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Decentralized Warfare: Russia’s Use of Cryptocurrencies to Fund Private Military Companies

Updated: Jan 18




CPT Nathan Emery and MAJ Mariya Golotyuk


Introduction

 

Russia increasingly uses asymmetric tactics such as leveraging bilateral trade agreements, conducting influence operations, military sales contracts, and deploying private military companies (PMCs) to fulfill Russia’s strategic goals worldwide.  Moscow has turned to these PMCs– most notably PMC Wagner – as a solution that offers reduced political risk, plausible deniability, and legal ambiguity in their operations.  This allows Russia to project its power surreptitiously in support of operations that potentially violate international laws and human rights.  This strategy is playing out today in Crimea, Ukraine, and the African countries of Mali, Burkina Faso, Mozambique, Libya, Sudan, the Central African Republic, and Madagascar.

 

PMC Wagner and other PMCs such as Redut, Gasprom, Patriot, and Convoy create dependencies on Russia for commercial and military assets. In return, Russia gains access to large swaths of strategic natural resources, such as gold, diamonds, and cobalt mines, and access to local economies and ports of entry. Further, these cutouts aid Russia in creating shell companies and transshipment points for the military and dual-use items it desperately needs in the war with Ukraine. These items have been difficult for Russia to procure under the heavy sanctions imposed since the initial invasion. Further, these shell companies allow Russia to obfuscate logistic channels.

 

Russia's deliberate use of PMCs to shape its influence in Europe and Africa is becoming more apparent in this age of complicated geopolitics. In this article, we examine how Russia its funding its operations through PMCs and scrutinize tactics the U.S. and its allies can take to address this concern.  Specifically, we will look at Russia's skillful use of cryptocurrency to finance PMCs and how that has transformed the terrain of warfare and its interplay with global banking and trade. 

 

Russian PMCs: A Historical Primer

 

The use of PMCs in Russia is not a new phenomenon. Moscow has a long history of utilizing semi-state military forces, including PMCs, even though they are technically illegal in Russia. However, under Vladimir Putin, Russia has expanded and evolved its use of PMCs.

 

Russia's deliberate use of PMCs to shape its influence in Europe and Africa is becoming more apparent in this age of complicated geopolitics. In this article, we examine how Russia is funding its operations through PMCs and scrutinize tactics the U.S. and its allies can take to address this concern. Specifically, we will look at Russia's skillful use of cryptocurrency to finance PMCs and how that has transformed the terrain of warfare and its interplay with global banking and trade. [i]

 

The most prominent and widely discussed Russian PMC is the Wagner Group, which has been active in various conflict zones worldwide. The Wagner Group first gained international attention for its activities in Ukraine, particularly during the conflict in the Donbas region in 2014. The group's involvement in the operation marked a significant evolution in the role of Russian PMCs as they began to operate more directly in support of Russian foreign policy objectives.[ii]

 

Since 2014, the role and prominence of Russian PMCs like the Wagner Group have expanded significantly, reflecting a strategic shift in Russian foreign policy and military engagement. The involvement of Russian PMCs in Syria, starting around 2015, marked a pivotal moment. In Syria, these groups played a crucial role in supporting President Bashar al-Assad's regime, often coordinating with Russian military forces but maintaining a separate, less visible presence. Their operations in Syria have been noted for their effectiveness in ground combat and for providing a mechanism through which Russia can exert influence without direct state engagement, thus maintaining deniability.[iii]

 

The activities of Russian PMCs in Africa have also gained attention. Countries like Libya, Sudan, the Central African Republic, and Mozambique have seen the involvement of these groups in various capacities, from military training to security services for governments and private entities. In Africa, PMCs have become instruments for Russia to expand its influence, secure mining and energy contracts, and assert its presence in a geopolitically strategic region.[iv]

 

Finally, after years of denial, in June 2023, Russian President Vladimir Putin admitted that PMC Wagner was fully funded by the Russian government and had been paid more than 86 billion rubles between May 2022 and May 2023.[v]  

 

Post-Ukraine War Sanctions and the Shifting Landscape

 

When we analyze the actions taken by the United States (OFAC), the European Union, and NATO in response to the war in Ukraine, we observe a significant push to levy swift and thorough economic sanctions against Russia and its enablers worldwide.

 

Since February 2022, the United States and its allies have implemented a comprehensive sanctions regime against Russia and its PMCs. These sanctions, coordinated by OFAC, have targeted over 2,500 Russia-related entities. These designations have encompassed senior Russian government officials, high net-worth individuals, leaders in revenue-generating sectors, particularly those supporting the military-industrial complex, and Russian PMCs. Over 80% of Russia’s banking sector by assets, including the top 10 Russian-owned banks, are under U.S. sanctions. Specifically addressing Russia’s military-industrial complex, “OFAC has added over 600 targets to the SDN List, including major Russian military manufacturing firms.[vi] This move aims to disrupt these entities' supply chains and operations, thereby impacting their ability to support military activities, including those of PMCs​​.

 

Additionally, the U.S. Treasury and State Department have designated over 200 targets associated with Russian sanctions evasion efforts across Europe, Africa, and Asia. These measures are part of a broader strategy to target Russia’s malign activities globally, leveraging various sanctions authorities, including the Global Magnitsky Act.[vii]

 

Cryptocurrency: Use as a PMC Funding Mechanism

 

Since 2014, there has been a notable increase in the use of cryptocurrencies by Russia to fund PMCs, particularly in the context of the conflict in Ukraine. This funding method has gained prominence due to its ability to bypass traditional financial systems and international sanctions.

 

A report by Chainalysis highlights the use of cryptocurrencies in funding pro-Russian groups engaged in the war in Ukraine. By mid-2022, over $2.2 million in cryptocurrencies were donated to 54 organizations. These donations were used to equip paramilitary groups with military items like drones, weapons, bulletproof vests, and communication devices. The appeal of cryptocurrencies in this context lies in their ability to facilitate anonymous transactions and evade sanctions. Many of these donations supported militias in the Donbas region, which are subject to sanctions by OFAC.[viii]

 

Furthermore, the Rusich group, which has been successfully associated with PMC Wagner, raised thousands of dollars in cryptocurrency donations by soliciting through various social media channels and accounts.[ix]  This demonstrates the widespread and coordinated use of digital platforms to finance these organizations​​.

 

This trend underscores a broader shift in how non-state actors and sanctioned entities leverage digital currencies to fund their operations, posing significant challenges for international regulatory and law enforcement agencies. The use of cryptocurrencies in such contexts raises critical concerns about the oversight and regulation of digital financial transactions, particularly in international security and conflict financing.

 

Relevant Terms

Definitions

Cryptocurrency

A digital or virtual currency that uses cryptography for security and operates independently of a central bank. Cryptocurrencies leverage blockchain technology to gain decentralization, transparency, and immutability.

Blockchain

A distributed ledger technology that records transactions across many computers in a way that the registered transactions cannot be altered retroactively. It is the underlying technology of most cryptocurrencies.

Crypto Exchange

A platform where customers can trade cryptocurrencies for other assets, such as digital and fiat currencies. Crypto exchanges can be centralized or decentralized and offer various tools for trading.

Tumblers and Mixers

Tools used in cryptocurrency transactions to obfuscate the trail of the transaction. They mix the funds of multiple users, making it difficult to trace the original source.

Privacy Coins

Cryptocurrencies that emphasize enhanced privacy and anonymity features. They use advanced cryptographic techniques to conceal the identities of the sender and receiver in a transaction.

Decentralized Finance (DeFi)

An emerging financial technology based on secure distributed ledgers similar to those used by cryptocurrencies. It removes the need for intermediaries in financial transactions, leading to a more open, accessible, and equitable financial system.

Private Finance (PriFi)

Refers to the fusion of privacy and decentralized finance, emphasizing the enhancement of user privacy in financial transactions within the DeFi ecosystem.

 

 Implications and Consequences

 

This development in Russia's sanction evasion strategy through cryptocurrencies poses a challenge to the current international financial system and the effectiveness of sanctions as a geopolitical tool. It underlines the need for enhanced regulatory mechanisms and international cooperation to monitor and control the use of cryptocurrencies in international trade, especially when preventing their use for illicit activities such as funding PMCs and evading sanctions. The inability to regulate these digital currencies effectively could lead to significant shifts in global financial practices and the balance of power, especially in international conflicts and sanctions enforcement.  Specifically, left unchecked, it allows Russia to directly fund illicit activities worldwide. Additionally, it could undermine the integrity of the global financial system, damage the economy of weak and fragile states where PMCs typically operate, and distort capital flows in, out, and through a country.

 

Strategies for the Future: A Civil Affairs Approach

 

Understanding how to counter these organizations requires a foundational examination of how they differentiate themselves from regular military forces, terrorist groups, and transnational criminal organizations (TCOs). Research by National Defense University professor Dr. Elena Pokalova suggests that these “quasi-state” entities are driven by monetary gain as opposed to acts of violence for a political purpose, public attention to their movement, or ideological motivation.[x]  This is why we should differentiate them from terrorist organizations as part of our campaign planning and instead treat them more like a TCO. In January 2023, the OFAC announced sanctioning eight individuals,16 entities, and four aircraft affiliated with PMC Wagner.[xi]  This designation opened the aperture for tools that the U.S. and its partners could legally impose against such a force, allowing for improved information sharing and the use of joint criminal investigations.  However, despite these actions, sanctions alone will not suffice when considering Russia’s use of cryptocurrencies to fund PMCs. 

 

To further enhance our response, capacity building along with collaboration and information sharing between interagency and international governmental partners is fundamental to successfully shutting down these networks.  Specific to U.S. Army Civil Affairs (CA), we should focus on the following four lines of effort:

 

1. Public Diplomacy and Strategic Communication: CA teams are skilled in engaging with local populations and authorities in areas of operations. They are well-positioned to educate and inform local and regional partners about Russian cryptocurrency transactions' risks and red-flag indicators. This could help identify and report suspicious activities that might be linked to sanction evasion or the funding of PMCs.

 

2. Building Host Nation Capacity: CA’s reach back capability to various agencies facilitates training and equipping for partner nations’ law enforcement and financial regulatory bodies. The training should focus on identifying, analyzing, and tracing cryptocurrency transactions, identifying indications of illicit use, and identifying the technological and legal tools they may have in countering the threat. 

 

3. Information Gathering: Given their close interaction with local populations, CA teams can gather information relevant to the human domain on the ground that may be relevant to tracking and understanding the networks and methods used by Russia and its PMCs in utilizing cryptocurrencies. This information could be vital for broader efforts to enforce sanctions and counter-sanction evasion strategies.

 

4.  Collaboration: CA can facilitate interagency collaboration by working closely with entities like the Department of the Treasury, Homeland Security Investigations, the Federal Bureau of Investigations, the Export Enforcement Coordination Center, and other relevant agencies. Their on-the-ground presence and understanding of local dynamics could provide valuable insights to these agencies in their efforts to track and counter the use of cryptocurrencies in sanction evasion and PMC funding.

 

Conclusion

 

Russia's strategic use of cryptocurrency to finance its PMC operations, such as those undertaken by the Wagner Group, represents a fundamental paradigm shift in modern warfare. This move by Russia cleverly combines the anonymity of digital currencies with the tactical advantages of private military operations, presenting a new challenge for global security and financial governance.  By funding PMCs through cryptocurrencies, Russia effectively sidesteps traditional financial systems know your customers rules and thus also international sanctions, illustrating a cunning use of emerging technologies to further geopolitical goals.

 

This development is more than just a tactical shift; it's a wake-up call to how important it is for the U.S. military to understand trade, finance, and banking when designing campaign plans and defining the scope of irregular warfare. Further, there is a need for enhanced interagency and international cooperation, along with private-sector collaboration, to curb Russia's illicit use of cryptocurrencies.

 

About the Authors


CPT Nathan Emery is a 38G Military Government Specialist with 6E (Commerce and Trade) skill identifier. He serves as a Senior Policy Advisor within the federal government and is recognized as an expert on export enforcement, trade-based money laundering, and countering sanctions evasion.  He received his Master of Arts from the National Defense University’s College of International Security Affairs.  He is presently assigned to the 450th Civil Affairs Battalion (Airborne) in White Plains, Maryland.


MAJ Mariya Golotyuk is a 38G Military Government Specialist 6C (Banking and Finance) skill identifier.  She serves as a Financial Forensic Advisor within the federal government, supporting law enforcement and the intelligence community.  She is a Certified Public Accountant and specializes in virtual currency investigations. She is presently assigned to the 353 Civil Affairs Command in New York, New York.



Standard Disclaimer. The opinions, conclusions and recommendations expressed or implied above are those of the authors and do not reflect the views of any organization or any entity of the U.S. government.

 

Endnotes:


[i] Catrina Doxsee, “Putin’s Proxies: Examining Russia’s Use of Private Military Companies,” Center for Strategic and International Studies, September 15, 2022

 

[ii] Robinson, Colin. “The Wagner Group: Russia’s Private Military Contractors.” Foreign Policy Research Institute, 2020

 

[iii] Aron, Leon. “Russia’s Private Military Companies: Moscow’s Hidden Forces.” Foreign Affairs, vol. 98, no. 3, 2019, pp. 97-106

 

[iv] Morozova, Anastasia. “Russian Private Military Companies in Africa: A New Tool for Moscow’s Foreign Policy.” The Journal of Slavic Military Studies, vol. 34, no. 2, 2021, pp. 161-178

 

[v] Camut, Nicholas, "Putin Admits Kremlin Gave Wagner Nearly $1 Billion in the Past Year," POLITICO, June 27, 2023, www.politico.eu/article/vladimir-putin-yevgeny-prigozhin-russia-kremlin-gave-wagner-group-nearly-1-billion-in-the-past-year/

 

[vi] U.S. Department of the Treasury. “Targeting Key Sectors, Evasion Efforts, and Military Supplies, Treasury Imposes Sweeping Sanctions Against Russia to Counter Its Aggression Against Ukraine.” Press Release, May 8, 2023

 

[vii] ibid

 

[viii] Chainalysis Team, "Pro-Russian Crypto Donations: How Cryptocurrency Is Being Used to Fund the War in Ukraine," Chainalysis Blog, April 14, 2022, www.chainalysis.com/blog/pro-russian-crypto-donations-war-in-ukraine

 

[ix] ibid

 

[x] Pokalova, Elena. “Quasi-State Entities: A New Security Challenge.” National Defense University, 2023


[xi] OFAC, "Treasury Sanctions Russian Proxy Wagner Group as a Transnational Criminal Organization," U.S. Department of the Treasury, January 26, 2023, https://home.treasury.gov/news/press-releases/jy1220.

 

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