The war in Ukraine and subsequent international sanctions have triggered a bank run in Russia. But this is no ordinary run—it may become a run on the central bank itself, one that holds important lessons for introducing central bank digital currencies.

Reports show Russians lining up at ATMs to withdraw their cash. For now, the run is largely driven by fears of withdrawal limits and the anticipation that credit cards and electronic means of payments will cease to function. If that happens, cash at hand is the better alternative. For that scenario, central banks know what to do: provide solvent banks with plenty of liquidity against good collateral, as Walter Bagehot recommended.

But will that be all? As Western countries freeze the Russian central bank’s reserves and limit the ability of banks to transact internationally, the exchange rate of the ruble has collapsed, falling by more than 40 percent. Prices for ordinary goods may begin to rise, perhaps dramatically so. If that happens, then rubles would no longer be a good store of value. Russians may seek to convert them into foreign currency, but that’s hard to do with the current sanctions. Consequently, they may start to hoard goods instead, dumping their cash as they go along. The situation would no longer be a run on specific goods, but a run away from fiat money and toward goods—a run, in other words, on the central bank.

We have seen such runs before. The hyperinflations in Germany, Hungary, and, recently, Venezuela are stark reminders. Usually, hyperinflation is driven by a massive and ongoing money-supply expansion. But the collapse of a currency can happen without an expansion in money supply. Fiat money, such as the ruble or the dollar, is intrinsically worthless: it is valuable only because people trust that others will accept it as a means of payment and that its value remains reasonably stable. Once that trust erodes, people will try to spend it quickly or refuse to accept it altogether.

What are the options for a central bank in that situation? We analyze three in our 2020 NBER working paper, “Central Bank Digital Currency: When Price and Bank Stability Collide.” First, the central bank can watch the price level explode, throwing away its commitment to price stability. Second, the central bank, together with the banking system and the government, can ensure that plenty of goods are available, turning long-term investments into short-term supply and creating problems down the road. Finally, the central bank can undermine the efficiency of the economy and intervene in the market mechanism: price controls and shopping restrictions come to mind, while investment restrictions at an earlier point could have prevented a central bank run altogether. It’s a trilemma: avoiding all three is impossible, and raising interest rates will not work.

Our analysis holds important lessons for the introduction of central bank digital currencies (CBDCs). With a CBDC as the main means of payment, people can convert their bank deposits into CBDC quickly. There is no longer a need to stand in line at an ATM as currently in Russia. With CBDC, ordering goods and dumping this electronic cash is easier, too: a simple online transaction suffices. While the Russian central bank may suspend electronic means of payments, this is a bad option in a CBDC system, as such transactions lie at its heart. Suspending CBDC payment possibilities risks breaking trust in the currency altogether. With a CBDC, a central bank run may no longer proceed in slow motion, as currently in Russia; it can be fast and dramatic.

The situation in Russia is unusual. The central bank run as described may not come to pass, and lines at ATMs may recede. But trust in government money should not be taken for granted. We have seen plenty of panic in the U.S. in the last two years already. Options on how to deal with the evaporation of trust need thinking through ahead of time, particularly once a CBDC is introduced.

Runs on central banks can happen. The Russian example offers an important case study for how one might unfold.

Photo by Anton NovoderezhkinTASS via Getty Images


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