transfers to Russia.

Effects on Armament Questionable

Traders in Russia are relying on increasingly creative detours. Some are purchasing gold, shipping it to Hong Kong, and selling it there. Other companies use chains of intermediaries in various countries to move money to China. All this makes transactions up to six percent more expensive, which will likely affect prices.

At the same time, payments for vital goods, such as raw materials or industrially relevant technologies, seem to continue flowing smoothly to and from China. Here, there seems to be an interest at high political levels to find solutions. Therefore, the sanctions are unlikely to hinder Russian armament but primarily harm small and medium-sized enterprises.

The issue of foreign currencies and payment flows is evident in many aspects of Russian economy and economic policy. Due to the lack of press freedom and transparency, comprehensive insights are lacking, with only isolated snippets suggesting rather than informing.

For example, the central bank recently extended limitations on foreign currency withdrawals imposed back in March 2022. It’s prohibited to withdraw more than $10,000. The fear of capital flight remains significant.

Meanwhile, the government and businesses are trying to creatively bring foreign currency into the country. Reportedly, Russia has imported $2.27 billion from „friendly countries“ since the war against Ukraine began. A recent report suggested that Russia imported $29 million in banknotes from Rwanda.

„Legalized Sanctions Evasion“

The role cryptocurrencies play in all of this remains unclear. Even a report by Chainalysis, released on September 5, offers little concrete information beyond basic observations. Titled „Legislated Sanctions Evasion,“ it merely mentions the usual exchanges like Garantex and remains vague, echoing what is already known from press reports.

There is little doubt that Bitcoin and Tether (USDT ($1.00)) are used to circumvent sanctions, both privately and publicly. What remains unclear is the extent to which this is happening.

The government appears keen to increase the use of cryptocurrencies to bypass sanctions. There are hints that this is happening, but apparently on a marginal scale. This could be due to Russia’s main trading partner, China, having a very restrictive crypto policy—or out of a legitimate concern that too much freedom in crypto could fuel capital flight from Russia itself.