Will Russia’s Digital Currency Bypass Western Sanctions by Fostering Investment Opportunities?

Russia’s new law on digital currency marks a significant milestone in the country’s approach to diversifying its banking sector. This initiative comes in response to Western financial restrictions that severely impacted the value of the ruble in the first quarter of 2022, prompted by the invasion of Ukraine.

One of the collective Western sanctions resulted in Russian banks being cut off from the global banking communication platform (SWIFT). As a result, over 300 banks in the country lost the ability to manage international payments. This led Russia to explore alternative methods for conducting cross-border transactions, rolling out a central bank digital currency (CBDC) for payments and transfers, and even managing mutual settlements with China. This move has significantly broadened the scope of Russia's cross-border payments.

Here we delve into the key aspects of Russia’s digital currency law, its potential implications for businesses, and the rapidly evolving digital finance partnerships with global economies, beyond the EU and the U.S.

Understanding the Current Landscape

On 1 August, the Central Bank of Russia (CBR) became the main operator directly governing the Digital Russian Ruble. This milestone was achieved after Vladimir Putin signed a digital currency amendment bill into law, amending the Civil Code of the Russian Federation.

With this new legislation in place, the CBR is now responsible for issuing the digital ruble in the form of digital tokens, making it the third official national currency, alongside existing cash and non-cash forms. Currently, the three official types of Russian currency hold equal value. The digital ruble can be used to make financial transfers, purchase goods and services, and even as part of an inheritance.

For Russia, the move toward digital national currency is a rational reaction, given that the ruble has declined by 45 per cent since mid-February 2022, prompting flashbacks of the country’s financial crisis in 1988.

Blockchain technology is expected to enable direct transactions and storage via electronic wallets. However, a key difference between the CBDC and cryptocurrencies is that the Russian Central Bank is responsible for issuing the CBDC and the competent authorities exercise close monitoring over these digital wallets. The digital ruble is anticipated to carry minimal risk compared to cryptocurrencies, as it is backed by the official monetary regulator and supported by traditional currency, experts say.

Pilot Programmes Underway

The CRB has already launched pilot projects with 13 Russian banks and a limited group of customers. After about 18 months, the service will be fully available to any Russian banking customer who wishes to use it, primarily for international transactions, as specified by the Western-sanctioned governor of the Bank of Russia Elvira Nabiullina. This will enable Russian authorities to assess the functionality of the digital ruble platform within an industrial setting.

The first phase of the pilot program will test digital wallets, digital ruble transfers between individuals, QR code-based purchases of products and services, and simple automated payments. Russia is planning to have a fully operational national digital currency available for citizens and businesses in Q1 of 2025, the latest in 2027, according to state officials.

Currently, 50 per cent of global central banks are engaged in researching or actively developing a pilot for a CBDC, which empowers Russia as a pivotal player, capable of influencing trends in the digital currency realm.

What Russia’s Digital Currency Means for Businesses

Given the landscape of Western sanctions and the digital ruble's emergence, businesses in Russia are set to experience a range of impacts. While experts predict that Western sanctions will last until at least 2026, the introduction of the fully operational digital ruble by 2025-2027, will provide Russia with a tool to withstand the adverse effects of these restrictions and keep pace with the rapidly evolving digitalization landscape. However, the stance of the West concerning sanctions can fundamentally shift based on ongoing actions related to the invasion of Ukraine, leading to potential heightened or reduced restrictions.

Ultimately, the digital currency initiative will allow Russia to establish cross-border payment capabilities with other nations that also introduce digital currencies. This, in turn, will create a conducive environment for digital investments and business opportunities between partnering states. However, in order for the digital ruble to be used in international transactions, it will have to be stable and openly exchanged. It must also instill confidence not only among governments, but also key financial stakeholders.

By the end of 2023, the CRB plans to expand its pilot program beyond citizens to include companies, allowing businesses to test their operations with the digital ruble. It is worth noting that the digital currency law in Russia will forbid individuals or entities who are not operators or participants within the digital ruble platform from using the term ‘digital ruble platform’ in their advertising campaigns.

Research estimates that the activity of traditional banks in Russia will potentially decrease due to the completed implementation of the CBDC, resulting in around $3.5 billion losses in over five years. However, the introduction of the digital ruble in 2023 is anticipated to emerge as a significant innovation within the country's payment system, possibly solidifying Russia’s position as a global leader in financial systems and tools.

Nevertheless, the market is expected to undergo an adjustment period during this transition. While the expenses associated with payment servicing will decrease, favouring retailers, experts are concerned about potential income decreases for consumers and banks as a result.

Digital currency in Russia is of high significance to international businesses. Foreign markets should be mindful that digital wallets can be accessed through any bank where the customer holds an account, allowing for streamlined access to financial transactions at consistent rates and reduced operational costs. Additionally, the digital ruble will offer the potential for offline financial transactions and a wide range of innovative products and services. The mass adoption of digital ruble will result in improving customer experience across industries. The digital ruble's logo will be integrated into mobile banking applications, enabling users to access their digital wallets and perform transactions using digital rubles.

These instances offer just a glimpse into the potential advantages that the digital ruble can offer to global businesses in the near future. It is positioned to streamline bilateral trade agreements with Russia and amplify the prospects for investing in digital solutions. Sectors such as telecommunications, retail, and IT-focused industries may find reason to reassess their existing approach to engaging with Russia.

Looking ahead, the rise of digital national currencies may facilitate direct trading between countries through blockchain technology, rendering traditional systems like SWIFT obsolete. Digital currencies might bring shifts in consumer habits and the way transactions are carried out, boosting business opportunities for investments and trading.

Digital Collaboration with East Asian and Global States

The global landscape of CBDCs is rapidly expanding, with 130 countries, accounting for 98 per cent of the global GDP, exploring their potential. Among the G20 nations, 19 are now in the advanced stage of CBDC development, and 11 countries have already fully launched their digital currencies.

China

Alongside Russia, China is also busy with the pilot stage of its own CBDC and has already tested its digital Yuan, reaching more than 260 million individuals, testing in the public transit, stimulus payments, and e-commerce industries.

Prior to the launch of the digital ruble, Russian politician and economist, Anatoly Aksakov, stated that Russia intends to employ the digital ruble for mutual settlements with China. This move aims to further diversify Russia’s financial systems and reduce reliance on “unfriendly countries.” Aksakov is convinced that if actively used, the digital currency system between Russia and China will eventually pose a significant challenge to existing international payment frameworks.

As Western countries have distanced themselves from Russia, collaboration with Beijing has grown in significance for Moscow. The two nations have strengthened their trade ties, with Russian companies even issuing debt in yuan whilst de-dollarizing its economy. It has been hitting the headlines that Putin will accept an invitation from Xi Jinping to visit China in October for the Belt and Road Forum. This would mark Putin's first trip abroad since an arrest warrant was issued against him earlier this year by the ICC. This demonstrates how significant Moscow's relationship with Beijing has become, in particular after Putin declined invitations to join the BRICS summit in South Africa and the G20 summit in India.

Additionally, Central Bank experts observed that emerging technologies could enable direct interactions between states, reducing their dependence on Western-controlled payment networks like the SWIFT system.

Turkey

The Governor of the CBR further stated that Russia is partnering with Turkey, to establish a network of gateways connecting payment systems to facilitate seamless transactions between the two states. At the beginning of 2023, the Central Bank of the Republic of Turkey (CBRT) also entered into the pilot phase and successfully tested initial transactions utilising the digital Turkish Lira.

India

India has also emerged as a potential partner for Russia in the digital currency realm. Both countries are actively exploring opportunities to enhance business ties and simplify the process for Russian enterprises to establish a presence in the Indian market. India is currently in the process of rolling out its own CBDC under the pilot program, the digital rupee, making this collaboration all the more promising.

Such initiatives can enhance cross-border trade, investment, and financial interactions between countries and eventually lead to bilateral agreements between countries to allow cross-border payments. Despite the recent expansion of BRICS, there have been no public declarations about launching cross-border payments via digital currencies. Experts observe that the digital ruble could offer minimal relief for Russia’s growing economic challenges due to the geopolitical situation.

The streamlined payment process associated with CBDCs can reduce transactional complexities and costs, ultimately fostering increased business opportunities and cooperation. While Russia moved quickly to establish a legislative framework for a CBDC, it is improbable that they will hasten the implementation process. This is due to the comprehensive and well-structured pilot program designed to ensure an effective digitization process.

Keeping Up With Evolving Digital Currency Policies in Russia Around the World

With the digital ruble becoming a fully operational national currency by 2025-2027, businesses must be prepared to navigate this transformative landscape. The implementation of CBDCs globally is rapidly unfolding, with Russia at the forefront of this digital revolution. Collaboration with East Asian and global states, particularly China, Turkey, and India, opens doors for enhanced trade ties, streamlined transactions, and the potential to challenge existing international payment frameworks.

In this dynamic and evolving landscape, businesses need to stay ahead of the curve and adapt to the digital currency era. This is where FiscalNote Professional Services can provide valuable support. With our expertise in the regulatory and policy landscape, we can help businesses navigate the complexities of digital currencies, understand compliance requirements, and seize the opportunities presented by the digital ruble ecosystem. Our team of experts can guide businesses in optimizing operations in this new era of digital finance, ensuring they are well-positioned to leverage the benefits of the digital ruble and global CBDC developments.