Digital ruble: why Russia's CBDC is turning into a sinkhole

A digital ruble is on the Kremlin's wish list.

A digital ruble sits on the Kremlin's wish list. But is rolling out a successful Russian CBDC realistic?

China has taken the lead and now Russia is following. The first practical tests of the central bank's own digital currency begin on April 1. First, 13 banks will test the functionality of the digital ruble, along with private households and retailers. Next year it could be ready to roll out nationwide.

CBDC: There are many reasons for Russia

With its invasion of Ukraine, Russia is largely cut off from the major SWIFT network for international payments. At the same time, the risk of further capital outflows is rising. Finally, the war economy combined with Western sanctions suggests the ruble is likely to weaken further in the future. This heightens the need for capital controls. At the same time, Russia is looking for ways to keep a tighter rein on its own people.

All of these reasons argue for a digital central bank currency that operates independently of Western financial infrastructures and promises more control options thanks to its programmability.

Integration: more wish than reality

No matter how promising the CBDC features may be for the Kremlin, they will likely remain wishful thinking for now. Rolling out the digital ruble across the entire world’s largest country is a gigantic task. Starting with the population's necessary digital affinity. Especially in remote areas like Siberia, integration seems tough.

Most likely the Kremlin is not yet able to implement a functional programming capacity that could enable targeted consumption incentives, among other things. In tests in China, e-yuan users were given discounts on public transit usage.

Even those who are skeptical of the Kremlin and want to hide capital will find ways to keep doing so. Effective capital controls and identifying dissidents remain hard to implement for now.

Is the digital ruble a poor copy of the Chinese e-yuan?

Unlike other countries, Russia is under pressure to achieve quick success with a CBDC. Given the current setup, Russia's digital ruble concept is not expected to be fully worked out.

Instead, it will likely model itself on the more competent China, which has far more experience rolling out CBDCs. The corrupt and inefficient administrative machine in Russia suggests the first practical versions of the digital ruble will be a complete flop.