This analysis was first published in SvD Näringsliv, in Swedish, on February 27th, 2022.
Anonymous. Global. Flexible. The effect of sanctions against the Russian oligarchs risks falling flat — thanks to the double-edged sword of the crypto world.
“If the Russians decide — and I’m sure they already are — to avoid using any currency other than crypto, they can effectively avoid all sanctions.”
The statement came from Ross S Delston, a money laundering expert, commenting on the sanctions US President Joe Biden presented on Thursday. Biden also singled out the people around Vladimir Putin as targets:
“We’re adding names from the Russian elite and their families to the sanctions list. These are people who have personally profited from the Kremlin’s policies — and they should feel the pain too.”
The question is whether this particular elite actually will.
The Russian oligarchs are in many ways the perfect users of cryptocurrency — transactions are anonymous, fast and global. With relative ease they can sidestep the banking system’s money-laundering controls, or in this case, direct sanctions. You’d be hard pressed to think of a better way to hide the origin of your money and fund an international lifestyle.
The problem is well known. Most recently, in October last year, the US Treasury Department warned about the risks and described it like this: “Technological innovations such as digital currencies […] potentially reduce the effectiveness of American sanctions. The technology offers these actors the opportunity to hold and move assets outside of the traditional dollar-based financial system.” The report also showed the possibility for individuals, as well as states and other groupings, to use these methods at scale.
The report’s big shortcoming was a clear plan for how to solve the problem. More coordination between states was proposed, along with hiring people with cryptocurrency expertise. Now, less than six months later, you can assume the solution is still a long way off.
Expertise in the field is certainly plentiful — but on the criminal side. Even without direct state involvement, multi-billion-dollar sums already flow through these systems. Around SEK 130 billion was swindled there in 2021.
Eastern Europe plays a lead role. For one, money laundering from criminal activity in the region is growing sharply. Second, analytics firm Chainalysis, which tracks transactions on blockchains, showed in a 2021 report that 75 percent of the money flows on so-called darknets — a part of the internet that is often encrypted and anonymous — came from a single marketplace, Hydra. What’s particularly interesting about Hydra is its language: it is only available in Russian.
For Russian oligarchs, finding local expertise that can facilitate transfers of enormous sums should therefore not be especially hard. Hydra is a highly sophisticated marketplace that has built its own logistics system to deliver drugs and other products without using existing postal systems. The business can best be described as a large enterprise. Between July 2019 and June 2020, $1.2 billion — over SEK 11 billion — was sent from Hydra to Eastern Europe. That makes it one of the largest crypto exchanges in the region.
Cryptocurrency isn’t the solution to every sanctioned person’s or state’s troubles, however. Russia is a major exporter of oil, and the global oil price is listed in US dollars. That means avoiding the currency entirely is difficult.
With new analysis tools, transactions are also more traceable than many users may have thought. In a noted case in the US, a couple tried to launder SEK 42 billion in cryptocurrency but were identified using new systems that worked through thousands of transactions designed to frustrate tracing. The flows may be anonymous, but, as the US case showed, they are also traceable. And when the cryptocurrency eventually has to be converted to ordinary currency, the risk of being identified rises — no matter how rich you are.