Russia has long been unable to do without cryptocurrency

Author: Shenchao TechFlow

In 2011, Li Xiaolai, who was still a teacher at the time, commented on Bitcoin as "this thing has turned the world upside down." Bitcoin is the first time in human history that technology has achieved the sacred and inviolable nature of private property.

This expression may seem abstract, but in Russia in 2022, ordinary people truly felt the inner meaning of this statement.

When the financial sanctions hit, traditional financial infrastructure collapsed, and cryptocurrency became Plan B. Stablecoins like USDT became the settlement currency for international trade, and many Russian billionaires used cryptocurrency for wealth transfer.

The Russian government, through legislation, allowed the use of digital currencies in cross-border transactions and exchange trading starting from September 1, 2024, and began to legalize cryptocurrency mining in Russia from November.

However, unexpectedly, the current cryptocurrency capital of Russia is not Moscow, but Dubai, thousands of miles away.

Russia Needs Cryptocurrency

Under the shadow of the Russia-Ukraine war, cryptocurrency (Crypto) has found the most fertile soil in Russia and is thriving.

As early as the initial outbreak of the war, according to Reuters, many Russian billionaires brought tens of billions of dollars in cryptocurrency to Dubai for cashing out, even directly purchasing local properties in Dubai with Bitcoin, as the UAE did not join the US and EU economic sanctions against Russia.

Under US financial sanctions, many Western companies exited the Russian market, and the international banking settlement system malfunctioned. At this time, cryptocurrencies represented by USDT took center stage.

In April 2024, the US Deputy Secretary of the Treasury made a formal statement to the Senate Banking, Housing, and Urban Affairs Committee, claiming that Russia was using Tether's USDT stablecoin to bypass economic sanctions.

This has even made Chinese businessmen mining for gold in Russia feel the pulse of Crypto.

After the Russia-Ukraine conflict, countries in Europe and the US blocked car exports to Russia, making China the main exporter of cars to Russia. Many Chinese traders discovered wealth opportunities, and Lin Xiang is one of them.

They usually order ready-made cars in Xinjiang, register them, complete insurance, and then deregister before exporting them as used cars. These vehicles are sent to land ports in Xinjiang, such as Horgos, and then reach Bishkek, the capital of Kyrgyzstan. Due to Russia's customs agreement with Kyrgyzstan, sending goods through Bishkek allows for more favorable tariff policies before being transported to central cities in Russia like Moscow or St. Petersburg.

For example, the Chinese-produced Li Auto L9, a large vehicle equipped with everything from a refrigerator to a big sofa and heated seats, is seen by Russians as a "substitute for Land Rover" and is highly sought after by Russian tycoons. According to the recently released sales distribution map of Li Auto in cities across the country for January to February 2024, the best-selling city for Li Auto is not Beijing, Shanghai, Guangzhou, or Shenzhen, but Urumqi in Xinjiang.

The Tank 500 and Li Auto L9 sell for around 400,000 yuan in China, but can fetch over 9 million rubles (about 700,000 yuan) in Russia.

However, Chinese traders making a fortune in Russia also have their own troubles: they earn rubles in Russia, and converting them into yuan is not easy and is susceptible to significant exchange rate fluctuations, so they do not want to hold rubles.

As a result, some Chinese traders are trying to convert rubles into USDT or receive payments directly in USDT, leading to a booming underground USDT-ruble over-the-counter trading market, with a premium of about 1% compared to the dollar/ruble exchange rate.

Perhaps you are wondering why not trade directly in yuan?

Bloomberg published a report in July titled "Direct Payments in Yuan Becoming Increasingly Difficult, Russian Companies Trading with China Are Taking Chances," which explains this.

Several major Russian commodity exporters indicated that after the US expanded the standards for sanctions in June, cases of direct payments in yuan being frozen or delayed have increased, making trade with China feel like a gamble. The threat of US sanctions and secondary sanctions has led more and more Chinese banks to be unwilling to conduct payments and foreign trade settlements with Russia.

Companies facing issues can usually find alternative payment methods, such as using cryptocurrency or trading through former Soviet countries like Kazakhstan or Uzbekistan, but this increases costs.

At least two senior executives from large Russian metal producers revealed that they have begun using Tether's stablecoin and other cryptocurrencies to settle some cross-border transactions, with most counterparties being Chinese clients and suppliers.

The surge in cryptocurrency usage has helped Russia evade financial sanctions, prompting the Russian government to adjust its cryptocurrency policy to support and encourage it.

On July 30, 2024, the Russian State Duma passed a law in its second and third readings, allowing the use of digital currencies, including Bitcoin (BTC), Ethereum (ETH), and stablecoins (such as USDT), in cross-border transactions and exchange trading starting from September 1, 2024. This marks a significant shift in Russia's attitude toward cryptocurrency.

Additionally, Russia passed a law to legalize cryptocurrency mining starting in November, allowing Russian legal entities and individual entrepreneurs registered with the Ministry of Digital Development of the Russian Federation to engage in cryptocurrency mining.

According to Russian media Kommersant, Russia plans to create at least two new cryptocurrency exchanges, one of which is planned to be based on the St. Petersburg Currency Exchange, focusing on foreign trade activities; the other is planned to be established in Moscow, with the main idea being to create a stablecoin linked to the yuan and the BRICS currency basket.

Under financial sanctions, blockchain and cryptocurrency have built a decentralized, relatively censorship-resistant financial infrastructure for Russians at minimal cost.

It can be said that today's Russia has coexisted with cryptocurrency.

Dubai, the Cryptocurrency Capital of Russia

A little-known fact is that the cryptocurrency capital of Russia is not in Moscow, but in Dubai.

Here, the political environment is stable but lacks transparency; it is sunny but has ambiguous laws. Purchasing property can grant residency visas, and there is no extradition agreement with the US and Europe, making it the preferred destination for Russian oligarchs and the wealthy to evade sanctions and transfer wealth, as well as a paradise for cryptocurrency development.

As mentioned earlier, at the onset of the Russia-Ukraine war, many Russian billionaires brought tens of billions of dollars in cryptocurrency to Dubai for cashing out, even directly purchasing local properties in Dubai with Bitcoin, which to some extent drove up property prices in Dubai.

As a large number of crypto-rich individuals flocked in, many local real estate developers in Dubai were also willing to accept cryptocurrency payments.

For instance, the luxury real estate developer DAMAC Properties in Dubai has been accepting cryptocurrency as a payment method since the beginning of this year. The developer of the world's tallest building, the Burj Khalifa, Emaar Properties, has also begun accepting cryptocurrencies like Bitcoin and Ethereum as payment for its properties.

In Dubai, the close connection between real estate and cryptocurrency has led most real estate practitioners to step into the crypto space, and the presence of real estate professionals is ubiquitous in Dubai's crypto activities, giving rise to several Dubai-themed crypto projects—Web3 real estate.

For example, there are Dubai Web3 real estate trading platforms like HouseLux and Directly, which tokenize Dubai real estate, allowing investors to directly purchase RWA assets to hold Dubai properties.

Meanwhile, a large number of Russian businesses and individuals are migrating to Dubai.

Today, Russians are everywhere in Dubai, to the extent that many long-term residents of Dubai exclaim, "Russians have taken over Dubai."

Dubai's IFZA is one of many free zones established to attract foreign investment. IFZA's Executive Director Jochen Knecht stated, "The number of Russian entrepreneurs and startups has increased tenfold compared to last year."

For example, the messaging software Telegram, which originated in Russia, has its headquarters in Dubai. Telegram founder Pavel Durov holds a UAE passport and often resides in Dubai.

Currently, the core circle of the entire TON ecosystem is also in Dubai.

According to relevant sources, almost all board members of the Ton Foundation reside in Dubai, and the core development team of the TON ecosystem, TOP (The Open Platform), is also headquartered in Dubai, with its founder Andrew being a member of the Ton Foundation.

TOP develops multiple tools and projects within the TON ecosystem, such as the Wallet in Telegram, as well as the independent wallet TonKeeper and Notcoin, which has several million users.

The well-known crypto market maker with Russian background, DWF, also has one of its bases in Dubai.

In Dubai, providing cryptocurrency financial services to Russian tycoons has become a business, but this has also led US sanctions to start targeting companies in Dubai.

In 2023, the US Treasury Department's Office of Foreign Assets Control (OFAC) sanctioned 22 individuals and 104 entities for assisting Russia in evading sanctions, including John Hanafin, the founder of the Dubai financial company Huriya Private, who is suspected of helping Russians transfer assets and invest for citizenship. His Ethereum wallet was flagged by OFAC, which has received approximately $4.9 million worth of cryptocurrency, mostly USDT.

In the context of regional conflicts and increasingly tense geopolitical situations, cryptocurrency, often associated with gray areas, is gradually binding itself to the snow-covered land of Russia in a clever and coherent manner.

The arrest of the Telegram founder in France has been interpreted by the outside world as a political game between the West and Russia. Beyond the actual battlefield, there are many invisible parallel wars, and on the financial battlefield, Russia has long been inseparable from cryptocurrency.