Russian central bank will examine in a year whether it makes sense to introduce another official currency in Russia, the digital Russian ruble. In addition to economic and technological advantages, he can also find one Russian-specific one in it, avoiding sanctions for banking operations in the Crimea.
The Russian central bank
Russia has joined many other countries whose central banks are studying the possibility of introducing digital currency as a third type of currency. The Governor of the Russian National Bank, Elvira Nabiullin, has announced that a pilot project is underway under the leadership of the bank to evaluate by the end of 2021 whether it makes sense to introduce a so-called digital ruble in Russia in addition to cash and non-cash currency. It would exist only in electronic form, in the form of a computer or mobile phone account, and transfers between organizations and individuals would also take place only in electronic form, without the possibility of transferring money to pay.
The Russian Digital Ruble
Russia has joined dozens of other countries experimenting with digital currency and considering the potential benefits of its introduction. In the vicinity of Russia, a similar project called E-Hryvnia has been tested by Ukraine, Sweden, and its central bank is working with the concept of e-krona. From the tested and considered advantages of the digital currency, each country takes what would be most suitable for it: in the case of countries like Ukraine, it is a reduction in the volume of cash payments, which is especially important in times of rising inflation or greater transparency of cash flows and the fight against corruption, which often takes place using cash; In more developed countries, the most frequently mentioned benefits are the greater comfort of clients and especially the immediate settlement of changes in accounts, without the need to wait for the settlement of transfers between different banks. Especially in international payments, where payment letters of credit and other mechanisms are used that make trades more expensive and complicated, the ability to pay only at the moment of confirmation, such as loading goods on a ship and at the same time immediately crediting money to the seller’s account would simplify many things and prevent fraud.
In Russian conditions, it is a matter of testing the concept of rapid distribution of social or other assistance in times of crisis (eg payment of benefits to all residents during a pandemic or natural disaster), providing targeted assistance to the socially disadvantaged, controlling the use of digital benefits to buy needed goods (baby food yes, alcohol no) or the introduction of the so-called social status modeled on China (worse credit conditions for people who do not live healthily or often buy alcohol or cigarettes). The use of digital currency for financial operations in occupied Crimea could also be specific to Russia. Due to the risk of international sanctions, large Russian banks such as Sber or VTB do not rush too much to serve the peninsula, and banking services there are not as high as in the rest of Russia. The possibility of transferring digital currency to the accounts of people and companies in Crimea, about which information would exist only on the servers of the central bank in Moscow without the need to open physical branches directly in Crimea, makes it an attractive option to be present but not seen and avoid sanctions.
The history of Russian currency
Governor Nabiullina emphasized that the state bank would not use this project to allow cryptocurrencies such as bitcoin or ethereum into the muddy waters, the use of which will be banned by law in Russia from 2021 onwards. While every cryptocurrency is also a digital currency, not every digital currency is also a cryptocurrency. The issuance of digital rubles would be fully within the competence of the central bank and would thus become another component of the monetary policy of the Russian state, for which the bank is responsible. Thus, the currency would not be decentralized, as cryptocurrencies are.
Governor Elvira Nabiullina has launched a test of the digital ruble
Critics point out that in the current situation, the digital currency is not exactly something that Russia would need and for which the state bank would have to spend its energy. They would rather see its efforts, for example, in issuing infrastructure bonds for essential projects in transport or energy. They also point to the need to build a digital infrastructure for the new currency and the likelihood of disputes between central and commercial banks. Digital currency can, in principle, function without commercial banks as intermediaries because people and companies can have their digital accounts maintained directly with the central bank. It may even prefer it, due to better insight into the wallets of citizens and companies and thus better information for macroeconomic decision-making. Commercial banks would therefore lose part of their profits from caring for clients’ money, and from their point of view, the central bank could become a competitor, just as the newly emerging fintech companies are. In Russia, where 70 percent of the capital in the 100 largest financial institutions is controlled by the state, a state-to-state struggle could break out, a classic tug-of-war for power and money.
Russia’s central bank has not yet taken a position, but it is already clear that not only economic and technological but also a sharp political debate will break down around the digital currency.