Digital Ruble will dull the effect of US sanctions going ahead

The introduction of the Digital Ruble, Russia’s upcoming Central Bank Digital Currency (CBDC) will reduce the country’s reliance on the US Dollar, economists have said amid increasing aggressive sanctions being imposed on Russia as a consequence of its invasion of Ukraine.

Unprecedented sanctions from the Western world are rising the likelihood of Russia defaulting on its foreign debt payments, the Institute of International Finance (IIF) said earlier this week

“The cumulative effect of sanctions on the Russian economy to be strong, leading to a sizeable contraction of output this year,” the institute explained.  

The value of the Ruble has fallen from $76.2 last month to $116.8 earlier today despite desperate measures from the Russian government to prevent Ruble depreciation. The central bank doubled interest rates to 20% two days as over 50% of Russia’s foreign exchange reserves continues to be inaccessible to the central bank.

While Russia began the process of reducing its reliance on the dollar in 2014, the impact of international economic sanctions as witnessed during the crisis is only expected to accelerate the process.

Russia has already reduced the share of its reserves in USD and shifted to backing the Ruble mostly via Gold. The IIF reported that the share of USD in Russian reserves has fallen from 43% to 16% from 2014 to 2021.   

Economists’ opinion that digital currencies will play an important role in reshaping the Russian economy. Lyn Alden, founder of Lyn Alden Investment Strategies explained that the introduction of the Digital Ruble will dull the blow caused by economic sanctions going ahead:

“Similar to how Covid accelerated a lot of digital economies and stay-at-work adoption, this aggression by Russia and the West’s response in terms of sanctions and freezing of reserves, might accelerate the adoption of alternative payment channels and self-custodial stores of value.” 

Meanwhile, cryptocurrencies continue to be the saving grace for both Russian citizens who have now been locked out of the SWIFT system and Ukrainian citizens looking to preserve their funds and receive donations, showcasing the utility of digital currencies as a hedge against crises.