In late-February 2021, Russian President Vladimir Putin recognized the independence of two breakaway regions in eastern Ukraine: the Donetsk People’s Republic and Luhansk People’s Republic. To this extent, President Putin signed decrees ordering military forces into the region for “peacekeeping” purposes, breaking the seven-year Minsk peace agreement and launching into a full-scale militarized action to occupy the region. This recognition and its specific follow-on operations has built on continuing tensions of a potential Russian invasion of Ukraine, with Russia viewing Ukraine as part of its “sphere of influence,” with this sense of ownership being described as an impetus for the potential Russian invasion of Ukraine.
American military forces have sent over 5,000 troops to Ukrainian neighbor Poland, with American President Joe Biden hoping that these soldiers will act as a deterrent to Russian aggression, to little or no avail. However, this armed conflict between the Ukrainian government and pro-Russian separatists goes much further than a traditional military force-on-force engagement. Rather, policymakers must examine Putin’s long-term hybrid warfare strategy to expand Russia’s sphere-of-influence, necessitating a closer look at tools such as Russia’s simultaneously newly proposed central bank digital currency (CBDC) to truly understand why Russia is trying to takeover Ukraine.
The story of digital assets in Russia and Ukraine
Central bank digital currencies (CBDCs) have experienced significantly increased interest in recent history, with 87 central banks currently in various pilot and sandbox test phases for a national-level CBDC. In mid-February 2022, Russia announced the trial launch of its own CBDC, termed the digital ruble, successfully completing CBDC transfers between its citizens. Simultaneously, Russia remains one of the staunchest opponents of cryptocurrencies, with Bank of Russia governor Elvira Nabiullina calling assets like Bitcoin “significant risks.” The Russian Finance Ministry has upheld this position in its February 2022 draft regulation document upholding the current ban on crypto payments for goods and services, highlighting the general Russian government consensus against cryptocurrencies and crypto mining.
The Ukrainian government has adopted a more friendly stance towards cryptocurrencies, blazing the trail even among its European counterparts who have only just begun a 24-month digital euro pilot in July 2021 through the European Central Bank. In contrast, the Ukrainian parliament passed a new Law of Ukraine on Virtual Assets to legalize cryptocurrencies in mid-February 2022. This warm relationship with cryptocurrencies has made Ukraine a powerhouse even within the cryptocurrency community itself, with Ukraine processing more transactions-per-day in cryptocurrency than its own fiat hryvnia. Major Ukrainian TASCOMBANK also entered into a government-backed pilot test phase of a digital hryvnia with fintech company Bitt in December 2021, with Bitt previously responsible for CBDC implementations in the Caribbean and Nigeria.
The variation in both countries’ stances regarding cryptocurrencies and digital currencies can be highlighted in the control that these assets offer to their respective governments. On one hand, a digital ruble could be utilized to enable greater control over Russia’s own population, violating data privacy to achieve these means. Conversely, Ukraine’s acceptance of cryptocurrencies in accordance with the principles of decentralized finance (defi) offers more transaction choices for Ukrainian, Russian, and international consumers, with Ukraine embracing these services as an alternative to its own CBDC.
Long-term plans in Eastern Ukraine as seen through the digital ruble
Donetsk and Luhansk have long been the subject of significant Russian influence, with reports of ruble transactions in Donetsk outweighing those of the Ukrainian hryvnia in May 2015 and Luhansk even adopting the Russian ruble as its official currency in February 2017. Additionally, Donetsk and Luhansk have significant importance to both Ukraine and Russia as industrial powerhouses, with both regions being well-known for their mining and production of steel, as well as their significant coal reserves.
The economic capacity for growth from both Donetsk and Luhansk may drive some readers to the conclusion that these resources are what Russia is after. However, the ability for Russia to capitalize on these economic resources is just one minor facet of hybrid warfare implementation, with Russia’s long-term plan being much more integrative into the fabric of Ukrainian society. Looking at the current conflict through the digital ruble enables this enhanced understanding of Russia's actions.
Simply put, Ukraine’s embrace of digital assets has created an untenable situation for the Russian government: enabling Ukraine to continue to achieve an international status as a cryptocurrency hub would result in a significant loss of regional Russian influence. Despite already having a significant political, economic, social, and even military foothold in the area, a transition to cryptocurrencies would make individuals drastically less dependent on Russian resources, which are currently represented in the area through the ruble. This reduced need for Russian support would drastically remove the reliance of regional actors on Russia for support, decreasing its sphere-of-influence almost overnight.
Additionally, the regions of Donetsk and Luhansk offer the Russians a unique area to better understand the tertiary effects of the digital ruble. If successfully incorporated as a Russian-sponsored area, these regions could help act as hubs for money laundering and sanction evasion by the Russian government. Former Putin economic advisor Sergei Glazyev alluded to this very notion in January 2018, stating how a digital ruble would enable account settlement with other threat actors “with no regards for sanctions.” Russia’s known history of money laundering, combined with increasing sanctions against Russia, further reinforces this notion, enabling increased Russian access and placement to interact with threat actors with zero international scrutiny.
Russia’s actions, though seemingly motivated by the desire to influence and occupy Ukraine more directly through military means, must be examined from a more strategic perspective. Understanding this will better enable military leaders and government officials to work together to counter increasing regional Russian influence, with force-on-force engagements perhaps giving way to currency-agnostic fintech platforms to counterbalance Russian regional influence.
Other factors to drive widespread digital ruble adoption
Other factors must also be considered when utilizing the digital ruble to understand Russia’s actions in Ukraine. For one, a digital ruble would enhance Russia’s ability to maintain control over its own population, providing Russian authorities with detailed personal financial records to enable more effective targeting of Russia’s political opponents, among other targeted groups. Ensuring that Ukrainians adopt Russia’s CBDC using a military invasion as a pretext to create these conditions would enable better control of the Ukrainian population as well.
On a more macroeconomic level, Russia’s military actions may help to solidify the ruble as a regional reserve currency. Despite the ruble falling in global markets due to the potential conflict, control over increased regions in Ukraine would act as a forcing function to make the ruble the currency standard in more areas throughout Eastern Europe. This would essentially force other countries to adopt a digital ruble because of its widespread use, with Ukrainians potentially being the first among other Eastern Europeans to adopt a Russian CBDC, whether this be out of simple convenience in the future or because of direct military pressures.
Conclusion
While Russia’s current aggressive military actions in Ukraine are extremely alarming for governments around the world, it is Russia’s development and future utilization of the digital ruble that should receive additional long-term attention by senior government officials. The digital ruble as Russia’s CBDC is undoubtedly a key factor in Russia’s plan to engage in hybrid warfare against Ukraine. This notion is best highlighted by Russia and Ukraine’s contrasting stances on digital assets. In short, the future implementation of a digital ruble within Ukrainian society, and potentially Eastern Europe, must be examined as a possible primary goal by the Russian government in its aggressive military actions against Ukraine.