Big moves are afoot on the digital ruble.
On July 30, Elvira Nabiullina, the governor of the Central Bank of Russia (CBR), told Russia’s Federation Council (parliament’s upper house) that a digital ruble could be ready for mass implementation as soon as July 2025. If this were to happen, it raises the prospect of Russia becoming the first G-20 economy to launch a full-fledged CBDC. But as I will try to explain in this article, it will face significant obstacles in this endeavour as well as stiff competition from countries further along the development path.
Here is the money quote from Nabiullina’s speech:
In terms of our pilot project for the digital ruble, we will expand it in just a month for those banks that are already with us in the pilot mode. There will also be a series of expansions for the pilot project going forward… I can currently say that if everything continues to go according to our plan, then we will successfully implement the pilot projects. We will be able to move from the pilot mode to mass implementation of the digital ruble as of July 2025. We are aiming for these dates.
As even Nabiullina herself hints at, the July 2025 deadline is probably a touch optimistic since it requires all of the new, scaled-up pilot tests to go according to plan. And a CBDC system, whether for an island economy like Jamaica or Russia, the world’s largest country in terms of landmass, consists of a lot of moving parts. Also, the pilot test conducted so far appears to be surprisingly small scale, especially compared to the pilot tests so far carried out by the People’s Bank of China and the Reserve Bank of India (more on those later).
Launched on August 15, 2023, the first stage of the CBR’s CBDC pilot involved testing active operations with (in the words of an Interfax article) “real” digital rubles. Those operations included opening wallets in digital rubles for banks and clients (individuals and legal entities), transferring digital rubles between clients, and payments at trade and service enterprises. So far, 12 banks, 600 individuals and 30 retail outlets spread across 11 Russian cities have taken part in the trial.
A Strictly Voluntary System, Apparently
Now, as Nabiullina says, the pilot tests will be expanded. Twenty-one more lenders are expected to join the next stage, which could begin as soon as September this year. The central has also started testing settlements using the digital ruble with a number of Russia’s foreign partners, according to RT. The legal apparatus has already been put in place for a CBDC system. In June 2023, President Vladimir Putin signed a law to introduce a digital ruble. From RT:
According to the document published on the official government portal, the electronic currency will become operational on August 1.
The digital currency will be issued alongside the traditional ruble – both cash and non-cash. It will be used to make transfers and payments and will be kept in digital wallets on a platform operated by the central bank. It will not be possible to open a deposit, take out a loan, or receive interest on the digital currency.
The president also introduced relevant amendments to the Civil Code to enable the digital ruble to be bequeathed and inherited.
A few weeks ago, Putin provided his own progress report on the digital ruble, asserting that the pilot launch had demonstrated the “efficiency and functionality” of the CBDC platform, opening up the way to “moving toward a wider, full-scale implementation of the digital ruble in the economy, in business activities and in the field of finance.”
For her part, the governor of the Central Bank of Russia insists that this process will be gradual, that the digital ruble will not replace cash and that its use by citizens and businesses “will be absolutely voluntary,” which more or less mirrors the European Commission and European Central Bank’s declarations on the digital euro. From an article in Vedomosti (machine translated):
“I will not grow tired of repeating this, because there is a major misunderstanding that we will impose the digital ruble. This is not true,” Nabiullina affirmed.
Nabiullina also spelt out some of the advantages of a digital ruble: absolutely free transfers for citizens and significantly lower processing fees on card and mobile payments for businesses.
“We believe that thanks to these advantages, the digital ruble will gradually become a habitual part of our life within five to seven years,” the head of the Central Bank of the Russian Federation concluded.
A Programmable Ruble?
Based on my limited reading of Nabiullina’s speech, which is not featured on the central bank’s website, she does not appear to have addressed the potential risks, pitfalls and dangers of CBDCs. They include the possibility of central banks programming how this new form of money is distributed to and used by citizens, businesses and other organisations.
This would offer huge benefits for government and central banks, allowing them to operate at much higher resolution, notes NS Lyons, a Washington DC-based political analyst and blogger, in his [largely US-centred] article, Just Say No to CBDCs: “Targeted microfinance grants, added straight to the accounts of those people and businesses considered especially deserving, would be a relatively simple proposition.”
By the same token, Lyons warns, CBDCs could be used to significantly curtail public choice. In a cashless CBDC-dominated world, less socially or politically desirable people or organizations could even be denied access to the financial system:
“The most dangerous individuals or organizations could simply have their digital assets temporarily deleted or their accounts’ ability to transact frozen with the push of a button, locking them out of the commercial system and greatly mitigating the threat they pose. No use of emergency powers or compulsion of intermediary financial institutions would be required: the United States has no constitutional right enshrining the freedom to transact.”
Other potential forms of programming applications include setting expiry dates for stimulus funds or welfare payments to encourage users to spend the money quickly.
The Kremlin is, at the very least, considering making its CBDC programmable. In an interview last autumn with Kommersant Radio, deputy Anatoly Aksakov, who apparently authored Russia’s digital ruble law, said that payments in the emerging CBDC system will be made through smart contracts that can be programmed. As an example, he raised the prospect of parents (or the government?) being able to ensure that children spend their money on meals and textbooks rather than games and sweets (again, machine translated):
As for personal use, a vivid example, of course, is children receiving money from their parents but spending it not on what they need. In this case, the intended use can be programmed allowing them only to spend digital money on lunch, breakfast, and textbooks. And those who receive the funds actually receive them in a decoded form. They can use them for the purposes they see fit.
Can the state interfere in this process? I admit that this is also possible, although we have not yet addressed this issue with regard to digital rubles. In principle, since everything revolves around the central bank’s IT system, the government can establish rules that will prevent the payment of, say, unscrupulous external partners.
In the EU, the UK and other Western jurisdictions, central banks and governments insist that their respective CBDCs will not be programmable, but only after a public backlash. But can we trust their world? After all, once the system is up and running, the central bank can quite simply change the rules of the game and install whatever programmable features it wants…
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Nick Corbishley 