Sanctioning Russia On The Blockchain: Following The Money To A Network Of OTC Providers

Sanctions can only work if those who are supposed to enforce them understand exactly what to do so that they cannot be circumvented easily. Russia’s extensive network of Over-The-Counter (OTC) providers requires an extensive review by sanction committees, as they might be adopted to circumvent sanctions.

As described in the previous release, due to the limited liquidity of cryptocurrencies and Decentralized Finance space in general, it remains close to impossible for Russia to circumvent SWIFT-based systems by using crypto. However, Russians might still hold up to $200 Billion USD in crypto assets, besides running the third-largest crypto mining industry in the world. These funds can potentially be cashed out with Russian OTC providers.

The fifth EU sanction package on Russia limits the crypto asset holdings of Russian nationals, individuals, and legal entities established in Russia to €10,000 (with the same account, wallet or custody provider). The use of Russian OTC providers, which represents a network of physical providers offering cash payouts from crypto, could be adopted to circumvent these sanctions.

In oversimplified terms, OTC refers to a process in which individuals theoretically could agree on a price and meet to complete a transaction. An example of such a process could be a personal meeting in which one side brings bags with cash or any other pre-agreed means of value, and the other side could conduct a transaction on the blockchain on the spot. Transactions primarily with larger sums of money could be risky, to say the least.

Contrarily to peer-to-peer exchanges (P2P) which involve independent parties, OTC exchanges act comparable to physical pawn shops. At dedicated physical locations with announced opening hours, individuals can visit and exchange their cryptocurrencies in Russia for cash or bank transfers.

Depending on the business models of virtual assets service providers (VASPs), both OTC and P2P providers have existed in various jurisdictions since the beginning of financial interactions between individuals.

An example of such a platform in the EU is LocalBitcoin, registered with the Finnish Financial Supervisory Authority. Unlike Russian OTC providers which are subject to the 6th Anti Money Laundering Directive of the EU and connected to its so-called Counter-Terrorism Financing (CTF) legislation, LocalBitcoin is a unique case.

Existence of such a platform in the EU is only possible in Finland, as the rest of the EU has followed the recommendation of the Financial Action Task Force (FATF) to define and include Digital Assets in the national legislation and created an oversight program as a regulator.

It can be argued that the current regulatory frameworks remain far from perfect, but there is increased interest in incorporating DeFi into traditional financial compliance programs.

Such requirements to register a P2P or OTC exchange are way different within the Russian Federation. On the one hand, Russia approved use of cryptocurrency as an investment tool or a payment method as of Q1 2021 but on the other its national bank proposed a long list of bans that should outlaw the circulation of cryptocurrencies within the country.

Due to such unclear legal circumstances, licensing and supervisory programs are close to non-existent. In the absence of platforms that have chosen ‘compliance excellence’ as their differentiating business strategy, for example, Coinbase or some Scandinavian VASPs, many Russian providers have to operate in the gray space to say the least.

What is surprising is the fact that even though Russians store up to one fifth of the national bank’s reserves in digital assets, the public side has decided to not provide much clarity for the VASPs or any other players in Decentralized Finance (DeFi).

By not providing clarity for players in the Digital Assets space, the governments in Moscow and Minsk continue to lose on potential tax revenues and regulatory oversight of over 623 crypto platforms identified so far, associated with Russia and Belarus. The logic to continue to lose out on easily taxable capital gain from crypto investments remains questionable.

“Is it not paradoxical that despite the Russian Prime Minister stating that Russians hold $200 Billion USD in crypto, Russia has not yet formulated a comprehensive legislation to legalize crypto or set a taxation process for it?” — Dominika Kuberska, PhD, Faculty of Economic Sciences, University of Warmia and Mazury in Olsztyn.

With the absence of regulated players in Russia, there is a well-developed gray market of OTC exchanges that facilitate the trade of Digital Assets in exchange for rubles using both cash and bank transfers.

Sources, who desire to remain anonymous, underline that bank transfers to individuals or entities from OTC brokers are labeled as payments for IT or consultancy services. The Russian government will officially tax profits from such transfers with personal or corporate income tax (PIT, CIT).

Moreover, for customers that desire to purchase or exchange a significant amount of digital assets, there are at least ten physical brokers in Moscow or even price comparison websites like BestChange.ru that display the current rates of OTC providers in various regions.

Due to the nature of the business model, customers can often exchange cash for digital assets at the physical offices of these exchanges which can be visited by both individuals and the members of the Russian financial supervisory authorities, in case they would acknowledge their existence.

The majority of OTC providers operate without identifying their customers. Multiple sources report on direct cooperation between dedicated Ponzi schemes or sanctioned brokers with OTC providers. Even if hard evidence such as an agreement or email exchange between confirmed parties is continuously being collected, blockchain based analytics continues to provide indications for illicit transactions.

Russia has been connected with an elevated amount of illicit activities for a country that has a population of 144 million, which is 1.5 times bigger than that of Germany.

“Russia has surprisingly large amounts of confirmed illicit “Unicorns” like BTC-e/WEX exchange, Hydra dark web marketplace, dozens of pyramid schemes like PRIZM, the largest ransomware attacks and other cybercrimes which experts consider to be possibly parts of state-sponsored-activities” – Oleksii Fisun, Co-founder of Global Ledger Protocol.

With so many confirmed illicit activities coming out of one jurisdiction, it remains worth investigating how profits from illegal activities could be potentially cashed out. As described extensively in the previous article, the advantage of a public blockchain is that it remains visible and traceable.

An example of such confirmed illicit activity that could be cashed out with a Russian OTC provider, would be funds allocated in a cryptocurrency wallet provider called Konvert.im. It includes more than 100 transactions and has more than 69% exposure to funds originating from newly sanctioned Hydra Darknet Marketplace.

As Konvert.im represents an exchange, most certainly, their compliance must be aware of the origination of those funds from sanctioned Hydra. It is within such schemes the funds might be mixed with other funds that could potentially be forwarded to OTC providers for cash out.

Regardless of the choice of the provider used for Blockchain based analytics, due to the nature of Blockchain based investigations that accumulate all of the funds and its traces on the Blockchain between different brokers, there will always be a certain exposure to illicit traffic, which most likely will be at a single digit percentage wise.

Similar to accepting a physical banknote at the local farmer’s market, there could be a possibility that this banknote was used to conduct illicit activity in the past. This connection to illicit activity remains invisible on the banknote itself, but such a transaction is perfectly visible on the Blockchain.

Having said that, it remains impossible to state that an exposure of 69% to Hydra has been a technical mistake. It should rather be perceived as a dedicated action and tracing the money from Konvert.im to a Russian OTC provider might serve as a symbol that this strategy can and might be adopted to circumvent SWIFT-based sanctions and easily bypass a limitation specified in the fifth EU sanction package.

I’ve specialised in the topics on the intersection between Information Systems, Fintech, Insurtech, Cryptocurrency, Blockchain – Distributed Ledger Technologies

Source: Sanctioning Russia On The Blockchain: Following The Money To A Network Of OTC Providers

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Russia Debt Default Could See the US Seize the Country’s Assets

The impending Russian debt default is likely to be one of the most difficult in history to resolve, and could even lead the US to permanently seize assets from the country’s central bank, according to a report from the consultancy Oxford Economics.

Russia is facing its first default on its foreign-currency debt since the aftermath of the Bolshevik revolution in 1918.

The US Treasury earlier this month blocked Russia from paying $650 million due on two bonds using funds held at American banks. Russia has instead tried to pay in rubles, but credit ratings agencies have said this would constitute a default.

Russia has a 30-day grace period from April 4 in which to pay in dollars. But thoughts are now turning to the next steps, and how bondholders might recoup their money.

Tatiana Orlova, lead emerging markets economist at Oxford Economics, said investors face a “very long and difficult” legal road. “Russia’s debt crisis will be among the most difficult in history to resolve, since the default has its roots in politics rather than finance,” she wrote in a report that was sent to clients Thursday.

One of the key problems is that political and financial relations between Russia and the West have completely broken down. That makes the usual default process, whereby bondholders and the government enter negotiations and thrash out a deal, seem unlikely to happen.

Orlova said another problem for bondholders is that Ukraine may lay a claim to Russian assets in international courts to pay for the rebuilding of the country. In that case, investors would have to weigh up whether they want to compete with the Ukrainian government for Russian assets.

The economist said the US might eventually end up seizing the money from the Russian central bank’s foreign currency reserves. Western governments have already frozen the bulk of the roughly $600 billion stockpile. Joe Biden earlier this year ordered that half of Afghanistan’s central bank reserves, which were also frozen, be made available as possible compensation for victims of 9/11 and to fund humanitarian support in the country.

“The US administration could possibly find a stronger moral cause for splitting the US-denominated portion of Russia’s FX reserves between Ukraine and bondholders,” Orlova said. Russia’s Finance Minister Anton Siluanov has said the government has fulfilled its obligations by paying in rubles. He said last week Western governments are forcing Russia into a default and threatened to take legal action.

It’s not just holders of Russian sovereign debt who may have to take to the courts to try to get their money. Orlova’s report said there is likely to be an “avalanche” of Russian corporate debt defaults, given that the US is taking a hard line and banning American banks from processing payments.

An international committee of banks last week deemed state-owned Russian Railways to be in default, after sanctions stopped the company from making bond payments.

There were roughly $98 billion of Russian corporate foreign-currency bonds outstanding as the war began in February, according to JPMorgan, with $21.3 billion owned by foreign investors.

By:

Source: Russia Debt Default Could See the US Seize the Country’s Assets: Economist

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Critics:

By:

A default would make Russia more of a pariah in the global economy. Selling bonds is a critical way that countries raise foreign currencies to fund projects and raise reserves of foreign currencies, among other purposes.

But the European Union is considering a ban on energy imports from Russia, which would further limit Russia’s ability to raise money in foreign currencies.Countries that have defaulted on their bonds have eventually been welcomed back to global debt markets, but memories of a default linger and Russia may have to pay more to borrow from foreign investors in the future.

A default would also be historically significant and fraught with symbolism. It would mark the first time Russia has defaulted on foreign bond payments in more than a century (though it did default on local currency debt in 1998). Russia’s predicament is yet another consequence of its invasion of Ukraine, according to Tim Samples, a professor at the University of Georgia who specializes in foreign investment.

“This is a reflection of just how far and how fast Russia has fallen from favor in Western capital markets,” he said. Not necessarily, but most investors will need to go through a protracted legal battle to try to get the money they are owed.

Although Russia was not a big seller of foreign debt, major hedge funds and asset managers, including Invesco and PIMCO, bought bonds. Russia has 15 bonds outstanding that are denominated in dollars and euros, and altogether, they are worth around $40 billion, according to Morgan Stanley.

Much of Russia’s debt was registered in the United Kingdom, which is where it’s likely that most of the court fights will take place. It can be a complicated process, and it will take a long time to resolve. After Argentina defaulted in 2001, several efforts were made to restructure the country’s debt. All told, negotiations lasted longer than a decade.

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Here’s How Much Major Energy Companies Are Losing By Exiting Russia

Major oil and gas companies, which scrambled to abandon operations in Russia following the invasion of Ukraine in late February, are now warning that doing so will result in billions of dollars of losses.

Shell disclosed Thursday that its suspension of operations in Russia could lead it to book as much as a $5 billion loss in its approaching quarterly earnings.

Like many other major energy companies, Shell closed its operations in Russia following President Vladimir Putin’s invasion of Ukraine in late February, exiting joint ventures with Russian state-owned gas company Gazprom and ending its involvement in the Nord Stream 2 natural-gas pipeline project.

Shell rival BP, which is exiting a nearly 20% stake in Russian oil producer Rosneft, has warned that potential losses could amount to as much as $25 billion.

American energy giant Exxon Mobil also ceased operations in Russia, abandoning holdings estimated to be worth around $4 billion at the end of 2021, while Norwegian oil and gas giant Equinor, meanwhile, is leaving some $1.2 billion in Russian investments on the table.

Wall Street analysts and investors are still assessing the impact of Western companies cutting ties with Russia under heavy sanctions, with President Joe Biden set to sign a ban on Russian energy, which was passed by the Senate on Thursday.

But in the short run those losses will be cushioned by high oil and gas prices, with the resurgent sector becoming a new favorite of legendary investor Warren Buffett and his investing conglomerate, Berkshire Hathaway.

The S&P 500 energy sector has surged nearly 40% this year, far outperforming the broader benchmark index, which is down roughly 6% in 2022. Shares of BP are up more than 11% this year, with Shell rising 26%, ExxonMobil 37% and Equinor 46%.

Major energy companies will provide more details on potential losses from exiting Russia in quarterly earnings reports next month. Despite the impact of lost business there, most are expecting to report strong first-quarter earnings, in large part thanks to surging oil and gas prices.

Russia’s invasion of Ukraine has slammed energy markets, causing the price of oil to surge to as much as $130 per barrel last month, though they have since moderated somewhat. After weeks of volatile trading, the price of U.S. benchmark West Texas Intermediate now sits at $98 per barrel, while global benchmark Brent crude is trading at around $103 per barrel.

I am a senior reporter at Forbes covering markets and business news. Previously, I worked on the wealth team at Forbes covering billionaires and their

Source: Here’s How Much Major Energy Companies Are Losing By Exiting Russia

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Critics:

Competitor BP will sell its 19.75% stake in Rosneft, which it has held since 2013. Its Russian assets totaled about $14 billion last year.

“The decisions we have taken as a board are not only the right thing to do, but are also in the long-term interests of BP,” said chief executive Bernard Looney. He and former BP executive Bob Dudley resigned their seats from Rosneft’s board Sunday. The company said it could be charged as much as $25 billion for ending its Russian investments.

“Russia’s attack on Ukraine is an act of aggression which is having tragic consequences across the region. BP has operated in Russia for over 30 years, working with brilliant Russian colleagues,” chairman Helge Lund said in a statement. “However, this military action represents a fundamental change. It has led the BP board to conclude, after a thorough process, that our involvement with Rosneft, a state-owned enterprise, simply cannot continue.”

The British government pressured both firms to cut ties with Russia. Shell recently relocated from the Netherlands to London.

“There is now a strong moral imperative on British companies to isolate Russia,” tweeted Kwasi Kwarteng, Britain’s business and energy secretary. He said he called van Beurden and supported Shell’s decision.

Western energy companies flocked to Russia after the fall of the Soviet Union. In 2020, it was the world’s third-largest oil producer, behind the United States and Saudi Arabia. Its 10.5 million barrels per day accounts for 11% of the world’s oil production.

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Russia’s Creditors May Have To Choose Between Getting Paid In Rubles Or Not Getting Paid At All

Russia’s creditors face the unappetizing prospect of accepting debt payments in rubles after the U.S. Treasury decided Monday to block the Kremlin from using its dollar reserves.

The Russian currency crashed 40% in the days after President Vladimir Putin’s unprovoked attack on Ukraine but has mostly bounced back since. A default on the $636 million debt payment and further sanctions tied to alleged Russian atrocities could trigger another nosedive in the ruble’s value.

“If they can’t get their dollars, either because they’re blocked or Russia won’t pay them, and they are offered rubles and they can get access to them, they’d be smart to take the rubles,” said Jay Newman, a former portfolio manager for Elliott Management who spearheaded the hedge fund’s 15-year battle with the government of Argentina over bond payments. “Rubles at least are worth something.”

The U.S. Treasury froze Russian central bank assets held in the U.S. in February after the invasion of Ukraine, but made an exemption for debt payments that was set to expire on May 25. With Russia continuing its offensive for more than a month, however, and new images showing horrifying scenes of bodies of civilians on the streets of Bucha, Ukraine, the U.S. accelerated that timeline, blocking Russia from making debt payments to investors.

Until then, JPMorgan Chase and BNY Mellon, two New York-based banks, acted as go-betweens for Russian payments to creditors. Putin’s government continued to make payments on time throughout March, most recently with a $447 million coupon payment last week. Both JPMorgan and BNY Mellon declined to comment.

“On the one hand, there’s a sense that if a sanction target wants to use scarce resources to pay U.S. creditors back, why should we object?” said Robert Kahn, director of global macroeconomics at the Eurasia Group. “But if we’re making life easier for them by opening up these doorways, I do think that at moments like this, particularly in the context of the awful images we have seen in the last few days, the interest of creditors is just not given a very high priority.”

The Kremlin dismissed the notion on Wednesday that it’s at risk of not being able to make the payments during a 30-day grace period. Spokesperson Dmitry Peskov said Russia has “all necessary resources to service its debts” and insisted that payments could be paid in rubles if necessary. A U.S.

Treasury spokesperson said the move will deplete the resources Putin is using to continue the war. “Russia must choose between draining remaining valuable dollar reserves or new revenue coming in, or default,” the Treasury spokesperson said.

If Russia elects not to pay, it wouldn’t be the first time — a 1987 Forbes story covered a 96-year-old woman who was still waiting to be paid for czarist bonds her husband had bought in 1919 shortly after Russia defaulted on its debt during the Bolshevik Revolution.

Anton Siluanov, Russia’s minister of finance, said on state TV in March that about $300 billion of the country’s $640 billion in gold and foreign reserves has been frozen by sanctions. If Russia still has access to about $340 billion in reserves, the country appears to have more than enough to cover its total of $40 billion owed in international bonds, but Kahn said it’s not that simple and expects defaults to begin in the coming weeks.

“Dollars in a Chinese bank or gold in Moscow may be in principle unblocked, but it’s hard for them to take those and use them to buy the things they need,” Khan said. “My sense is that the usable reserves are really far lower than what the minister said.”

Russia will still be able to use revenue from sales of commodities like wheat, palladium and oil to meet its debt obligations. The U.S. has blocked imports of Russian oil, but other importing countries haven’t followed suit.

Meanwhile, trading in dollar-denominated Russian corporate bonds has skyrocketed, with investors hunting for bargains despite the reputational risk. The average daily value of trades as of March 24 was double the same period a year before and the most in two years, according to Bloomberg.

I’m a reporter on Forbes’ money team covering the wealthiest people and most influential firms on Wall Street. I’ve reported on the world’s billionaires for Forbes’ wealth team and was

Source: Russia’s Creditors May Have To Choose Between Getting Paid In Rubles Or Not Getting Paid At All

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Is This Stock A Better Pick Over Schlumberger?

The shares of Baker Hughes (NASDAQ: BKR) currently trade 50% above pre-Covid levels observed in January 2020 while the shares of its competitor Schlumberger (NYSE: SLB) are up by just 3%. Does that make SLB stock a better pick over BKR? Both companies provide oil field services including drilling & completion and production solutions to upstream oil & gas companies in the U.S. and abroad. Due to lower benchmark price expectations in the long term, SLB and BKR incurred sizable impairment charges in 2020.

However, the recent uptick in the oil benchmark due to strong demand, supply constraints by the OPEC, and economic sanctions on Russia, have increased demand for oil rigs across the world. Given Baker Hughes’s lower financial leverage, comparable topline to Schlumberger, and a low valuation multiple, Trefis believes that the stock is a good pick to realize more gains.

We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis, Baker Hughes vs. Schlumberger: With Return Forecast Of 109%, Baker Hughes Is A Better Bet

1. Revenue Growth

Baker Hughes has observed a lower decline in revenues in recent years as compared to Schlumberger. Baker Hughes revenues observed an annual decline of 4% from $22.8 billion in 2018 to $20.5 billion in 2021, whereas Schlumberger reported an annual decline of 11% from $32.8 billion in 2018 to $22.9 billion in 2021. Top line contraction has largely been due to a decline in rig count figures and capital control measures implemented by upstream companies.

  • Schlumberger’s four operating segments, Digital & Integration, Reservoir Performance, Well Construction, and Production Systems contribute 12%, 28%, 36%, and 24% of total revenues, respectively. The uncertain demand environment had persuaded upstream companies to limit capital expenses in the last two years. However, the surge in benchmark prices due to the Russia-Ukraine war has rekindled demand for oil field services – taking worldwide rig count figures from 1,521 in December 2021 to 1,850 at present. Moreover, the company’s digital solutions business is likely to assist margin expansion in the coming years.
  • Baker Hughes’ four operating segments, Oilfield Services, Oilfield Equipment, Turbomachinery & Process Solutions, and Digital Solutions contribute 47%, 12%, 31%, and 10% of total revenues, respectively. The company’s international operations have been assisting the top line in recent times, which observed a 10% contraction from pre-pandemic levels and contributes 80% of total revenues.
  • After reporting relatively flat revenues for FY2021, Baker Hughes and Schlumberger are expected to observe strong growth in FY2022. (related: How Does Schlumberger Make Money?)

2.Returns (Profits)

As both companies incurred sizable impairment charges leading to 25% contraction of the balance sheet, we compare their cash generation capabilities. In 2021, Schlumberger generated $4.6 billion of operating cash from $22.9 billion in total revenues – implying an operating cash flow margin of 20%. Whereas Baker Hughes reported $20.5 billion in total revenues and $2.3 billion of operating cash flow – resulting in a margin of 11%.

  • Schlumberger’s cash generation capabilities have been stronger than Baker Hughes which has resulted in a sizable difference in the P/S ratio. In 2021, Schlumberger and Baker Hughes’ P/S multiple was 1.5 and 1.2 respectively. Historically, it has been observed that there is a difference of 0.5 units between Schlumberger and Baker Hughes.
  • However, the difference between Schlumberger’s non-cash depreciation charges and capital expenditures was higher than Baker Hughes – affecting the operating cash flow margin figures.
  • Before the pandemic, Schlumberger returned 50% of operating cash to shareholders as dividends and invested 30% in property, plant & equipment as capital expenses.
  • Whereas, Baker Hughes had been investing its operating cash in capital assets.
  • Both companies implemented cash control measures and limited capital expenses as well as dividend payouts due to the pandemic. Given Schlumberger’s higher cash generation capabilities and historical dividend trends, it is a good pick to earn consistent dividend income.

3.Risk

Per annual filings, Schlumberger and Baker Hughes reported $13 billion and $6.7 billion of long-term debt, respectively. While a shrinking asset base due to impairment charges is a drag on shareholder returns, Baker Hughes’ lower financial leverage is a boon during uncertain times.

  • Higher financial leverage coupled with continued revenue growth augments equity returns. However, interest expenses weigh on finances as revenues decline – limiting dividend payouts and capital expenses.
  • Schlumberger’s higher financial leverage compared to Baker Hughes, despite similar revenues and a comparable balance sheet size, makes SLB stock a riskier bet.
  • In 2021, Schlumberger and Baker Hughes’ total assets were $41 billion and $35 billion, respectively.

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Source: Is This Stock A Better Pick Over Schlumberger?

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Critics:

U.S. oil field services company Baker Hughes said Saturday that it was suspending new investments for its Russia operations, a day after similar moves were announced by rivals Halliburton Co. and Schlumberger.

The steps from the Houston, Texas-based businesses come as they respond to U.S. sanctions over Russia’s invasion of Ukraine. In its statement, Baker Hughes, which also has headquarters in London, said the company is complying with applicable laws and sanctions as it fulfills current contractual obligations. It said the announcement follows an internal decision made with its board and shared with its top leadership team.

“The crisis in Ukraine is of grave concern, and we strongly support a diplomatic solution,” said Lorenzo Simonelli, chairman and CEO of Baker Hughes. Halliburton announced Friday that it suspended future business in Russia. Halliburton said it halted all shipments of specific sanctioned parts and products to Russia several weeks ago and that it will prioritize safety and reliability as it winds down its remaining operations in the country.

Schlumberger said that it had suspended investment and technology deployment to its Russia operations. “Safety and security are at the core of who we are as a company, and we urge a cessation of the conflict and a restoration of safety and security in the region,” Schlumberger CEO Olivier Le Peuch said in a statement.

Oil companies ExxonMobil, Shell, and BP, along with some major tech companies like Dell and Facebook, were among the first to announce their withdrawal or suspension of operations. Many others, including McDonald’s, Starbucks and Estee Lauder, followed. Roughly 30 companies remain.

Ukrainian President Volodymyr Zelenskyy on Wednesday asked Congress to press U.S. businesses still operating in Russia to leave, saying the Russian market is “flooded with our blood.”

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