Russia Launches Blockchain Initiative to Challenge U.S. Dollar's Global Dominance

Key Takeaways

• De-dollarization Drive: As the rotating president and chairman of BRICS, Russia is spearheading efforts to establish a blockchain-based international payment system within the alliance, aiming to reduce reliance on the U.S. dollar.

  
  

• A wider trend: Russia's push is part of a wider trend of countries exploring alternative payment systems and currencies, aiming to improve their financial autonomy.

  
  

• Gradual Shift: De-dollarization is a gradual, incremental trend rather than an abrupt change. The integration of blockchain technology and initiatives like the BRICS Bridge platform signal a paradigm shift towards non-dollar settlements.

• BRICS integrate: The integration of advanced financial technologies like blockchain and the emergence of digital currencies, notably China’s digital yuan, have the potential to transform cross-border payments and trade processes, facilitating broader economic integration within BRICS and beyond.

  
  

• Challenges to implementation: There are a number of practical challenges associated with such systemic change.

Russian-led De-dollarization Since assuming the role of rotating president and chairman of BRICS on January 1st, 2024, Russia has been at the forefront of promoting de-dollarization within the alliance. The initiative focuses on creating a blockchain-based international payment system among member countries.

The Ushakov Interview Yury Ushakov, a foreign policy aide to the Russian president, recently highlighted Russia’s commitment to establishing an independent payment system within BRICS. Ushakov emphasized the importance of leveraging modern tools like digital technologies and blockchain to achieve this goal, with a focus on ensuring convenience, cost-effectiveness, and non-political nature for governments, businesses, and individuals.

Referencing the 2023 Johannesburg Declaration, Ushakov urged BRICS nations to prioritize transactions in national currencies and fortify banking networks for international dealings, by diversifying currency usage beyond the U.S. dollar.

In 2023, Russia also revealed intentions to create a “special organization” dedicated to mining and transferring cryptocurrencies across borders, aiming to streamline global business transactions involving digital assets. This initiative occurs amid the ongoing war in Ukraine as Russia faces extensive American-led financial sanctions, making it the most sanctioned country globally with over 16,000 sanctions. 

Despite Western sanctions, Russia has evaded restrictions through growing economic ties with BRICS nations, particularly China and India. For instance, a significant portion of Russia’s imports are now invoiced in Chinese yuan, while trade with India has doubled to over $50 billion. Despite challenges like high interest rates, inflation, and frozen foreign reserves, Russia’s economy persists. 

Analysis

In the near term, Russia’s plan to implement a blockchain-based payment system encounters significant hurdles due to the restrictions barring transactions with its major banks by Americans and Europeans.

This limitation, compounded by the recent imposition of over 500 new sanctions by the U.S. in response to events such as the invasion of Ukraine and the passing of opposition leader Alexei Navalny, diminishes the likelihood of Russia successfully introducing a blockchain-based alternative in the near future.

A discernible momentum, however, for de-dollarization is currently underway, marked by incremental policy shifts favoring non-dollar settlements. That is because de-dollarization involves a multitude of incremental initiatives encouraging non-dollar transactions, unfolding as a gradual, secular trend rather than a singular, decisive strategy.

Brazil, India, and South Africa, among others, have consistently backed BRICS’ collective statements advocating for reform in the global financial system dominated by the dollar. This support includes efforts to encourage the use of local currencies in international trade and development financing over the last twenty years.

For the Global South, the benefits of utilizing local currencies in international trade and financial transactions extend beyond mere economic autonomy; they facilitate the strengthening of economic ties and enable seamless transactions between BRICS nations and their trade partners.

While Ushakov’s recent announcement lacked explicit details about the blockchain payment system’s contents, such a system could streamline cross-border payments, reducing costs associated with currency exchange, transaction processing, and the need for intermediaries.

Implications of the Blockchain Initiative

• Cross-border payments: If successful, the initiative has potential to become an alternative to SWIFT.

  
  

  • By June 2021, the digital yuan had been utilized in over 1.2 million scenarios, with 20.87 million personal wallets and 3.51 million corporate wallets opened, facilitating 70.75 million transactions valued at approximately RMB 34.5 billion. 

    
    

  • It is anticipated the digital yuan’s influence will grow, particularly within the Belt and Road Initiative (BRI) network and among China’s major trading partners.

    
    

  • Companies trading with BRICS need to closely monitor the developments and must prepare for the ascent of digital currencies in global and regional trade. 

    
    

• Risks associated with Blockchain: Utilisation of Blockchain technology in cross-border payments carries inherent risks, primarily stemming from its decentralised nature and anonymity. 

  
  

  • The accessibility and anonymity of cryptocurrencies facilitate their use in illicit activities like money laundering and tax evasion.

    
    

    • North Korean hacking group was tied to the $625 million hack of crypto currencies.

  
  

  • The utilization of blockchain in financial systems also presents practical challenges. While it enhances transparency, it faces scalability and efficiency issues, notably in the context of CBDC. 

    
    

    • Transactions on blockchain often entail high costs and delays due to confirmations required, posing obstacles for everyday commercial transactions. 

      
      

    • The transparency of blockchain also raises privacy concerns, especially as CBDC lacks the anonymity of cash, creating compliance hurdles for banks regarding Know Your Customer (KYC) and anti-money laundering (AML) regulations.