International Finance
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Inside Russia’s stablecoin initiative

The project raises legitimate questions on whether a multinational stablecoin can strengthen trade and reduce US dollar dominance

Russian President Vladimir Putin is all for cryptocurrency—the pivotal factor accelerating the country’s interest in building a digital economy. Two years ago, something stood out of the ordinary in his address to the Federal Assembly, when he emphasised, “Build your own digital platforms.” It pointed to Russia’s financial literacy strategy and even the possibility of introducing a stablecoin to evade western economic sanctions.

It was in the same year that Putin held a discussion with ethereum co-founder Vitalik Buterin and miners from fifteen countries, including the US, India, Israel, Armenia and Turkey to seek recommendations and understand their approaches to mining regulations. It was, perhaps, his idea to launch a multinational stablecoin initiative which would typically involve digital currencies backed by commodities. Russia’s proposed stablecoin initiative has received full support from the member states of BRICS and the Eurasian Economic Union. The expectation is that stablecoin will reduce corruption, facilitate trade and strengthen the economies of those countries involved in the initiative.

BRICS experiment in multinational stablecoin initiative
BRICS which is a group of five emerging economies—Brazil, Russia, India, China and South Africa are working together to create a single payment system and make settlements in a single cryptocurrency. Last year, they announced the development of BRICS Pay, a cloud platform designed to link the national payment systems of those countries to create a digital wallet. The proposed digital wallet once launched will make it possible for buyers to purchase goods and services in any of those countries irrespective of the currencies held in their accounts.

It is important to Russia and other member states because it could help them achieve mass adoption of cryptocurrencies and peer-to-peer transfers eliminating middlemen and challenges in fighting against money laundering, observed the Financial Action Task Force. Dmitriy Sheludko, member of the commission for blockchain technologies and cryptoeconomics Investment Russia, expert in cryptocurrency trading and CEO of CoinBene, told International Finance, “Cryptocurrency stablecoins have established themselves as a universal and fast means of payments around the world. This has made central banks change their processes and keep up with the times.”

A bold attempt at dedollarisation
The stablecoin development is a major step toward something significant—it will result in the integration of BRICS member states as they seek dedollarisation and disassociation from the US-dominated global banking system. That could be a turning point for BRICS member states to further reduce the share of settlements in US dollars. The share of the US dollar in foreign trade settlement has reduced from 92 percent to 50 percent in the last five years. It appears that the creation of cryptocurrency for settlements can be especially convenient for supranational organisations such as BRICS.

Experts believe the main reason for stablecoin development is to reduce dependence on transnational payments amid rising geopolitical tensions. Dmitry Labokho, who has been actively working with China for Russian companies in the field of cryptocurrency, in an interview with International Finance said, “The point of creating a stablecoin is to get away from the diktat of the dollar and get some kind of instrument of netting without complicated external control and to provide through the resources that are stored in the depths that countries have.”

Russia, China and India are exploring an alternative to the US dominated Society for Worldwide Interbank Financial Telecommunication (SWIFT) payment mechanism. For that reason, Russia’s financial messaging system SPFS will reportedly be linked with China’s Cross-Border Interbank Payment System and India plans to link the Central Bank of Russian Federation’s platform with a service that is underway. In practice, this new system will act as a ‘gateway’ while transcoding payments messages in line with a particular financial system.

Russian companies seek an alternative to US dollar
Building an alternative for the US dollar is perceived to be an integral part of asset-pegged stablecoins. Interestingly, “Russian commodity companies want to use stablecoins instead of the dollar in mutual settlements. In addition, this would help the country to get away from sanctions,” Denis Chernookiy, assistant director of Integration Advisory Group in KPMG Russia, told International Finance in an email interview. Last year, a prominent mining company Nornickel which is owned by Russian entrepreneur Vladimir Potanin announced the development of its own stablecoin tied to the company’s metals. “It was slated for 2019, but has been postponed due to the current position of the state. The oligarchs are unlikely to become a locomotive for the development of stablecoins in Russia, since their fate depends too much on the central government.”

Russia’s efforts in developing an oil-backed stablecoin
The Central Bank of Russian Federation has already started testing stablecoins pegged to commodities in a regulatory sandbox. Last year, it was reported that the country was preparing to launch an oil-backed stablecoin.

Having an oil-backed stablecoin is a logical solution to the Russian economy on the back of the current state of the oil market and surging dollar value. Sheludko sees positive signs for Russia in this context, as he points out that “When a stablecoin is created at a national level, trade relations across the country will go to a whole new level in terms of speed and convenience of mutual settlement processes.” Arguably, it could even limit the US influence on the Russian economy—and more importantly, help the country to circumvent sanctions and trade restrictions imposed by the Trump administration.

This particular attempt requires dedication and movement in the right direction to optimise the cryptocurrency industry. “For the development of cryptocurrency, it is necessary to build the right bridges between organic, direct investment and the industry. At the same time, the flexibility of attracting resources should be combined with a responsible approach to investment,” Chernookiy said. “An approach in which investments are perceived as a tool and not just funds received from the investor is required. The stablecoins for the development of which big businesses advocate it could help this.”

Real intent behind testing an oil-backed stablecoin
The push for stablecoin remains debatable in Russia. Despite mixed views, the central bank testing an oil-backed stablecoin does not imply it will function as a means of payment or become a surrogate for money. For now, the idea is to simply understand its potential uses by pegging to another asset. “I don’t believe in an early launch of stablecoin as there seemed to be too much controversy even during the discussion phase. If the stablecoin works, it will allow the member countries to work more freely together, without involving the FRS or the Central Bank of Europe,” Labokho said.

Is it a far fetched idea?
Indeed, stablecoin talk has received a lot of attention and criticism at the same time. “This initiative does not go beyond the talk, especially if you are talking about the deep involvement of all potentially interested countries,” Labokho explained. Pavel Grachev, who is the co-founder of Cyberian Mine GmbH considers stablecoin as a “Trojan horse for truly decentralised technology.” Some experts argue that it is not possible for the proposed stablecoin to become an alternative to the US dollar—or at least it is a far fetched idea. In fact, Grachev seconds that thought in an email interview with International Finance, as he explained, “It could turn out to be an alternative for some national states pushed by Russia into the EAEU to adopt eRouble. But even that is an enormous task. As far as international trade is concerned, there is no alternative to the US dollar and it is unlikely that any (stable) coin would have a chance of replacing it in the foreseeable future.”

Positives for Russia’s business, trade and crypto industry
But when—and if Russia launches an oil-backed stablecoin the implications for businesses and the cryptocurrency industry might be huge. For businesses, it might even lead to the “possibility of achieving a larger investment during an IPO and making it easier to hedge investment risks,” Chernookiy said. In the midst of all this, an oil-backed stablecoin could even be an opening for cryptotraders to start participating in oil trading markets.

Another interesting fact is that the proposed stablecoin could result in a “great revival and development of cryptoeconomics in Russia and the world,” Sheludko said. In addition, he adds that without this transformation, there is a good chance that “We will live for more than a decade in the current economic situation and all the old problems that have risen already.” In short, developing a stablecoin is a boost to the Russian cryptocurrency industry because “there will be a varying number of innovative projects in the pipeline waiting to offer services and products related to the national stablecoin and other crypto assets.” The outcome could have a profound effect on trade and corporate relations between the public and the private sectors in Russia.

Overlooked is the fact an asset-backed stablecoin could positively support economies against global crisis. For example, the current pandemic has forced China to freeze its production and the rest of the world is facing the wrath of the situation. In theory, “by making commodity-money settlements faster and more convenient will reduce the effect of such crises as goods will be produced and delivered on time,” Sheludko explained.

Again, if Russia strengthens efforts in stablecoin development it will provide “unlimited opportunities for free and transparent trade relations within the state and in the global world,” Sheludko emphasised, stating that “the simplicity, speed and transparency of operations to trade with anyone in relation to any product or service” will make the country more sophisticated in trade and technology by “removing various barriers of existing commodity-money relations.”

Its energy sector necessitates digitisation
Digitisation is imperative to Russia’s energy sector because it already ranks fourth in the world for primary electricity production, energy consumption and carbon emissions—and the Russian Natural Resources and Environment Ministry has further acknowledged that the country is heating faster than the rest of the world. Now numbers show that 80 percent of Russia is dependent on exporting oil, natural gas, timber and metals. “The strength of Russia’s dependence on hydrocarbons lies in the streamlined process of trade in raw materials and a large lobby to support these processes,” Sheludko said.

In 2018, Putin signed a decree establishing a Digital Economy state programme to diversify Russia’s hydrocarbon-intensive economy—and digital energy infrastructure is seen as a key component of the programme. Stablecoin can contribute to Putin’s ambition in its own way. “When states seriously engage in the establishment of other areas of the economy and the introduction of innovations, including the creation of stable national currencies, this deviation will lead to a change in the structure of state revenue generation and hydrocarbon dependence will be removed,” Sheludko explained.

Against this background, the Ministry of Digital Development, Communications and Mass Media of the Russian Federation has developed projects focused on digitalisation, regulation and coordination of Russia’s energy sector. For example, Russia’s national energy grid operator Rosetti in collaboration with technology startup Waves is testing a blockchain solution for payments in the retail electricity sector in Kaliningrad and Sverdlovsk regions. “The stablecoin could make it so much easier for companies to raise funds on the basis of the ICO for such projects than to receive state funding,” as Chernookiy sees this as “the only lever of change so far.”

Solarisation of stablecoin is as important as stablecoin itself
Ever since the talk of building a stablecoin started there has been speculation on whether it will help Russia and other countries involved to diversify away from their hydrocarbon energy intensive and dependent economies. The solution to this problem is solarisation of stablecoin. But for Russia, utilisation of solar energy only stands at 0.03 percent.

Solarisation is highly crucial because it is estimated that more than 41 percent of the world will be using electric energy-intensive blockchain and smart contracts. Last year, the UN published the Emissions Gap Report 2019 which found that temperatures are expected to rise 3.2 degrees celsius above pre industrial levels by the end of the century if this technology is fuelled by hydrocarbons highly subsidised by member states. To make matters worse, the BRICS member states are not on track to prevent 1.5 global warming.

A report published by the International Monetary Fund ranks Russia third in subsidies of the hydrocarbon industry valued at $551 billion and it houses the world’s largest gas reserves, equivalent to 27 percent of the total. It is worth noting that the country’s tax policy is majorly hindering solarisation as it imposes tax on 13 percent of carbon emissions from its energy use. The problem is “the tax will push mass investors away from stablecoin and the mass boom will not happen,” Chernookiy explained.

Taxation is hindering solarisation
The path to taxation taken by the Russian government is partially slowing down the country’s cryptoeconomics. According to Sheludko, “It is understandable that both stablecoin and cryptocurrencies will be subject to taxation, but the country needs to be aware that making the process complicated will not make crypto-economics more effective than previous monetary relations. Thus, a more simple and flexible approach is needed for such innovations.” Currently, Sheludko as part of Investment Russia is working on a cooperation to develop flexible taxation of cryptocurrencies and national stablecoin.

In this context, Chernookiy speaks from an objective standpoint that “For a preferential tax regime to appear, the state must learn to use the benefits of stablecoin for its own purposes. This experience will not come in one or two years and during this period the development will not be very rapid.”

Frailty of Russia’s approach need to be addressed
But even if Russia makes progress, there are fears associated with the possibility of stablecoin development in the country which further pronounces the “head of central bank Elvira Nabiullina repeatedly stating that the financial regulator will not allow cryptocurrency circulation in Russia,” Chernookiy said. “Imagine, if a ruble stablecoin is issued in Russia, the private companies will have an opportunity to organise the circulation of an analogue of the national currency in private blockchains out of the control of the central bank. With that, stablecoins can be exchanged for both rubles and cryptocurrencies. According to Nabiullina, ‘if, for instance, individuals are allowed to keep money in accounts with the central bank, it could significantly change the passive base of commercial banks. During uncalm times, the flight of deposits and overflow of funds may begin’. This could eventually lead to the collapse of the banking system’”—a true nightmare to the Russian economy.

These fears will only make the situation bleak and there is no sense to use a new tool if it does not bring obvious advantages. “State policies together with the lack of drivers of growth in interest in cryptocurrency may reduce its investment attractiveness,” Chernookiy said. On the downside, it can even cause an “outflow of capital from cryptocurrencies and provoke the beginning of a phase of long-term decline in the value of digital assets, which will only increase as the stablecoins rise in price relative to fiat currencies.”

Although many have cast doubts on Russia’s stablecoin development, Labokho said that the country has not yet made up its mind about how to treat cryptocurrencies. “Once again, what is planned to be created has nothing to do with the current cryptocurrencies. But its release will really push the government toward stricter regulation of this sphere. Putting this in perspective, Russia revising its approach toward stablecoin will see a new round of development.

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