Russia sees workarounds for sanctions in the energy, gold and crypto sectors

WASHINGTON (AP) — The harsh sanctions against Russia and the resulting plunge in the ruble are prompting the Kremlin to keep the country’s economy afloat. For Vladimir Putin, that means finding ways out of the Western economic blockade even as his military forces continue to invade Ukraine.

Former Treasury officials and sanctions experts expect Russia will seek to mitigate the impact of the fines by relying on energy sales and drawing on the country’s reserves of gold and Chinese currency. Putin is also expected to move funds through smaller banks and accounts of elite families not covered by the sanctions, trading cryptocurrency and relying on Russia’s ties with China.

Right now, “the two biggest opportunities Russia has are China and energy,” said John Smith, former director of the Treasury Department’s Financial Intelligence and Enforcement Sector.

The US and EU have slapped sanctions on Russia’s biggest banks and their elite, frozen the country’s central bank’s offshore assets and banned its financial institutions from the SWIFT banking messaging system – but oil and natural gas largely remain unhindered into the rest of the world flow.

While Russia is likely to draw closer to China to make up for lost supplies of goods and services it would normally receive from the West, Smith said, “they are also betting that their vast energy reserves will continue to be in demand, especially during this cold winter.” . There’s a lot more profit to be made from their energy if they can bring it to market.”

Last month Russia and China signed a 30-year deal that will allow Russia to supply gas to China, although the pipelines to transport that gas will not be completed for at least three years. In addition, China announced last week that it would allow wheat imports from all parts of Russia for the first time.

However, Smith said the Chinese and others are “going to make incredibly tough deals” now that Russia has fewer willing buyers and China wants to avoid being subjected to secondary sanctions or sanctions violations.

On Monday, the US further tightened its sanctions to immobilize all assets held by the Central Bank of Russia in the United States or owned by Americans. The Biden administration estimated the move could affect hundreds of billions of dollars in Russian funds.

Recent moves included a spin-off authorizing energy-related transactions with the bank. Nor will the penalties affect Russia’s gold stash, which Putin has been amassing for several years.

Tyler Kustra, an assistant professor of politics at the University of Nottingham who has worked on economic sanctions, said Moscow had already adopted a “fortress Russia economy” in which many goods are produced domestically, even if it was easier to import them to shield the economy from sanctions.

Many foods in Russia are produced locally, but some of them don’t match similar products made abroad, while others cannot be substituted, he said.

“My friends in Moscow are like, ‘Look, they’ve never gotten the cheese right,'” Kustra said.

An increasing reliance on cryptocurrency will be an inevitable way for Russia to try to shore up its financial transactions, said David Szakonyi, a professor of political science at George Washington University, “but it’s unlikely to become a substitute for cryptocurrency over time.” corporate transactions will serve .”

While about 80% of Russia’s financial transactions have historically been conducted in the dollar, federal law enforcement and Treasury officials are stepping up efforts to “aggressively combat” the abuse of cryptocurrency to evade sanctions, according to a White House official who did not have the authority to speak publicly and spoke on condition of anonymity.

The official declined to comment on whether the Biden administration is considering sanctions against Russian-based crypto exchanges.

The administration has experience in regulating Russian crypto business. Earlier this year, the Ministry of Finance sanctioned Russia-based SUEX and 25 affiliated cryptocurrency companies and blacklisted the exchange from the dollar financial system for allegedly helping criminal hackers clean up and cash out their loot. It was the first crypto company to be given this designation.

Ari Redbord, a former senior adviser to the Treasury Department who heads government affairs at TRM, which develops financial crime analytics among other things, said his organization has identified at least 340 companies in Russia that could potentially be used as “on and off ramps” for crypto Currency.

Redbord said that due to the breadth of the sanctions, the amount of crypto Russia would need to replace the billions in sanctions “would be very difficult to convert to traditional currency.”

Ori Lev, who served as head of enforcement at the Treasury Department’s Office of Foreign Assets Control during the Obama administration, said that overall, “whether it’s the use of cryptocurrency or the reliance on China, there are mitigating factors.” Actions they can take, but they can’t replicate this financial system.”

The Biden administration has argued that China will not be able to make up for the loss of US and European business and that sanctions cutting Russia off western sovereign debt markets will be crippling. At the same time, the White House has tried to argue publicly that Beijing’s rescue of Moscow could, in the long run, damage China’s standing in Europe and around the world.

By Monday afternoon, the ruble had cratered and Russians queued for hours at ATMs as fears of inflation exploded.

“I don’t know what exact steps they will take to mitigate the bite of the sanctions, but it won’t undo them,” Lev said.

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Associated Press writers Aamer Madhani, Alan Suderman in Richmond, Virginia, and Kelvin Chan in London contributed to this report.

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