Moscow is prioritizing blockchain technology advancement as a long-term economic and national security goal to lessen the impact of U.S. sanctions and diversify its foreign currency reserves. Russia’s political leadership is motivated to facilitate trade and investment outside the U.S.-led global financial system.

Russia has a highly active and relatively mature blockchain tech business community, and a central bank that encourages distributed ledger technology experimentation among its financial institutions. Russian financial institutions are piloting multiple blockchain projects, seeking to develop a strategic advantage. As a Russian intelligence officer told an international blockchain standards conference in 2017, “The internet belongs to the Americans — but blockchain will belong to us.”

Russia’s focus on blockchain is a change from its disinterest just a few years prior. Talk of a Russian national cryptocurrency dates back as far as 2015 but was confined to the private sector. In 2015, Russian payment companies Qiwi and Webmoney approached the Central Bank of Russia with a proposal for a state-controlled digital currency, but the bank rejected the proposal. The following year, however, Andrei Lugovi, a member of the Duma, noted that cryptocurrencies could help Russia avoid U.S. and EU sanctions. In the three years since, other Kremlin officials have thrown their support behind Russia building a national cryptocurrency or blockchain-based financial system. While President Vladimir Putin initially argued against a national cryptocurrency, he eventually conceded the need to better understand the technology to “avoid various limitations in global finance trade.”

Blockchain’s transformation of the financial sector will likely take decades, but Russia’s National Security Depository (NSD) is laying the groundwork for it now. The NSD provides securities and cash settlement services for the country. In mid-2018, the NSD ran a pilot project where a large Russian property management firm issued shares in the form of digital tokens to Sberbank, the country’s largest bank. Sberbank is currently under U.S. and EU sanctions, limiting its ability to raise capital internationally. The NSD a few months later issued a separate $12 million corporate bond for Russia’s largest telecom firm MTS through a blockchain platform, in collaboration with Sberbank. A Sberbank executive remarked, “Our joint blockchain project with NSD and MTS is just the beginning, and in the next 5-10 years, blockchain-based products and services, including smart contracts on the basis of blockchain, will become a standard thing.”

The NSD has also formed a consortium with Japanese and Swiss blockchain firms and Slovenia’s central security depository to create a distributed digital depository platform called D3 Ledger. The platform reportedly offers custody and settlement of digital assets for banks, asset managers, and other central security depositories. In essence, it provides a way to store and trade cryptocurrencies, as well as a way to track ownership of traditional assets by “tokenizing” them on a permissioned distributed ledger. The D3 Ledger software also is based on a form of Hyperledger, a free open-source blockchain platform.

Meanwhile, state financial institutions are conducting tests with Hyperledger, Masterchain (another open-source, Ethereum-based blockchain), and other blockchain protocols for broader commercial use. The tests use blockchain applications to deliver existing financial services more efficiently. Most of the banks piloting these projects are under U.S. and EU sanctions. Appendix 1 describes some noteworthy pilots in Russia, as well as China and Iran. Appendix 2 highlights key institutions influencing blockchain development by U.S. adversaries.

The Bank of Russia, meanwhile, expresses strong support for developing blockchain systems for the banking industry. Currently, however, Russia lacks the legislative framework, regulatory authorities, and technical requirements to immediately “combine its financial system with cryptocurrencies,” according to Elina Sidorenko, chair of the Russian Duma cryptocurrency working group.

In addition to its domestic blockchain initiatives, Russia has become a facilitator for other nations looking to experiment with blockchain technology, especially those seeking to lessen the impact of U.S. sanctions. Since sanctions have hampered the Russian banking sector’s ability to transact in new debt and attract foreign direct investment, it needs new means of cooperation with foreign partners. To achieve this, Moscow needs the ability to transfer value across borders with parties who also use digital currencies or blockchain technology platforms.

The deputy head of Russia’s central bank announced in April 2018 that she was considering Masterchain for a new system to transmit the payment messages from the SWIFT global financial messaging system. The new system is meant specifically for use with countries in the Eurasian Economic Union (EAEU). Separately, in December 2018, the Russian Ministry of Finance announced that because sanctions were hindering the business of local companies, it planned to develop a regional digital currency in coordination with other members of the EAEU. The ministry claimed that other unnamed countries supported the plan. However, it said that the digital currency would likely be developed without blockchain technology, possibly due to questions regarding blockchain’s capacity to handle a high volume of transactions in the near term.

Russia is also exploring blockchain technology’s potential via joint efforts with members of the BRICS association. In 2016, the NSD signed a memorandum of understanding (MOU) with China’s Securities and Depository Clearing Corporation to collaborate on financial technology research, including ways to use blockchain technology. In August 2018, the major development banks from each BRICS nation signed a MOU to cooperate in studying distributed ledger technology. Elina Sidorenko said in January 2019 that the BRICS initiative has made more progress than the EAEU plan. Sidorenko emphasized the importance of this initiative to Russia, adding that “if a cryptocurrency unit had been invented that allowed making payments only for energy, the Russian Federation could have made long-term advancements in the economy.” Russian officials are particularly interested in creating a system that ensures the quick billing and receipt of funds for the energy industry.

When Venezuela announced its attempted launch of the petro in February 2018, details emerged indicating that Russian tech entrepreneurs, possibly directed by Putin advisors, were helping the Maduro regime develop its state-backed digital token. When the Maduro regime announced the rollout of the petro, it asserted that two relatively unknown tech companies, whose founders had Russian roots, would be helping with the project’s execution. But after the Russian government publicly denied involvement, the Russian tech companies seem to have been sidelined.

Meanwhile, Russia-based Evrofinance Mosnarbank emerged as a primary foreign financial institution behind the petro as an accepted currency. In March 2019, the Treasury Department sanctioned Evrofinance for using its offices in Russia and Venezuela to engage in a sanctions evasion scheme to enable foreign investors to acquire petro coins.

Iran also seeks to partner with Russia and others to use blockchain technology as an alternative to SWIFT. In May 2018, the head of Iran’s Parliamentary Commission on Economic Affairs met in Moscow with the chair of the Russian Federation Council of Economic Policy to discuss using digital currencies to avoid sanctions and exchange goods. The officials planned future meetings to discuss interbank cooperation. The Iranian official told the press, “If we manage to move this work forward, then we will be the first countries that use digital currencies in the exchange of goods.”

In mid-November 2018, Iran Blockchain Labs personnel participated in a meeting in Armenia with the Russia Association of Crypto-Industry and Blockchain (RACIB) and the Armenian Blockchain Association. All parties signed an agreement to cooperate on distributed ledger technology. A RACIB press release said it would provide advisory services for implementing blockchain in Iran and developing a regulatory framework for Iran’s cryptocurrency industry. The president of RACIB vowed to help Iran address its sanctions challenges.