Iran and Russia are now reportedly in talks to jointly issue a stablecoin, backed by gold, for use in foreign trade in an attempt to circumvent the aggressive economic sanctions plaguing both regimes.
As the partnership between these two nations expands from military drones to cryptocurrency, is it time to start talking about an “axis of evil” again? That phrase, coined by President George W. Bush in his January 29, 2002, State of the Union address, less than five months after the 9/11 attacks, originally referred to Iran, Iraq and North Korea. However, today U.S. policy makers could attach the oft-used turn of phrase to Iran and Russia – two countries bedeviled by a barrage of U.S. and international sanctions and now turning to each other to seek shelter from the economic storm.
Last October, as Iranian-made drones struck Ukraine’s capital, Russia and Iran, both chafing from Western sanctions and bound only by a mutual enemy in the United States, sought ways to work more closely together. The New York Times
It appears that Russia now sees cryptocurrency as a tool for engaging in bilateral trade with Iran, and a way to pay for those drones. By January 2023, the Russian news agency Vedmosti started reporting that the “Central Bank of Iran (CBI) is cooperating with the Russian government to jointly issue a new ‘cryptocurrency backed by gold,’ to serve as a payment method in foreign trade.” The prospective token is described as a “stablecoin backed by gold” that will “enable cross-border transactions instead of fiat currencies like the United States dollar, the Russian ruble or the Iranian rial.” Vedomosti reportedly notes that the cryptocurrency would operate in a special economic zone in Astrakhan, where Russia has already started accepting Iranian cargo shipments. On the involvement of a special economic zone, Alex Zerden, Founder of Capitol Peak Strategies, a risk advisory firm explained to me, “As identified by the intergovernmental Financial Action Task Force, special economic zones can be misused for money laundering and terrorist financing. This proposal will likely enrich corrupt and malign actors but will create little benefit for those citizens living in these authoritarian regimes.”
While both Iran and Russia have banned their residents from using cryptocurrencies for payments, these two governments have been working to establish crypto payments for foreign trade. Iran already announced its first official import order – worth $10 million – back in August 2022. Statements from Russia’s finance ministry’s financial policy department had already confirmed that Russia is exploring how to use crypto for international payments.
So, the question is, can Iran and Russia evade U.S. sanctions by trading in a new stablecoin or other cryptocurrencies?
While Russia may be able to trade with Iran using the new stablecoin – potentially trading some amount of arms and oil – in order to meaningfully avoid the global financial system and U.S. dollar transactions, the stablecoin would have to be more widely accepted. There is no indication that other partners would want to accept a stablecoin, even one backed by gold, issued by Iran or Russia. While a few countries might be willing to participate, countries looking to do business with the United States, Europe and other democratic nations will likely view the activity from an illicit finance lens. As Zerden, a former U.S. Treasury official explained to me how democratic nations will look at the stablecoin partnership, “This novel proposal to misuse emerging technologies appears as a desperate measure by two brutal, authoritarian regimes to not just evade sanctions, but likely facilitate money laundering and corruption which plague both countries and undermine a transparent global financial system.”
For example, in 2018, when the embargoed government of Venezuela launched the petro, a cryptocurrency it created to settle oil imports in the face of sanctions, the U.S. prohibited U.S. persons from engaging with the token. Foreign partners had no interest in it, so it fizzled quickly.
In addition, parties paid with such stablecoins will still likely be looking for off ramps to more usable fiat currencies. Major exchanges, where most of the liquidity exists in the crypto markets today, would likely de-risk the Russo-Iran coin, making converting the currency difficult. In addition, these large exchanges tend to have robust anti-money laundering controls to include know-your-customer procedures. Exchanges use geolocation and blockchain intelligence tools for transaction monitoring and wallet screening to ensure that they are not transacting with sanctioned actors or jurisdictions. In short, Russia and Iran using cryptocurrencies with each other doesn’t negate the massive sanctions that have been levied against them. While it may be easier to move large amounts of funds faster using new technologies – perhaps negating the need for clandestine ship-to-ship transfers or bulk cash smuggling – robust compliance controls at cryptocurrency exchanges can mitigate the risk of sanctions evasion in new and innovative ways.
While, we have seen efforts by China, Iran and Russia – chafing under the sanctioning power of the United States – to expand bilateral trade in non-dollar currencies and beef up domestic payments systems like Russia’s MIR, the reality is that we are still living in a dollarized world.
Prior to Russia’s invasion of Ukraine, 80% of its daily foreign exchange transactions and half of its international trade were conducted in dollars. As Senior Treasury Official Todd Conklin explained in the wake of Russia’s invasion: “Russia is a G20, fiat-based economy, and now the ruble is at a record low.”
“Russia has not focused on building the rails needed to support crypto or DeFi [decentralized finance] innovation,”Conklin said in an interview with me back in March 2022. “You can’t flip a switch overnight and run a G20 economy on cryptocurrency.”
While creating a new stablecoin is an attempt at a workaround, the reality is that there is not enough liquidity – about $1 trillion – in the entire cryptocurrency market to prop up a regime that has seen unprecedented economic sanctions, its central bank accounts frozen, and mounting losses in an ever more expensive war effort. While the, let’s call it the “Rubial,” may allow Russia and Iran to engage in small scale bilateral trade to evade sanctions on the margins, it will be a drop in the bucket compared to the overall impact of the sanctions levied against both regimes. Crypto does not fix that.
More Experiments Are Coming
And yet, the Russia-Iran stablecoin project is indeed significant. While we have seen other countries experiment with alternative payment systems – think China’s digital yuan – to avoid dollar dominance and U.S. sanctions, the Russia-Iran stablecoin project is the first time we have seen this type of coordination between two rogue and isolated regimes.
Cryptocurrencies, with their promise of nearly instant cross-border value transfers, could seem like a solution for increasingly isolated regimes. But it won’t work well if they try to benefit from the decentralized security of public blockchains, which are transparent, traceable, and permanent, enabling law enforcement, regulators, and compliance officers to identify attempts at sanctions evasion. If they make a stablecoin without a public blockchain, it will be just as insecure and limited as any pre-existing method. Neither option is effective at scale, in terms of liquidity.
Either way, one thing is certain, as long as we continue to see a barrage of sanctions against countries like Russia and Iran, we will also see those countries exploring tech tools in an effort to evade sanctions.