Russia is a country filled with natural resources for energy use, most notably the country’s massive oil reserves under the vast Siberian plains.

With such plentiful oil reserves, the news of a new oil-backed cryptocurrency in Russia seems like a logical solution to reduce reliance on the US dollar and to swerve US sanctions. Each token will reportedly represent the value of one barrel of oil.

Russia places its first big blockchain bet on an oil-backed cryptocurrency

This year, Russian President Vladimir Putin chaired a meeting of a regulatory group for cryptocurrencies in the Bocharov Ruchei residence in the Black Sea resort of Sochi. He told those in attendance that Russia was looking to bypass trade and other financial restrictions with the creation of an oil-backed cryptocurrency.

Other oil-producing countries are also aiming to increase their oil and gas exports without relying on US dollars, so the idea has gained some support.

Igor Yusufov, head of the Energia corporation and former energy minister, believes that Russia creating a cryptocurrency backed by oil is a logical move. However, the initiative is currently being held back by the absence of cryptocurrency legislation.

Explaining the benefits of an oil-backed cryptocurrency, Yusufov said that switching the energy market to such a cryptocurrency would allow Russia to avoid the costs of using unsecured currencies that are subject to exchange rate fluctuations, various sanctions or trade restrictions, and commissions.

Yusufov noted that the introduction of an oil-backed cryptocurrency in the energy market will push the development of the entire cryptosphere.

According to Yusufov, the state of the oil market and the instability of dollar settlements are conducive to the transition to a digital economy. The use of cryptocurrency will give oil-producing countries flexibility in circumventing sanctions, the number of which has increased significantly in recent times.

The biggest beneficiaries of an oil-backed cryptocurrency will be the OPEC+ countries – including Russia – which will be able to increase the volume of commodity exports. At the same time, Yusufov called the crypto-ruble and other digital currencies pegged to national currencies as economically useless.

Learning from the past

Oil-producing countries such as Russia, Iran, and Venezuela are currently facing economic sanctions imposed during Donald Trump’s presidency. Venezuela has tried to circumvent the sanctions and announced the launch of its own oil-backed cryptocurrency called the Petro in 2019. President Trump then signed a decree banning any financial transactions in US dollars involving the Petro.

On the other hand, Russia looks more cautious when it comes to launching its crypto-oil project. Yusufov said that Russia will launch its project with the backing and involvement of the Commonwealth of Independent States (CIS) countries. This step will help minimise US intervention in their plan. At the same time, this would allow the government to first establish a framework between producers and consumers of energy in the CIS before rolling it out worldwide.

“In this regard, one should not forget about the current intergovernmental agreement between the Russian Federation and Turkmenistan on cooperation in the gas sector until 2028 and the relevant contract for the purchase of Turkmen gas by Gazprom,” said Yusufov.

“Therefore, if created, the project can become the first global cryptocurrency center with real security.”

The former head of the Federal Securities Commission of the Russian Federation, Igor Kostikov, believes that any exchange resource can be used to provide the cryptocurrency. Yusufov also said that to create a cryptocurrency, the project needs infrastructure, investment, and trust.

The creation of a cryptocurrency supported by oil will have a serious impact on the economy of Russia and other large oil-producing countries. They will be able to export oil and gas to other countries without relying on the US dollar. Cryptocurrency will also help them circumvent the strict sanctions imposed by the US.

Pros and cons of creating an oil-backed cryptocurrency in Russia

In the current Russian economic climate, the idea of ​​creating an independent, fully secured, and decentralised means of payment is extremely attractive. But, as is always the case, each idea has positive and negative sides.

Pros:

1. Mutual settlements in convertible world currencies (dollar or euro) for petroleum products have long been outdated. The buyer and seller lose money on bank commissions when converting their national currency into dollars and back and also on fluctuations in rates. An oil-backed cryptocurrency will immediately eliminate the need for commission payments to a third party and will have a stable exchange rate to the ruble.
2. Any Russian oil-backed cryptocurrency will use the lessons learned from Venezuela and will be truly decentralised. Only then will there be a 100% guarantee that all assets emitted in cryptocurrency will never be held or seized by third parties.
3. The practice of creating a digital currency based on the tokenisation of raw materials will serve as a positive example for other countries. The emergence of such tokens will also be a serious incentive for the further development of the cryptocurrency market as a whole.

Cons:

1. The absence of a legislative base poses some problems when looking to create a new cryptocurrency. Cryptocurrencies, blockchain technology, and any processes based on their use are still a grey area in Russia. However, after the recent very clear and persevering recommendation of President Vladimir Putin that regulation should be established in this area as soon as possible, this should soon simplify the lives of all those involved in the blockchain industry.
2. The second obstacle to the creation of an oil-backed cryptocurrency is the fact that changes in the ruble exchange rate in the process of selling oil does not always become a negative factor, so the low exchange rate of the national currency has a very positive effect on the replenishment of the Russian budget.
3. The third obstacle is determining the value of a unit of the cryptocurrency. It must be a stablecoin so that any calculations are reliable and predictable. Yusufov has suggested tying a token to a ton of fuel or to CO2 emissions. However, countries with large oil reserves – such as Russia – would benefit much more from this than other countries. It would be easier, for example, to link the value of a digital asset to the average volume of daily oil exports, as this value is more or less stable.

Conclusion

It appears it’s only a matter of time until Russia launches its oil-backed cryptocurrency. If during its creation all necessary procedures are followed and it is not centralised and managed by state structures, then this new token can become guaranteed insurance for the entire system of Russian export settlements, even if a new line of sanctions against Russia are introduced.

Everything rests on a reliable infrastructure, the creation of which requires not only investment, but also more confidence and trust. Perhaps Russia’s oil-backed cryptocurrency will finally allow for the creation of a reliable structure for the development of the Russian cryptocurrency market as a whole.

Read more about Russia’s plans for an oil-based cryptocurrency here: