Babushka, Bullet, and Bitcoin: Crypto and the watershed moment in global politics
Introduction
Tensions between Ukraine and Russia are at an all time high. With over 147,000 Russian troops now entering Ukraine’s borders, the possibility of a Russian invasion is now a reality, and world leaders who had hoped to maintain some semblance of peace between these two sovereign relics of the Soviet Union must now watch as conflict unfolds. President Biden has authorized the mobilization of about 90,000 US forces across the continent, posing NATO for a defense against this Russian barrage.
As the geopolitical landscape now braces itself for conflict, both traditional and non-traditional asset classes have seen a massive shift. What is at the heart of this conflict between Ukraine and Russia? How will it all play out, both politically and economically, especially for crypto? Read on to see the latest developments in the global market as it pertains to the Ukraine-Russia Crisis.
The Ukraine-Russia Crisis
The Russian Civilization
Ukraine has endeavored to maintain sovereignty over its people and land for decades. As demonstrated in two distinct revolutions, one in 2005 and the other in 2014, Ukraine has striven to reject Russian supremacy and to join the EU and NATO.
However, Russia’s fixation with Ukraine results from a millennium of linguistic, political, and cultural history, as Ukraine, Russia, and Belarus were all part of Kievan Rus, a medieval sovereign nation that contained a massive portion of eastern Europe about 1200 years ago.
It is this history that Putin relies upon to declare that Russian and Ukrainian populations are “one people,” and that Ukraine belongs to the “Russian civilization”. Ukraine, keen on protecting its sovereignty, rejects Putin’s claims.¹
The Kremlin’s Motivation to Invade
For the Kremlin, there is more than just cultural heritage to support Putin’s mission of Ukrainian annexation — in fact, Ukraine is likely the principal key piece of the economic puzzle that Russia is missing. What puzzle is that?
The Eurasian Economic Community, also known as the EAEC or EEU. This is a fully-fledged, “Moscow-dominated free-trade bloc,” which launched in 2000 under Putin’s first tenure as both President and Prime Minister of Russia. The EAEC “was widely seen as a first step to reincarnate the USSR,” but its influence was crippled when Kyiv, the capital of Ukraine, refused to join.
With a population of 43 million and strong agricultural and industrial sectors, Ukraine would greatly contribute to the goal of a Moscow-centered, “self-sufficient market,” which, according to the theories of Nobel-prize winning economist Paul Krugman, would require “a population of about 250 million.”
According to the assessment of Kyiv-based analyst Aleksey Kuschch, “Krugman’s models are a basis for the bloc’s architectonics, and for the union [to work], Ukraine and Uzbekistan [with a population of 34 million people] need to be included. That’s why there are permanent geo-political wars around these nations.”²
The Effect on the Global Economy
So how does the current Ukraine-Russia conflict affect the global economy?
In short, it’s highly destabilizing. With multiple world governments going head-first into armed combat, investor risk appetite is waning rapidly, causing certain traditional asset classes to be in much higher demand. Read on to see exactly how the conflict influences these markets.
Sanctions, Sanctions, Sanctions
One sector that is deeply influencing investor strategy globally right now is energy. This past Tuesday, Berlin declared that it would halt the Nord Stream 2 Baltic Sea gas pipeline project, which was “designed to double the flow of Russian gas direct to Germany.”³ Completed last September, the Nord Stream 2 would grant much of Europe access to the abundance of gas in Russia, allowing citizens in many European countries to finally secure their individual energy requirements at a reasonable price.
However, for a long time, the EU and the US opposed the project for its implications on the power dynamic between all countries involved. Specifically, the US and EU believed that the project “would increase Europe’s energy dependence on Russia as well as deny transit fees to Ukraine, host to another Russian gas pipeline, … making it more vulnerable to Russian invasion.”⁴
Germany’s decision to halt the project despite its potential price-reducing benefits demonstrates its commitment to impose tough sanctions on Russia.
Other notable sanctions have been placed by both the US and the UK on a number of Russian commercial, government, and military banks as well as key high-wealth individuals of the Russian leadership hierarchy, resulting in the freezing of over $80 billion in assets.⁵
Energy, Gold, and the Dollar
With the halting of Nord Stream 2 and the beginning of armed combat within Ukraine’s borders, prices are soaring for crude oil and investment safe havens like gold.
As of early Thursday, Brent, the global benchmark for crude oil, “jumped nearly $3, topping more than $100 a barrel for the first time since 2014.”⁶ Gasoline and natural gas futures were similarly climbing. Analysts from J.P. Morgan predicted “oil prices could soar to $120 per barrel” given this full-scale invasion by Russia.⁷
And with the threat of inflation from military spend across the world, gold is spiking, hitting its highest price in eight months at $1900 an ounce. As stated by Cliff Hodge, CIO of Cornerstone Wealth, “the flight to safety is on, as long-end Treasury yields fall, gold rises, and the dollar spikes.”⁸
A Reeling Stock Market
As investors flock to more risk-averse assets, risk-oriented investments like stocks took a massive hit.
MSCI Asia is down more than 3%, which is the lowest it has been since November 2020. In Europe, stock futures have dropped across the board. The Euro Stoxx 50 and German DAX futures were both down more than 3.5%, while FTSE futures were 2% lower. And in the US, the Dow Jones Industrial Average is down 1.38%, the S&P 500 lost 1.84%, and the Nasdaq dropped 2.8%. It is clear that the stock market is reflecting investors’ expectations that “the Federal Reserve is set to start hiking interest rates… in a bid to curb inflation.”⁹
Interestingly, after President Biden imposed additional sanctions Thursday evening, including technology export controls and more frozen assets belonging to Russian banks and Russian elites, the US stock market experienced a recovery as investors piled money into tech and defense stocks.
How about crypto?
The prevailing question for many investors right now is whether or not cryptocurrencies will prove to be a worthwhile investment given these politically trying times. Can crypto withstand the ebbs and flows of geopolitics?
As of recent, crypto prices have undeniably mirrored risk-oriented holdings like stocks. This is disheartening to many crypto enthusiasts who hoped to see Bitcoin act as “digital gold,” with the ability to provide a store of value similar to gold — one that’s uncorrelated with other financial markets. Instead, amid greater adoption of crypto assets, a strong correlation between crypto and equities is evident.
Bitcoin (BTC) extended losses during the Asia trading day and reached as low as $34,322. Altcoin tumbled harder with Ethereum dropped almost $400 to the lowest at $2,300, leading across-the-board intraday loss. Crypto market capitalization slipped to $1.5 trillion, abruptly wiping out almost 9% with 24-hour liquidation volume at time of press going as high as $392 million.¹⁰
This recent co-movement between crypto and equity markets concerns many investors, as it is generally accepted that a balanced and fruitful investment portfolio is a diverse one that is able to withstand market movements and produce consistent returns.
The Power of Decentralization
While the conflict in Ukraine is certainly pushing the crypto market into bear territory, it doesn’t tell the whole story. Because even with diminished prices, crypto is playing a massive role thanks to its variegated utility.
A great example of this is decentralized crowdfunding. Ever since Russian aggression in Ukraine began to heighten in the second half of 2021, cryptocurrency payments spiked proportionately in Bitcoin, litecoin, ether, and a number of other currencies, amassing to a total value of around $550,000 last year. Come Back Alive, a Ukrainian hacktivism group using crypto as a reliable method of military funding, independently raised $200,000 for Ukrainian troops, using the donations to purchase bulletproof vests, drones, and medical supplies. A separate hacktivist group known as the Ukrainian Cyber Alliance received $100,000 worth of crypto donations, which were used for hack-and-leak and web defacement operations targeting Russian government agencies.¹¹
While this is merely a small fraction of the total funds available to the Ukrainian defense, it demonstrates how borderless and unregulated crypto payments like these could have a more potent effect on international wartime funding in the future.
Another utility of crypto is that it is censorship-proof and thus far more immune to government sanctions than traditional asset classes. This is well-demonstrated today by another crowd-funded movement of COVID-19 protests by Canadian truckers. With 20 BTC — almost $800,000 — at their disposal, thousands of Canadians took to the roads of Ontario and the capital of Ottawa to protest international travel restrictions imposed by the Canadian government, blocking international bridges and border crossings in several Canadian provinces.¹²
While he has since revoked it, Canadian Prime Minister Justin Trudeau was able to freeze the bank accounts and credit cards of protestors through the Emergencies Act, which had never been used since its passing in Parliament in 1988. Despite this aggressive economic sanction on the protestors, the truckers were still fully mobilized and able to access funds thanks to bitcoin. While many of the wallets used to hold this crypto were frozen, the bitcoin itself has been on the move, as the authorities cannot veto transactions on blockchain networks. This situation goes to show the limitations of a government’s ability to limit transactions through decentralized systems.
Conclusion
Politics and finance have witnessed some of its most drastic changes in 2022 due to the entrance of Russian forces in Ukraine. If there is anything we’ve learned from modern history, it is that power has always traded hands between those who could finance conflict. In its borderless, permissionless nature, cryptocurrencies is bound to enjoy an expanded role as international politics becomes increasingly convoluted with conflicts, sanctions, and censorships. As both a mean and as an end, cryptocurrencies will not take a decisively protagonist or antagonist role in the writing of history. The development of the technology is inevitable, and we are on a steep learning curve of how it will unfold.
1,2. Russia and Ukraine conflict explained: What you need to know, Mansur Mirovalev, aljazeera.com
3,4. Germany freezes Nord Stream 2 gas project as Ukraine crisis deepens, Sarah Marsh & Madeline Chambers, reuters.com
5. What’s at Stake for Global Economy as Russia Standoff Escalates, Anna Andrianova & Lin Noueiheid, bloomberg.com
6,9. Stocks swing and oil prices soar after Russia attacks Ukraine, Alain Sherter, cbsnews.com
7,8. Crude soars, and stocks and crypto bomb lower, as fears of a Russia-Ukraine war consume global markets, Bernhard Warner, fortune.com
10. coinglass.com
11. Bitcoin donations are pouring into Ukraine as Russia masses troops on the border, MacKenzie Sigalos, cnbc.com
12. Canada Sanctions 34 Crypto Wallets Tied to Trucker ‘Freedom Convoy’, Aoyon Ashraf & Daniel Nelson, coindesk.com
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