How a Digital Ruble Could Impact the Global Economy

On July 24, 2023, Vladimir Putin signed legislation that paved the way for the introduction of a Russian central bank digital currency (CBDC). The law establishes the legal framework for the digital ruble, while also providing the Bank of Russia with the authority to issue and regulate a Russian CBDC.

A total of 130 countries representing 98% of the world’s economy are exploring a CBDC, making the announcement of a digital ruble unsurprising for many. However, a digital ruble has significant implications through specific use-cases aimed at improving the Russian economy, particularly in light of the ongoing Russia-Ukraine crisis. While retail usage and implementation for a Russian CBDC will be challenging given the lack of of digital payment services currently in Russia combined with Russia’s cash-based society, wholesale usage of a digital ruble could potentially enable a stimulation of growth in the Russian economy, with far-reaching implications on global trade.

Current economic conditions in Russia

The Russian economy currently faces a number of significant challenges, with the majority of these factors being due to the ongoing Russia-Ukraine war. Heavy American-led sanctions have led to a decline in the ruble, a rise in inflation, and a general slowdown in economic growth.

This compounds the fact that the Russian ruble has been a relatively weak currency for many years, owing primarily due to its history of economic instability among other factors. The Russia-Ukraine crisis has only exacerbated the weakness of the ruble, with investors selling off Russian assets due to further economic sanctions against Russia, with over 300 sanctions being imposed by the United States and its allies against Russia as of May 2023, with this number increasing as recently as in July 2023.

Therefore, the introduction of a Russian CBDC could help to encourage the strength and value of the ruble, while also encouraging trade with Russia. This is significantly needed to help stimulate the Russian economy to fund the ongoing Russia-Ukraine crisis, while also aiding Russia sustain its increasingly limited foothold in the global economy.

What would be the immediate effects of a digital ruble?

With these factors in mind, a digital ruble could help grow the Russian economy in the short-term by helping to circumvent sanctions and enable cross-border transactions through two use-cases: enabling trade in Russia’s oil and gas sector and Russia’s military armaments ecosystem.

A potential short-term use-case for the digital ruble could be as an alternative currency for trading oil and gas commodities, particularly in light of heavy American-led sanctions focusing on Russia’s oil and gas exports due to the Russia-Ukraine war. Russia’s oil and gas industry accounted for nearly 20% of the country’s GDP between January and April 2023, and promoting continued cross-border trade within this industry will be critical to sustain the Russian economy. A digital ruble could present an alternative to the dollar, which is the most commonly used currency for trading oil and gas commodities, reducing Russia’s vulnerability to sanctions targeting said dollars.

Another potential short-term use-case for the digital ruble would be to revitalize Russia’s arms exports industry. Whether because of direct use in the Russia-Ukraine conflict or due to aggressive sanctions targeting Russian arms exports, Russia’s previous status as the world’s second largest weapons exporter accounting for 20% of global arms sales has come to a startling halt, with Russia exporting 91% of its arms to a mere four countries in 2022. A digital ruble might encourage countries to purchase arms from Russia, with a Russia CBDC potentially enabling smoother cross-border transactions between Russia and its customers.

How a Russian CBDC could help the Russian economy in the long-run

A more long-term strategy to the utilization of a digital ruble, particularly because usage is not currently mandatory, is to disintermediate the power of the American dollar. It is well-known that the BRIC countries (Brazil, Russia, India, and China) have sought to promote the use of alternative currencies to reduce global reliance on the dollar, citing factors such as the perceived instability of the dollar, the influence of American sanctions, and a desire to have stronger control over their own financial system.

China has been at the forefront of dollar disintermediation efforts over the past decade, developing its digital yuan and the Cross-Border Interbank Payment System (CIPS), with the renminbi gradually gaining popularity as a currency of choice for global payments.

Russia’s announcement of a CBDC presents the digital ruble as another alternative currency to the dollar, particularly on the heels of an April 2023 announcement in which Brazil’s president expressed support for a BRIC-led currency as a dollar alternative, which itself followed the heels of a March 2023 move where Russia adopted the renmibi as one of the main currencies for its international reserves. Additionally, the announcement of a digital ruble could further improve trade between BRIC countries, enabling cross-border payments in both digital and fiat forms of both the yuan and ruble.

Conclusion

The announcement of a Russian CBDC is certainly an interesting one, with the implications of a digital ruble, the Russian-Ukraine conflict, and other global events currently unfolding. However, it remains clear that these factors have the potential to significantly impact the global economic system, whether this be through potential sanction evasion, increased global trade with Russia, or dollar disintermediation as a whole. It will be interesting to see how the digital ruble continues to evolve, and if the Russian population will adopt and embrace the digital ruble as a store of monetary value.