Why Russia hopes accepting Bitcoin will save the economy, prop up the ruble, and leave Western sanctions in the dust

The chairman of the State Duma Committee on Energy, Pavel Zavalny, suggested countries like China and Turkey would have the ability to settle cross-border transactions in yuan or lira, respectively. Alternatively they could pay with Bitcoin, a stateless asset backed only by the trust of the community behind it.

“We have been proposing to China for a long time to switch to settlements in national currencies for rubles and yuan,” said Zavalny. “You can also trade Bitcoins.”

Diversifying into Bitcoin and other currencies could help Russia lessen its dependence on dollars and euros issued by unfriendly states like the U.S. and the EU—and in the process skirt the sanctions they placed on it.

These western allies have taken the unprecedented step of freezing Moscow’s reserves of hard currency held in their countries, with even neutral country Switzerland following suit. Without access to these reserves—about half of Russia’s $643 billion of foreign reserves is thought to be held in countries that sanctioned Moscow—it is less able to sell dollars, euros and francs to bolster the value of its own ruble.

Happy crypto bulls

The announcement was hailed by crypto bulls, who celebrated that Bitcoin was being tapped to play an economic role in the here and now after years of talk about its possible use in the mid-term future. 

“We’re talking about real transactions,” said Seth Wunder, chief investment officer of investing app Acorns, on Coindesk TV. 

One of the risks for Bitcoin investors—beyond a high carbon footprint that inspired a failed EU attempt to ban it—has been the digital currency’s limited appeal due to its reputation as a speculative investment with no inherent value.

Perceptions now appear to be changing, however, with even crypto-skeptic Larry Fink, the chairman and CEO of BlackRock, starting to warm to the idea as the war in Ukraine creates new uses. 

“We’re moving from hopes and dreams and concepts to practical applications, and that sets up for a significant shift in demand over the long term,” Acorn’s Wunder added. 

Bitcoin was trading around $44,600 at 8 a.m. ET, up about 4% over the previous 24 hours. That marks a high not seen since early March, when bettors bid the price higher on the theory that the war would hasten the broader adoption of cryptocurrencies.

Sanctions apply to crypto too

Simply switching to Bitcoin or Ether would not exempt actors obligated to observe existing EU sanctions, which is perhaps one reason why Zavalny suggested the offer may only be open to those countries not participating in retaliatory economic measures against Russia.

“If and when large amounts of crypto assets are converted to fiat currencies, and vice-versa, these transactions will fall under the usual anti-money laundering rules,” an EU Commission official told Fortune.

Economic sanctions against Russia have attempted to starve the Kremlin of its ability to wage and finance its war against Kyiv’s government. The conflict was sparked in part by Ukraine President Volodymyr Zelenskyy’s attempts to free Ukraine from its role as client state to Moscow—a fate that has befallen neighboring Belarus—and align it with western powers such as the EU.

Zavalny’s proposal comes a day after Russia demanded that all “unfriendly” states, including those participating in western sanctions, settle their gas bills in rubles, in an apparent attempt to prop up the currency. 

A stronger ruble could help reduce domestic inflationary pressures, tipped this week by households to approach record heights. Soaring inflation is seen by analysts as a potential destabilizing force in Russia. 

According to the results of a survey published on Wednesday, Russian consumers expect inflation over the next 12 months to reach a median level of 18.3%, up from 13.5% in February.