Bank of Russia

Foreign trade and pensions: What’s next for Russia’s CBDC project?

The Russian digital ruble pilot launch was delayed until at least May, but the government still hopes to kick off the currency in 2024.

The pilot for Russia’s central bank digital currency (CBDC) pilot should have been launched on April 1, but it was delayed at practically the last moment due to the slow pace of the necessary associated legislation passing through parliament.

However, with the launch of the pilot still possible in May and the general roll-out of the digital ruble scheduled for 2024, the Russian project remains one of the most important CBDC developments to watch — especially given its possible role in cross-border payments between BRICS countries (Brazil, Russia, India, China and South Africa) and the intent to include it in the massive state-controlled pension system.

A brief timeline of Russia’s CBDC

The first time the Bank of Russia, the country’s central bank, announced its plans to explore the possibility of issuing a digital currency was in 2017. Back then, the bank’s first deputy governor, Olga Skorobogatova, said a CBDC would be a priority for the bank and that it would be looking into it in the near future.

However, at the time, Skorobogatova’s boss — Bank of Russia Governor Elvira Nabiullina — refused to acknowledge it as a “top priority,” instead calling it “a medium-term, or, perhaps, a long-term” prospect.

In 2022, the Bank of Russia revealed it planned to roll out the digital ruble across all banks in the country by 2024. The bank said the implementation would take place in stages and involve extensive testing and infrastructure development. It stated that the digital ruble would coexist with cash and non-cash payment systems, providing consumers more flexibility.

Perhaps the most significant factor in accelerating the CBDC’s development was the need for a reliable tool for foreign trade and settlement following Russia’s invasion of Ukraine and the subsequent sanctions implemented by several countries worldwide.

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By early 2023, local media was reporting that the Bank Of Russia had begun studying two possible cross-border settlement models with the digital ruble.

In February 2023, Skorobogatova publicly announced that the first consumer pilot for the CBDC would take place on April 1, 2023. The experiment would involve 13 local banks and several merchants, as well as real consumers — though it would be limited to the employees of participating companies.

Russian state media subsequently reported that the pilot was delayed pending the passage of specific legislation by the State Duma, the lower chamber of the Russian parliament. The legislation will reportedly come into force no earlier than the beginning of May.

Elena Klyuchareva, senior associate at Russian law firm KKMP, told Cointelegraph that two laws would enable the digital ruble launch. The first is a bill on amendments to the Civil Code, which determines the legal nature of the digital ruble as “a form of non-cash money and contractual relations arising from the use of a digital account.”

The second is a bill on amendments to several laws, the main one being the “Law on National Payment System.” These amendments stipulate the basis for the functioning of the digital ruble platform and the responsibilities of its participants.

Both bills were adopted in the first reading by the State Duma on March 16, 2023. The term for commenting expired on April 14, 2023. “We may expect the continuation of its discussion soon, most likely in May,” Klyuchareva added.

Digitalization and retirees’ anxiety

Governor Nabiullina herself first suggested using the digital ruble in pension payments back in 2021, with few details regarding how it would work.

Discussions around the idea resurfaced at the end of March 2023 as the state-controlled Izvestia newspaper once again teased the CBDC pilot. Several weeks later, Nabiullina had to clarify that the digital ruble wouldn’t be the principal or even the common currency for pension payments but an additional option.

The pension system, for which the state is primarily responsible, is a traditionally sensitive area of politics and economics in Russia. With the elderly often being far from tech-savvy, the mention of something “digital” can provoke anxiety. However, Chris Emms, a former business developer at Bitcoin.com who now lives in Russia, said:

“The average Russian pensioner will still be able to spend their money in the exact same way and likely won’t even realize that their money is digital.”

Aleksandr Podobnykh, head of the Saint Petersburg branch of the Association of Chief Information Security Officers, also doesn’t see any potential tension.

He told Cointelegraph that while many citizens, including pensioners, will eventually interact with the digital ruble, the government will probably use some kind of incentivization policy to help people switch to the digital form of money. In fact, digitalization has been a priority for quite some time.

“Today, there are a huge number of initiatives and events aimed at improving the culture of citizens in the field of digital technologies and electronic services. Special attention is also paid to information on investment and security issues in this area,” Podobnykh said.

Will the digital ruble find adoption?

Will the digital ruble significantly affect the use of private cryptocurrencies in the country? All over the world, CBDCs are under development, and the crypto community at large perceives this as governments’ answer to the rise of digital money.

The Russian central bank has been highly hostile to any idea of legalizing crypto and even fought the Ministry of Finance on the matter. Podobnykh has no doubts about the bank’s plans regarding the new currency:

“Undoubtedly, with such an emphasis of the central bank on the monopoly use of the ruble, its position will remain strong. And don’t forget the plans to use it in calculations in the CSTO [Collective Security Treaty Organization] and BRICS countries.”

Emms sees the launch of the CBDC as a type of compromise between the anti-crypto central bank and the Russian politicians in the Duma who are “taking a positive stance over crypto regulation in general.” He believes the central bank hopes Russians will “choose to put their money into CBDC instead of buying high-risk altcoins.”

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Klyuchareva said that the Bank of Russia expects the digital ruble to replace cryptocurrencies within Russia and be more popular as a safer instrument for settlements and investment. “Whether this expectation will come to life remains to be seen,” she concluded.

Speaking to the members of one of the parliamentary parties on April 17, Nabiullina didn’t refute the possibility of using cryptocurrency in foreign trade. Strangely enough, she didn’t specify whether this cryptocurrency would be private or issued by the central bank but mentioned the creation of “special entities responsible for mining.”

That makes the central bank’s stance on the digital ruble and private crypto less transparent — the “experimental” plan to mine some currency and the testing of a national CBDC for cross-border settlements seem to contradict each other. But one thing is certain, in Nabiullina’s words:

“Cryptocurrency shouldn’t be used inside the country.”

Russia delays digital ruble launch testing due to lawmaking process

The participating banks expressed their readiness to proceed with the CBDC pilot.

The rollout of The Bank of Russia’s central bank digital currency (CBDC) pilot is being delayed indefinitely. However, participating banks have stated their readiness to begin the testing.

As reported by the state-owned TASS on March 28, the CBDC pilot won’t start on April 1, as previously announced , because specific legislation has only passed through the first reading in the State Duma — the Federal Assembly’s lower house. According to TASS, the legislation may be enacted by early May.

The number of private banks participating in the pilot has also changed from 15 to 13. Some of the banks’ employees would become the test participants for CBDC retail payments, as well as one of the largest insurance companies in the country, Ingosstrakh.

Bank executives expressed enthusiasm for the project. The director of innovations at Sinara Bank, Vitaly Kopysov, told journalists:

“The use of smart contracts should reduce the operational load of banks and make the deals transparent, which not only will reduce the chances of the misuse of government and banks’ funds, but ultimately simplify the control over the existing contracts.”

The upcoming pilot will involve real operations and consumers, although it will be limited in scale. The general public will be unable to participate in the first stage, as the banks will enter the pilot with chosen customers. Following the first stage, the Bank of Russia intends to determine how to scale the digital ruble further.

Initially scheduled for 2024, the consumer CBDC pilot was moved to an earlier date as the Russian central bank sought an alternative to the SWIFT payments system amid Western economic sanctions against Russia.

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Russian crypto advocates urge Putin to stop regulatory hostility

Russia’s existing regulatory stance on the cryptocurrency industry would potentially lead the country to “direct financial losses,” the RACIB argued.

As Russia continues to delay adopting cryptocurrency regulations, local advocates have appealed to Russian President Vladimir Putin to change the government’s approach to regulating the market.

The Russian Association of Crypto Industry and Blockchain (RACIB) — a major group of crypto and blockchain enthusiasts in Russia — issued an open letter to Putin on March 6, urging the president to address the risks of ignoring the global development of the crypto industry.

In the letter, the RACIB argued that Russia has been too slow to implement experimental legal regimes targeting crypto adoption despite enforcing its first crypto law, “On Digital Financial Assets,” in 2021.

In November 2022, lawmakers in Russia introduced a series of legal amendments to the crypto law, proposing to launch a “national cryptocurrency exchange.” According to the RACIB, some of those amendments would significantly complicate the implementation of digital financial technologies in Russia as they introduce criminal sanctions for local blockchain developers.

The proposed amendments would give Russian enforcement authorities a “sea of choice” to pressure the local crypto community, the RACIB’s executive director Alexander Brazhnikov told Cointelegraph.

“It will not be easy for companies in the digital asset industry to prove that they are doing everything within the framework of the Russian legislation,” Brazhnikov stated.

The RACIB has ultimately called for Putin to put an end to Russia’s hostile regulatory stance on crypto, as it prevents local businesses from fully using the potential of crypto and would potentially lead the country to “direct financial losses.” The RACIB stated:

“The existing state policy around the regulation of digital financial assets creates serious risks for the Russian economy to lag behind not only unfriendly, but also friendly countries due to delaying the introduction of new financial technologies.”

According to the RACIB, one of the biggest risks behind ignoring the benefits of the crypto industry is the relocation of local talent to advanced jurisdictions, including Eurasian Economic Union (EAEU) countries like Kazakhstan and Armenia.

To help Russia change its tough regulation stance on crypto, the RACIB has asked Putin to build a working group, including representatives of the digital asset community, to collaborate with the government on building the state’s crypto regulation policy. The group has specifically expressed interest in developing and applying cross-border payment systems in Russia, EAEU jurisdictions, as well as other countries like Brazil, India, China and South Africa.

In 2021, RACIB’s Yury Pripachkin argued that Russia was doing “absolutely nothing” to regulate the local cryptocurrency market.

The news comes soon after the Russian central bank reiterated its uncompromised stance on crypto, with Elizaveta Danilova, head of Bank of Russia’s financial stability department, arguing that legalization of crypto investments threatens the welfare of Russian citizens. At the same time, the Bank of Russia sees no problem in legalizing crypto mining and allowing crypto use in cross-border transactions.

Russia to roll out CBDC pilot with real consumers in April

Russia’s central bank is preparing to launch the first consumer pilot for the digital ruble in collaboration with 13 local banks.

The Bank of Russia is preparing to roll out the first consumer pilot for the nation’s central bank digital currency (CBDC) on April 1, 2023.

Russia’s central bank is set to soon debut the first real-world digital ruble transactions involving 13 local banks and several merchants, first deputy governor Olga Skorobogatova said.

The official noted that the upcoming CBDC pilot will involve real operations and real consumers in Russia but will be limited to a certain number of transactions and customers, the local news agency TASS reported.

“We plan to launch the digital ruble project on April 1, with transactions involving individual transfers as well as payments in trade and service enterprises,” Skorobogatova stated at the Ural Forum Cybersecurity in Finance. She added that the banks participating in the pilot have technically confirmed their readiness to start testing the digital ruble.

The deputy governor clarified that general customers would not be able to participate in the pilot in the first stage, as the banks will enter the pilot with chosen customers. Following the first pilot stage, the Bank of Russia plans to determine how to scale the digital ruble further, Skorobogatova stated.

*Bank of Russia’s first deputy governor Olga Skorobogatova. Source: Bank of Russia*

The latest announcement by Skorobogatova follows the roadmap for the digital ruble rollout that the central bank officially introduced in June 2022. Initially scheduled for 2024, the consumer CBDC pilot was moved to an earlier date as the Russian central bank was looking for an alternative to the SWIFT payments system amid Western economic sanctions against Russia.

The news comes amid some Russian officials claiming that the Bank of Russia is considering a potential gold-backed token targeting cross-border transactions. Bank of Russia’s first deputy governor Vladimir Chistyukhin believes that such a “golden token” will help Russia create a new attractive investment product and build a demanded payment method in international settlement.

Russia’s Gazprombank recommends slow CBDC rollout fearing loss of income

Gazprombank, a subsidiary of a state-owned energy corporation, which participates in Russia’s CBDC initiative, fears losing a part of its income as the digital ruble replaces traditional fiat currency.

Gazprombank, a subsidiary of the leading Russian government-owned gas company, Gazprom, publicly proposed giving banks more time before implementing the digital ruble. The country’s central bank digital currency (CBDC) project has been accelerating due to global financial sanctions amid geopolitical tensions.

As reported by local media on Feb. 7, Gazprombank, one of the 15 banks participating in the CBDC pilot, issued a public statement with a suggestion to proceed with caution regarding traditional banks’ interests:

“It is imperative that banks take measures to mitigate potential losses. Hence, it is crucial to recognize the potential risks associated with the transition to a digital ruble and approach its implementation with caution, allowing the financial system sufficient time to adjust.“

However, the statement admits that the CBDC will help raise transparency across the Russian financial system and economy.

The Russian branch of McKinsey estimated the potential losses of traditional banks from the CBDC implementation at around $3.5 billion (250 billion rubles) in five years. At the same time, the consultancy firm estimated the retailers’ profit at $1.1 billion yearly.

The work on a CBDC in Russia started back in 2020. The digital rouble is currently being tested for settling with the banks and is expected to be completed this year. According to the Bank of Russia’s latest monetary policy update, the authority will begin to connect all banks and credit institutions to the digital rouble platform in 2024.

The Central Bank of Russia has also begun developing a cross-border settlement system using a CBDC. The country faced mounting financial and trade sanctions since the escalation of the Russo-Ukrainian war when it launched a full-scale invasion of Ukraine in late February 2022.

Russia to begin work on CBDC settlement system in Q1 as sanctions endure: Report

The country’s central bank will begin studying two possible cross-border CBDC settlement models this quarter.

Russia’s central bank is reportedly set to begin developing a cross-border settlement system using a central bank digital currency (CBDC) amid ongoing sanctions in response to its invasion of Ukraine.

The plans to move forward with Russia’s digital ruble are expected to come in the first quarter of 2023 and will see Russia’s central bank study two possible cross-border settlement models, according to a Jan. 9 report by local media outlet Kommersant.

The first proposed model sees various countries entering into separate bilateral agreements with Russia to integrate their CBDC systems.

Each agreement would be made to ensure the conversion and transfer of assets between the countries are in accordance with the rules of the agreements.

The second, more complicated model proposes a single hub-like platform for Russia to interact with other countries, sharing common protocols and standards to facilitate payments between the connected countries.

Roman Prokhorov, the head of the board of the Financial Innovations Association (AFI) opined that the first model was more simple to implement but less promising for bilateral interactions between countries.

The other option was more “advanced” and he considered an initial two-way system may be implemented, with China as the most likely partner given its “technological and political readiness.”

Reports in September claimed that Russia was planning to use its digital ruble for settlements with China by sometime in 2023.

Still, others believe Russia’s CBDC play won’t be hamstrung by technology, but rather by politics.

The vice president of the Association of Banks of Russia, Alexey Voylukov, said that introducing a digital ruble won’t change or improve Russia’s global political situation, and trials for the CBDC platform can only be undertaken with countries that are friendly withthe Russian government and technologically ready.

Previously, the Bank of Russia said it was looking to roll out its digital ruble by 2024, with all banks and credit institutions connected to the CBDC’s platform.

Russia has faced mounting financial and trade sanctions since its escalation of the Russo-Ukrainian war when it launched a full-scale invasion of Ukraine in late February 2022.

It’s since tried and pondered ways to skirt the sanctions, such as the central bank considering the use of cryptocurrencies in the country “only to support foreign trade.”

The Bank of Russia and the Ministry of Finance came to an agreement in September on a rule allowing Russians to send cross-border payments using crypto.

Russia to begin work on CBDC settlement system as sanctions endure