FSB Seeks to Forge ‘Digital Sovereignty’ in Russia’s Financial Sector

The recent involvement of the Russian Federal Security Service’s (FSB) cryptography specialists in international efforts to instrumentalize emerging currencies such as Bitcoin and Ether (Iso.org, accessed September 11) shows how profoundly the official Russian position on cyber technology has shifted in the past year. It is no secret that the FSB has long been deeply involved in cyber security activities, a fact dramatized by the December 2016 arrests on charges of treason of Sergei Mikhailov, the deputy head of the FSB cyber center, and Ruslan Stoyanov, a top manager of the private cyber security firm Kaspersky (RBC, January 25). But Russian government attention to cyber security previously was seen as focused on protection and prohibition. It is only recently that the age-old slogan “if you can’t beat them, join them” seems to have won out among Russia’s security elite. Currently, the FSB has pivoted to take a leading role in designing the cryptographic accounting (so-called “blockchain”) system for new currencies (Vedomosti, August 18). The FSB’s goal is for Russia to achieve “digital sovereignty” in the financial sector.

With the emergence of Bitcoin in 2009 and the global proliferation of it and its many competitors, the Russian authorities initially viewed the crypto currencies with disdain and apprehension. For years, authorities considered the new crypto currencies as a volatile and hazardous novelty, offering advantages mainly to criminals. The “Yarovaya packet” of laws— legislation passed by the Russian parliament in July 2016 and signed into law soon thereafter by President Vladimir Putin—introduced highly restrictive measures targeted mainly at terrorists and money launderers. The Yarovaya packet included provisions enabling state agencies to exert extensive control over all digital communication (Duma.gov, July 14, 2016).

But the rapid global growth of cyber technology came to be recognized as a juggernaut that could not be simply ignored or dismissed. In December 2016, President Putin called for the leading technological institutes to make progress in establishing the conditions for achieving a “digital economy” in Russia (Kremlin.ru, December 1, 2016). Yet, as late as May 2017, the deputy chairman of Russia’s Central Bank, Olga Skorobogatova, told the Russian parliament, “In so far as virtual money is being circulated and it is not backed up by gold and is not under volume control, sooner or later it can lead to instability in financial markets” (Interfax, May 25). German Gref, the head of Sberbank, the largest bank in Russia, shared this caution but also stated, “We need as soon as possible to reach a resolution, to regulate and legitimize virtual currency. We cannot and should not simply prohibit it” (Iz.ru, May 26). The recent meeting of Vladimir Putin with Vitalik Buterin, the creator of Bitcoin’s closest competitor, Ethereum, in June 2017, dramatized the meaning of the new technology (Kremlin.ru, June 2). Thus, Russian government officials can no longer afford to not take this issue seriously.

Russian law enforcement authorities are now taking steps toward closing the circle. The Russian news agency Interfax announced this past August that the Russian Prosecutor General and the Ministry of Justice have concluded there is no longer any basis for pursuing criminal complaints in connection with the use of virtual currencies (Interfax, August 12). The Ministry of Finance, the Russian Central Bank, and the Office of the President announced they concur with this decision (Interfax, August 12). Despite these top-level statements, the message about the need to reinterpret the law regarding digital technology has clearly not yet reached all officials: trading in cryptocurrency in Russia may still be interpreted as a violation of current law. Even this month, one could find references in the Russian press to arrests of crypto currency brokers, such as in the case of a recent report of three young Russians in Kostrom, who were arrested by ski-masked cyber police for allegedly violating the Russian Federation’s Criminal Code 172 (Rossiyskaya Gazeta, September 1).

That said, the change in the attitude of many top Russian officials vis-à-vis digital currencies is probably as much driven by politics as economics. Russian authorities have a long sought to displace the US dollar as the international reference currency. As early as 2003, Moscow vowed to replace the dollar with the European euro. At one point that year, a Russian parliamentarian even introduced legislation—which did not pass the Russian Duma—that would have made possession of US dollars not only illegal but also subject to confiscation (RBC, November 13, 2013).

Since then, Russian authorities have repeatedly attempted to “dethrone” or at least circumvent the international use of the US dollar. A number of currency “swap” agreements, such as the deal between China and Russia in 2014, were designed to habituate making authorized bilateral financial transactions without denomination in dollars (CBR, October 13, 2014). The BRICS (a loose political grouping of major developing economies Brazil, Russia, India, China and South Africa) “Contingency Reserve Agreement,” which went into force in July 2015, provided for non-dollar based alternatives among the BRICS countries to International Monetary Fund (IMF) adjustment financing (Brics.itamaraty.gov.br, July 15, 2014). Russia and China also signed a bilateral agreement to buttress their currencies by linking them to the value of gold (Sputnik News, December 5, 2015). After the inclusion of the Chinese Yuan (RMB) into the IMF basket of Special Drawing Rights in September 2016, Russian authorities began to promote the idea of a gold-based crypto currency, managed by China or Russia. The idea of a new gold-based digital currency is one of the most discussed policy innovations in the Eurasianist movement. But not all supporters of closer Eurasian integration agree: Kazakhstan’s President Nursultan Nazarbayev has long been an advocate of an international currency and has also endorsed the adoption of a blockchain-supported crypto currency. However, Nazarbayev urged that it be a currency managed by a consortium of central banks under the auspices of the United Nations (Astana Times, June 19).

The FSB clearly sees gaining control over the evolution of cyber currency as a means to achieve what is referred to in Russia as “digital sovereignty.” Nothing illustrates this more plainly than the participation of the FSB’s crypto spies in the International Standards Organization (Iso.org, accessed September 11), the technical committee charged with defining the blockchain of the future. But by its very nature, this new digital technology functioning in non-divisible electromagnetic realms raises more questions than it answers. Combining “digital” and “sovereign” may prove more difficult for Moscow than it appears.