As economic sanctions hit Ukraine in the wake of the Russian army’s invasion, including a sweeping blockade of the Swift messaging system, raising fears of a collapse of its banking and financial system, Russia is looking for alternatives. This search goes back to 2014 during the first sanctions related to Russia’s annexation of Crimea.
In this regard, its desire to accelerate the digital ruble project shows that the Russian government intends to strengthen its monetary sovereignty in the scenario of locking down its economy, the world’s eleventh largest in terms of GDP.
Thus, the digital ruble is part of the policy pursued by Vladimir Putin since he came to power in 1999. World Wide Webon the principle of the “great Chinese digital wall”, approved by the Russian parliament in March 2019.
By the same logic, control over the new digital and encrypted currencies that the population of the former USSR member states is so fond of, demonstrating their distrust of institutions, will stand before the Putin administration. Especially since Russians and Ukrainians have embraced these crypto assets, which allow them to deposit their woolen socks in digital wallets considered inviolable. According to Chainanalysis, these two states also rank 4th and 18th, respectively, for the adoption of cryptocurrencies in the world.
‘Vital’ project to get out of the dollar
In April 2021, six months after an initial letter of recommendation to the local financial sector, the Russian central bank announced that it was working on a prototype “digital ruble” belonging to the MDBC (central bank digital currency) family, on which the Bank for International Settlements (BIS) called for to accelerate to counter the popularity of cryptocurrencies, especially bitcoin.
This “digital ruble” project was tested by more than a dozen Russian banks in January (Gazprombank, Rosbank, Sberbank, Promsvyazbank, Tinkoff, VTB, Transcapitalbank…) is positioned for both wholesale and retail digital ruble, according to the introductory letter. Ultimately, this does not rule out allowing 100% dematerialized transactions between consumers.
“It is vital for us to prepare for the timely launch of the digital ruble, should such a launch become necessary for the Russian economy,” the central bank wrote in its 2020 paper.
And underline: “At the same time, the introduction of a digital ruble could further contribute to financial stability by limiting the risks of dollarization of the economy in the context of the rapid development of global trends or the digitalization of the financial sector”continued by the central bank.
Other bank motives are being added, confirms Frederic Okana, a cryptocurrency expert who has worked on the topic in Russia in Gallery :
“In Russia, there are no cash payments in public services, you pay through the phone using a QR code, and this is in order to avoid the risk of fraud. The digital ruble fits into this logic. Then the Russian central bank was also worried that many investments would go into cryptocurrencies. Its goal is to maintain total control over the savings of Russians. During Soviet times, the Russian diaspora returned with suitcases full of jeans. She moved from a barter economy to cryptocurrencies. »
Initially, to encourage its use, the Central Bank’s project on the digital ruble even had to turn to foreign owners of digital wallets, reminds the site bitcoin.com. And not in vain. Since 2014, a large number of Russian banks have already been blacklisted by the United States, and the largest international payment networks Visa and Mastercard once again suspended services to banks that were subject to new sanctions.
Response to sanctions
According to cointelegraph.com, six days before the 2022 invasion, the Russian central bank announced a successful test of the digital ruble with two banks, and only two due to infrastructure issues.
Will Russia’s financial and monetary isolation accelerate the rollout of the digital ruble while the national currency is in free fall against the dollar (-30% of its YTD value)?
“When closing, they will seek to keep purchases in the territory so that the assets remain in the country. Sanctions will undoubtedly change this situation.” anticipates Frederic Okana.
But for now, Russia, with its cheap electricity, occupies the top of the world podium for the use and creation (“mining”) cryptocurrencies, “they will do everything to give preference to the digital ruble, not cryptocurrencies”, he continues.
Digital currency or cryptocurrencies?
“The Russian central bank project has a distributed part of the blockchain, but there is basically no consensus unique to cryptocurrencies as they are negotiated between 14 banks. Ultimately, this is what allows them to reduce the number of blocks as they see fit. The central bank wants to retain control by keeping the money or making it disappear… which you can’t do on a public blockchain.”, explains Frederic Okana. The same principle is similar to the electronic yuan in China or the digital euro. The system is still controlled by a central authority, and not by a registry of interconnected and duplicate accounts on the computers of miners around the world – anonymous.
This dispute between the crypto and the digital ruble excites the top of the Russian state. When the central bank proposes a complete ban on cryptoassets (in favor of its digital ruble project), the Treasury Department pushes forward a bill to regulate cryptocurrencies, a financial investment that has attracted many oligarchs. Parliament and some ministries have also spoken out in favor of tighter regulation through increased taxes and therefore potential windfall financial gains.
“After the sanctions, Iran uses bitcoin and can trade with Western companies, even in the US, which suits them too…”expert notes.
Increase ruble transactions
So far, Vladimir Putin has responded to the sanctions with excessive economic management. On Monday, he ordered the implementation of measures to support the ruble, including a ban on Russian residents to transfer currency abroad, the Kremlin said. The Russian economy is struggling to maintain its financial assets, with Bloomberg estimates that since 1994 capital outflows have amounted to $750 billion.
In addition to this first measure, Russian exporters are also ordered to convert 80% of foreign exchange earnings received since January 1 into rubles from Monday.
Similarly, faced with an outflow of foreign investment,The central bank has announced measures to prevent foreigners from selling Russian shares and withdrawing funds from the Russian financial market, according to Russian news agencies quoted by AFP. There was even a ban on leaving Russia with more than $10,000 in cash.
But other problems could potentially arise both for the digital ruble in a closed economy, and for the crypto of wealthier Russians. “What about crypto mining chips and technologies that can no longer ship with an embargo, and what about microprocessors used in data centers for a digital ruble?”asks Frederic Okana. “It will be difficult if they don’t come from China.”