Exclusive DappRadar Report: How Russia’s War and the West’s Response is Impacting Crypto

When Russia launched an unprovoked invasion of Ukraine, its neighbor and trading partner, the world reacted in horror and anger. The West, led by the U.S. and the E.U., immediately imposed severe sanctions on President Vladimir Putin’s regime, including barring its access to foreign reserves. The global economy has been impacted with soaring energy and commodities prices, and capital markets are grappling with the uncertainty and long-term effects of Putin’s aggression and the worst military tragedy on the European continent since World War II.

The cryptocurrency community, too, has been roiled by this tragedy. Due to blockchain technology’s peer-to-peer nature, there are a number of questions about the utility of Bitcoin and other digital assets in the war zone, and in Russia itself, where ordinary citizens have lost purchasing power as the rouble craters and access to financial infrastructure such as the Swift system.

In this report, we unpack the macroeconomic forces at work and analyze how blockchain-based solutions may come to play an important role as the war continues.

In a way not seen before, blockchain and web3 are demonstrating their value in contributing to the humanitarian effort to bring aid to Ukrainian refugees, and to providing support to Ukrainian citizens defending their country against the Russian military.

Before we plumb the specifics of these initiatives, let’s understand how Russia and Ukraine affect the macroeconomic picture.

Seismic shift in the global markets

Russia is one of the largest economies as a major energy and commodities producer, while Ukraine is a global leader in wheat production. Russia is the third-largest oil producer worldwide and holds around 5% of the world’s reserves. Half of its exported oil is consumed by European countries, fueling one-third of Europe’s oil consumption.

Russia is also the largest producer of natural gas and controls 25% of the world’s gas reserves. As a result, the price of crude oil has skyrocketed as sanctions came into force. So, too has gasoline, natural gas, coal, and heating oil. A rise in the price of electricity will impact Proof of Work blockchains like Bitcoin that require a high energy input.

Russia also has a tight grip on the fertilizer industry due to its high nitrogen production but is also a high exporter of copper, nickel, palladium, and platinum, elements required for the production of chips and graphic cards used to mine cryptos or play high-end games. At the same time, Ukraine is the sixth largest producer of Titanium, a metal primarily used in manufacturing industries, and the third-largest producer of neon gas.

Too big to fail?

Global leaders have also sanctioned Russian banks while providers of payment services have halted operations in the country. It is estimated that by mid-2021, Russia’s Central Bank held around $650B in reserves; however, the restrictions will limit that amount to approximately $230Bn, as 65% of those reserves are held overseas in currencies such as the U.S. dollar, the euro, British sterling, and gold.

The sanctions also mean that at least seven of the Russian most critical financial institutions will no longer be part of SWIFT, a global messaging system that’s crucial to cross-border payments. SWIFT is utilized by more than 11,000 institutions generating over 35M daily transactions.

In similar fashion, payment giants Visa, Mastercard, American Express, and PayPal have all ceased operations in the sanctioned country, leaving millions of users without a critical monetary gateway. Although the citizens and businesses of Russia may eventually find alternatives to SWIFT, the financial constraints will damage its economy severely.

One of the advantages presented by blockchain is the ability to enable seamless peer-to-peer transactions without intermediaries, creating practically borderless assets. This type of decentralized financial ecosystem can prove helpful for millions of Ukrainians and Russians who have been deprived of a direct payment gateway.

However, the situation in Russia is far graver and more complex. Besides PayPal, Visa and Mastercard, payment and remittance services from organizations like Apple (Pay), Google (Pay), Wise, Remitly, and TransferGo have also halted operations in that country, bringing additional hurdles to a Russian working-class who could also be at risk of credit default.

As a result, the most prestigious rating agencies have lowered Russian credit rates significantly. S&P and Moody’s downgraded Russia’s sovereign ratings to junk level, while Fitch cut Ukraine’s credit rating. The Russian ruble has experienced significant devaluations of almost 33% in the last seven days and can drop even further.

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