Weekly 23 January 2022

Bitcoin ban?

Hello! Our top story is the discussions about a cryptocurrency ban among Russian officials as the Central Bank comes out in support of tougher restrictions. We also look at market turbulence amid U.S.-Russia talks over Ukraine and rapidly rising coronavirus case numbers as the Omicron variant finally arrives in Russia.

Russia mulls cryptocurrency ban

Russia could impose tough restrictions on cryptocurrencies, according to a report published Thursday by the Central Bank. When China banned cryptocurrencies last year, there was an exodus of miners to neighboring states, and Russia suddenly found itself the world’s third-largest bitcoin miner after the U.S. and Kazakhstan.

What happened?

The Central Bank report on the crypto-market recommended:

  • A ban on the issuance (including mining), circulation and exchange of cryptocurrencies (including stablecoins). This would affect crypto-exchanges and peer-to-peer (P2P) platforms.
  • A ban on banks investing in cryptocurrencies or related financial instruments, and a block on using Russia’s financial infrastructure for any crypto-operations. This means a halt to all the operations of exchange-traded funds (ETF) for cryptocurrencies, as well as customer payments to crypto-exchanges.
  • Penalties for companies and individuals that make crypto-payments. Miners are likely to be dealt with separately, but no specific punishments were proposed for them.
  • NFTs and digital currencies issued by Central Banks remain unaffected. Importantly, the Central Bank does not intend to ban ownership of cryptocurrencies nor investing in them via foreign jurisdictions.

At present there are no restrictions on cryptocurrency mining in Russia (although the authorities are planning to raise the energy price for those taking advantage of subsidized electricity to produce crypto at home). Officially, it’s forbidden to use cryptocurrency when buying or selling goods or services, but this is not usually punished in any way.

The Central Bank stands alone

It’s far from certain that the Central Bank’s proposals will become law. About nine agencies are involved in regulating the crypto-market, including the Finance Ministry, the Federal Tax Service, financial watchdog Rosfinmonitoring and the Federal Security Services (FSB). Only the Central Bank is insisting on a strict ban, according to The Bell’s sources.

For example, Rosfinmonitoring just wants to control the flow of funds from crypto to traditional assets, while the Finance Ministry wants to protect unqualified investors.

A complete ban on cryptocurrency in Russia is supported by the FSB as it seeks to block funding for opposition groups and independent media, according to reports from news agency Bloomberg. However, The Bell’s information suggests otherwise. Crypto regulation has been under discussion for some years and The Bell’s financial market sources have never said the FSB takes a hard line — there have even been hints that security officers who control informal money flows may have their own reasons to want to avoid strict regulation.

What’s it for?

The Central Bank gave a long list of reasons why it wants such tough measures. The big one is the risk to individual investors, who have already purchased cryptocurrency at a rate of $5 billion a year. Crypto-investments are easily lost due to volatile exchange rates, fraud, hackers or market manipulation and there’s no protection for investors. An increased role for cryptocurrency in the economy could render the Central Bank’s monetary policies less effective, pushing up interest rates, which would slow the growth of stock markets and destabilize banks. Finally, large-scale crypto-purchases represent an outflow of capital, which weakens the ruble.

A Central Bank source familiar with the discussions on this issue told The Bell that the regulator is concerned that, if Russia makes it easy to purchase cryptocurrency, then it will become available to people who understand nothing of the risks involved. Then, if the value of cryptocurrencies collapse, it will be the Central Bank that is left to clear up the mess — and deal with all the financial and political consequences.

Would a ban work?

Given that Russia is a world leader in terms of cryptocurrency penetration, the Central Bank is probably too late, according to The Bell’s sources. Even the Soviet Union’s brutal persecution of currency speculators could not subdue a shadow market in the U.S. dollar and in modern Russia it will be impossible to ban cryptocurrencies, Yury Pripachkin, the president of the Russian Association of Crypto-economics, told media outlet RBC.

Market participants were surprised that the Central Bank seems keen to push Russian crypto-investors into foreign jurisdictions where they can no longer be controlled. As a result, the Central Bank’s forecasts about the criminalization of crypto-transactions will become a self-fulfilling prophecy: when everything happens on the gray or black markets, the regulator can no longer track who is buying tokens and how they are transferring them.

Why the world should care

News of the possible ban was not followed by any immediate price moves for bitcoin, but the currency crashed Friday and had lost more than 10 percent in a 24-hour period by Saturday. Russia accounts for at least 11 percent of Bitcoin’s computing power (hashrate), and if that were lost it could lead to a spike in costs for crypto-miners and a wave of crypto-migrations.

 

Markets tumble as U.S.-Russia talks drag on

Nothing in the whole of last week — including a Friday meeting between U.S. Secretary of State Antony Blinken and Russian Foreign Minister Sergei Lavrov in Geneva — shed any meaningful light on a possible outcome of the confrontation between Russia and the West over Ukraine. But tensions are so high that the Russian market saw big losses.

Lavrov’s meeting with Blinken was short by recent standards — just 90 minutes. And, judging from the statements issued by both sides, nothing new was said.

The first to sum up the talks was Lavrov. He said:

  • It was an intermediate meeting, and Blinken was satisfied with the outcome.
  • The U.S. has promised to submit a written response to Russia by the end of next weekend, after which there will be a further ministerial-level meeting.
  • Russia has no plans to attack Ukraine. A deployment of Russian weapons in Cuba and Venezuela was not discussed.

A little later, Blinken commented that:

  • The talks were frank and substantive.
  • Any incursion over the Ukrainian border by the Russian military will be seen as an invasion and meet a swift response. A non-military attack will also elicit a response.
  • The U.S. and its NATO allies are ready to respond to some of Russia’s ‘concerns’, but will not shift from their core principles, including NATO’s open door policy.
  • The diplomatic path is still open.

The meeting came at the end of a second successive week of bloodletting on Russian stock markets. The issue is not just that the markets have yielded to geopolitics, but that investors are finding it hard to understand what’s going on. Gossip seemed to be in the driving seat.

  • The Russian stock market fell 6.5 percent Tuesday. This was short of 2018’s record drop when the U.S. imposed sanctions on a series of Russian billionaires. But recent declines (the market was down a total of 4.5 percent this week) are unusual because they come amid high oil prices. Analysts expect oil to soon hit $100 a barrel.
  • The collapse happened despite little real news, and mixed messages from the Kremlin. Russia’s main ‘hawk’, Lavrov, unexpectedly said that, in place of a guarantee not to expand NATO, the Kremlin would be happy with a U.S. commitment not to support Ukraine’s admission to the alliance. At the same time, Russia announced it was joining Belarus in military exercises close to the Ukrainian border.
  • When not watching the stock markets, experts in Moscow have been discussing every snippet of news about how a possibile military conflict might play out. For example, the Communist Party published Wednesday a draft appeal to President Vladimir Putin, urging him to formally recognize the Russian-backed rebel statelets in Eastern Ukraine as fully-fledged countries. However, most experts came to the conclusion it was not worth reading too much into this – if this was Putin’s secret plan, it would hardly be entrusted to the Communists.
  • Similarly, there was much debate Thursday about the Putin Accountability Act proposed by Jim Banks, the Republican congressman for Indiana. In it, Banks called for personal sanctions against the Russian president, his family, the entire Russian government, plus billionaires, security chiefs and propagandists. Clearly, this act has no chance of being enacted — and everyone in Moscow who understands the U.S. political system knows that. However, it gave the likes of editor-in-chief of television channel RT Margarita Simonyan the chance to boast of being included on the list.

What’s the prognosis for Russian markets

Russian investment bank Renaissance Capital recently attempted to evaluate what might happen in the event of a military escalation and Western sanctions. According to its predictions, the ruble would immediately fall 20 percent, and this would be accompanied by an outflow of funds from the debt and stock markets, a tightening of Central Bank policy, capital controls, foreign exchange interventions and a tax on the sale of Russian government bonds. In short, it would be a nightmare for emerging market investors.

For the moment, the Kremlin can afford stock market turbulence. Despite a private investment boom in Russia, which has attracted many column inches, in reality only about 2.6 million people are actively trading (that means making at least one trade each month) —  less than 2.5 percent of the Russian electorate.

Why the world should care

The risk of a military conflict in Europe seems not to have significantly receded, or increased, this week. Back in November Putin instructed the Foreign Ministry to “keep the West on its toes” and this appears to be exactly what Russian diplomats are doing. But the longer this goes on, the greater the risk of an error that could be enormously costly to all sides.

 

Omicron arrives in Russia

The Omicron variant of the coronavirus finally reached Russia last week. The Saturday tally of new cases hit 57,212, almost doubling in six days and hitting a new pandemic record. However, the authorities remain anxious about attempting to curb the spread of the virus.

  • Compared with other countries, Russia’s infection numbers are relatively low (this is partly due to less testing). However, there are some signs of the seriousness of the problem: the Kremlin has not ruled out postponing a planned address by Putin, and the government announced Friday a full switch to remote working.
  • Infectious disease doctors openly admit that infection rates in Russia could be much higher than the official figures, and that rising case numbers could continue well into February. Less than 50 percent of the population are fully vaccinated.
  • Despite all this, it seems unlikely that there will be new restrictions. Newspaper Kommersant published Thursday a summary of discussions at the Expert Institute for Social Research, a think tank close to the Kremlin, which showed experts were in agreement that there is no justification for a lockdown. Any restrictions would be deeply unpopular with the public and possibly damage Putin’s poll ratings.

Why the world should care

The repeated attempts to push through legislation on compulsory QR-codes (that show your vaccine status) highlight the fact that the Russian public — and the authorities — are far more adverse to coronavirus restrictions than avoidable deaths. Such attitudes are exacerbated by an official reluctance to talk publicly about the dangers of the pandemic.