Reframing the Relationship: Putin, His Kleptocrats and the Regulation of Cryptocurrencies

As excitement over cryptocurrencies builds around the world, countries and their leaders have begun seeking ways to take advantage of this financial technology, or “fintech,” industry. The Russian Federation is no exception.

By Alexis Corn

April 18, 2018

In October 2017, President Vladimir Putin approved five rules1 that direct officials to establish a framework for the use of cryptocurrencies and slated the passage of 2 In the following months, Russian ministries also rolled out draft bills to regulate cryptocurrencies. The Central Bank of Russia proposed establishing a payment system through the distribution of registries and new financial technologies for Eurasian Economic Union members.3 The Russian Finance Ministry published a draft law that creates parameters for initial coin offerings (ICOs) and their investors4, and is drafting a bill to criminalize the use of cryptocurrencies as a means of payment for goods and services.5 The Russian Ministry of Communications and Mass Media released a draft law that outlines the parameters for ICO organizers6. In January 2018, Communist Duma representative Rizvan Kurbanov introduced a draft bill establishing the blockchain-based “cryptoruble” as a form of legal tender in Russia.7

While it is too early to know the precise role that cryptocurrencies will play in Russia, use of the industry by kleptocrats—individuals who work with the government and exploit the state for personal wealth — will depend on the potential threat of Western sanctions on their capital abroad, exposure concerns from political activists, and journalists’ “name and shame” campaigns, as well as the potential wealth they could accumulate from the industry itself. Yet, the Kremlin will undoubtedly have unabridged oversight over the industry, which will allow Putin to maintain maximum control over his kleptocrats.

Since assuming the presidency in 1999, Putin has maintained a delicate balance with Russia’s kleptocrats through the use of incentives and punishments. Putin allows kleptocrats to gain wealth from lucrative ventures, and in exchange, the elite must protect the political status quo. Threaten Putin’s regime or carry allegiances elsewhere however, and kleptocrats will be stripped of their wealth.8

There are several advantages for kleptocrats to participate in the Kremlin-regulated cryptocurrency industry. Using cryptocurrencies would mask transactions for individuals who do not relish when political activists or journalists criticize the country’s corruption. Exposés, such as the Organized Crime and Corruption Reporting Project’s article on the “Russian Laundromat,”9 showcase how Russia’s elite avoid paying taxes and reinforce the narrative of corruption within Russia. Cryptocurrencies provide another avenue to diversify the elite’s assets that will be difficult for watchdogs and activists to track.

Kleptocrats can also use cryptocurrencies as a way to forgo sending portions of their wealth abroad out of concern for Western sanctions. In the month before the publication of the “Kremlin Report” on January 30, 2018, Sberbank Private Banking—Sberbank’s asset management division for large private clients—found that hundreds of millions of dollars flowed into Russia from abroad. This was three times the amount of inflows from abroad in January 2017.10 If the West takes, or is perceived to be about to take, a more hardline stance against Russia and its kleptocrats, many may prefer to move funds from overseas and into the state-controlled domestic cryptocurrency system.

This fintech industry can only alter the Putin-kleptocrat relationship if it ensures investors and entrepreneurs not only of its stability, but also of its profitability. At a meeting of the Ministry of Economic Development of the Russian Federation, officials considered various additions to the Ministry of Finance’s draft bill, including a cryptocurrency income tax break and an increase in the contribution amount to ICOs.11 Regulatory measures intended to increase users’ wealth may encourage kleptocrats to use cryptocurrencies.

At the same time, a regulated framework for cryptocurrencies would strengthen Putin’s grip on kleptocrats. While the public cannot easily track kleptocrats’ cryptocurrency assets, the government must have the power to know the identity of users to ensure that illegal actors—such as terrorists, who can upset the security of the state—are unable to use the Russian fintech system. The Russian government could verify the identity of users by requiring the registration of private keys or cryptocurrency wallets or require investors in ICO campaigns to confirm their identities. This would allow the Kremlin to supervise the industry not only for taxation and law enforcement purposes, but also to threaten kleptocrats’ wealth if their loyalty began to waver.

Some have hailed the emergence of cryptocurrencies as a monumental change in how the financial and investment world operates. Even so, the regulation of cryptocurrencies does little to alter the present Putin-kleptocrat relationship. Kleptocrats will likely continue to benefit under Putin so long as their loyalty towards the president remains absolute. For Putin and his kleptocrats, the tried and true carrot-stick relationship is likely to remain for the foreseeable future.

The author would like to thank Izzy Klein and Tyler Larson for their invaluable input, assistance and time in the preparation of this essay.

Endnotes

[1] “Перечень поручений по итогам совещания по вопросу использования цифровых технологий в финансовой сфере,” President Russia, October 10, 2017, http://kremlin.ru/acts/assignments/orders/55899.

[2] Maria Mikhailovskaya, “Криптовалюты узаконят к лет,” The Parliament Newspaper, February 28, 2018, https://www.pnp.ru/economics/kriptovalyuty-uzakonyat-k-letu.html.

[3] Andrew Munro, “Russia’s central bank proposes multi-national BRICS cryptocurrency,” Finder AU, February 13, 2018, https://www.finder.com.au/russia-central-bank-proposes-multi-national-brics-cryptocurrency.

[4] Wolfie Zhao, “Russian Finance Ministry Proposes Draft Law on ICO Regulation,” Coindesk, January 26, 2018, https://www.coindesk.com/russian-finance-ministry-proposes-draft-law-on-ico-regulation/.

[5] Kevin Helms, “Russia Drafts Law to Criminalize the Use of Cryptocurrencies as Money,” Bitcoin, March 7, 2018, https://news.bitcoin.com/russia-drafts-law-criminalize-use-cryptocurrencies-money/.

[6] Wolfie Zhao, “Russian Ministry Proposes Capital Mandates for ICO Organizers,” Coindesk, February 13, 2018, https://www.coindesk.com/russia-proposes-mandate-on-ico-organizers-capital-threshold/.

[7] Kevin Helms, “Bill Submitted to Make Cryptoruble Legal Tender in Russia,” Bitcoin, January 27, 2018, https://news.bitcoin.com/bill-cryptoruble-legal-tender-russia/.

[8] The Sochi Olympics highlights this relationship. Christian Neef and Matthias Schepp, “Influence Peddling at the Feeding Troughs of Sochi,” Spiegel Online, January 29, 2014, http://www.spiegel.de/international/world/putin-using-olympics-in-sochi-to-reward-friends-and-punish-enemies-a-945907.html.

[9] “The Russian Laundromat Exposed,” OCCRP, March 20, 2017, https://www.occrp.org/en/laundromat/the-russian-laundromat-exposed/.

[10] Artem Gubenko, “Перед «кремлевским докладом» россияне вернули активы на «сотни миллионов долларов,»” The Bell, February 12, 2018, https://thebell.io/pered-kremlevskim-dokladom-rossiyane-vernuli-aktivy-na-sotni-milliardov-dollarov/?utm_source=The+Bell+%28Eng%29&utm_campaign=96187c09ef-Weekly_English_15_December_2017&utm_medium=email&utm_term=0_cc8c2d1cde-96187c09ef-73259317&ct=t(Weekly_English_15_December_2017).

[11] Helen Partz, “Russian Officials Propose Lighter ICO Regulations, Cryptocurrency Income Tax Breaks, “ Coin Telegraph, March 2, 2018, https://cointelegraph.com/news/russian-officials-propose-lighter-ico-regulations-cryptocurrency-income-tax-breaks.

 


Alexis Corn is an associate at Signal Group, a Washington, DC-based federal government relations and communications firm, where she works on a diverse set of issues. With a specialty in international relations and defense, she gained a comprehensive view of defense appropriations and authorization process after working for Innovative Federal Strategies, a bi-partisan lobbying firm. Alexis earned a B.A. in International Relations from Mount Holyoke College in Massachusetts and a minor in Russian and Eurasian Studies.

The Center on Global Interests does not take institutional positions. The views expressed in this article are the author’s own and do not reflect those of the affiliated institutions or individuals.

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