War, Sanctions, and Crypto: Putin’s Economic Balancing Act

The economic activity in Russia is experiencing instability. In the face of mounting pressure, President Vladimir Putin is turning to cryptocurrency. On November 29, he signed a law officially classifying crypto as property.

The Russian ruble fell to its lowest level in more than two and a half years on November 27. The Russian currency broke below 110 against the greenback for the first time since March 2022.

Additionally, it also declined to a historical low versus China’s yuan by dropping below 15. This crash coincides with rising tensions with the war in Ukraine and progressively tightening sanctions.

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Even the stock market has not been better off, to say the least. It has dipped almost 20% as the year runs out. People are withdrawing their investments with such and shifting their funds to more secure bank accounts.

BCS brokerage firm commented that the situation is a panic in an environment of uncertainty. The Russian ruble and stock markets continue to slide, and everyone is now waiting for the actions of Russia’s financial experts.

Russia Turns to Crypto for Stability

Putin’s move could allow Russia to bypass sanctions and conduct trade outside the traditional financial system.

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The law brings significant changes. Crypto miners will no longer pay VAT on their activities. Income from mining is now classified as “income in kind” and taxed at standard rates.

Personal earnings up to 2.4 million rubles ($22,000) face a 13% tax, while larger amounts are taxed at 15%. Corporate taxes stay at 25%. Miners must report their operations to the tax authorities or risk fines.

These new rules come just weeks after another law regulating crypto mining took effect.

That law set energy consumption caps and allowed certain companies to make international payments through the Bank of Russia. It’s clear that Russia sees crypto as more than just an asset—it’s a lifeline.

A Fragile Economy

Experts predict that the ruble will continue to decline to between 115 and 129 against the dollar by the end of 2024.

Analyzing the currency decrease, Russia finance minister dismissed it as a positive for export business. A ruble devaluation does indeed increase the competitiveness of Russian goods in foreign markets, but at the same time it hikes the domestic prices for imports, which experts say is likely to exacerbate Russia’s high inflation rate further.

The fluctuations in the ruble have been aggravated by new penalties affecting the Russian financial industry. These restrictions have affected foreign payments for import and export of goods, especially oil & gas and a shortage of foreign exchange in Russia.

As most Russian banks have been banned from performing dollar transactions with American counterparties because of the sanctions, Russia has no other option but to import banknotes in large quantities.

Although there is a slight reprieve in the situation, the Russian economy is not exactly out of the woods yet. It continues to rely on oil and gas sales as its main export earner while both have been affected by the sanctions.

The conflict in Ukraine remains a factor that undermines investor confidence and keeps consuming resources.

Crypto isn’t a guaranteed fix. But for Russia, it’s a gamble worth taking. By integrating digital currencies into its economy, the country hopes to offset some of the damage caused by sanctions. Whether this strategy works remains to be seen.