Cryptocurrencies appear to be have been buoyed in recent weeks by Russian money leaving the country following the invasion of Ukraine on February 24. With the ruble subject to dramatic inflation and increasingly strict controls on foreign currency exchange, Russians hoping to hedge or convert their savings have instead turned to cryptocurrencies.

Following Russia’s invasion of Ukraine on three different fronts and the imposition of severe retaliatory sanctions from the West, the value of the ruble began to plummet. The Central Bank of Russia (CBR) was at pains to mitigate the devaluation, but its instruments for doing so were limited by sanctions, which included a freeze on Russian foreign currency reserves abroad.

With large-scale currency intervention off the cards, the CBR instead resorted to a shock-and-awe interest rate hike to 20% and forced Russian companies to sell of 80% of their foreign currency earnings. This failed to slow the ruble’s dramatic descent, as western sanctions on Russian banks saw citizens rush to ATMs to withdraw their cash, increasing the amount of hard currency in circulation.

Most recently, the CBR limited withdrawals of foreign currency until September 9, effectively reducing the liquidity of the ruble.

With Russians flocking abroad and trying to convert their savings into more liquid currencies, cryptocurrencies became one way of circumventing the limits on ruble conversions.

Roman Nekrasov, co-founder of blockchain service ENCRY Foundation, said that the number of cryptocurrency transactions in Russia has grown by between three and five times in recent weeks.

FxPro senior market analyst Alex Kuptsikevich said: “Against the backdrop of a severe crisis in the financial system of the Russian Federation and restrictions imposed on the circulation of the dollar and the euro, the demand of the population for cryptocurrency has increased sharply. Now it is primarily used for the transfer of capital abroad or for parking in ‘hard’ currency.”

Although crypto exchanges generally do not allow the transfer of fiat currency abroad via crypto, peer-to-peer (p2p) platforms provide a loophole, whereby users can buy crypto from another user independent of the crypto exchange, then transfer it to a crypto wallet for a conversion fee.

“Analysts believe that regulators are unlikely to be able to effectively prevent such transactions. But the state is helped by crypto-exchanges, which block the Russians on their own initiative. There remain the possibilities of p2p platforms, that is, transfers between individuals. However, there are significant risks of fraud associated with such transactions,” said Kuptsikevich.

One cryptocurrency enjoying particular popularity at the moment is Tether, a cryptocurrency tied to the US dollar. According to data from Bloomberg, ruble-Tether trading volume on March 5 was worth RUB2.6bn, compared to just RUB300mn in early February.

But with most crypto-exchanges vulnerable to American regulators, Russians may feel uneasy that they will start limiting their access to their crypto assets in line with American sanctions. Reuters reports that Russians have attempted to liquidate billions of dollars in crypto assets in recent days. High-value individuals appear to have been converting their crypto holdings into real estate, hard currency, and conventional investments.

Much like America, Switzerland has also urged crypto-exchanges to limit the access of Russians to their digital currencies. Switzerland’s economic affairs secretariat (SECO) said that crypto assets were subject to the same sanctions as "normal" Russian assets. Therefore sanctioned individuals must also have their crypto assets frozen, the secretariat said in an emailed statement.

But governments have difficulty limiting the exchange of fiat currencies using crypto. Even in China, where cryptocurrencies are banned, this backdoor method appears still to be in operation.

Russia was also mulling limiting cryptocurrency before the war began, and the CBR even advocated a total ban of the mining and trade of cryptocurrencies in January. Yet some commentators are speculating that the liquidity of bitcoin and its relative dissociation with western regulators could help Russia to wean itself off the dollar and gear up to overcome future sanctions.

Russia is the third-biggest miner of bitcoin in the world, and Russia’s Ministry of Finance has estimated that Russians already hold around 12mn crypto wallets, with a total capacity equalling around $26.6bn.