Asia and Eurasia
Rublefication or the Prospects of the Ruble in a New Era

The rublification of all trade and investment relations between Russia and its partners is a first and very important step on the way from currency sovereignty to a new role for the ruble as a reliable alternative to other currencies, writes Kubatbek Rakhimov, Executive Director of the Applicata Center for Strategic Decisions Public Foundation, Advisor to the Prime Minister of the Kyrgyz Republic (2019-2020).

The ancient Chinese saying, "May you live in interesting times", implies there’s something disturbing to come. But life is always more complicated than speculative constructions, and the world is going through one such moment at the present time. There is a second Chinese proverb that more accurately reflects the situation: "a changing world produces heroes". This has most clearly manifested in the economic life of the Russian Federation and the economies of the post-Soviet space gravitating towards it.

Without dwelling on many events of the spring and autumn of 2022, one of the most important tectonic shifts can be touched upon. I call it "rublification", to put it simply. In fact, we have witnessed the transition of the Russian energy trade to Russian rubles, a sharp contraction of excess imports while maintaining export earnings, and a corresponding stabilisation of the ruble against the US dollar, as Russia’s currency is 15-20% higher than it was in January 2022. I think that in a few years more profound scientific conclusions will be made on many aspects of the sovereignisation of the national currency in the face of an unprecedented break of the Russian monetary system with the US dollar and the euro.

Moreover, we are witnessing a sharp imbalance in the exchange rates of the so-called collective West. The euro collapsed to almost below the 1:1 ratio to the US dollar - the pound sterling has rushed to the same place and the Swiss franc exchange rate has been bouncing back and forth for a long time. As some economists bitterly joke, these currencies can be safely replaced by the US dollar: they have caught up with it and it is already easier for them to become a single currency.

Let's return to the ruble. Speculative assets rushed to the Chinese yuan, through which market players somehow project the US dollar, euro or other currencies. The volume of yuan trading on Russian stock exchanges by October 2022 has already exceeded the volume of transactions with the US dollar. This is normal, it is inevitable, especially in the context of the explosive growth in imports from China, replacing the flows that previously came from the EU and the US, as well as from a number of "unfriendly" countries. However, outside of speculative games, the transfer hot stocks to the yuan as a safe harbour, and servicing the trade flows between the Russian Federation and PRC, we almost do not notice a very important point.

The sovereignisation of the ruble has become an interesting process of returning (you can’t call it otherwise) to the trade of the allies of the Russian Federation in rubles, bypassing the US dollar and  euro. It is clear that on the global scale of world trade, these two currencies together exceed half of world trade turnover, while the national currency of the world's second-largest economy, the Yuan, accounts for only 4-5%. With all this, few people imagine the prospects of the ruble as a convenient trading and investment currency, at least on the Eurasian continent. If the power of the United States is largely based on the issuance of the dollar and the formation of a neo-colonial system where the whole world is dependent on the Federal Reserve System, then we must respond in a similar way.
World Economy
Prospects for De-Dollarisation of the World Monetary System and Settlements in National Currencies
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The world monetary system is not eternal but will evolve with environmental changes. At the end of World War II, the United States promoted the establishment of the Bretton Woods system, the core of which was the dollar as a means of valuation, trading, and value storage.

The rublification of all trade and investment relations between Russia and its partners is a first and very important step on the way from currency sovereignty to a new role for the ruble as a reliable alternative to other currencies. That is, the transition to a model where Russia transfers all its investment, credit and trade relations to its own ruble, like the transition of payments for hydrocarbons in the spring and summer of 2022, is quite possible and feasible, but will come with certain reservations.

In particular, there are assets of the Russian Federation in various international financial institutions. Take, for example, the Russian-Kyrgyz Development Fund (RKDF)  with an authorised capital of $500 million. It was created to facilitate the adaptation of the Kyrgyz economy to the realities of the Eurasian Economic Union and to strengthen the industrial and agricultural components of the national economy. It is clear that this is entirely the money of Russian taxpayers, and now, in a period of geopolitical turbulence, it is important to understand how prudently it’s being used, on the one hand, and on the other hand, why the assets of the RKDF are still denominated in US dollars, and not in Russian rubles or Kyrgyz soms.

Moreover, when creating the RKDF, it was assumed that the assets would total 1 billion US dollars, which at that time was comparable to the deposit base of the entire banking system of Kyrgyzstan. But it turned out that even half a billion dollars could not be easily and quickly used in the industrial and agro-industrial projects of a country with a GDP slightly below 8 billion US dollars per year

In fact, the total volume of potential investment projects in Kyrgyzstan exceeds 20 billion US dollars, since it includes the construction of a railway network with access to China, powerful hydroelectric power plants, the development of various mineral deposits, and good potential for agricultural products that are in demand not only amid markets in the EAEU, but also in other countries.

The excessive dollarisation of the Kyrgyz economy (more than half of loans are issued in US dollars) and extremely high loan rates in the national currency have led to a situation where lending to the real sector has become a problem, not to mention direct investment and project financing. Now there is a unique chance for the rublification of investment, credit and trade relations between Russia and Kyrgyzstan as a pilot project. The presence of a unique instrument like the Russian-Kyrgyz Development Fund, a "clean" balance in interstate relations (Russia for 31 years wrote off all the debts of Kyrgyzstan, an amount totalling more than 700 million US dollars, and is no longer a creditor of the external debt of the Kyrgyz Republic from 2016) make it possible to conduct this economic experiment quickly and painlessly. Russia is a key trading partner of Kyrgyzstan both in terms of exports and imports, transfers of citizens of the Kyrgyz Republic working in the Russian Federation account for more than a quarter of Kyrgyzstan's GDP - all this together gives hope for the success of the rublification of relations between allies in the EAEU as a whole. In fact, the same RKDF allocates loans in US dollars, demanding in return the priority of purchasing equipment or semi-finished products from Russian suppliers, but again in "unfriendly" currencies! It is time to cut this Gordian knot of dependence on a third party, and for this there are all the necessary prerequisites.

Extrapolation of the experience of the rublification of Russian-Kyrgyz relations to other members of the EAEU and participants in the CIS free trade zone (the key stakeholders are Azerbaijan, Uzbekistan and Tajikistan, which are not members of the EAEU) will allow the obtaining of the so-called minimax, that is, the maximum result with minimum effort in the face of risks and losses associated with geopolitical turbulence.

The US dollar actually has many faces and it has an interesting projection called the Eurodollar. Typically, this is a US dollar held outside the US banking system which is used to service international trade. The array of Eurodollars is so large that, in a hypothetical case of "homecoming", they could completely destroy the US economy (at least its financial system), causing a hyperinflationary tsunami. Such predictions are regularly voiced by economists (for example, Mikhail Khazin), but such a scenario is still unlikely. We are interested in the algorithm for building a stable system of circulation of the “external ruble” within the framework of actual rublification. Most likely, China's unique experience in splitting the yuan into onshore and offshore yuan, as well as issuing panda bonds denominated in yuan, will most likely be more applicable in this case.
Therefore, for rublification, there is both the world’s experience with such systems, and the economic space of allies and friendly countries, and the necessary technological basis. You just need to start with a specific country and work out all the necessary algorithms as part of a pilot project.

The use of advanced technologies such as digital currencies is extremely important for the described process. That is, the use of the digital ruble in itself is a powerful factor in promoting rublefication, which I call digital rublefication. It turns out that this process automatically makes life easier for everyone, since the use of the most modern digital technologies and the replacement of the US dollar as an instrument in trade, credit and investment will not be carried out mechanically by replacing one traditional currency with another, but in a revolutionary way - from the usual US dollar, tied to the banking system with correspondent accounts, intermediary banks, SWIFT (that is, full control by the US Federal Reserve) to the most advanced new currency options, albeit with their own financial technologies.

An example is the Indian telephonisation case, where various options for providing wired communications to many densely populated states of the country were discussed for decades, and, as a result, wireless cellular communication technology came along and immediately solved many issues facing modern communications coverage by eliminating the need to build out-dated infrastructure.

Another example is the construction of fourth and fifth generation cellular communication infrastructure (4G, 5G) “from scratch” in China, while the telecommunications companies of the US and the EU still beat back the costs of old and outdated communication  equipment and cannot easily and quickly move to 5G.

In fact, digital rublification can simultaneously solve many issues at once, both in terms of a technological leap and clear economic benefits for all participants in the process.
A sharp and significant reduction in transaction costs and the use of digital infrastructure, bypassing the classical banking system, instant transfers and much more from the new digital era - all this can serve as a weighty argument for potential partners among Russia's friends and allies.

If we are talking about a modern and sophisticated form of neo-colonialism through the monopoly of the global financial system and the issuance of a super-currency in the form of the US dollar, then decolonisation should go with a fundamentally different and advanced technology, already tested both on various kinds of crypto-currencies, and on completely legal and officially issued digital yuan, followed by the launch of the digital ruble. 

But we must be proactive rather than looking back at what has already been created and implemented, but try to become a world-class leader and maintain technological leadership in the future.

In such an asymmetric way, a new era can be brought closer - without superpowers and without super-profits for some countries due to the sophisticated exploitation of others. Russia and its allies have a chance to be at the forefront of progress.
Views expressed are of individual Members and Contributors, rather than the Club's, unless explicitly stated otherwise.