In light of ongoing Western sanctions, the digital ruble, Russia’s central bank digital currency (CBDC), is emerging as a pivotal tool in reshaping the country’s financial landscape. A recent analysis by Alexandra Prokopenko, a Fellow at the Carnegie Russia Eurasia Center and former adviser at the Central Bank of Russia, explores the potential of the digital ruble to mitigate the impacts of these sanctions while raising important questions about its long-term viability and adoption.
The digital ruble project was initiated in 2020 and has progressed rapidly, with real-world tests involving banks already underway.
The Russian government aims for full integration of the digital ruble by 2025, positioning it as a viable alternative to traditional international payment systems like SWIFT, from which Russia has been excluded due to sanctions imposed after its invasion of Ukraine in 2022.
On August 1, 2023, a new law came into effect, establishing the digital ruble as legal tender in Russia, as it was implemented as part of Russia’s strategy to enhance financial sovereignty amid increasing economic isolation.
Prokopenko’s paper, titled “Can the Digital Ruble Shield Russia From Western Sanctions?”, co-authored with the German Council on Foreign Relations, delves into whether this digital currency could effectively shield Russia from the repercussions of Western sanctions.
According to him, the digital ruble could potentially facilitate trade with countries like China, allowing for transactions that bypass traditional Western financial systems. However, significant hurdles remain before widespread adoption can occur.
There are concerns regarding public acceptance of the digital ruble, particularly issues surrounding privacy and government surveillance.
Prokopenko noted that the digital ruble will not accrue interest in wallets, distinguishing it from traditional savings mechanisms, raising questions about its classification as “true money,” positioning it more as a means of payment than a store of value.
While Russia seeks to leverage its digital ruble to navigate sanctions, it lags behind other nations like China, which has already implemented its own CBDC, the digital yuan. Prokopenko warns that this could deepen Russia’s dependence on Chinese technology and infrastructure.
Although there are discussions within BRICS nations about creating alternatives to Western-dominated financial systems, Prokopenko emphasizes that these efforts are unlikely to undermine the U.S. dollar’s dominance in the near term. The BRICS Bridge platform could provide non-SWIFT alternatives but lacks immediate effectiveness against established financial norms.
As part of its strategy to counter sanctions, Russia has also legalized cryptocurrency for international payments. This legislative shift allows companies to conduct transactions using cryptocurrencies, reflecting a significant change from previous anti-crypto stances.
The Central Bank of Russia is expected to develop an experimental payment system that facilitates cross-border transactions using cryptocurrencies. Initial trials are anticipated by the end of 2024.
Despite its potential benefits, Prokopenko concludes that the digital ruble is not a panacea for circumventing sanctions, significant technical challenges and skepticism from both domestic and international financial institutions remain obstacles to its success.
While the digital ruble may eventually reduce Russia’s reliance on Western financial structures, achieving widespread adoption will require overcoming substantial hurdles both within Russia and in its interactions with global partners.
