The percentage numbers show the share of import/export from/to a specific country. One can see that Russia and the EU entertain very strong trade relations with shares above 50% in both directions. Also pronounced and equally balanced are Russia’s relations with China. The smallest shares are between Russia and the US. As to the relations between the two nation states, one can observe that Ukraine’s trade overall is more dependent on Russia than vice versa. Finally, Ukraine has similar relations to the EU, China, and the US as Russia does, albeit with a more pronounced disbalance as it imports more than it exports, with a very strong dependence on the EU.

What goods are relevant in these trades? Table 1 shows the top ten export/import goods for both countries highlighting a few that are of relevance either for energy supply, food production, or manufacturing. Russia exports much of its oil and natural gas supply to the EU, a dependence that is not easy to ignore or remedy for the EU. As all pipelines flow through Ukraine, Russia is facing a problem as Germany halted the Nord Stream 2 gas-pipeline deal that aims to route gas through the Baltic states in the North. War activities require more energy and the risk of disruptions in energy delivery may push energy prices up in the medium-term.

Russia also provides for 17.7% of global wheat production. With Ukraine also being an important exporter of wheat, a conflict between both may lead to increased prices or even supply shortages in the medium term.

In addition, Russia is one of the nuclear-weapons states, effectively controlling the largest arsenal of warheads.

Altogether, the intense trade relations suffer from the conflict directly, but also put limits on the levels of sanctions other countries may impose on Russia. The energy supply is critical in the sense, that increased energy prices will manifest themselves in increased production costs in many industries, putting upward pressure on prices (inflation). The Western blocks, already challenged to tame inflation rates, may find it hard to follow through with the tapering measures already underway.

Trade, energy, econ sanctions, financial system (swift), natural resources, state and non-state currencies, currencies and enticed inflation as weapons

Geopolitics: sanction effectiveness and currency options

One strategy to overcome an opponent in international conflict is causing economic damage. Disconnecting a country from the USD-based SWIFT, the international network of financial transaction information, used to be an effective measure as preventing domestic banks from doing international transactions is a painful blockage. The US, EU, UK, and Canada have disconnected “key sanctioned Russian banks” from SWIFT.

What other options would be left for Russia to transact outside the USD? Russia can use its own system, SPFS, although it only works inside the country. Alternatively, the Chinese payment network, CIPS, offers a much larger user base and geographic reach, but would come with a new dependence on China.

In any case, both currencies, Russian Ruble and Ukrainian Hryvna, suffer greatly from the military conflict: as of 2 March 2022 the RUBUSD fell -32% within one month to a new all time low, while the UAHUSD decreased -2.5% (TradingView).

However, the trading pairs for both currencies with Bitcoin surged significantly since the invasion began. Russian demand for BTC nearly reached 1.5b RUB on 22 March. Demand also raised prices of Bitcoin denominated in UAH.

Role of Bitcoin

Already prior to the invasion, both countries had strong links to Bitcoin.

Since the China ban in 2021 reshuffled the global mining hash rate landscape, Russia hosts 11% of hash rate on its territory. This may explain the sudden policy turn of the Russian government just days before the attack. While the Russian Central Bank proposed an encompassing ban on cryptocurrencies, the Russian government intervened by the Ministry of Finance proposing new bills that would consider Bitcoin as investment vehicle, limit buying to $7,700 per year, require full identification, require a “test”, and preventing self-custody. Overall, this gives Russia some level of control over sovereign Bitcoin, but also hampers its future potential. This setup lends itself to speculation that the government itself also have plans for Bitcoin.

Ukraine, on the other side, impressively showed that its #4 position in Chainalysis’ global crypto adoption index is well deserved by reaching out to the global community and asking for crypto donations while providing addresses (Table 2). Bitcoin and other cryptocurrencies seem to be the only means to send funds to families at home, without interference, fast and discrete.

On a side note, the US is facing a dilemma of either tolerating Bitcoin as an effective donations instrument for Ukrainian families and the government, or of fighting it because Russia is equally well positioned to use it to try to avoid sanctions that are imposed by SWIFT and the USD reserve status. The US may also be cautious to not push the SWIFT punishments too far because a Russia successfully doing without being connected to SWIFT may set an unintended precedent for other countries and undermine the role of the USD in the future.

Conclusion and Outlook

The Russian attack on Ukraine is arguably the first large international conflict between two nations in which Bitcoin does play a relevant role. In the process, the largest cryptocurrency may experience its most profound acid test and be able to reveal the weaknesses of the fiat money system. Will it withstand the different forces in this complex conflict?

While citizens of both Ukraine and Russia currently lose much of their wealth “stored” in their national fiat currency, Bitcoin can give a vision into the future of a country where many people own state-independent money. Because after all, without the possibility to create fiat money in the first place, it would be hard to convince citizens to give their bitcoins to finance a war. This and other critiques will be the topic of part 2 on the fiat money system in the next Decrypt.

The author thanks Dominic Weibel and Afina Inina for valuable input and support.