The recent signing of the Digital Ruble Bill into law by President Vladimir Putin has reinforced Russia’s commitment to the widespread implementation of its central bank digital currency (CBDC). The bill proposing the legalisation of Russia’s CBDC received approval from both houses of the country’s Parliament, the State Duma and the Federation Council, as Russia accelerated its CBDC research following financial sanctions imposed by several nations on its funds and assets in the wake of the conflict with Ukraine.
Embracing digital currencies and exploring interoperability can enhance international trade and create an alternative sphere of influence beyond the dollar-dominated system. However, the success of these initiatives requires careful consideration of various factors, including the power of China’s Digital Yuan and the potential resurgence of the US Dollar. Realistic approaches and vigilant monitoring will be essential to navigate these complexities.
Digitising the Ruble
Russia’s CBDC approach differs from its counterparts. While countries like India are focused on asserting monetary sovereignty and staying competitive in the world of digital currencies, Russia’s motivations are driven by factors crucial for their nation’s survival and growth.
During a business conference in New Delhi, Alexander Babakov, Deputy Chairman of the State Duma, proposed a unified digital currency for Russia, China, and India. The primary objective is to promote trade in compliance with each country’s regulations while reducing reliance on the United States (US) Dollar or Euro, mitigating Russia’s vulnerability to international sanctions. Promoting trade is Russia’s primary objective while circumventing the sanctions for now and reducing its dependence on two of the world’s primary global reserve currencies in the long run.
Beyond this, such a common digital currency could foster stronger economic ties between the three nations and pave the way for an alternative financial system beyond the traditional dominant currencies. Russia, India, and China are members of the BRICS minilateral, which has considered a multinational digital currency but with limited progress.
Although not entirely new, this concept holds critical significance for Russia, especially in the face of escalating sanctions following the Ukrainian invasion. Previously, Russia explored using digital currencies for international transactions, but European limitations hindered that approach. Additionally, there have been intriguing speculations about potential digital currency collaborations between Russia and Iran.
Blow to the economy
In response to the Russia-Ukraine conflict, the European Union, US, Canada, and the United Kingdoms imposed sanctions on Russia, including banning certain Russian banks from SWIFT. The aim is to isolate Russia economically and pressure the Putin regime to end military operations in Ukraine.
These sanctions strain global supply chains as Russia is a major exporter of crude oil, wheat, and cobalt leading to price spikes globally. Russia is exploring trade partnerships in Asia and Africa, and considering the Digital Ruble for enhanced trade efficiency.
US sanctions have a significant impact as the global trade in US Dollars allows freezing transactions, causing the Ruble to plummet and raising concerns about Russia’s debt obligations. The exclusion from SWIFT and other sanctions could lead to a major restructuring of Russia’s economy.
Nations around the world are experimenting with CBDCs, and Russia is no exception. The Bank of Russia first showed interest in a CBDC in 2017, with no significant plans for development. However, in 2022, the Bank announced plans to launch the Digital Ruble by 2024, aiming to coexist the digital currency with existing payment systems. The plan to develop a CBDC was already in motion before the Ukraine crisis, but the implementation gained momentum due to Western sanctions and restrictions. The urgency to develop the CBDC grew due to the need for a reliable tool for foreign trade after the Ukraine invasion and ensuing sanctions. Nabiullina, governor of the Bank of Russia, suggested exploring the Digital Ruble for pension payments, and discussions for a CBDC pilot resumed in March 2023. Thus, while Russia initially intended to use its CBDC for domestic payments and transfers, the post-Ukraine invasion sanctions pushed it to keenly explore cross-border applications, reducing its reliance on the Western clearinghouses-controlled SWIFT system.
The Russian government aims to encourage Digital Ruble adoption, while the Bank of Russia sees it as a replacement for cryptocurrencies, promoting safer domestic settlements and investments. The central bank’s stance on private cryptocurrencies is unclear, as it mentioned the creation of special entities responsible for mining without specifying the type of cryptocurrency. Nabiullina also emphasised that cryptocurrencies should not be used for domestic purposes.
Forging a new direction
With the broader implementation of the Digital Ruble, Russian citizens will have the convenience of processing payments and instant money transfers through their digital wallets. Interestingly, the use of the CBDC will remain optional, and the government expects its popularity to grow by 2027.
During the pilot trials of the CBDC last year, several Russian banks participated, and valuable feedback on its use cases was gathered from various financial market participants. As the Digital Ruble becomes more accessible, it promises to revolutionise financial transactions and reshape Russia’s financial landscape.
As Russia, India, China, Brazil, and South Africa develop their respective CBDCs, their BRICS-level interoperability becomes probable. Embracing digital currencies could boost international trade and foster an alternative sphere of influence outside the Western-dominated financial system centred around the US Dollar. The intent of BRICS members to develop CBDCs reflects their convergence for exploring the likely advantages and implications of digital currencies on international trade and financial landscapes.
The BRICS countries’ rising economic influence, surpassing the G7 nations in global GDP, makes the concept of a common currency intriguing. Despite the uncertain role of a digital currency in this scenario, the potential for strong trade ties among BRICS members and their reliance on Russia for commodities make this development worth monitoring. This growing trend points towards a future where nations challenge the dollar-dominated status quo and significantly change the global financial landscape.
However, there are several moving parts in this situation. China’s Digital Yuan’s growing influence or a resurgence of the US Dollar could spoil the party.
About the author: Sauradeep Bag is Associate Fellow at Observer Research Foundation.
Source: This article was published by the Observer Research Foundation