Digital ruble: what Russia expects from the CBDC

Russia wants to roll out a digital ruble quickly.

Russia wants to roll out a digital ruble quickly. The central bank's digital currency (CBDC) should be used nationwide by 2024. Why Russia is sending a clear signal to the West and what the autocracy expects from it?

It wasn’t unexpected. It’s been known for some time that Russia has been pushing a CBDC. In a new document, the Russian central bank, also known as the Bank of Russia, envisions a test phase next year, which will then move into commercial practice with an initial version in 2024. Further developments, such as an offline mode, are planned from 2025.

Russia: isolated from the West

Western sanctions, such as exclusions, mainly affect payments. Western infrastructures like SWIFT dominate globally and leave states like Russia highly dependent. A CBDC, by contrast, would build on new infrastructure and, in principle, could not be sanctioned by the West.

The big example here will likely be China. Not only is this country the furthest along in implementing a CBDC, it also shares the same motive as Russia: to reduce the influence of the U.S. and Europe. It’s reasonable to assume Russia will learn a lot from China. It’s also likely there will be an effort to achieve a high degree of technical compatibility between the two CBDCs. After all, it’s in the national interest that the CBDC infrastructure functions not only at home with the domestic currency.

Given Russia’s resource-rich exports, it could be interesting if commodity transactions with China and other countries were processed via a CBDC. Especially since the goal is to displace the U.S. dollar as the reserve currency.

Central bank power

Especially in autocracies like Russia and China, central-bank independence is hardly a given. This means that in moments of doubt, Putin can decide where monetary policy goes. A CBDC would, in turn, give him new ways to steer. In the past, particularly in recent months, Bank of Russia has had to take bold steps to keep the ruble stable. In the long run, a CBDC could be a much more efficient way to implement capital controls.

These are especially relevant to prevent the consequences of a monetary flight and stabilize the domestic currency. By moving cash to the background, money flows can be better managed and analyzed.

Autocracies love CBDCs

The result would be surveillance typical of autocracies. If the state knows exactly who gets which payments and how, the state gains more control. Political opponents, whose monetary transactions have so far flown under the radar, would hardly be able to hide from the state.

Cryptocurrencies like Bitcoin will likely face tighter regulation in the future. So far there’s no clear direction for crypto regulation.

Even if Russia does not ban cryptocurrencies, it’s reasonable to expect that any privacy-protecting applications will come under fire. This means the state will probably not allow non-custodial wallets or truly decentralized services. Technically they can’t shut it down, but they can criminalize it.

Russian helicopter money

Given Russia’s weak economic outlook, a drop in living standards is to be expected, especially if current high gas and oil prices return to normal levels. It’s important that the state has the means to target economic support. This is especially true as public satisfaction is likely to decline amid the downturn.

With its own CBDC, the state can target support to the population. Depending on how the CBDC is handled and accounted for by the state, the digital ruble could theoretically let Putin credit CBDC accounts at a push of a button.

As pilot projects in China have shown, CBDCs can even be earmarked. That means the state can decide what the CBDC is spent on. In one Chinese pilot, for example, users received transit discounts when paying with CBDC. It’s hard to say what concrete forms of money and control will develop in the digital ruble in the future. In any case, many possibilities exist.