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Russia’s Push Into Crypto Is a Big Step Backwards


The country is moving toward a tiered financial system, using rubles for enemies and bitcoin for friends. But it’s tried – and failed – with this approach before.

While most of the world watches in horror as Vladimir Putin advances his military invasion of Ukraine, Russia’s congruent foray into Bitcoin, gold-linked rubles and central bank digital currencies are triggering a conflicted response from financial technology and crypto enthusiasts.

On one hand, the moves by Russia vindicate and legitimize alternative-money visions for the world. On the other, they empower the ambitions of a rogue leader who has been condemned by the international community.

All indications are that Russia is more focused on reviving failed economic systems of the past rather than moving ahead with anything truly pioneering. Consider the country’s eagerness to fragment its money system in a bid to achieve financial autarky as evidence.

Russia has responded to international sanctions in recent weeks by demanding “hostile states” pay for natural gas in rubles, whereas it’s been proposed that “friendly” countries can make payments for the same resources in digital currencies such as Bitcoin. At home, a population largely cut off from international payment systems such as Apple Pay, Visa and Mastercard will now be directed to the Russian central bank-managed MIR system — a likely precursor to a formal central bank digital currency.

Far from being a progressive move, these developments hark back to the last time Russia put its faith — unsuccessfully — in technologists and data science to unshackle itself from the global financial system. That was under the grand vision of the old Soviet planned economy, known as Gosplan, which focused on centrally managing the allocation of resources between producers and consumers. The end goal was to do away with money altogether, but planners understood that a transition period involving a multi-tiered money system would be necessary.

The purpose of this system was to use money and prices passively, to facilitate ties between sectors, not as a means of generating individual profit or wealth accumulation, according to Yakov Feygin, associate director of the Future of Capitalism Programme at the Berggruen Institute and an expert in the Soviet planning model.

In the end, there were three forms of money under the Gosplan system. Nalichnye rubles, or “cash rubles,” were paid out through wages that could be used on the retail market domestically, but in controlled ways. Beznalichnye rubles, or “cashless rubles,” were mostly treated as a bookkeeping system for use between enterprises to facilitate central planning and control. Finally, there were perevodnyii rubles, or “transferable rubles” to be used as a reserve currency for trade with “friendly” countries within the Council for Mutual Economic Assistance.

Trade with unfriendly countries, if it was to occur, would be conducted via unofficial countertrade channels, usually involving corporations indulging in swap deals on a marked-up price basis. This trade would often be financed via letters of credit issued by banks in neutral states, which knew the entities were good for the deals because of unregistered securities or cash they kept in their vaults — the cryptocurrency of their day.

By the mid-1980s, however, the system was visibly failing to deliver on its promises of prosperity. Inflation, priced in local currency, was skyrocketing, shortages of goods were appearing everywhere and the black market was running almost exclusively on hard currency such as U.S. dollars, which the Soviet system could not control. 

It’s tempting to attribute Gosplan’s failure to a lack of data or insufficient processing power. Indeed, in some economic quarters, it’s been argued that if Soviet planners had access to the powerful computers and machine-learning systems of today, many of the capital misallocations that led to the downfall of the USSR might not have happened. This time, the theory goes, the internet of things and artificial intelligence are far more likely to make a demonetized Gosplan work.

But this is a dangerous assumption. Most Western academics specializing in the period agree that Gosplan didn’t fail because of a lack of data or insufficient processing power. It failed because the quota-based system was based on misaligned incentives and encouraged corruption across state-led enterprises. The system’s preoccupation with monitoring past and current behaviors, meanwhile, discouraged innovation and free enterprise.

However, clues that Russia might be inclined to move in this direction, regardless of these insights, have been mounting ever since the country found itself on international sanctions lists in 2014.

In 2017, I was asked at a Russian diplomatic function if the country’s plentiful supplies of cheap energy would ensure it did well in a Bitcoin-based economic framework. As the token crypto cynic in the room, I quipped something about how Venezuelan citizens’ embrace of Bitcoin had done little to reinvigorate its energy-rich economy — a point that still stands in 2022.

But then came Russia’s well-publicized efforts to move its official currency reserves away from the U.S. dollar and toward yuan-denominated assets and gold, and a more neutral stance on crypto. By November 2020, Moscow City Hall had announced it was planning to roll out a sophisticated citizen surveillance system to collect the digital profiles of Muscovites, and an official consultation on central bank digital currencies was underway.

Perhaps most telling, it was on Feb. 15 — days before Russia’s invasion of Ukraine — that the Bank of Russia announced the launch of its digital ruble pilot.

Knowing what we know now, it might be tempting to conclude that the rise of fintech and crypto may have played into the hands of autocracies such as Russia. But this would be wrong.

Like any weapons system, financial technology, especially cryptocurrency, is ultimately neutral. It can be used for good or for bad. If Russia continues to steer these resources to tier its financial structure, limit freedom and close itself off from the international arena, history suggests it will be taking a big step backward.

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