Where finance and media intersect with reality


Is Putin’s end game the roll out of a domestic CBDC?

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IK – I’ve received a guest submission from an informed source that I can vouch for (to some degree). The author wishes to remain anonymous but what I can tell you is that he runs a global technology company from the UK and has close family and assets in both Russia and in China. He was also extremely ahead of the curve on some other major stories in 2021 involving trade finance shenanigans. The TLDR of it is that he believes Putin isn’t mad, but focused on strategically cutting himself off from the global economy for a different purpose. He wants an excuse to onboard the entire nation onto a digital currency plaform that’s 100 per cent controlled by the state so as to better control the domestic economy which is facing unparalleld pressure.

As someone who has followed the evolution of central bank digital currencies (CBDCs) for years, with exceptional access to decision makers in the field, I have some insight into goings on in this area. Over the years I have been very vocal about how CBDCs could be misused by authoritarian states and how even in Western economies they could lead to a counterproductive “gosbankification” of the economy. I think the analysis this author provides is therefore plausible, which is why I am printing it.

I will also add an anecdote: In 2017 I was invited to a strange little UK fintech gathering at the Russian ambassadorial residence in Kensington, hosted by Russian Ambassador Alexander Yakovenko,. It was over drinks in the embassy’s exuberant conservatory — sampling the err delights of Russian champagne — that Mr Yakovenko made some surprisingly positive noises about bitcoin to me. Bitcoin, in fact, became the key topic of conversation. This seemed odd to me as the Russian central bank had until then had been fairly anti-crypto. I cannot recall the exact wording used, but the general thrust of the argument from the Russian side was that Russia’s immense commodity wealth would ensure the country would have a signficant natural advantage in a crytpo based economy.

Here is the submission:

What if Putin is not mad?

Everyone thinks Putin is mad. But what if he is not?

Is there actually a plan that can be explained by the picture in front of us?

There is a simple explanation that fits all the facts. As with everything that Putin does, his audience is domestic and it could be that we are all his useful fools.

There is a well-known saying among my own circle of friends, which is that nothing that happens in Russia is actually planned, it all happens by accident. Perhaps plan A, a quick win in Ukraine, has failed – but plan B will almost certainly be underway, whether or not it existed from the start.

Some relevant facts:

  • The war in Ukraine: Putin is not trying very hard to conquer Ukraine. His expensive weaponry is being held back – he is invading on the cheap with expendable conscripts and lots of shelling from close range. He is making a big noise and ensuring his behaviour attracts a maximum amount of controversy and condemnation.
  • Kiev: He has not really attacked Kiev (at least not yet) – why not? He could quite easily.
  • Isolation: He has used the situation to justify kicking the world’s media out from Russia and he has engineered a shutdown of the borders. Russia is isolated – and the Russian population has been manipulated into supporting the actions he is taking.
  • The rouble has collapsed in value; domestic confidence in the currency has gone.

What could Plan B be?

Putin may well have realised that his current “managed democracy” is unlikely to survive continuing interactions with the Western countries – especially if Ukraine turns West.

He needs a software reset and that software is now available. And that is crypto. But not Bitcoin and similar. He will be using a “fiat crypto” – a central-bank digital currency which is used to replace cash across the Russian economy. China is already basically there with the digital yuan.

A crypto dictator’s dream

Imagine a world where the state could monitor everything that you spend, and also switch your access to currency on and off at will.

China is already almost there. Living in China almost mandatorily requires access to WeChat. This is how you pay for your McDonalds (which no longer takes credit cards, by the way) – and it is how you organise your life. When your access to WeChat is limited, life becomes very difficult very quickly. And shortly a digital yuan, riding on the back of the marketing machine that is crypto, will mean that the state, through the central bank, will be able to abolish cash. And then the state will have full control. Big brother will have truly arrived.

Is this where Russia is going?

In the last few years, we can observe two very important technologies emerging in Russia:

  • Every single shop till in Russia is now connected in real-time to the tax system. It is illegal for a shop to sell goods or services via a till which is not connected. Every receipt that you get has a cryptographic code evidencing that the transaction has been recorded for tax purposes in the central system. The man who delivered this project for the Federal Tax Service is now the deputy prime minister of Russia, Mikhail Mishustin.
  • In the years since 2014, Russia has built its own internal clearing system called “Mir”. This has enabled Russian banks and commercial infrastructure to operate independently of the visa, mastercard and SWIFT as an internal matter.

Russia has already demonstrated the ability to roll technology out across the whole country in order to increase the control of the state. Russian citizens have not yet appreciated what this means – but the next step is now required and it is much bigger than before.

So why invade Ukraine?

Putin’s focus here is the manipulation of his own population.

He is going introduce a digital rouble and likely abolish cash. The technology to do this is already available. With this in place, he will be able to control his population through their wallets – monitoring everything that his people spend and deciding who should have access to money and who should not.

A software reset based around a new digital currency requires mass adoption and acceptance – and a population that is ready to accept a much higher level of centralised control.

In order to do this, he needs to isolate his country and ensure that his population is submissive and accepting of a significant change in how things work. This necessarily includes undermining confidence in the rouble as a cash-based currency and cutting Russia’s payment systems off from international markets. Then he can bring in a state-controlled digital alternative – something that the Chinese are already well on the path to implement for themselves.

This is the dictator’s dream – controlling the people via their wallets, absolutely and totally. As we have been saying ourselves: “banks not tanks”. How much he must be laughing when he hears this phrase. And we are willingly helping Putin here, we are his accomplices in this grand plan – not that there is much we can do about it.

And once the new system is in place and working, borders can come down, concessions of a kind can be made and maybe interactions with liberal western democracies resume – but now with control systems in place that can conserve his regime for the long term.

Why invade Ukraine so badly?

Putin may have overestimated the power of his forces, and underestimated the strength of resistance and vigor of international responses. But Putin probably does not need to win any war in Ukraine. He seems to be preserving his defence capabilities rather than needlessly wasting them. He is doing the invasion of Ukraine on the cheap because the invasion does not really have to succeed.

He has now achieved what may have been his objective all along – which is the financial and media isolation of Russia.

What he now needs to do is create a frozen conflict in Ukraine that he can maintain at minimum cost for as long as it takes for him to reset the control systems that he uses with his domestic population.  So that’s also why he is not sending in the expensive fighter jets, bombing Kiev or firing lots of hard-to-replace missiles. Of course, a land bridge to support his occupation of Crimea would be a useful by-product of the campaign – but this is not the main objective.

Putin has no actual interest in trying to wipe Ukraine off the map – only creating the conflict narrative needed to isolate his population for a period to get them to accept a new way of living day-to-day. And we should also note that he continues to sell his Ukrainian adventure to his local people as a “strategic operation” not as an invasion – which is because it might not be about an invasion (unless it has to be) and he has no intention of seeing it through.

If Putin is not mad?

So let’s assume that Putin is not actually mad. Plan A might not have worked – but he surely has plan B, whether or not he arrives there by design or accident.

He is a very clever and capable man – with enormous resources and he is focussed on maintaining control and absolute power over his Russian subjects. After more than 20 years in charge, he probably does not have any other choice.

Putin does not care about us. Putin does not care about the people of Ukraine. Perhaps we are all his useful fools. Whatever we might think, the agenda with Putin is always domestic. Perhaps the real targets and ultimate victims of the Ukrainian invasion are going to be Russian?

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18 Responses

  1. Seems the point of the value of the rubble is wrong, it hasn’t tanked, and linking it to gold shows no intent to have it dive, yet.
    Also, the point about invading badly seems to be moot now, but hindsight isn’t very useful unless it’s used to prescribe corrections to foresight.
    Here I come up blank as I don’t know where to go with this information, except that Russia has a lot of skilled technocrats but being cut off from buying IPR may be a problem. Of course now that they are cut off perhaps there is little downside to simply taking it without worrying about paying IPR fees.

  2. This seems far-fetched. I will not rule it out entirely, but it seems most unclear.

    What is the big gain of doing this? More control, granted, but how much more than what you already get by controlling the banks? From the perspective of a state, “crypto” is a red herring – there is no meaningful technological difference between a “central bank digital currency” on a blockchain and the “digital” money that already exists within the banking system. So the gain here is simply that you can use the war to ban cash. But has Russia even been making efforts toward this? I would personally imagine that a cheaper way to accomplish the same goal is through the carrot – creating cheap/free, universal mobile payments systems (think M-Pesa, Venmo, Swish). If cashless society is the end goal, why haven’t we seen efforts to create this before the war?
    Is this worth the risk? Most analysts appear to suggest that a loss here would not just be a Vietnam-style humiliation or the failure in a minor skirmish, but rather debellatio – the total disintegration of the Russian state.

    Considering only these two factors, the expected value seems strongly negative. Assuming Putin to be rational, we must conclude that the expected value is positive, from which we may conclude that there are factors the author has missed.

    In conclusion, I think “central bank digital currencies” are overrated, because they are not meaningfully different to “bank balances”.

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