The Russian financial regulator has made an extraordinary intervention, in a sign of how hard recent Western sanctions are hurting Russia’s foreign trade.

Reuters reported that the Central Bank of the Russian Federation (otherwise known as the Central Bank of Russia), has encouraged the use of cryptocurrencies to counter sanctions impacting financial transactions with Russian entities.

Russia’s central bank has reportedly told businesses that they should use “multiple choice solutions” including cryptocurrencies and other digital assets to facilitate payments with foreign partners to counter Western sanctions imposed over the Ukraine war, Reuters reported.

Russia sanctions

This is a notable change, as in recent years the Russian central bank had advocated banning cryptocurrencies in the interests of financial stability, while the Ministry of Finance had worked toward regulating them.

But Russia’s economy is in trouble, after the West enacted a broad range of sanctions against the nation after its illegal invasion of Ukraine on 24 February 2022.

This has seen Russia cut off from Western technology, the exit of multiple Western businesses, and the halting Russian energy imports, after Moscow’s actions in Ukraine turned Russia into a pariah nation for many countries around the world.

In April 2022 for example, the European Union extended its financial sanctions on Russia to include crypto-wallets, in an effort to address concerns that cryptocurrencies could be used to circumvent existing sanctions.

However Russia is still trading with BRICS nations most notably China, India, the UAE, and Turkey and others.

Western sanctions have also cut off selected Russian banks from the SWIFT messaging system for global payments, and more recently sanctions have targeted major Russian financial institutions, including the Moscow Stock Exchange and Russia’s domestic alternative to SWIFT.

Indeed, recent Western sanctions have focused on making it even more difficult for Russian entities to evade existing restrictions and carry out financial transactions.

Payment challenges

This has caused major setbacks in the last few weeks for Russia’s booming trade with China, India, the United Arab Emirates, Turkey and other countries, Reuters noted.

Elvira Nabiullina, governor of the central bank, reportedly admitted that payments problems were one of the key challenges for the Russian economy.

“New financial technology creates opportunities for schemes which did not exist before. This is why we softened our stance on the use of cryptocurrencies in international payments, allowing the use of digital assets in such payments,” Nabiullina was quoted as telling a financial conference in St. Petersburg.

“Different alternatives are being discussed. Businesses have become very flexible, very enterprising. They find ways to solve this and often don’t even share them with us,” she reportedly said.

Nabiullina said Russia’s business partners in various countries were under “tremendous pressure” but said a new global payments system not involving Western institutions would gradually emerge since many countries felt vulnerable using only one international payment system with no alternatives.

BRICS Payment System?

Nabiullina was quoted by Reuters as saying that Russia and other countries from the BRICS grouping of countries were in discussions over the BRICS Bridge payments system, which would be designed to bridge the financial systems of member countries.

But she added that the discussions were difficult and that it would take time to create such a system.

Andrei Kostin, head of Russia’s second largest lender VTB, which recently had sanctions imposed on its branch in Shanghai and was sitting alongside Nabiullina, reportedly said that any information about mechanisms to facilitate international payments should be made a “state secret” by law due to its sensitivity.

“I can see very well that right now somewhere at the US embassy, a second secretary is sitting and writing down every public statement of ours. Maybe he is even sitting here. Whatever steps we take, we can see that the reaction [from Western countries] is very quick,” he reportedly said.

In March 2022 it emerged that financial regulators at G20 countries were monitoring the use of cryptocurrencies, and concerns that digital assets could be used to circumvent Western sanctions on Russia.