Just the day before yesterday, on August 8, Russian President Putin signed a bill that officially legalizes cryptocurrency mining in Russia. This bill introduces new concepts such as digital currency mining, mining pools, and mining infrastructure operators. Putin previously emphasized in an economic meeting that digital currency is a highly promising economic sector, and Russia must seize the opportunity to quickly establish a legal framework and regulatory mechanisms. Rather than viewing this as part of the grand narrative of the Russian authorities, Aiying believes that Russia is seeking a way to break through economic blockades under the heavy pressure of international sanctions.

1. Challenges in Cross-Border Payment Settlements for Sino-Russian Trade

At the beginning of 2024, with the intensification of Western sanctions, major Chinese banks began to feel increased pressure from the United States, especially when their positions in the financial market and dollar clearing system were threatened. Consequently, these banks had to adopt more cautious measures. Several large Chinese banks started restricting U.S. dollar transactions related to Russia, particularly cross-border settlements involving dollars. Banks significantly reduced or completely halted credit services to companies with business dealings in Russia.

According to Aiying, as of June 12, with the expansion of U.S. secondary sanctions on Russia, some small and medium-sized banks with ties to Russia have faced similar issues. For example, Hunchun Rural Commercial Bank and Russia’s VTB Bank have stopped processing cross-border incoming remittances and have suspended account openings. Even accounts that have already been opened cannot process payments normally, with VTB being on the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) sanctions list. Executives from three major Russian commodity exporters told Bloomberg that after the new round of U.S. sanctions, making direct payments from China to Russia has become very difficult, if not impossible, even when using RMB.

Payment issues affect not only metals and agricultural commodities but also other industries. Aiying found that Chinese companies are experiencing delays in the delivery of automotive parts and agricultural machinery due to payment issues. Payments that used to take one or two days are now delayed by one to three months due to various required procedures and checks. Questions about whether certain products have dual military and civilian uses also cause further delays, and transactions frequently fail due to incomplete documentation. Last week, the Russian Automobile Dealers Association warned that, due to settlement issues, it may suspend imports of cars and auto parts from China.

A recent report by the Renmin University Chongyang Institute for Financial Studies, titled “Creating New Channels – Current Status, Challenges, and Recommendations for Sino-Russian Bilateral Investment,” noted that between February and March 2024, Western secondary sanctions threats led to the suspension of SPFS and CIPS RMB-ruble transactions. As of March this year, 80% of transactions were blocked. This aligns with what Aiying has heard from businesses: Chinese funds cannot reach Russian accounts, and Russia itself is unable to make payments.

2. Cross-Border Payment Settlements in Sino-Russian Trade: A Major Issue

According to statistics compiled by Bloomberg, China’s share of total trade with Russia was about 28% last year, up from 19% in 2021. In contrast, the EU’s share of trade with Russia decreased from 36% to 17% during the same period.

In May, the RMB accounted for only 53.6% of trading volume on Russian exchanges, but the latest sanctions imposed by the U.S. in mid-June forced these exchanges to suspend trading in USD and EUR. As a result, the RMB’s share in the Russian foreign exchange market surged to 99.6%, with nearly all transactions settled in RMB.

In the over-the-counter market, trading in USD and EUR continues. In June, the OTC trading volume slightly decreased to 13 trillion rubles, with the RMB’s share increasing by 0.8 percentage points to 40%. Major exporters’ sales remained high, reaching $14.6 billion (approximately 19.7 billion SGD) last month.

From these figures, it is clear that if Sino-Russian cross-border payment and settlement issues are not appropriately resolved, they will have a significant negative impact on Chinese businesses and result in substantial economic losses.

Currently, the problem of cross-border payment settlements in Sino-Russian trade resembles a major financial traffic jam, which is actually more problematic than logistical delays, as payment and settlement are the lifeblood of bilateral trade.

3. Breaking Through with Cryptocurrency Cross-Border Payments

Against this backdrop, China and Russia have begun exploring new payment methods to overcome the obstacles posed by sanctions. According to Aiying, some enterprises active in Sino-Russian trade initially focused on importing Chinese consumer goods into the Russian market. These goods include daily necessities, electronics, clothing, and home products. They established comprehensive logistics and distribution networks in Russia to facilitate the rapid entry of Chinese goods. However, recent sanctions have led to difficulties in settlement and a decline in trade volumes.

Initially, these companies found that many small regional Chinese banks, due to their smaller scale and being outside the direct target of international sanctions, could handle payment transactions with Russia more flexibly. These banks, operating at the local level with limited scope, managed to maintain their daily business needs relatively smoothly despite being under the international sanctions “radar.” However, as sanctions deepened, these methods also faced limitations, prompting a shift toward more innovative approaches—specifically, cross-border payments using virtual currencies. By utilizing digital assets and cryptocurrencies, such as Tether (USDT), settlements could be completed within a day, significantly simplifying the process and reducing overall payment costs.

4. Russia’s Strategic Move: Introducing Supporting Legislation for Cryptocurrency Cross-Border Payments

1. Anatoly Aksakov, Chairman of the State Duma’s Financial Market Committee, has predicted that in the future, Russian citizens will be able to exchange Bitcoin for digital rubles.

2. Russia is also actively promoting the use of the digital ruble. The digital ruble has made significant progress in its pilot phase, with President Putin strongly supporting it and hoping to accelerate its integration into the economic system.

3. Elvira Nabiullina, Governor of the Russian Central Bank, stated in an interview, “By 2031, CBDCs will become a part of daily life. The digital ruble has the advantage of free or low transaction fees, which will drive the adoption of CBDCs.”

4. The Russian Duma has passed a law in its second and third readings, allowing digital currency cross-border settlements and trading under an experimental legal regime (EPR) starting from September 1, 2024. For more details, see: [Cryptocurrency Payments: Russia to Allow Virtual Currency for Cross-Border Transactions from September].

According to “Izvestia,” the Russian government is actively considering the legalization of stablecoins in international transactions to simplify and promote cross-border payments for Russian companies. For more details, see: Russia Considers Permanent Legalization of Stablecoins for Cross-Border Payments, Promoting a New International Trade Landscape.

It is important to note that before 2017, the Russian government and central bank were very cautious about cryptocurrencies. Cryptocurrencies and mining were considered highly risky, primarily due to concerns about their use in illegal activities such as money laundering and terrorism financing. The central bank repeatedly warned the public against investing in Bitcoin and other cryptocurrencies, citing their high price volatility and financial risks. In 2020, Russia passed the “Digital Financial Assets Law,” which recognized cryptocurrencies as property but banned their use for payment of goods and services. However, in recent months, Russian policy has undergone a complete turnaround, with the adoption of various laws and statements recognizing digital currencies as a highly promising economic sector. Russia must seize the opportunity to quickly establish a legal framework and regulatory mechanisms. My personal judgment is that Russia has made significant adjustments based on the progress it has achieved in using virtual currencies as a solution to break through sanctions.

5. Can Cryptocurrency Cross-Border Payment Solutions Perfectly Overcome Sanctions?

This question is often raised regarding regulatory compliance, particularly in the financial sector where adherence to FATF anti-money laundering regulations and banking protection laws is crucial. Does this mean that cryptocurrency operations are exempt from such requirements? If they are required, can these solutions still be effective?

This brings us to a deeper examination of practical execution details. Given the scope, it’s impossible to delve into all aspects, but we can refer to a question posed to Aiying by Foresight last week to frame our answer: Is the increasing political entanglement of cryptocurrencies good or bad? On one hand, cryptocurrencies, led by Bitcoin, represent decentralization; on the other hand, increased political involvement is pulling them back toward centralized control.

In cross-border payments using virtual currencies, centralized rule-makers will employ every means—whether through technical methods, legislation, licensing, or anti-money laundering regulations—to bring these systems within their sanctioning capabilities and maintain the effectiveness of their tools. This reality may be disappointing for those who idealize “freedom and innovation.”

Aiying views this relationship as a form of “love and conflict.” The cryptocurrency industry aims for decentralization and revolution, but capital’s primary goal is profit. Capital’s pursuit of profit leads to increased political lobbying and involvement in rule-making to ensure favorable conditions for them. This process might not be entirely negative for the cryptocurrency industry; rather, it can be seen as a Trojan horse gradually infiltrating and reforming the existing financial system’s rules.

For instance, in cross-border payments, using assets like USDC or USDT—while representing USD and operating within the USD settlement framework—also becomes an effective method for sanctioned countries to circumvent restrictions, serving as a countermeasure or backlash against the original rules. After being sanctioned by the U.S. government, the activity on the cryptocurrency mixer Tornado Cash significantly dropped, but according to blockchain analytics firm Flipside Crypto, the protocol received over $1.8 billion in deposits in the first half of 2024, approximately 45% more than the total deposits for the previous year. This can be seen as a form of “breaking through” sanctions.

Therefore, whether the blockchain technology and its derivatives, like Bitcoin and stablecoins, will be truly tamed, and who will be forced to adapt, remains an open question. This is a dynamic issue. The emergence of cryptocurrency payments introduces new variables into the traditional currency settlement system. Combined with the timing, geography, and cyclical changes, this variable interacts with the Bretton Woods system and the USD-dominated international monetary system, resulting in a continuous and evolving negotiation process.

6. Keeping integrity is amazing

Of course, adhering to principles of integrity is essential in all matters. While cryptocurrency payments offer a way to circumvent sanctions, they also create opportunities for misuse by illicit actors. Aiying previously highlighted this issue in the case of “Cambodia Huione: A Platform for Money Laundering by Cybercriminals.”

Thus, when using digital currencies for settlements in legitimate trade, it is crucial to enhance anti-money laundering capabilities and comply with local regulations to prevent misuse of corporate accounts for laundering money. Failing to do so could lead to significant losses.

We look forward to using new technologies in cryptocurrency payments to reform outdated settlement systems and reshape unreasonable rules. Aiying will continue to monitor global trends in cryptocurrency payments and changes in existing settlement systems. Feel free to connect on WeChat for further discussions.

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