Photo by Jp Valery on Unsplash
There's been a lot of fuss in the media over the last few weeks about the prospect of a Russian invasion of Ukraine. But I have noticed (with some relief) that over the last few days, both sides have pulled back from the more extreme statements. Despite this the US has ramped up talk of sanctions, with more talk of pre-emptive sanctions.
Will Russia Invade ?
To be honest, I haven't a clue. I can't get inside the heads of Joe Biden or Vladimir Putin, nor do I sit in their meetings. I hope it doesn't happen, but in this crazy world nothing can be ruled out.
Personally, I don't see Russia doing it, because I think Putin is a shrewd operator. His previous military interventions (2nd Chechnya, Georgia, Crimea, Syria and Kazakhstan) have tended to be carefully controlled and well thought-through affairs with defined and limited goals. He has avoided the open-ended commitments the Western powers tend to get pulled into.
There is still the possibility that the US might spark a proxy war in the hope that it doesn't escalate and is successful in the short term to boost Democrat ratings prior to the mid-term elections.
What Kind of Sanctions Are Proposed
The US has implied that sanctions won't follow the usual model of ramping up over time, but will rather be all-in from the start. The include;
- Personal Sanctions on Vladimir Putin - symbolic. I doubt he has any assets in Western banks, but if the sanctions include a travel ban it would clearly disrupt any further diplomacy.
- Blocking sale of US technology to Russia - chips, telecoms and computer equipment etc.
- Blocking sales of Russian military exports, by the proposed financial restrictions as well as threatening sanctions on countries buying military equipment from Russia. This may work with Egypt, but Turkey and India have already shown that this approach is counter-productive, and countries like Iran, North Korea and Venezuela are already fully sanctioned so won't care.
- Blocking Russian energy exports to the EU. The US has no mechanism to block exports to China.
- Removing Russia from the SWIFT payment system. Strictly speaking, SWIFT is a private company that just offers a useful service, and doesn't take orders from the American government. So the sanctions would actually have to take the form of secondary sanctions on any company using SWIFT to transact with Russia.
How Would Russia Respond ?
Russia have stated publicly (and maybe hyperbolically) that this level of sanctions would be equivalent to a declaration of war. But I doubt Russia would respond militarily. A diplomatic response could include anything from vetoing every US motion in the UN Security Council, to agreeing mutual defence treaties with Iran, several South American countries, and maybe even North Korea or China.
However, under their doctrine of Hybrid Warfare I would expect a very significant uptick in deniable attacks on US interests. This could include cyber attacks on US business and financial institutions (including sabotage of infrastructure, which the West is far more vulnerable to than Russia), attacks by proxies on US forces in the Middle East, and maybe even an "accidental" severing of the main US to EU internet cable (a Russian naval squadron is currently carrying out live-fire exercises in international waters just off the coast of Ireland, right over the top of where the cable runs).
But it is the financial response that might get interesting.
- Russia has been stockpiling gold and non-dollar forex reserves which will make it easier to pay cash (or equivalent) for imports from neutral and friendly countries.
- Russia has developed SPFS as an alternative to SWIFT. It currently works within Russia and to 23 non-Russian banks, with plans well advanced to fully integrate it with China, Iran and Turkey.
- Most interestingly, Western media have made a big thing about Russia banning crypto recently. As is so often the case, the headline is far more dramatic than the reality, which was Russia's Central Bank floating the idea, not any concrete measures. But Vladimir Putin publicly slapped them down, and the Ministry of Finance has come out in favour of moderate regulation rather than a ban.
What Does This Mean For Crypto ?
- SPFS is still clunky compared to SWIFT. Small businesses in Russia, or in other countries selling to Russia are likely to find it far easier and cheaper to make payments through crypto. Once they get used to it, they are unlikely to go back to using legacy banks.
- If Russian sales of oil and gas to the EU diminish, some of those reserves could be funnelled through to Kazakhstan to help resolve the energy shortages caused by crypto miners that recently relocated from China, which would help increase hash rates nicely.
- Russia could also easily become a significant power in crypto mining. Most of the ASICS are made in China, so getting hold of them wouldn't be an issue, and Russia has the ability to generate huge amounts of cheap electricity from oil, gas, hydro and nuclear power.
- If Russia no longer has access to SWIFT, and Putin decides to play hardball, they could demand that EU countries pay for their gas up-front in BTC. The alternative gas supplies the US is trying to arrange are likely to be limited and hugely expensive. Germany in particular would have little option. There are already regular protests against vaccine mandates; power cuts, business closures and lack of heating due to energy shortages could rapidly turn that into serious civil disturbance or even start a "European Spring".
All of these factors rolled up together could lead to a scenario where Russia unofficially treats Bitcoin as legal tender. I doubt they'd be as brave as El Salvador and do it officially, although one can hope !
It would also do significant damage to the concept of the US Dollar as a global reserve currency. Sanctions inevitably harm the sanctioner as well as the sanctioned, and if the US applies the kind of secondary sanctions they are talking about it could force significant volumes of transactions currently carried out in dollars to move to crypto or other currencies. This could hasten the day when the dollar stops being the main reserve currency, and I feel we'd end up with a mix of reserves including one or more cryptos.