Your idea is good because it does not require intervention by the admin, but since there will be those who will not read the rules and will make this fatal mistake (maybe accidentally) and thus be disqualified, it would certainly be better to merits be completely disabled in that thread. Either way, some of it would be desirable to apply.
I suggested penalties either in this thread or the one in Meta regarding the merits. Theymos doesn't have to intervene at all in that case. For each merit that a candidate awards in the thread, he will have one vote removed from his total count. So if you get 20 votes for a certain category, but your rewarded people with 10 merits altogether, 10 of your votes would be disqualified. Ultimately, your final count is 10 votes.
Yes, it's a very reasonable idea. There's no doubt that some of the voting members are purely driven to nominate users giving out Merit if you nominate them. It's obvious and somehow an act of "buying" nominations. The people giving out Merit are getting more nominations and the people nominating such members will obtain a cheap bunch of Merits.
That's not how it works and it's outright manipulating the contest.
In my opinion, nominations where a Merit was given by the nominated member, should be removed by half because it wasn't defined in the rules but awarding full points would be manipulation.
Example:
20 nominations
10 nominations with Merit = 10/2 = 5 nominations removed
= 15 nominations
I would also be okay by removing merited nominations entirely to prevent the result from being manipulated by Merits but would prefer 50/50 since it was't stated in the rules.
And next time, we can add it to the rules that giving out Merit, if someone is voting for you, will remove this vote entirely.
Donating BTC awards to Ukraine sounds very good, much support is currently needed in Ukraine.