Don’t Dream Too Hard – Vladimir Putin Won’t Bet Everything on Bitcoin To Survive US and EU Sanctions
Bitcoin will be one option among others, but probably not the number one for Putin's Russia.
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While each day is marked by new American or European sanctions against Russia, Vladimir Putin continues to advance towards his goal: to take control of Ukraine in one way or another. Some do not want to talk about a heinous war, considering that Russia is only “correcting history” to quote Syrian President Bashar al-Assad's shameless words.
However, this invasion of Ukraine by Russia marks the beginning of a war. While we thought we were safe from this type of conflict in Europe, Putin has shattered all the certainties we could have had on the old continent.
If Putin can afford to continue to advance towards his goal without batting an eyelid, it is above all because he knows that he has an enormous advantage over America and NATO. He is the only one who is prepared to go all the way. America and NATO have already announced that there will be no military intervention to support Ukraine. De facto, Ukraine finds itself alone against Russia, which is much more powerful militarily.
The question is not if Ukraine will eventually give in, but rather when in my opinion. It is sad to say, but there is probably no other way out, even if the Ukrainians will heroically defend their territory. The economic and financial sanctions will have an impact on Russia, but this impact will be in the medium and long term. By then, Putin will probably have achieved his goal of taking control of Ukraine.
Russia has been preparing for several years for the economic and financial sanctions taken against it by America and the European Union
The problem with economic and financial sanctions is that they will also hit hard a part of those who take them. Indeed, Europe, and in particular Germany or Italy, is ultra dependent on Russian gas. If ever the decision was taken to cut the access to the SWIFT interbank network to Russia, Putin could very well decide to cut the access to Russian gas. It is easy to understand why Germany and Italy are so reluctant to take massive sanctions against Russia.
Putin knows all this very well, and that is why he is acting at the very moment when inflation is the main concern in America and Europe. He is betting that people will be more interested in their purchasing power than in the democracy in Ukraine.
To deal with economic and financial sanctions, Russia seems much better equipped than it was in 2014 when it annexed Crimea. Putin has been preparing for eight years. He has sharply reduced Russia's debt and accumulated a cash reserve of more than $620 billion by leveraging the budget surpluses generated each year since 2014.
While the economic situation in Russia has been more than precarious for many years, Putin and other top Russian officials justified this accumulation of currency as follows: Russia is preparing for hard times. Putin knew very well what he was up to, there is no doubt about it as he seems to be an outstanding strategist.
These 620 billion dollars of reserves represent 23 months of oil and gas export sales. Russia, therefore, has enough to last a long time in case it decides to cut gas sales to Europe.
Some imagine that Vladimir Putin could move Russia fully into Bitcoin
To continue trading in the worst-case scenario, Russia already has several scenarios in mind. Putin would not have embarked on such an operation without having a plan B in place. And when it comes to plan B, Bitcoin supporters are dreaming of seeing Putin's Russia go all-in on Bitcoin in the months and years to come. After all, Bitcoin is a global P2P payment system whose transactions cannot be censored.
After long hesitating to ban Bitcoin and cryptocurrencies from its territory altogether, Russia made a 180-degree turn in early 2022 by announcing a law making Bitcoin and cryptocurrencies legal in Russia. Besides, the country announced that it wants to take advantage of its strengths in low-cost electricity to become a leader in the Bitcoin mining industry.
To see Russia change its mind in this way just before it embarks on a war with Ukraine is sobering.
For many, Russia may be tempted to go so far as to denominate its oil or gas in Bitcoin in the future to circumvent US sanctions that could go so far as to prevent companies around the world from trading in US Dollars with Russia.
At the risk of disappointing some people, I regret to say that Russia will not go all-in on Bitcoin. Bitcoin will just be one of many options, but not the preferred one
I don't like to be the one to crush dreams, but I'm going to have to do it here. I'm a Bitcoiner myself, but I don't think Putin's Russia will go that far. Rather, I think Bitcoin and cryptocurrencies have been legalized to keep all the doors open. Putin did not want to deny himself any options. However, Bitcoin will be used on the margins.
Indeed, Putin's Russia has been developing its SWIFT competing system for several years now. This is the SPFS system (System for Transfer of Financial Messages). By the end of 2020, it connected 23 foreign banks to Russia in Armenia, Belarus, Germany, Kazakhstan, Kyrgyzstan, and Switzerland. Agreements are being discussed to integrate the Russian network with China's Cross-Border Inter-Bank Payments System (CIPS) and to connect the Russian SPFS system to India, Iran, and the countries of the Eurasian Economic Union.
I rather see Russia relying on SPFS and accelerating the connection with China's CIPS system. We have seen that China has enough economic power to resist American economic sanctions. Putin has been getting closer to Xi Jinping's China for several years for this reason. You know as well as I do the adage: “The enemy of my enemy is my friend”.
At present, Russia and China have every interest in being the best friends in the world to undermine American domination of the world.
Because that is also what this is all about. By showing that their alternatives to SWIFT are sufficiently advanced to make it possible to do without it, Russia and China would undermine American domination of the world monetary and financial system. For the Chinese, it is a question of ensuring that the American dollar is no longer the hegemonic world reserve currency that gives America an exorbitant privilege.
This is a prerequisite for Xi Jinping's China to achieve its great goal: to become the world's leading superpower in 10 to 20 years.
The road will be long, and the challenges numerous for China as its population ages, but this is an objective pursued by Russia's great ally in the current situation. China will also push for Russia not to make a 360° turn towards Bitcoin. It has not escaped your notice that China has banned Bitcoin in 2021, both in terms of use and mining.
Xi Jinping would take a dim view of his main strategic ally in the world going over to Bitcoin. Putin knows this too, and he will not be able to afford to challenge China on this point. Not at a time when Russia will need China's economic and financial power more than ever to achieve its goals in Ukraine.
Bitcoin mining could be a way to generate money if Russia stops selling gas to Europe
Bitcoin and cryptocurrencies, on the other hand, could be used by some of Russia's wealthy businessmen to circumvent the bans they will face. However, you should keep in mind that Bitcoin is only a pseudonymous network. I've already told you about techniques to increase your privacy and anonymity with Bitcoin, but in the end, on-chain firm surveillance will be able to track in near real-time all the transactions of those banned from the global financial system.
So Bitcoin will not be the advertised paradise for illegal transactions. And that's just as well, if I may say so! Because if Bitcoin were to become the number one solution used by Russia in the coming months and years, there would be a great risk that America and the European Union would attack Bitcoin and cryptocurrencies head-on. Even if Bitcoin cannot be banned due to its decentralized nature, this would slow down the adoption by the general public.
Finally, the last option for Russia to consider concerning Bitcoin would be to use its low-cost energy to become the leader in Bitcoin mining if it were to decide to stop selling its gas or oil to Europe. A strategy already employed by Iran, which thus uses the energy from its oil to generate money by contravening American economic sanctions.
We'll see what happens in the future, but you can already forget about a total switch from Vladimir Putin's Russia to Bitcoin.
Some reading
Worried About Regulations’ Impact on Bitcoin? You May Not Really Understand What Bitcoin Is. The current authoritarian excesses of Western governments will help bring to light what Bitcoin really is.
4 Moves To Make in a Bitcoin Bear Market That Will Make All the Difference for You Later. Don't expect anything, be ready for everything.
Bitcoin and KYC Policies – Everything You Need To Know (Risks, How To Protect Yourself, …). Whatever your choice, the important thing is to understand where the risks lie.
Four Essential Questions on Bitcoin Privacy and Anonymity Answered. An attempt to end the confusion of some newcomers to this world.
Wanting More Privacy and Anonymity Than Bitcoin Can Give You at the Moment? 3 Privacy Coins To Consider. An opportunity as an investor as well, as these coins should see a resurgence of interest in the months to come.