Russia eyes sanctions workarounds in energy, gold, cryptocurrency

WASHINGTON — The harsh sanctions imposed on Russia and the resulting crash of the ruble have the Kremlin scrambling to keep the country’s economy running. For Vladimir Putin, that means finding workarounds to the Western economic blockade even as his forces continue to invade Ukraine.

Former Treasury Department officials and sanctions experts expect Russia to try to mitigate the impact of the financial penalties by relying on energy sales and leaning on the country’s reserves in gold and Chinese currency. Putin also is expected to move funds through smaller banks and accounts of elite families not covered by the sanctions, deal in cryptocurrency and rely on Russia’s relationship with China.

Right now, “the biggest two avenues that Russia has are China and energy,” said John Smith, former director of Treasury’s financial intelligence and enforcement arm.

The U.S. and EU have levied sanctions on Russia’s biggest banks and its elite, frozen the assets of the country’s Central Bank located outside the country, and excluded its financial institutions from the SWIFT bank messaging system — but have largely allowed its oil and natural gas to continue to flow freely to the rest of the world.

While Russia is likely to turn closer to China to make up for lost supplies of goods and services it normally would get from the West, Smith said, “they’re also betting that their enormous energy supplies will continue to be in demand, particularly during this cold winter. There’s significantly more profit to be made from their energy if they can get it to market.”

Last month, Russia and China signed a 30-year deal that will allow Russia to supply gas to China, though the pipes to carry that gas won’t be completed for at least three years. In addition, China announced last week that it would allow imports of wheat from all parts of Russia for the first time.

However, Smith said the Chinese and others “will be driving incredibly hard bargains” now that Russia has fewer willing buyers, and China will want to avoid being subject to secondary sanctions or sanctions violations enforcement.

On Monday, the U.S. further tightened its sanctions to immobilize any assets of the Russian Central Bank in the United States or held by Americans. The Biden administration estimated the move could impact hundreds of billions of dollars of Russian funding.

The latest measures did include a carve-out that authorizes energy-related transactions with the bank. The penalties also do not impact Russia’s gold stockpile, which Putin has been accumulating for several years.

Tyler Kustra, an assistant professor of politics at the University of Nottingham who has studied economic sanctions, said Moscow had already been adopting a “Fortress Russia economy” — producing many goods domestically even if it was easier to import them — to shield the economy from sanctions.

Much of Russia’s food is produced locally, but some of it doesn’t match similar foreign-made items while others can’t be substituted, he said.

“My friends in Moscow say, ‘Look, they’ve never really gotten cheese right,’” Kustra said.

An increased reliance on cryptocurrency will be an inevitable avenue for Russia to try to prop up its financial transactions, said David Szakonyi, a political science professor at George Washington University, “but it’s unlikely it’ll serve as a substitute for corporate transactions over time.”

While about 80% of Russia’s financial transactions in the past have been done with the dollar, federal law enforcement and Treasury officials are stepping up efforts to “aggressively combat” the misuse of cryptocurrency to evade sanctions, according to a White House official who was not authorized to comment publicly and spoke on the condition of anonymity.

The official would not comment on whether the Biden administration is weighing targeting Russia-based crypto exchanges for sanctions.