digital ruble

As the country's central bank plans its central bank digital currency pilot, banks are concerned its introduction could cause funding costs to rise.

Russia is among a handful of countries — including China, South Korea and Sweden — to take a decisive step towards establishing a central bank digital currency (CBDC). The Central Bank of Russia (CBR) plans to begin its digital rouble pilot at the start of 2022, which it hopes will boost competitiveness in the domestic economy through lowering transaction costs and digitalising payment services. 

The planned digital rouble will be available to both consumers and businesses, who will store the currency in digital wallets available through the apps of domestic financial institutions. 

At a later stage, it is hoped the digital rouble could also be used in offline transactions, improving financial inclusion for people in remote areas of the country lacking internet connectivity. However, the required technology for offline transactions remains a long way off.

Although the digital rouble will initially be only used in Russia, over the longer term it is hoped the new form of currency will also be used for cross-border transactions, which is appealing to the Russian government amid constant threats of being cut off from global payments network Swift.

According to the CBR: “The digital rouble will provide tangible benefits to citizens and firms, including safety of central bank money, easy access and lower transaction costs.” 

The central bank estimates that future payment commissions could be cut in half, while person-to-person transfers will be free of charge. At the same time, the CBR’s report on how the concept will work concedes that the introduction of the digital rouble could potentially affect the transmission mechanism of the monetary policy, financial stability, liquidity and profitability of the banking sector. 

As households and businesses transfer money from bank deposits to digital roubles, the liquidity surplus in Russia’s banking system could quickly turn into a deficit

In a speech in April, Alexander Khandruyev, vice-president of the Association of Banks of Russia, expressed concerns that the “imprecise” definition of the digital rouble could lead to financial instability and undermine the Russian banking system.

Banks’ reluctance to accept the new form of national currency is hardly surprising. Existing payment systems will be disrupted, cutting into profits — particularly those of smaller banks unable to reduce transaction fees. Banks have been the primary beneficiaries of rising domestic demand for electronic payments. From January 2017 to June 2020 the share of electronic payments in retail trade, including services, reportedly expanded from 39% to 69%. At Sberbank, the country’s largest bank, payment revenues accounted for 14% of total operating income in 2020

Moreover, as an increasing number of households and businesses transfer money from bank deposits to digital roubles, the liquidity surplus in Russia’s banking system could quickly turn into a deficit. Particularly vulnerable to outflows are current accounts, on which banks pay symbolic interest rates. These accounts are an important funding source: the CBR estimates it was the source of a quarter of the Russian banking sector’s pre-tax profit between 2018 and 2020. Going forward, Sberbank, for example, was planning to use these accounts to counterweigh an expected decline in net interest margins by 2023. The share of current accounts in total deposits is expected to grow from 44% to 48%, according to Sberbank’s 2023 strategy. 

It is, therefore, likely that funding costs of Russian banks will rise with the introduction of the digital rouble and, possibly, push up loan interest rates for households and businesses. If the competitive environment will not allow banks to increase their lending rates, they could raise commission rates to boost profitability. The latter will put them at a disadvantage with Russian tech giants and fintech groups, which are playing an increasing role in the domestic financial system. Banks will also incur additional costs for setting up, testing and operating the new system. Sberbank’s estimates point to between $270bn and $337bn of additional costs to the banking system to ensure the cyber security of the digital rouble.

The CBR will discourage large deposit outflows by making wallets interest free and, as a result, reduce its potential use by consumers to covering anticipated payment needs as opposed to storing value. Although the central bank stands ready to provide liquidity to the banking sector, outflows could be high in the short term or in times of stress for the domestic financial system. The regulator admits that, if necessary, limits could be placed on transfers from bank accounts into digital rouble wallets, at least during the introductory stage.

Nuriya Kapralou is an economic research consultant.


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