Of Dollars and Crypto Roubles

Paul Goncharoff

Over these holidays, here in chilly Moscow I had the chance to catch up socially with business contacts and friends while all Russia took a 2-week time-out. While socializing and digging around, a few perspectives emerged that seemed to find confirmation among various dissimilar interest groups. As my interest is mainly business and Russia, I thought to share them in this opinion piece.

The de-dollarization trend in Russia is alive and well. To begin with, during 2018 the central bank of Russia transferred from US Government securities over $100 billion to yuan, yen and euros. Reserves in euro increased from $102 billion to $147 billion. Reserves in yuan from $23 billion to $67 billion, and yen increased from zero to $20.6 billion. 

The share of investments geographically attributable to the United States dropped from 29.4% at the end of March 2018 to 9.6% at the end of June 2018, and the opinions seem to be that as of the end of December 2018 it may even be below 5%.

So where does Russia go from here? Many opinions, few facts, yet the economy is chugging along, people are being paid, eating and getting around. What many agree on is that something is cardinally in the process of change as it relates to Russia, the Ruble and their geo-economic place in the world.

One excellent and sadly underappreciated fundamental indicator, which recently came out, was the economist’s Big Mac Index. This shows the dollar equivalent for a Big Mac in a number of countries. In my personal gastronomic opinion it is a realistic and basic means of comparing actual value, stripped of the many complex and constantly revised formulas used for public announcements of inflation, GDP, FIAT currency value, and so on.

This index is based on purchasing-power parity. This means that ideally exchange rates should move towards a level that would make the price of the same item the same in different countries. In this example, the item is the humble Big Mac found in over 110 countries. If the local cost of a Big Mac converted into dollars is above $5.28, the average price in four American cities, a currency is overvalued; if it is below, it is cheap.

Metrics such as the Big Mac index, while on the surface are amusing; it in fact clearly shows the on-the-ground fundamentals of how far currency values are distorted and out of sync. The exchange values are driven still further into La-La land by capital flows, fear, greed, and through the interventions of various geopolitical policymakers.

If we believe in the Big Mac Index, then the Russian ruble is incredibly undervalued vs the dollar, which is unsurprising in this era of manic sanctions and trade restrictions. According to Big Mac, the Russian ruble, for instance, is 57% undervalued to the dollar. 

Russian Cryptocurrency?

Another trend that keeps raising its head and will not simply give up and die is the prospect of Russia implementing officially a form of cryptocurrency. Over the past 4 years, the notion of a Crypto ruble has kept banging on the door of credibility. The other day a Russian economist, Vladislav Ginko, who is also a professor at the Russian Academy of National Economy and Public Administration under the President of the Russian Federation, opined that the Kremlin would soon begin to invest in crypto (BTC or ETH) to get out from under the sanctions whip and further diversify its cash reserves using cryptocurrencies. He apparently even went as far as to confidently claim that the Russian government would begin to diversify its reserves with the help of Bitcoin in February, when the US Congress is expected to introduce further new anti-Russian sanctions. 

Recall that from October 2018, the Russian government is preparing a draft for the de-dollarization of the Russian economy; however, this does not mean a complete rejection of the dollar, just a more sensibly diversified exposure that is in keeping with the global trend.

At the same time, more practical voices maintain that nothing extreme is likely to occur, much less by February 2019 as it would take a major overhaul to somehow combine Russia’s (or any other countries) traditional financial system with cryptocurrencies. That is a process which could take a decade or longer. Furthermore, the idea expressed by Ginko sounds absurd in light of the lack of legislative regulation of cryptocurrencies in the territory of the Russian Federation.

In spite of the polar difference in opinion, the trend towards using a cryptocurrency, let’s call it a “crypto ruble” seems to be realistically evolving to one degree or another. The idea to use digital assets at the state level would require the creation of such an interstate cryptocurrency, which would then become a unified system of payments between countries.

The Russian Association of Cryptocurrency and Blockchain (RACIB) recently announced that the government’s idea for a state-issued cryptocurrency, known as the Crypto Ruble, might be launched as soon as by the middle of 2019. The Russian government has been agonizing back and forth on developing the Crypto Ruble since 2015. 

The Government and the Central Bank of Russia were expected to prepare regulatory measures for Initial Cryptocurrency Offerings (ICOs) and cryptocurrency mining by July 2018; however, this has been pushed to mid-2019. Back in 2018, one of President Putin’s advisors mentioned that the Crypto Ruble could help the Russian government strengthen its economy by reducing the impact of international sanctions against the country. According to a Russian crypto news journal Forklog, the coin is set to be pegged to the ruble, be non-mineable, and will be the only legal cryptocurrency in the country. The government hopes the Crypto Ruble will attract foreign cryptocurrency investments.

As recently as this past November the Chairman of the Russian State Duma Aksakov said that the “crypto ruble,” may appear after the adoption of laws regulating the cryptocurrency industry in Russia, and would be “the same ruble, just in encrypted form.” He further explained that it would be possible to change the Russian crypto ruble for the equivalent in fiat money: “For example, you bring 100 thousand roubles to a bank and get 100 thousand crypto roubles, one to one for fiat money. You use these funds to buy goods fixed in the blockchain.”

While the Russian Government has been on an argumentative learning curve where cryptocurrencies and their regulation is concerned, it is heading in the direction of acceptability. Recently the CEO and Chairman of the Executive Board of the largest Russian bank Sberbank Herman Gref considers both cryptocurrencies and Blockchain to be the “new huge technologies whose power cannot be realized at the moment.” He also declared “in no circumstances should [cryptocurrency] be banned”.

As time waits for no-one, Sberbank is soon to launch a cryptocurrency exchange in its Swiss branch, Sberbank Switzerland AG. The Russian bank chose Switzerland for the exchange location because Russian authorities do not currently allow cryptocurrency operations, while cryptocurrency exchange is legal in Switzerland.

Whatever the timeline really is, one thing is certain that Russia is making serious strides to ensure that it is globally trade-capable, despite the global politics of restrictive trade that is popularly fashionable in the west. This is clearly seen in direct investment projects for the Russian Far East where cryptocurrency is the investment medium for bricks and mortar construction and similar property development projects.