Can A Central Bank Digital Currency Wane The Effects Of Sanction In Russia?

Can a Central Bank Digital Currency (CBDC) wane the effects of sanctions on Russia?

In response to Russia’s invasion of Ukraine, the US and several of its allies decided to disconnect a few Russian banks from the Belgian-based Society for Worldwide Interbank Financial Telecommunication (SWIFT), which facilitates most commercial cross-border payments between firms banked in different countries. 

The decision was made to exert pressure on Russia as Western nations’ financial sanctions on the country grew more severe. Leaders from the US, UK, and Japan, among others, have endorsed disconnecting certain Russian financial businesses from SWIFT. Can this help put pressure on Russia?

According to a report in Official Monetary and Financial Institutions Forum (OMFIF), an independent forum for central banking, economic policy and public investment, though removing Russian participants from Swift and the dollar payments network will be a major setback for the country’s economy, the measure’s effectiveness may quickly wane as cross-border central bank digital currency (CBDC) networks may become priority.

The report goes on to state that the decision to disconnect many Russian institutions out of Swift was “something of a red herring”. 

It goes on to say that SWIFT isn’t a payment network, but only transports messages that define payments. That means Russia can transfer payments through alternative messaging platforms, though many of those are slow or underutilised, and many of their counterparties may refuse to work with them due to the sanctions.

Russia may have anticipated these sanctions and, so, started working on its own CBDC — the “Digital Ruble”. In mid-February, according to a statement from the deputy chairman of the Bank of Russia, Olga Skorobogatova, the bank, and market players had begun testing the Digital Ruble platform. 

The statement added that the first Digital Ruble transfers between residents had already been performed successfully.

Additionally, Russian entities may use cryptocurrencies to weaken the impact of the sanctions. Many predict that Russian banks and other entities may invest in Bitcoin and other cryptocurrencies to ease the situation. 

With cryptocurrencies allowing the entities to avoid the banking system, tracking the transaction will become difficult.

Also, according to a report in the Global Times, a few experts believed that the sanctions would have little impact on Russia’s economic fundamentals. 

Cited similar sanctions in 2014, such as the freezing of assets of some Russian enterprises and the suspension of certain bank cards, they said it did not destabilise the country’s economy at that time. 

The countermeasures Russia took then included government aid to large businesses and the legalisation of offshore capital returning to Russia.

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