The Cryptoruble - Russia's Ambiguous Approach to Cryptocurrencies

Russian President Vladimir Putin has ordered the creation of a national, state-operated cryptocurrency - the Cryptoruble - to allegedly fight sanctions and stay innovative. The real motivation seems to be to maintain scrutiny over the public. 

Russian president Vladimir Putin has ordered the creation of a national, state-operated cryptocurrency as reported by Communications Minister, Nikolay Nikiforov, after a closed-door meeting in October. According to a recent report by the Financial Times, the “Cryptorouble” quoting Putin's economic adviser Sergei Glazyev, should help Russia to circumvent sanctions, specifically those imposed by the United States and the European Union for the annexation of Crimea, and military operations in eastern Ukraine. As Glazyev explained, “This instrument suits us very well for sensitive activity on behalf of the state. We can settle accounts with our counterparties all over the world with no regard for sanctions.”

The Cryptorouble will not be issued via mining, but instead by state authorities, and its potential gains to the fiat Rouble will be subject to a 13% tax. This tax will also apply should the owner fail to explain the origin of his Cryptoroubles. At this point, there is no information on how the currency could be applied against Western sanctions. It should be noted, however, that when introducing a new regulatory framework for cryptocurrency on 27 December 2017, just a few days before Mr. Glazev’s announcement, the Central Bank of Russia and the Russian Ministry of Finance did not see any need for a national cryptocurrency. At this occasion, the central bank’s First Deputy Chairman, Olga Skorobogatova, however, admitted that “the Bank of Russia is considering the possibility of introducing a supranational digital currency within the BRICS or the Eurasian Economic Union (EAEC).” Despite such contradictory statements, several points can be made about the adoption of national cryptocurrencies (vs. global/decentralized open source currencies like Bitcoin, Litecoin) by Russia.


"Russia was not able to provide basic conditions for innovation"


For years, the Russian government has demonstrated a concentrated effort to develop its IT and high-tech sector. However, the results have been meagre at best. Although the government did invest substantial amounts into various projects in recent years (e.g. Skolkovo Innovation Center), it was not able to provide basic conditions for innovation like an open competitive market with property protection, access to capital, and participation in the global tech ecosystem. Furthermore, the Russian Internet is restricted by blacklisting, censorship and monitoring.

This ambivalence can also be seen in Russia's stance toward the booming cryptocurrency environment. In 2017, President Putin met with Vitalik Buterin—founder of Ethereum, a programmable cryptocurrency—and was reportedly enthusiastic about the potential of cryptocurrency and blockchain applications. The Central Bank started the Masterchain pilot project, an Ethereum based blockchain system for financial services. Now, officials announced the Cryptorouble. At the same time, the Central Bank and Ministry of Finance prepared regulation that „does not and will not consider cryptocurrencies as settlement or payment means,” limits Initial Coin Offerings (a popular, mostly Ethereum based system of raising startup capital by issuing cryptocurrency) and is taxing cryptocurrency mining.

Obviously, by claiming they are not a payment method, limiting their funding, and taxing the participation in and management of their networks (also known as mining, the verification of transactions, maintenance of their ledger, and issuance of new coins), it is difficult to profit from the development of cryptocurrencies.


“The wider public will remain under careful scrutiny by Russia's institutions”


From the perspective of the Russian political system, this contradiction makes sense. A limited, privileged few (e.g. Dmitry Marinichev, Mr. Putin’s Internet ombudsman and crypto/mining farm owner) and those well-connected to the power centres will be able to access the crypto ecosystem. They can profit from Russia's abundance of (state-controlled) energy and cold weather for optimal mining or use, for example, anonymous transactions systems like Monero, which can to a limited extent, enable alternative financial settlements by institutions and individuals under sanctions. The wider public will remain under careful scrutiny by Russia's institutions, which can deliberately criminalize inconvenient individuals. A national cryptocurrency, especially if complemented with the regulation of physical money, would further enable a more convenient way for information gathering about citizens and their economic activity. The bonus would include a small saving in the operations needed to circulate physical money and even profit from electronic transactions, which is now collected for example by credit card operators.

So far, cryptocurrencies were hailed as the anarcho-capitalist and libertarian dream come true that will eventually render national currencies obsolete. Russia’s attempt could turn technology against such ideals and become a tool for a more efficient system of controlling its citizens. Down the road, Russian officials will have to solve two basic but crucial problems: users and markets’ trust in the Cryptorouble, and keeping up with the massive development of the crypto technology ecosystem.

But, what about Mr. Glazev’s plan to circumvent sanctions? The current cryptocurrency ecosystem, the capitalisation available, and the various bottlenecks like transaction speed, liquidity of exchanges, and security, would make it difficult to settle accounts and acquire capital for an economy of the size of Russia. Furthermore, all banks, businesses and institutions dealing with Russia would still be very careful to settle their bills in crypto as there still are many ways to track and sanction it by law enforcement.


You can see the original article at the Prague Security Studies Institute blog.

About author: Boris Kalisky


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