The Russia-Ukraine war is dragging down the economy! Russia promotes the legalization of Bitcoin, and Putin attempts to bypass sanctions for survival.

As President Putin's war in Ukraine enters its fourth winter, dozens of regions in central and southern Russia are feeling the proximity of war. Beyond the front lines, areas such as Moscow are also beginning to feel the economic impact, with the Central Bank of Russia raising interest rates to a record 21%. Against this backdrop, Russia is pushing for the legalization of Bitcoin, allowing businesses to use crypto assets to replace traditional banking operations in order to bypass Western sanctions for cross-border transactions.

Economic Multiple Cracks Triggered by the Russia-Ukraine War

(Source: Bloomberg)

Beyond the front lines, other regions in Russia, including Moscow, are also beginning to feel the economic impact of the Russia-Ukraine war. From households cutting back on food spending to struggling steel, mining, and energy companies, the country's economic engine is showing multiple cracks, and the resilience previously fueled by massive fiscal stimulus and record energy revenues is being tested. While the level of suffering cannot be compared to that of Ukraine, it highlights the increasingly heavy toll of Putin's decision to launch a full-scale invasion in February 2022.

“Prices are rising faster than wages now,” said Elena, a manager of an event company from the Moscow region. Bloomberg did not disclose her last name to protect her identity. She has changed her shopping habits because imported goods have become too expensive, buying fewer clothes and more domestic brands. This stands in stark contrast to the early days of the war when GDP was driven by military investment, leading to nearly a 20% growth in wages in 2024 and stimulating consumer demand.

In October last year, the Central Bank of Russia raised interest rates to a record 21% to cool inflation and slow down the overheating economy. The inflation rate dropped to around 6.8% in early November, but the main reason was weakened consumer demand. According to data from the open data platform SberIndex by Sberbank, Russians are cutting back on food spending. “The average grocery bill for weekly purchases has more than doubled in recent years,” said Denis, a 40-year-old manager from Tambov in central Russia. Forced to reconsider their consumption, his family is now buying less and less fruit and vegetables.

According to an analysis by the Business Journal, sales of milk, pork, buckwheat, and rice dropped by 8-10% in September and October. Russia's largest grocery chain, X5 Group, saw an increase in revenue in the third quarter, mainly influenced by inflation, but net profit fell nearly 20%, reflecting weak demand and rising costs.

Key Indicators of Russia's Economic Deterioration

Central Bank Interest Rate: Increased to 21% (a historical high)

Food Sales: Milk, Pork, Buckwheat, Rice down 8-10%

Retail Collapse: Fashion retailers account for 45% of store closures in the third quarter.

Car Sales: Decreased by nearly 25% in the first nine months.

Steel Industry: Total consumption this year decreased by 14%.

Oil Revenue: From January to October, it decreased by more than 20% compared to the same period last year.

Industry-wide recession and energy revenue collapse

The Russian retail sector is undergoing significant changes. Local media reports that fashion retailers account for 45% of all store closures in the third quarter, with nearly one in every two stores closing. According to the state-owned “Russian Newspaper,” the electronics market is experiencing the most severe demand decline in 30 years, as buyers postpone major purchases. In the first nine months of this year, car sales have decreased by nearly a quarter, affected by high borrowing costs and increased state tax recoveries.

The decline in the industrial sector is becoming more severe. According to leading steel manufacturer Severstal PJSC, the steel industry is experiencing a crisis, with total consumption down 14% this year. Demand for construction steel has decreased by 10%, while machinery demand has plummeted by 32%. The coal mining industry is facing its worst situation in a decade, with major companies cutting production. The banking sector is not performing much better: the Russian bank reported in September that the ratio of corporate debt in the second quarter rose to 10.4%, reaching 9.1 trillion rubles (112 billion USD).

Economic growth in the third quarter slowed to 0.6%, below expectations, while the budget deficit reached 1.9% of GDP in October, with the Ministry of Finance projecting it will grow to 2.6% of GDP by the end of the year. According to Bloomberg's calculations based on data from the Ministry of Finance, significant oil and gas revenues fell by more than one-fifth from January to October compared to the same period last year, dropping to 7.5 trillion rubles. Declining crude oil prices, sanctions, and a strong currency have reduced the rubles earned by producers for each barrel of oil sold.

Oleg Buklemishev, director of the Economic Policy Research Center at Moscow State University, stated: “The immunity of the Russian economy has been significantly weakened. A systemic crisis may not occur in 2026, but the economic situation will continue to deteriorate.”

Legalization of Bitcoin: A Lifeline to Bypass Sanctions

In this economic predicament, Russia is pushing for the legalization of Bitcoin, allowing businesses to use Crypto Assets instead of traditional banking. If approved, one of the world's largest economies will be able to achieve cross-border transactions using BTC, promoting global adoption. This shift will make Bitcoin a true geopolitical infrastructure, reshaping the flow of funds and the management of sanctions among countries.

Russia's motivation to promote the legalization of Bitcoin is very clear: to bypass Western financial sanctions. Since the outbreak of the Russia-Ukraine war in 2022, the United States and the European Union have imposed unprecedented financial sanctions on Russia, including: excluding major banks from the SWIFT system, freezing the Central Bank of Russia's foreign exchange reserves, and prohibiting transactions with Russian energy and military enterprises. These sanctions severely restrict Russia's international trade capabilities, and many Russian companies are unable to receive payments from overseas customers or pay foreign suppliers.

Bitcoin, as a decentralized digital asset, is not controlled by any country or financial institution, and theoretically can bypass the SWIFT system and traditional banks. If Russian companies can use Bitcoin for cross-border payments, it will significantly alleviate the pressure of sanctions. For example, Russian energy companies can request Chinese or Indian buyers to pay in Bitcoin, avoiding the dollar settlement system; Russian importers can purchase components from Turkish or Middle Eastern suppliers using Bitcoin.

This strategy is not without precedent. Iran has explored using cryptocurrencies for international trade when facing U.S. sanctions. Venezuela even launched its own national cryptocurrency Petro (although it failed). North Korea has raised funds by stealing cryptocurrencies through hacking. As the world's 11th largest economy, if Russia fully adopts Bitcoin for international trade, its impact will far exceed that of these smaller economies.

However, the legalization of Bitcoin also faces challenges. The technical infrastructure needs to be established (exchanges, wallets, payment gateways), the legal framework needs to be improved (tax treatment, accounting standards, anti-money laundering regulations), and international cooperation needs to be coordinated (whether trading partner countries accept Bitcoin payments). More importantly, the United States may regard the use of Bitcoin to circumvent sanctions as illegal, imposing secondary sanctions on entities participating in the transactions.

Potential Impact of Peace Negotiations on Bitcoin

As President Trump pushes to revise the peace plan to end the Russia-Ukraine war, diplomatic activities between the United States, Ukraine, and Russia are intensifying. Trump has sent envoy Steve Witkoff to Moscow, and Ukraine has expressed cautious support for the framework's “nature”, prompting global markets to begin paying close attention.

Historically, alleviating geopolitical tensions can boost investor confidence, reduce volatility, and encourage capital inflow into risk assets. Bitcoin and Ethereum often behave like high-beta macro assets, making any shift towards global stability crucial. Ukraine has expressed support for the core of the revised U.S. peace framework, with President Zelensky stating that Ukraine is ready to “advance” the framework.

European leaders are becoming more assertive in shaping a peace framework. French President Macron and UK Prime Minister Keir Starmer are pushing for stronger long-term guarantees for Ukraine. Macron emphasized that the Ukrainian military should not be restricted, and the decision to freeze Russian assets will soon be finalized with the European Commission. These assets are estimated to be around $300 billion and can be used for Ukraine's reconstruction.

A lasting peace framework will generate multiple positive ripple effects in the global financial markets: the geopolitical risk premium for stocks and digital assets will decrease, investor confidence in emerging markets will improve, global liquidity will increase as uncertainty diminishes, and demand for high beta assets such as Bitcoin, Ethereum, and altcoins will be stronger.

However, there is no guarantee for the peace plan. Russia has not yet accepted the revised framework, and Ukraine still has sensitive concerns that need to be addressed. The visit by Trump's envoy may bring new negotiation hurdles. If these factors change negatively, the global market may experience a temporary sell-off.

Frequently Asked Questions

How does the Russia-Ukraine war affect the Russian economy?

The Russian economy is showing multiple cracks, including an inflation rate of 6.8%, a Central Bank interest rate of 21%, food sales dropping by 8-10%, a large number of retail stores closing, a 20% decline in oil revenues, and only a 0.6% economic growth in the third quarter.

Why is Russia promoting the legalization of Bitcoin?

The main purpose is to circumvent Western financial sanctions. After Russian companies were excluded from the SWIFT system, there is a need for alternative cross-border payment methods. The decentralized nature of Bitcoin makes it an ideal choice.

What is the impact of Bitcoin legalization on the global crypto market?

If the world's 11th largest economy officially adopts Bitcoin for international trade, it will promote global adoption and make Bitcoin a true geopolitical infrastructure, reshaping the way capital flows.

What impact do the Russia-Ukraine peace talks have on Bitcoin prices?

Geopolitical tensions easing usually boosts investor confidence, reduces volatility, and encourages capital inflow into risk assets such as Bitcoin. If a peace framework takes shape, it will lower the geopolitical risk premium in global markets.

Will the Russian economy collapse?

Experts believe that a systemic crisis may not occur in 2026, but the economic situation will continue to deteriorate. If Russian authorities want the economy to continue to operate normally, they must gradually end military operations.