Digital International Relations [1 ed.] 9789819934669, 9789819934676

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Digital International Relations Edited by Andrey Baykov · Elena Zinovieva

Digital International Relations

Andrey Baykov · Elena Zinovieva Editors

Digital International Relations

Editors Andrey Baykov MGIMO University Moscow, Russia

Elena Zinovieva MGIMO University Moscow, Russia

ISBN 978-981-99-3466-9 ISBN 978-981-99-3467-6 (eBook) https://doi.org/10.1007/978-981-99-3467-6 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Palgrave Macmillan imprint is published by the registered company Springer Nature Singapore Pte Ltd. The registered company address is: 152 Beach Road, #21-01/04 Gateway East, Singapore 189721, Singapore

Introduction

The past couple of decades have seen an exponential growth in digital technologies, leading to dramatic change in the international political, economic, and social landscape. The surge of cyberspace as a new domain of global politics and its far-reaching implications have sparked heated debates among scholars and policymakers. The book “Digital International Relations” serves as a comprehensive, yet reflective guide into the ongoing digital revolution and its multifaceted ramifications for world politics. The advent of the digital era has imbued international relations with previously unobserved dynamism. It has reshaped diplomacy, global governance, and cybersecurity, extending its influence to non-traditional areas like business models, payment systems, and taxation. It has brought new actors into play and pushed existing ones to adapt to the digital age, precipitating a paradigmatic shift in the theoretical and empirical understanding of international relations. The chapters of this book, grouped into six parts, encapsulate the nuances and complexities of these transformations, with each part highlighting a unique characteristic of the digital dimension of contemporary IR. Part I sheds light on the role of Russia in Digital International Relations, focusing on Russian businesses’ role in international cybersecurity, digital transformation of business models, the evolution of Russian payment systems, and the development of artificial intelligence. v

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INTRODUCTION

In Part II, the book takes an analytical journey into the concept of sovereignty in cyberspace. It discusses sovereignty as a practice in the digital age, comparing American and Russian conceptions of cyber sovereignty, and the implications of digital space for the principle of sovereignty in international law. Part III explores the interplay between the digital world and legal norms. It elucidates the problems of legal regulation of digitalization, with a special focus on artificial intelligence, and discusses the digitalization of taxation in Russia and the implications of the digital economy for financial law. It ends with an assessment of the risks associated with the development of information and communication technologies in international criminal law. As the book covers the legal aspects of digitalization, it illuminates the issues of legal regulation of this emerging domain, especially with innovations like artificial intelligence. The authors provide an refreshing look at how law and policy struggle to keep pace with technological advancement, addressing issues ranging from the digitalization of the tax sphere in Russia to the evolving role of financial law in the era of digital economy. Part IV investigates the economic aspects of digital international relations. It talks about digital employment platforms, the impact of digitalization on Eurasian industrial performance, and the role of “green” investment in renewable energy in the context of digitalization. It also presents an overview of the world robotics market’s key characteristics and trends. With the exponential growth of digital platforms, the global economy has experienced a seismic shift, a theme that the fourth part of the book meticulously unpacks. This exploration is augmented by a discussion on the new forms of digital employment, sustainable development within the Eurasian industrial sphere, and the role of green investments within the digital era. Part V is devoted to the role of digital technologies in education and research in international relations. With respect to digital education, it offers an examination of hybrid learning, the evolution of digital education, and the efficiency of distance and traditional academic activities in teaching English language to students of international economic relations. Regarding the new dimensions of the digital research in the field of international politics, it delves into the use of network data analysis in researching political groups. The significance of digital technology in transforming education and research is another pivotal theme that this book touches upon. Hybrid learning, digital education, and the efficiency

INTRODUCTION

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of distance learning are just a few aspects of this digital metamorphosis in the field of education. The impact of these transformations on international relations studies and how they redefine ways in which academic research and interaction are carried out is a crucial component of this analysis. Finally, Part VI is concerned with the digital transformation of diplomacy and international organizations. It discusses global cyberspace governance from the perspective of the BRICS countries and looks at the digital dimension of the Eurasian Economic Union’s financial integration. It also includes a unique chapter reviewing the use of video games in diplomacy. By looking at the digital transformation of diplomacy and international organizations, the book helps readers understand how the advent of digital technology has not only changed the methods of diplomacy but also challenged the traditional structures of international governance. From the BRICS’ perspectives on cyberspace governance to the exploration of video games in diplomacy, this section offers a glimpse into the future of international relations in the digital era. These chapters underscore how traditional concepts and practices are being challenged, reinvented, and sometimes, replaced. Through these diverse yet interconnected chapters, this book stresses the importance of understanding the various manifestations of digital international relations. As digital technology continues to evolve at a rapid pace, the need for a more comprehensive, nuanced, and future-oriented understanding of its impact on international relations becomes all the more crucial. The volume “Digital International Relations” contributes to this essential understanding, providing readers with a rich, multidimensional view of the transformations taking place in the international arena. It not only broadens our understanding of the scope and impact of digital technologies but also demonstates how the international community can navigate this digital age more effectively and equitably. In this hyper-connected reality, it becomes crucial to understand how digital technologies are redrawing power dynamics, sovereignty, and diplomacy. In a world fraught with challenges like cybersecurity threats, disinformation campaigns, and the digital divide, understanding how to navigate the digital landscape becomes a matter of national security, economic prosperity, and social well-being. “Digital International Relations” brings this understanding into sharp focus, shedding light on the strategies that nations like Russia employ in the face of international sanctions, as well as how these digital strategies redefine the conceptions of

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INTRODUCTION

sovereignty in cyberspace. This book is not just a reflection of our current digital reality, but also a roadmap to navigate the future trajectories of digital international relations. As digital technologies increasingly permeate our lives, the distinction between the physical and digital worlds blurs. “Digital International Relations” also poses vital questions that warrant further debate and research. How will the ongoing digital revolution reshape global power structures? How can nations maintain their sovereignty while navigating complex digital landscapes? How will digitalization transform legal norms and economic systems? And perhaps most importantly, how can we ensure that the digital revolution fosters inclusive, equitable, and sustainable growth? This volumes equips readers with the analytical tools to come up with some of the answers. As we turn the pages, we are invited to engage with the complexities, challenges, and opportunities that the digital age presents to international relations. Andrey Baykov Elena Zinovieva

Contents

Part I Russia in Digital International Relations 1

2

3

4

Russian Industrial Business in the New International Cybersecurity Agenda Dmitry Grigoriev and Anna Manakhova

3

Digital Transformation of Business Models: International and Russian Experience Maria Kozlova and Natalia Komarovskaia

15

Digital Transformation of the Russian National Payment System Svetlana Pertseva

37

Artificial Intelligence Politics and Sanctions: Comparing the Cases of Russia and Iran Radomir Bolgov

59

Part II

Sovereignty in the Digital Space

5

Sovereignty as Practice in Digital Age Elena Zinovieva and Sergey Shitkov

6

Principle of the Sovereign Equality of States in the Digital Realm Vera Rusinova

75

91

ix

x

CONTENTS

Part III 7

Digital Dimensions of International and National Law

Problems of Legal Regulation of Digitalization (the Case of AI) Nikita Molchakov, Ekaterina Ryzhkova, and Evgeniya Ryzhkova

109

8

Digitalization of the Tax Sphere in Russia Gennadi Tolstopyatenko and Dina Osina

123

9

Financial Law in the Era of Digital Economy Lana Arzumanova

139

10

International Criminal Assessment of the Risks Associated with the Use of Digital Technologies for Criminal Purposes Elina Sidorenko and Zarina Khisamova

Part IV

Digital International Economy

11

Digital Employment Platforms Vera Gnevasheva

12

Eurasian Industrial Performance: Sustainable and Digital Aspects Maria Maksakova and Angelina Kolomeytseva

13

14

149

“Green” Investments in Renewable Energy in the Context of Innovative Development and Digitalization Ekaterina Voronova, Marina Simonova, and Elvira Yarnykh World Robot Market: Key Characteristics and Trends Alexander Ulanov

165

191

215 235

Part V Digital Education and Research in International Relations 15

Hybrid Learning as a Response to Modern Challenges in Education Oleg Pichkov, Kseniia Patrunina, and Yana Saltykova

249

CONTENTS

16

Evolution of Digital Education Svetlana Ivanova

17

The Efficiency of Distance and Traditional Academic Activities in Teaching English Language to Students of International Economic Relations Anna Shpynova and Nadezhda Andreeva

18

The Use of Network Data Analysis in Research of Political Groups (The Case of Ukraine) Dmitriy Karasyov, Nikolai Silayev, and Vasiliy Taran

Part VI

Global Governance of Cyberspace: The BRICS Agenda Alexander Ignatov

20

Innovative Digital Technologies for Ensuring Financial Integration in the Eurasian Economic Union Natalia Adamchuk Gaming Goes IR: Reviewing Videogames in Diplomacy Maria Urueva and Yevgeny Uchaev

Index

259

271

281

Digital Transformation of Diplomacy and International Organizations

19

21

xi

305

329 345

365

List of Contributors

Natalia Adamchuk is Doctor of Economics, Professor of the Department of Risk Management and Insurance at MGIMO University, Moscow, Russia. Nadezhda Andreeva is Senior Lecturer in the English Language Department No. 2 at MGIMO University. Her main subject areas and research interests include English language for special purposes—professional English in economics, business, finance, management and marketing, and English for business correspondence and negotiations. Lana Arzumanova is Doctor of Law, Professor of the Finance Law Department at Kutafin Moscow State Law University, Moscow, Russia. Andrey Baykov is an Associate Professor of International Affairs and Vice-President for Research at MGIMO University, as well as a nonresident Professor at Henley Business School (UK). Dr. Baykov is also the editor of the International Trends, a leading Russian IR theory journal. He has authored or co-authored more than 60 articles in refereed journals, four monographs, and over 10 textbooks for undergraduate and graduate students reading International Politics. Radomir Bolgov is Associate Professor at the School of International Relations at Saint Petersburg State University, Russia. He graduated from Saint Petersburg State University and Defended PhD thesis at the School of International Relations of Saint Petersburg State University. His main

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LIST OF CONTRIBUTORS

field of research interest includes digital aspects of international relations and military and political threats to international information security. Vera Gnevasheva is Doctor of Economics, Associate Professor, Professor in the Department of Economic Theory at MGIMO University, Head of the Department of Reproduction of Labour Resources and Employment of the Institute of Demographic Research of the Federal Research Sociological Center of the Russian Academy of Sciences (IDI FNISTC RAS). Dmitry Grigoriev is Vice President of “Norilsk Nickel” for Information Security. After graduation from Moscow State University, he worked as a lecturer, researcher, served in the Ministry of Foreign Affairs of the Russian Federation. In 2014 headed the Information Security Division in MMC Norilsk Nickel, and later—the Department of Information Security and IT-Infrastructure Protection, since it was established in 2016. Alexander Ignatov is a Ph.D. student at MGIMO University, a research fellow at the Centre of international institutions research at the Russian Presidential Academy of National Economy and Public Administration (RANEPA). Svetlana Ivanova is a senior Lecturer in English Department 2 at MGIMO University. She earned her Ph.D. in Philology from Ulyanovsk State University. Information technologies and e-learning have been a domain of her educational engagement since 2003. Her research interests include e-learning in language teaching, IT application in education, and building functional competences in the classroom environment. Dmitriy Karasyov is Ph.D., Research Fellow Laboratory of International Trends Analysis Institute for International Studies Moscow State Institute of International Relations of the Ministry of Foreign Affairs of Russia. Zarina Khisamova Ph.D. in Law, Department of Planning and Coordination of Scientific Activity, Krasnodar University of the Ministry of Internal Affairs of Russia, Krasnodar, Russia. Angelina Kolomeytseva is Ph.D. in Economics, Associate Professor at the Department of International Economic Relations, MGIMO University. Her research interests include digital economy, foreign economic relations of Russia and the impact of sanctions of foreign economic relations of States.

LIST OF CONTRIBUTORS

xv

Natalia Komarovskaia is a senior lecturer in the Department of Economics at MGIMO University. Her main research interests include public choice theory, the labour market, consumer behaviour and the green economy. Maria Kozlova is an Associate Professor in the Department of Economics, MGIMO University. She holds a Ph.D. in Economics from MGIMO University. Her main research interests include national innovation systems, global public goods, consumer behaviour and the green economy. Maria Maksakova is Ph.D. in Economics, Head of the International Economic Relations and Foreign Economic Affairs Department, MGIMO University. Her research interests include international economic integration, digitalization of the world economy and international economic organizations. Institute of Economics of the Russian Academy of Sciences, Moscow, Russia. Anna Manakhova is Councillor to the Vice President of “Norilsk Nickel” for Information Security. She holds M.A. from MGIMO University and her field of specialization is international information security. Nikita Molchakov is a candidate of Law, an associate professor, at the Department of Constitutional Law, MGIMO University, Moscow, Russia. Dina Osina is Law, Associate Professor in the Department of Legal Theory and Comparative Law, International Law School, MGIMO University. Kseniia Patrunina is Deputy Dean of the School of International Economic Relations and a Lecturer in the Department of Accounting, Statistics and Audit at MGIMO University. She holds a Ph.D. in Economics from MGIMO University. Her main research interests include digital transformation, economic inequality, digital inequality, and accounting. Oleg Pichkov is Dean of the School of International Economic Relations, Associate Professor in the Department of International Economic Relations and Foreign Economic Affairs, and Head of the Digital Educational Technologies Development Team at MGIMO University. He earned his Ph.D. in Economics at MGIMO University. His main research interests

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include international economic relations, international relations, world economy, and the digital transformation of the world economy. Svetlana Pertseva Ph.D. in Economics is an Associate Professor in the Department of International Finance at MGIMO University. Payment systems and international settlements have been the focus of her research expertise since 2005. Her main research interests include the digital transformation of the payment industry, the development of the Russian payment system and Fintech, and cross-border payments and international settlements. Vera Rusinova is a Doctor of Law, Professor, and Head of the School of International Law at the Faculty of Law, National Research University Higher School of Economics. The main fields of her research activities comprise International Human Rights Law, International Humanitarian Law, the use of force, the theory of International Law, and the application of International Law to information and communications technologies. Vera Rusinova is a Co-Chair of the ILA Committee on Use of Force: Military Assistance on Request. She is a member of the Editorial Groups/ Boards of “Journal of International Humanitarian Legal Studies”, and “International Cybersecurity Law Review”. She also led the Research project “Reshaping Public International Law in the Age of Cyber: Values, Norms and Actors”. Ekaterina Ryzhkova is Ph.D. in Law, Associate Professor, Department of Legal Theory and Comparative Law, MGIMO University, Moscow, Russia. Evgeniya Ryzhkova, is a postgraduate student at the Department of Legal Theory and Comparative Law, MGIMO University, Moscow, Russia. Yana Saltykova is Deputy Dean of School of International Economic Relations and Lecturer at the Department of International Economic Relations and Foreign Economic Affairs at MGIMO University. She holds a Ph.D. in Economics from MGIMO University. Her main research interests include international economic relations; the world economy; digitalization of the world economy, trade policy, and industrial markets. Elina Sidorenko is Doctor of Law, Department of Criminal Law, Criminal Procedure and Criminology, MGIMO University, Moscow, Russia.

LIST OF CONTRIBUTORS

xvii

Sergey Shitkov is Ph.D. in Law, Deputy Rector for Administrative and Legal Issues, MGIMO University. Anna Shpynova is Associate Professor in English Language Department No. 2 at MGIMO University. She earned a Ph.D. in Economics from MGIMO University. Her main subject areas and research interests include English for Special Purposes—professional English in economics, business, finance, the oil and gas sector and English for business correspondence and negotiations. Nikolai Silayev Ph.D., Senior Research Fellow Laboratory of International Trends Analysis Institute for International Studies MGIMO University. Marina Simonova is Doctor of Economics, Professor of Accounting, Statistics and Audit Department; MGIMO University. Vasiliy Taran, M.A., Analyst Laboratory of International Trends Analysis Institute for International Studies MGIMO University. Gennadi Tolstopyatenko is a Doctor in Law, Professor in the Administrative and Financial Law Department, International Law School, MGIMO University. Alexander Ulanov has done Ph.D. in Economics, Advisor to the Rector, Deputy Vice-Rector for Legal and Administrative Affairs, Senior Lecturer, Department of International Economic Relations and Foreign Economic Affairs, MGIMO University, Moscow, Russia. Maria Urueva is an independent researcher specializing in the intersection between video games and politics, and an editor of the MGIMO Review of International Relations. She holds an M.A. in Area Studies (Asia & Africa) from MGIMO University. Yevgeny Uchaev is a lecturer and Ph.D. student in the Department of World Politics at MGIMO University. He holds an M.A. in International Relations from MGIMO University. His main research interests include constructivist approaches to the state in IR, temporality in world politics, and normative foundations of international political theory. Ekaterina Voronova is Doctor of Economics, Head of Accounting, Statistics and Audit Department MGIMO University.

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Elvira Yarnykh is Doctor of Economics, Professor, Department of Statistics, Plekhanov Russian University of Economics. Elena Zinovieva in Doctor of Political Science, Professor of the Department of World Politics, Deputy Director of the Centre of International Information Security, Science and Technology Policy, MGIMO University.

List of Figures

Fig. 2.1 Fig. 11.1

Fig. 12.1

Fig. 12.2

Fig. 12.3

The long tail model Share of persons included in digital employment (DE) in different formats by employment status, % (Source Based on the online survey of the urban population, ISP HSE, 2021 [Platform Employment in Russia, 2022]) Industrial production index of the EAEU countries (%) (Source Compiled by the authors based on data from the Eurasian Economic Commission. Retrieved from: https://eec.eaeunion.org/upload/files/dep_stat/ econstat/statpub/Brief_Statistics_Yearbook_2022.pdf?ysc lid=lbnvdffzq6326804280) Industry Share of Total Manufactured Exports (%) (Source compiled by the authors based on data from the United Nations Industrial Development Organization. Industrial Analytics Platform. Retrieved from: https://iap.unido.org/data/competitive-industries? p=ARM&s=RUS&t=EAEU) Share of intermediates in total manufacturing trade of the EAEU countries (%) (Source Compiled by the authors based on data from United Nations Industrial Development Organization. Industrial Analytics Platform. Retrieved from: https://iap.unido.org/data/ competitive-industries?p=ARM&s=RUS&t=EAEU)

23

178

197

199

201

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LIST OF FIGURES

Fig. 13.1

Fig. 13.2

Fig. 14.1

Fig. 14.2

Fig. 14.3

Fig. 14.4

Fig. 14.5

Fig. 14.6

Installed wind power capacity in the world and the global volume of electricity production (Source IRENA Wind Energy Data, https://www.irena.org/wind) Installed capacity of solar installations in the world and the global volume of electricity production (Source IRENA Solar Energy Data, https://www.irena.org/solar) Annual installations of industrial robots in the world, 2010–2020, thousand units (Source World Robotics 2021 Presentation. International Federation of Robotics. October 28, 2021. https://ifr.org/downloads/press2 018/2021_10_28_WR_PK_Presentation_long_version. pdf [accessed December 1, 2022]) Annual robot installations by customer industry, 2018–2020, thousand units (Source World Robotics 2021 Presentation. International Federation of Robotics. October 28, 2021. https://ifr.org/downloads/press2 018/2021_10_28_WR_PK_Presentation_long_version. pdf [accessed December 1, 2022]) Operational stock of industrial robots in 2010–2020, thousand units (Source World Robotics 2021 Presentation. International Federation of Robotics. October 28, 2021. https://ifr.org/downloads/press2 018/2021_10_28_WR_PK_Presentation_long_version. pdf [accessed June 26, 2022]) Robot density in the manufacturing industry in 2020, by Country (Source World Robotics 2021 Presentation. International Federation of Robotics. October 28, 2021. https://ifr.org/downloads/press2018/ 2021_10_28_WR_PK_Presentation_long_version.pdf [accessed December 1, 2022]) Changes in the ratio of collaborative and traditional industrial robots in 2018–2020, in thousands (Source World Robotics 2021 Presentation. International Federation of Robotics. October 28, 2021. https://ifr. org/downloads/press2018/2021_10_28_WR_PK_Pres entation_long_version.pdf [accessed December 1, 2022]) Service robots for professional use, unit sales in 2019 and 2020, thousands of units (Source World Robotics 2021 Presentation. International Federation of Robotics. October 28, 2021. https://ifr.org/downloads/press2 018/2021_10_28_WR_PK_Presentation_long_version. pdf [accessed December 1, 2022])

219

220

240

241

241

242

243

244

LIST OF FIGURES

Fig. 18.1 Fig. 18.2 Fig. 18.3 Fig. 19.1

Fig. 21.1

Extended network of “Kolomoyskyi’s people” in the 8th Verkhovna Rada As a rule, “Kolomoyskyi’s people” work “in pairs” Comparison of the network and cluster analysis in one of the groups of “Kolomoyskyi’s people” Level of implementation of BRICS’s commitments in the field of ICT and digital economy in 2015–2017 and 2019–2021, the average level of implementation in this area, and the overall average level of implementation of BRICS’s commitments (Notes Commitments on the development of ICT and digital economy were not included in the selection of commitments to be monitored in the 2018–2019 cycle following the Johannesburg Summit in South Africa; in 2020 and 2021, two commitments for each year were selected for monitoring, with an average level of performance shown. For the full wording of the commitments assessed, please refer to the following sources. Source Compiled by the author based on BRICS Research Group, CIIR [2016, 2017, 2018, 2020, 2021, 2022]) Online identity construction framework (Source Costa Pinto et al., 2015: 407)

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291 293 294

316 354

List of Tables

Table 2.1 Table 2.2 Table Table Table Table Table

2.3 2.4 2.5 3.1 3.2

Table 3.3 Table 3.4 Table 3.5 Table 3.6 Table 3.7

Table 3.8

Key milestones in the development of digital business transformation SWOT analysis of business models in the context of digitalization Top ten global companies in 2008 and 2018 The world’s largest digital companies in 2022 An example of digital ecosystems in Russia NSD indicators in 2022 Quarterly traffic dynamics of the system for transfer of financial messages (per cent) Dynamics of the share of international and national card payment systems in Russia in 2016–2020 (per cent) Quarterly traffic dynamics of the Russian faster payments system in 2019–2022 (tn RUB) Indicator of the effectiveness of payment systems in selected countries SWOT analysis of cryptocurrency legalization for foreign trade settlements SWOT analysis of the use of non-bank credit institutions for the implementation of international settlements by Russian companies SWOT analysis of the system for transfer of financial messages for the implementation of international settlements and payments

19 29 31 32 32 42 44 46 47 50 53

54

55

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LIST OF TABLES

Table 4.1

Table 4.2 Table Table Table Table Table Table

11.1 11.2 11.3 11.4 12.1 12.2

Table Table Table Table

12.3 12.4 13.1 15.1

Positions of China, Russia, and the United States in the international rankings of AI development (compiled by the author) Political initiatives on AI in China, Iran, Russia, and the United States (compiled by the author) Indicators of fair work Comparative statistics of multiple regression estimates Individual indicators of labour force formation Correlation estimates of the main indicators of fair work Industrial production of the EAEU countries ($billion) Main priorities for the industrial development of the EAEU countries GVC participation index (% of total gross exports), 2018 SDG-9 industry tracker of the EAEU countries Types of investment in renewable energy development Hybrid and traditional learning experience (National Education Association, 2021)

67 68 182 182 183 184 196 198 202 204 223 255

PART I

Russia in Digital International Relations

CHAPTER 1

Russian Industrial Business in the New International Cybersecurity Agenda Dmitry Grigoriev and Anna Manakhova

Introduction Recent international developments have exacerbated the existing problems and intensified contradictions in the field of information security at the global level. This has created an unprecedented situation for Russian industry, which is faced with large-scale sanctions and new challenges and threats in the digital space. Protecting the information infrastructure, especially critical information infrastructure, has always been a priority for business. Under the current circumstances, the largest Western tech companies have decided to leave the Russian market. Thus, Russian companies, which have been building their information security systems for years primarily on the basis of the leading and internationally recognized Western information and

D. Grigoriev (B) · A. Manakhova Norilsk Nickel, Moscow, Russia e-mail: [email protected] A. Manakhova e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 A. Baykov and E. Zinovieva (eds.), Digital International Relations, https://doi.org/10.1007/978-981-99-3467-6_1

3

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D. GRIGORIEV AND A. MANAKHOVA

telecommunication technologies (ICT) and solutions, have been pushed into a corner. Foreign software and hardware have turned into a “time bomb,” becoming less and less effective with each passing day and thus threatening total collapse at any moment. This situation has inevitably increased the vulnerability of information and communication systems, including those responsible for the functioning of critical information infrastructure (CII). The last three decades have seen the development of a distributed interdependent and interconnected global information infrastructure, where each region and country plays a role as a producer of certain hardware and software, generating new ideas for IT solutions and providing technical support or consulting (Creemers, 2022). On the one hand, the cyber world is fragmented (Xuetong, 2020). On the other, all the fragments represent pieces of a global ICTs system (Zinovieva, 2020). The latest developments in the cyber sphere and the intensification of confrontation have given an impulse to new trends—namely, digital self-sustainability, regionalization and the protection of digital sovereignty. In the context of the new international cybersecurity agenda, the Russian industry faces new threats and challenges in ICTs and the protection of critical information infrastructure. Given the unprecedented situation and its dynamic development, there is no “cookie cutter” solution. The unparalleled increase in the number of cyberattacks and the massive decrease in cyber trust between different stakeholders creates new risks with regard to the information infrastructure itself and, as a result, increases the likelihood of man-made disasters. The main idea of this research is to determine the new framework that the Russian industry has to consider when developing and implementing measures for protecting its information systems, including new threats and challenges in the digital sphere. We will also put forward a number of proposals for a new international cybersecurity agenda which recon with the interests of the industry. Our research begins with a description of the new challenges facing Russian industry in cyberspace. We then move on to the threats emanating from the new international cybersecurity agenda. The current situation in the sphere of international information security poses a number of open questions that need to be studied and addressed, some of which we will cover in this paper. Finally, we conclude with a list of measures that, in our opinion, could become a subject for discussion on

1

RUSSIAN INDUSTRIAL BUSINESS IN THE NEW …

5

the next steps towards a unified, fair and efficient international information security system, which serves the interests of both state and business equally. An analysis of the existing scientific and research base reveals a number of methodological problems with regard to assessing the current situation (Tikk & Kertunnen, 2018). We have studied multiple, interdisciplinary approaches towards the constantly changing external situation in the cyber sphere. It is hard to find a comprehensive research paper that covers all the issues that the industry is dealing with when it comes to protecting its information infrastructure and securing the continuity of business processes. Methodologically, our research is based on the neorealist approach to the role of transnational business in world politics, according to which non-state actors advance the foreign policy priorities of states in their activities (Waltz, 2004). Empirically, the research is based on the widely recognized documents and public declarations, which form the current ideology of co-existence in cyberspace: the UN (1945) United Nations Charter, UN resolutions on ICT security issues (UN, 2018), reports of the UN Group of Governmental Experts on information security (UN, 2021b), reports and working documents of the UN Open-Ended Working Group (OEWG) (UN, 2021a, 2021b), the Paris Call for Trust and Security in Cyberspace (Paris Call…, 2018), and public documents and position papers of the regional organizations and forums. We also carefully studied and considered input by the United Nations Institute for Disarmament Research (UNIDIR), primarily on supply chain security (Demidov & Paoli, 2020), as well as well-known international initiatives regarding private sector involvement in cybersecurity issues: Siemens Cybersecurity—Charter of Trust (2018) publications by the Cybersecurity Tech Accord (2023), Microsoft initiatives, including Digital Geneva Convention (Microsoft, 2017) and others. Our goal was to study the extent to which these documents can ensure the safety of the information infrastructure of industrial companies and, consequently, the security and integrity of digital supply chains around the world. This is not the first time that business has been hostage to geopolitics, but this is a unique case because it takes place in the sphere of ICT and global cybersecurity (Krutskikh & Zinovieva, 2021). The roots of this complex situation lie in the fact that the IT infrastructure of large industrial holdings is built mainly on solutions, products and services of a limited number of vendors registered in the jurisdiction of the United

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D. GRIGORIEV AND A. MANAKHOVA

States and several other Western countries. If we look at the operating system market, Microsoft Windows dominates (it is used on 76% of desktops), followed by Apple’s macOS (14.5%), Linux-based systems (2.5%), and Google’s ChromeOS (1.7%) (Statista, 2022). Thus, approximately 95% of all desktop computers in the world run on operating systems developed by US-based companies (Microsoft, Apple and Google). If we look at the leaders in cybersecurity solutions, in the first quarter of 2020, Cisco accounted for 9.1% of the market share in the cybersecurity industry, while Palo Alto Networks and Fortinet—US companies with a wide global presence that stretches far beyond their countries of jurisdiction—accounted for 7.8% and 5.9%, respectively (Statista, 2020). For example, 6% of Fortinet customers are from India, 3.5% are from Brazil, and 2% from Mexico (Fortinet, 2022); 6% of Cisco customers are from India, while approximately 900 companies that use Cisco are located in Pakistan, the United Arab Emirates and Saudi Arabia (Cisco, 2022). The major problem facing the industry is the decrease in the level of security of critical information infrastructure facilities, which the business owns or operates. The technical solutions used to guarantee the security and continuity of business processes are now compromised and no longer a viable option. With the number of cyberattacks directed against the abovementioned infrastructure increasing dramatically by the day, this threat becomes even more acute, especially considering its potential consequences. At the same time, in the context of unprecedented sanctions in the technology sector, Russian business will inevitably face a drop-off in the pace of digitalization, which may lead to a decrease in production volume, changes in product quality, the disruption of supply chains, and the interruption of environmental programmes. All these consequences stem from the sphere of the security and integrity of ICTs and spread far beyond, influencing global processes in the development of the industrial sector. Similar problems have arisen in the field of information and data protection. Recently, we have been witnessing a steady trend of IT vendors transferring their services to “clouds.” The largest global providers of cloud services, whose complex platforms include products and services with data processing technologies, artificial intelligence, the Internet of Things and blockchain, have recently left the Russian market. As a result, Russian companies need to either switch to Russian cloud solutions or abort “clouds” altogether.

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For large state-significant industrial holdings, it is of fundamental importance to guarantee the security of information resources in accordance with state regulations, which is difficult to provide in cloud solutions. In addition, foreign “clouds” have proven themselves extremely unreliable. With the absence of legally binding international regulations in this sphere, the principles of trust and joint commitment to progress are the key elements of effective cooperation. But the example of the Charter of Trust (2018)—an international initiative uniting 17 technological companies, including those that offer cybersecurity solutions, such as Siemens, Atos, IBM, DELL, etc.—offers responsibility throughout the digital supply chain and commits to serve as a trusted partner that provides products, systems and services based on the customer’s cybersecurity needs and risks (Charter of Trust, 2018). In reality, these principles have been undermined. Finally, in the current situation, responsible industrial companies experience difficulties with certification for compliance with international information security standards. The risk of international certification bodies discontinuing their work in Russia is quite high. Companies whose certificates were issued by those bodies have to reshape their strategies for demonstrating compliance with international standards following the requirements of the market in which they operate. In the context of the total violation of previously adopted agreements and taking the possible and very real consequences of threats to industrial information security into account, the following questions are pertinent: 1. How does this situation correspond with international law and internationally recognized principles and goals? For example, the UN Sustainable Development Goals (UN, 2015), and Goal 9 in particular, states the need to “develop quality, reliable, sustainable and resilient infrastructure, including regional and transborder infrastructure, to support economic development and human well-being, with a focus on affordable and equitable access for all; promote inclusive and sustainable industrialization; significantly increase access to information and communications technology.” 2. Do the decisions taken by Western companies go along with the recommendations and principles of the main negotiating UN bodies on security issues in the ICT sphere? The final report of UN OEWG on developments in the field of information and telecommunications in the context of international security provides that “ICT activity contrary to obligations under international law

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that intentionally damages critical infrastructure or otherwise impairs the use and operation of critical infrastructure could pose a threat not only to security but also to State sovereignty, as well as economic development and livelihoods, and ultimately the safety and wellbeing of individuals” (UN, 2021a, 2021b). For the major industrial city- and region-forming companies, whose activities are of strategic importance to the national economy, the protection of CII facilities under their control is one of the key priorities. Business, in general, represents a concentration of CII objects, therefore business is mostly responsible for their protection. According to the UN OEWG 2021 Final Substantive Report: “…there are potentially devastating security, economic, social and humanitarian consequences of malicious ICT activities on critical infrastructure (CII) and critical information infrastructure supporting essential services to the public” (UN, 2021a, 2021b). Illegal and malicious influence through electronic communication means on the CII facilities of major industrial players that ensure technological processes and the integrity of supply chains may have a significant socio-economic impact and negatively influence macroeconomic indicators. 3. With the general agreement at the international level (UN, OSCE) on the need to further develop and strengthen confidence-building measures, what kind of signal does denying Russia access to technological solutions send to the international community, especially developing countries, which count on external support and assistance? This is a matter of trust with regard to the common goal of building a globally transparent and reliable information security system. Considering all of the above, certain recommendations might help to mitigate the abovementioned threats and challenges in ICT security for businesses in the future. The current situation rightfully creates the need to develop a special international legal regime for products and services that constitute the core of information security systems for the majority of industrial companies in the world. It is also necessary to consider, at the international level, the possibility of removing companies that produce those products and provide services from the jurisdiction of certain states in order to ensure the reliability, integrity and efficiency of the global IT infrastructure and avoid possible adverse consequences, which can affect industrial development, as well as the life of the civilian population.

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The global community faces the urgent need to intensify the dialogue on the rules, norms and principles of responsible behaviour in global cyberspace, taking the new realities into account (Krutskikh, 2019). Not every country is able to withstand the onslaught of such pressure in the use of information and communications technologies, and the consequences will be visible at the global level. Thus, a legally binding international agreement in the sphere of ICT looks like the most viable, and indeed the most balanced, option (Tikk & Kertunnen, 2020). It should guarantee the rights of all actors in the sphere of ICT, considering the need to protect CII and create equal conditions for all players, including industry. International dialogue on security issues of technological cooperation should actively engage business—both tech companies producing cybersecurity solutions and industry representatives using their products. It is important to discuss the possibility of creating separate international regulatory mechanisms to ensure the integrity and continuity of the cybersecurity supply chain. The final report of the 2021 UN Group of Governmental Experts (GGE) on Advancing Responsible State Behaviour in Cyberspace in the Context of International Security (UN, 2021a, 2021b) says that “… states should continue to encourage the private sector and civil society to play an appropriate role to improve the security of and in the use of ICTs, including supply chain security for ICT products” (UN, 2021a, 2021b). It is of fundamental importance to include provisions that are critical for the industry in international documents on information security. It would be also extremely useful to adopt a specialized regulatory document that establishes the principles of protecting information infrastructure (including CII) at the international level. A draft of such a document, the Information Security Charter for Critical Industrial Facilities, was developed and introduced by Norilsk Nickel at the international level in 2018 (OSCE, 2018). The main idea was to create a framework document of a declarative nature for the international business community, which does not impose any legal obligations, but at the same time determines the framework of safe and respectful behaviour in cyberspace. The Charter leaves out the political aspects of information security, focusing on global industry, while its wording is universal

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and does not contradict international documents already adopted in this sphere. Among other provisions, the Charter calls for: ● criticizing any actions that undermine stability and cause threats to the security of the public information and communication infrastructure involved in business processes of major industrial companies; ● opposing the intentionally negligent provision of information and communications services for critical industrial facilities, and equally disapproving of any actions encouraging developers, vendors and suppliers of technical solutions for such actions; ● encouraging the efforts of states and the global community to establish an effective international information security system; and ● developing internationally accepted legal security guarantees for supply chains of products and services, shaping the technological foundation of the critical information infrastructure. In order to minimize the consequences of sanctions for information security and critical information infrastructure, Russian industry has taken a course towards substituting imported IT and information security solutions with domestic alternatives (Russian Federation, 2022). Unprecedented challenges in the field of information security require businesses to respond quickly and develop flexible approaches and innovative solutions. In conditions where the stability of the country’s economy largely depends on the stability of its flagships, the importance of a wellbuilt system for protecting critical information infrastructure increases manyfold and requires effective interaction between the public and private sectors in this area. Not only do the threats created by the new international cybersecurity agenda jeopardize the information assets and business processes of certain companies, but they also produce risks to the economies and populations of regions where they operate, and sometimes to the entire countries. The current situation in the sphere of international information security poses a number of open questions that require further consideration at the global level. Russian industry is a perfect case study for the whole world, one that can help us find solutions for the future and benefit from the lessons learned. Finally, our research shows that the international situation in the use of ICT is extremely unfavourable towards industrial players from countries

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outside the Western bloc. And this contradicts the idea of establishing a just, integrated and reliable global cybersecurity regime, which is being discussed in the United Nations. Even those declarations and recommendations made at the highest international level appear to be useless when individual actors take measures that affect others without much consideration of the consequences. This underlines the importance of adopting a legally binding international agreement in the sphere of ICT, which would create equal conditions for all players, including industry. The list of measures could be the subject of a high-level discussion on the next steps towards a unified, fair and efficient international information security system that serves the interests of both state and business actors. In order to achieve this, the voice of industrial business should be heard and taken into consideration.

References Charter of Trust. (2018). https://www.charteroftrust.com/. Accessed 22 Feb 2023. Cisco. (2022). Companies Using Cisco Routers. Statistical Report. https://enl yft.com/tech/products/cisco-routers. Accessed 22 Feb 2023. Creemers, R. (2022). China’s Cybersecurity Regime: Securing the Smart State. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4070682. Accessed 22 Feb 2023. Cybersecurity Tech Accord. (2023). https://cybertechaccord.org/. Accessed 22 Feb 2023. Demidov, O., & Paoli, G. (2020). Supply Chain Security in the Cyber Age: Sector Trends, Current Threats and Multi-Stakeholder Responses (p. 88). UNIDIR. Fortinet. (2022). Companies Using Fortinet. https://enlyft.com/tech/pro ducts/fortinet. Accessed 22 Feb 2023. Krutskikh, A. V. (Ed.). (2019). International Information Security: Theory and Practice (3 vols.) Aspekt Press (in Russian). Krutskikh, A., & Zinovieva, E. (Eds.). (2021). International Information Security: Russia’s Approaches. Moscow. Microsoft. (2017). The Need for a Digital Geneva Convention. https:// blogs.microsoft.com/on-the-issues/2017/02/14/need-digital-geneva-con vention/#sm.0000181ffs46qtdzfqcqifespllr1. Accessed 22 Feb 2023. OSCE. (2018). OSCE to Support Nornickel’s Initiatives in Global Cybersecurity. https://www.nornickel.com/news-and-media/press-releases-and-news/ osce-to-support-nornickel-s-initiatives-in-global-cybersecurity/. Accessed 22 Feb 2023.

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Paris Call for Trust and Security in Cyberspace. (2018). https://pariscall.intern ational/en/. Accessed 22 Feb 2023. Russian Federation. (2022). Executive Order on Additional Cybersecurity Measures in Russia http://en.kremlin.ru/catalog/keywords/128/events/ 68322. Accessed 22 Feb 2023. Statista. (2020). Leading Cybersecurity Vendors by Market Share Worldwide from 2017 to 2020. https://www.statista.com/statistics/991308/worldw ide-cybersecurity-top-companies-by-market-share/#:~:text=Cisco%2C%20P alo%20Alto%20Networks%20and,7.8%20and%205.9%20percent%20respect ively. Accessed 22 Feb 2023. Statista. (2022). Global Market Share Held by Operating Systems for Desktop PCs, from January 2013 to June 2022. https://www.statista.com/statistics/ 218089/global-market-share-of-windows-7/. Accessed 22 Feb 2023. Tikk, E., & Kerttunen, M. (2018). Parabasis: Cyber-Diplomacy in Stalemate. NUPI Report. https://nupi.brage.unit.no/nupi-xmlui/bitstream/handle/ 11250/2569401/NUPI_Report_5_18_Tikk_Kerttunen.pdf?sequence=1&isA llowed=y. Accessed Feb 2022, 2023. Tikk, E., & Kerttunen, M. (Eds.). (2020). Routledge Handbook of International cybersecurity. Routledge. UN. (2010, July 30). Report of the Secretary-General “Group of Governmental Experts on Developments in the Field of Information and Telecommunications in the Context of International Security”. A/65/201. https://digitalli brary.un.org/record/688507. Accessed 22 Feb 2023. UN. (2015). Department of Economic and Social Affairs. Sustainable Development. The 17 Goals. https://sdgs.un.org/goals. Accessed 22 Feb 2023. UN. (2018). Resolution Adopted by the General Assembly on 5 December 2018 73/27 “Developments in the Field of Information and Telecommunications in the Context of International Security”. https://undocs.org/ru/A/RES/ 73/27. Accessed 22 Feb 2023. UN. (2021a, March 10). Final Substantive Report of the General Assembly “Open-Ended Working Group on Developments in the Field of Information and Telecommunications in the Context of International Security”. A/AC/290/2021a/CRP.2. https://front.un-arm.org/wp-content/uploads/ 2021/03/Final-report-A-AC.290-2021-CRP.2.pdf. Accessed 22 Feb 2023. UN (2021b, July 14). Report of the General Assembly “Group of Governmental Experts. Advancing Responsible State Behaviour in Cyberspace in the Context of International Security”. A/76/135. https://ceipfiles.s3.amazonaws.com/ pdf/CyberNorms/Multilateral/UN+GGE+Report_7.14.21.pdf. Accessed 22 Feb 2023. Waltz, K. (2004). Neorealism: Confusions and Criticisms. Journal of Politics and Society, 15(1), 2–6.

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Xuetong, Y. (2020). Bipolar rivalry in the Early Digital Age. The Chinese Journal of International Politics, 13(3), 313–341. https://doi.org/10.1093/cjip/poa a007. Accessed 22 Feb 2023. Zinovieva, E. (2020). International Information Security: Problems of Multilateral and Bilateral Cooperation. MGIMO University Publishing (in Russian).

CHAPTER 2

Digital Transformation of Business Models: International and Russian Experience Maria Kozlova and Natalia Komarovskaia

Introduction Currently, digitalization influences all elements of corporate and individual consumer activities, as well as those of the state. The American scientist and publicist Nicholas Negroponte was one of the earliest researchers of the digital economy, drawing a contrast between the conventional “real” economy based on the movement of tangible products and the virtual economy of the future, where the key element would be the exchange of digital goods (Negroponte, 1995). The Canadian business exec and consultant Don Tapscott identified the key aspects of

M. Kozlova (B) · N. Komarovskaia Department of Economics, MGIMO University, Moscow, Russia e-mail: [email protected] N. Komarovskaia e-mail: [email protected]

© The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 A. Baykov and E. Zinovieva (eds.), Digital International Relations, https://doi.org/10.1007/978-981-99-3467-6_2

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the influence of digitalization on changing economic processes (Tapscott, 1997). He pointed out the following key trends in the growth of the digital economy: ● The increasing digitalization of information in various sectors. ● The emergence of mechanisms for converting “real” material values into virtual ones and vice versa. ● The elimination of intermediaries between producers and consumers. ● The growing importance of innovative activity based on the creative imagination of the individual. ● The individualization of products. Not only has digital transformation affected the virtual space, but it has also contributed to the digital transformation of enterprises through the automation, digitization and informatization of current business processes. The transition of enterprises to a digital economy is reflected in the legislation both at the international level and at the level of individual states. The 2030 Sustainable Development Goals include building resilient infrastructure, promoting inclusive and sustainable industrialization, and fostering innovation and digital technologies will play an essential part in this. The Declaration on Global Electronic Commerce was adopted within the framework of the WTO in 1998, and the Digital Single Market strategy was endorsed by the European Union in 2015. Russia also places a high priority on digitalization development in the framework of the national programme “Digital Economy of the Russian Federation,” adopted in 2017. Since the impact of digitalization on the economy is immense, this paper will only focus on the impact of digitalization on changing company business models, as well as on the main benefits and drawbacks of emerging new business models.

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Literature Review Before we go into greater detail on the impact of digitalization on evolving business models, let us define the term “business model” and how different researchers interpret it. The construction of business models has been examined by such experts as David Teece (2010), Alexander Osterwalder and Yves Pigneur (2010), Paul Timmers (1998), Patrick Stähler (2002). Researchers that have studied the features of modern business models and their digital transformation include Carsten Linz et al. (2019), Nick Srnicek (2016), Ted Ladd (2021), Selsabila and Linder (2022), A.E. Issaeva (2022), M.V. Khachaturyan (2022), T.V. Sergievich (2021), Juan D. Carillo and Tan Guofu (2021), I.Z. Geliskhanov et al. (2018), E.S. Kravchenko and V.V. Ovsyannikova (2021) and others. Yves Pigneur and Alexander Osterwalder define business model in a very general way, characterizing it as follows: a business model serves to describe the basic principles for the creation, development and successful operation of an organization (Osterwalder & Pigneur, 2010). According to another interpretation, business models can be understood as a plan created by a company to maximize profits and minimize costs, a kind of guideline in cooperation with market participants, as well as in the provision of services and the production of goods (Selsabila & Linder, 2022). A business model can also be defined as the means by which a business provides value to customers, attracts customers to pay for that value, and converts the payments received into profit (Teece, 2010). A detailed definition of the business model was provided by European Commission Director Paul Timmers. It represents the following: ● The architecture of product, server and information flows, including a description of the various business participants and their roles. ● A description of potential benefits for various business participants. ● A description of income sources (Timmers, 1998). Business models take the following factors into consideration: ● The technologies and tools available to the company to achieve goals. ● The sources of funding for the company’s current activities.

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● Goals, deadlines, and methods for achieving them (Selsabila & Linder, 2022). Patrick Stähler identifies the following three components of the business model: ● Value proposition, when the business model contains a description of the benefits that customers or other business partners can obtain by connecting to this business, that is, what value the company offers to customers and strategic partners. ● Value-added architecture, which describes how benefits are generated for customers and strategic partners. ● Revenue model, i.e., the cost of the business model and hence its sustainability (Stähler, 2002). In this case, we will take a broad view of the business model as the primary method used by companies, allowing them to build relationships with customers and make a profit.

Methodology The study involves analysing published materials and systemizing knowledge in order to examine the impact of digitalization on changing business models. We will also examine the impact of digitalization on changing business models in a historical timeline. A SWOT analysis will also be carried out to assess the impact of digitalization on changing business models, highlighting the strengths, weaknesses, opportunities and threats. Further, we will examine successful and unsuccessful attempts to implement digitalization in business operations.

Key Features of New Business Models Driven by Digitalization Before we talk about the impact of digitalization on changing business models directly, let us consider the main stages in the evolution of digital business transformation (Table 2.1).

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Table 2.1 Key milestones in the development of digital business transformation 1970–1989

1990–2000

2001–2014

2015–present

The emergence of integrated circuits considerably simplified and accelerated calculations (engineers began to use programs for computer design, and managers were able to track stocks of materials and goods in real time)

Access to local and global networks The active development of web and cloud services provides common computing patterns The emergence of a virtual economy of interconnected PCs, software, and processes where physical actions can be performed digitally

The advent of sensors integrated into wireless networks opened up new opportunities in the development of monitoring systems Methods for intelligent algorithms for pattern detection and verbal information processing are being actively developed

Industry 4.0, which is characterized by the emergence and development of artificial intelligence enables not only the analysis of data arrays but also the performance of human functions with the help of robots that can learn from previous experience

Sources Digital Transformation: A Roadmap for Billion-Dollar Organizations. Findings from Phase 1 of the Digital Transformation (2011) and Kravchenko and Ovsyannikova (2021)

The digital transformation of enterprises was propelled by internal and external drivers. Internal drivers include business process optimization, increasing the flexibility and efficiency of business models, developing new innovative products, optimizing the value chain, improving the ability to find partners, entering new markets, increasing revenues, and increasing the motivation of top management and their interest in digital transformation (Sergievich, 2021). External drivers of transformation include competitive pressure; the emergence and spread of new digital technologies and new standards; customer expectations; the appearance of new types of business models; and the growing dynamism of the external environment. The business processes and technologies used at enterprises, interactions between product suppliers and manufacturers, and relationships between firms and product consumers have all changed as a result of digitalization. So too have business models. The main features of new business models are the following: 1. Customization and Individualization

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Individualization can also be referred to as customer centricity, as firms strive hard to function more efficiently and quickly, and to serve customers better. Customization gives customers the opportunity, among other things, to participate in the creation and/or modification of the product itself. 2. Increasing the speed of business scalability by using new growth points Traditional companies supply tangible goods, so they incur costs related to the production of goods. Individual companies could cut costs by exploiting economies of scale, but increased revenues from scale last only for a limited time before being replaced by decreasing returns. At the same time, because digital companies offer services that are intangible, their growth opportunities are significantly higher. Companies do not need to invest in the development of new plants, factories or hotels in order to expand their network. Their growth opportunities are solely defined by the inclusion of new members in the network. Digital companies gain an advantage because they can both offer their own services on their platform and also act as intermediaries, providing access to services available on the market. 3. Using Information and Big Data to Provide Feedback Digital companies can quickly receive feedback from their customers. They can swiftly monitor the reaction of participants and determine which products are in demand and which are not. Big data also allows companies to look at other options in order to create an offer that meets the needs of customers. 4. Enhanced Functionality Functionality can be defined as a set of capabilities provided by a given system. The increased functionality of digital companies is determined by the fact that the speed of all business processes is growing, the number of available options is increasing, and the opportunity to establish business contacts between residents of different cities or countries is growing.

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5. Creating Positive Network Externalities Network externalities can be classified as direct and indirect network effects. Direct network effects include the direct impact of some platform participants on others with an increase in connections between them and an increase in the number of community participants. Indirect network effects occur when an increase in the value of the primary product leads to the emergence and growth of the values of secondary products. 6. Reducing Transaction Costs Transaction costs are costs associated with the implementation of transactions and they are not directly related to the production process. Transaction costs include costs associated with the search for information, the conclusion of contracts, checking the quantity and quality of goods, the specification and protection of property rights, and protection against opportunistic (bad faith) behaviour. Digital companies, in particular, can reduce the costs associated with searching for information, since searching for information on the Internet is significantly faster than visiting individual stores and comparing prices in them. 7. Environmental Friendliness The activities of digital companies are more environmentally friendly because they do not involve the physical production of goods, which can lead to harmful substance emissions into the atmosphere and environmental pollution. There is no manufacturing waste, something that contributes to environmental degradation.

The Main Types of Business Models Emerging as a Result of Digitalization In recent years, competition has shifted from technology and processes to business models. Carsten Linz, Günter Müller-Stewens and Alexander Zimmermann, note that processes such as “phygital,” understood as the balance between digital and physical assets, and “physicalization,” understood as the emergence of new physical proposals with the help of new

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knowledge derived from the digital environment, have been developed (Linz et al., 2019). The freemium model, the open-source model, the “long tail” model, and the development of digital platforms and digital ecosystems are all examples of digital business models. 1. The freemium model gets its name from the words “free” and “premium.” This type of model is credited to Jarid Lukin, and was further promoted by Fred Wilson. This model was initially used in computer games in the 1980s, and it later began to be employed in other areas of activity. Users in this case can first use the free version before being offered additional services or features that enhance the user experience. The game Homescapes can be considered as an example of a game that can be played for free, but with extra money you can purchase game currency, additional game bonuses, and so on. In some cases, the premium product allows you to watch movies online without ads, whereas the free product forces the user to watch a series of several commercials every 10–20 minutes. The Zoom video conferencing platform is free to use, although conference time is limited to 40 minutes. This format is inconvenient for conducting lectures since you have to reconnect at least twice during a single lecture, and this takes up valuable lesson time. In this case, a paid subscription is available for purchase where the video conference time is not limited. The advancement of digital technologies has significantly increased the number of game users. Although the number of paid users is often small (no more than 10%), the steady increase in their numbers allows them to actively develop. Companies that use this model include Spotify, Skype, DropBox, Linkedin, Xing, Canva, MailChimp and others. 2. Open-source models are based on a business model where the software code is open for modification by any user. Because the code is free, it can spread quickly, attracting more and more new users. This model assumes that developers will make a profit by providing paid access to new versions of the programme, support services, and tuition fees. Moodle, a free and open-source learning management system (LMS) licensed under the GNU General Public License, is an example of this system. This system is used in schools, universities, workplaces and other

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sectors of the economy for hybrid learning, distance education, and other e-learning projects. Red Hat, which provides software based on the open-source Linux operating system, is another example of an open-source system. 3. The concept of “long tail” was first used by Chris Anderson in 2004. In this model, all products are classified into hits, mass market products, and “long tail” niche products (Fig. 2.1). With a traditional physical product business model, store and warehouse space is limited, so stores will focus on bestsellers and mass market products, while niche products are less popular and could be left unsold and thus incur losses. The use of digital technologies, on the other hand, has the potential to significantly expand the list of possible goods offered. The “long tail” model is adopted, in particular, by such companies as Amazon, Netflix and eBay. Electronic searches allow customers to find a product that meets their needs much faster, and the range of products is not limited to those currently available in the seller’s warehouse. 4. Digital Platforms Digital platforms are defined as digital infrastructures that allow two or more groups to interact in a way that benefits all parties (Moazed & Johnson, 2016; Srnicek, 2016). Consumers and producers can connect online through digital platforms to exchange goods, services and information. This is a new type of firm that, like traditional companies, exists for profit, but differs in that its primary resource—a kind of “raw material”— is data. The platform is, first and foremost, an intermediary between Popularity

The “Hits” (Head) Mass production Niche Products (Long tail) 0

Fig. 2.1 The long tail model

Degree of Customization

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users and, secondly, it is a platform on which they interact, giving them privileged access to the registration of this interaction. The primary functions of digital platforms are as follows: ● Attracting an audience to create a critical mass that allows you to repeatedly increase the value of the network; ● Coordinating the actions of participants; ● Providing tools and services; and ● Defining the rules and standards of interaction. The following main groups can be identified among the main participants of the platforms: ● Owners (proprietors) of the platform; ● Managers (providers); ● Complementors (developers of the core and peripheral elements); and ● End independent users (consumers, suppliers, etc.) (Geliskhanov et al., 2018). Digital platforms can be decentralized, centralized or hybrid. The owner of a decentralized digital platform is not the owner of the asset being sold. The owner provides an opportunity to use the platform they have created to connect potential sellers and buyers, acting as an intermediary and receiving a commission for his or her services (at the same time, they can receive a commission only from one of the parties—for example, only from sellers who are interested in offering their services). In contrast, centralized platforms allow the owner of an asset to price their own product and offer it to a significantly larger number of customers than traditional stores. A hybrid form can also be used when decentralized and centralized approaches are merged.

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The prevalence of various platforms and their penetration into many areas of life is evidenced by the classification of Nick Srnicek (2016), which distinguishes the following types of platforms: ● Advertising platforms that create spaces for information activity and provide the opportunity to collect user data and distribute advertising in this space (these are search engines such as Google and Yandex, and social networks, in particular, Facebook, Instagram and TikTok). ● Cloud platforms rent out digital power in the form of hardware and software (for example, cloud storage, computing and cloud gaming). ● Industrial platforms —the “Internet of things” in production, thus optimizing production processes. ● Product platforms that offer goods and services “on-demand,” often by subscription (streaming services, such as Spotify and Netflix). ● Thrifty platforms that use a hyper outsourcing model to satisfy certain needs of people. The platform owns only data and software (the digital infrastructure can be rented), and the needs are directly satisfied by one or another economic agent from the many agents offering their services on the platform. In this case, the platform serves as an intermediary (examples are services for ordering a taxi or food delivery).

5. Digital Ecosystems The digital ecosystem is the next stage in the evolution of digital platforms. A digital ecosystem can be defined as an interdependent group of entities that use standardized digital platforms to achieve common goals. Collaborations between various organizations are a characteristic of the digital ecosystem, as a result of which various platforms join together and form a single ecosystem. There can be both ecosystems of one key participant (for example, the ecosystem of Sberbank), as well as ecosystems of partners in one or several industries. When using digital ecosystems, users can access different services on the same platform, which may not necessarily be connected to one another. The Yandex Go ecosystem, for example, provides services in

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sectors such as travel, medicine, education, children’s entertainment, communications, work, retail, food and so on. Other companies that create ecosystems include Apple, Netflix, Mail.ru, MTS and others.

Advantages and Disadvantages of Digital Business Models First, let us consider the advantages of digital business models. ● The platform’s operation enhances the transfer of information in the markets between different agents, primarily price signals. Platforms aggregate all possible price offers for a certain product or service, including by forming and demonstrating their average market level. They significantly reduce transaction costs. In particular, the costs of finding the most favourable offer, that is, the costs of information search, are decreased. Platforms also provide additional information about the good being sold (specifications, documentation, photos, reviews, ratings, etc.) and can request such information from sellers, thereby reducing the transaction costs of measuring and solving (at least partially) the problem of asymmetric information and the market for “lemons” (Ladd, 2021). Providing information about the reputation of sellers reduces the costs of opportunistic behaviour, among other things. It is worth noting that filters offer an option that allows consumers to quickly select the required goods or services and check whether or not they are available on the market. As a result, the customer can make a more rational economic decision. ● Platforms serve as a tool for monitoring and tracking consumer preferences. Requests for certain goods or services indicate the level of demand for them. In this case, manufacturing enterprises have the opportunity to adapt swiftly to fluctuations in demand and act more rationally, thus increasing the difference between costs and revenue and resulting in increased effectiveness. ● The platform economy provides the convenience of cross-platforms or platform “ecosystems.” This is the phenomenon of combining the use of multiple platforms to handle complicated issues with a single application or device. Yandex services is a good example of this: in addition to a developed search system, e-mail, maps, and other traditional e-services, the company has created many of the largest

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platforms in a number of industries—Yandex.Taxi, Yandex.Food, Yandex.Lavka, etc. These have all been merged into one integrated Yandex Go system, allowing the user to satisfy several demands in a single mobile application. The “ecosystem” of platforms increases the difference between the costs incurred and the outcome obtained in the consumption process, corresponding to a higher degree of rationality. ● Platforms have enhanced ordering and delivery mechanisms by providing many conveniences such as unprecedented assortment, remote shopping, scheduling capabilities, and so on. The increased availability of substitute products for consumers expands their choice and increases the chances of their needs being met, which in turn allows them to behave more rationally. The availability of a wide range of substitutes leads to an increase in demand price elasticity, limiting the influence of manufacturing firms on prices and increases market competition. More transparent, and therefore more intense competition encourages producers to reduce costs and improve product quality, resulting in more efficient market mechanisms. ● Today digital platforms are the cornerstone of the sharing economy, which encourages “conscious consumption” and, as a result, can contribute to improving the global environmental situation and solving the problem of natural resource depletion (Rong et al., 2021). The reduction in expenses as a result of sharing also leads to an increase in the difference between costs and benefits, that is, to a more rational economic choice. Along with a number of pros, digital business models have the following cons: ● The accumulation of a colossal amount of personal data from platforms—private firms. Since data within the platform economy becomes the most essential economic resource with value, platforms strive to gather as much of it as possible: “Everything related to a person and his activities can be transformed into data and resources” (Sasikumar & Sersia, 2020). Having so much personal data opens up new, never-before-seen opportunities for its use. How exactly platforms and people who have access to this data use it is a matter of concern. Tools for analysing all kinds of user data (from the place of residence to interests) allow for extremely effective advertising of

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various benefits through “targeted” advertising, that is, differentiation and formation based on the demands of different people, which the platform learns about through the data received (for example, you can see how contextual advertising on different sites adjusts to recent Google searches). Targeted advertising may be used as an instrument of pressure on the consumer, causing them to be impulsive and make choices based on momentary whims, impulses and caprice, resulting in the formation of “irrational demand” according to Leibenstein’s theory (Leibenstein, 1950). ● By using volumetric data on the state of the market, the platform gains an informational advantage over other market participants, which the platform can use when competing with them in its own space (Carillo & Guofu, 2021). Similarly, Yandex, which is primarily dependent on advertising, offers the opportunity on its Yandex Market platform to “buy on the Market” (directly from Yandex as a company), thereby entering into competition with other companies on its own “territory.” In this case, Yandex has the opportunity to capture the market of a certain product by using its brand and setting its price slightly above the lowest but below the market average. The information advantage of the platform exacerbates the problem of asymmetrically disseminated information across manufacturing firms, which can adversely affect the efficiency of the market mechanism. Increasing reliance on technology, which has been especially evident recently due to the COVID-19 pandemic. Without platforms, many activities would be impossible to carry out, and their further integration into social life will only increase this dependence. Let us highlight the issues that arise in the platform economy: ● The “showroom” problem, also known as disintermediation, arises when buyers and sellers use the platform to coordinate their actions and conclude transactions bypassing it. This issue can be seen as a specific form of the free rider problem and, in general, it has the potential to cause the platform to collapse (Ladd, 2021; Wang & Wright, 2020). User actions in this case can be considered opportunistic behaviour in relation to the platform, the detection of which is linked with high transaction costs.

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● The problem of changing the structure of employment arises as a result of the significant differences between the most common occupations in the industrial and the platform economies, as well as the differences between the nature of employment—permanent or “on demand” with exceptionally flexible hours (Sasikumar & Sersia, 2020). ● The problem of monitoring and regulating platform activities stems from the specifics of how platforms operate: first, the platforms “generate value only in the event of a transaction” (Ladd, 2021) and register it only in this case, complicating the regulation of the actual actions of users and platform holders. Second, the regulation of platform activities is directly related to the processing of personal data, and, as a result, the inherent right to privacy. Extreme care is required in terms of the regulatory measures applied. A SWOT analysis may also be used to illustrate the primary strengths, weaknesses, opportunities and threats (Table 2.2). Table 2.2 SWOT analysis of business models in the context of digitalization Strengths

Weaknesses

For the consumer: • Reducing transaction costs and cutting time • Digital systems provide recommendations based on previous consumer behaviour For the manufacturer: • Taking advantage of network trading • Reducing the cost of renting an office, hiring part-time staff Opportunities For the consumer: • The opportunity to purchase goods in one’s home city, as well as to order them from other cities or countries For the manufacturer: • The ability to continue operating under the restrictions associated with the coronavirus

For the consumer: • The possibility of using targeted advertising to put pressure on the consumer For the manufacturer: • Maintenance costs • Platform participants do not have the same rights and preferences as employees

Source Compiled by the authors

Threats For the consumer: • Privacy concerns • The lack of clear legal regulation For the manufacturer: • Privacy concerns • A lack of awareness of the value for customers when creating a platform • The lack of clear legislative regulation • Institutional issues

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Although digitalization provides a lot of advantages, the implementation of digital solutions is not always effective and does not guarantee the firms that have adopted them an edge. Let us consider the activities of eMetex. In 2000, eMetex attempted to establish an electronic trading system in the Russian market for pipes and other goods made out of ferrous metal. Before setting up the digital platform, eMetex studied how comparable trading platforms in other countries operated, thus making it theoretically feasible to carry out sales, but this system was never launched. Despite the fact that the Russian Pipe Industry Development Fund funded the eMetex initiative, which included the 11 largest plants in the industry, not a single deal was completed. The fundamental issue was that the company had fallen into the trap of digital business models described by M.V. Khachaturyan (2022). These include promoting a digital business model without understanding its customer value, promising additional benefits without understanding the value creation process, and selling digital opportunities without understanding the formula and sources of profit. In this case, it was more familiar and convenient for companies to make deals with their traditional partners. Since the overall number of enterprises and buyers was limited and strong ties had long been established between them, the digital system provided no extra benefits. Furthermore, the owners intended to take a commission of 1% on all deals, an excessively high amount given that most transactions were for very large amounts. Another issue was the poor legislative support for the operation of the electronic platform at that time in Russia. There were issues with concluding electronic contracts and the reliability of e-signatures. Without this, none of the companies were willing to risk large sums of money. In the absence of formal restrictions, opportunistic behaviour such as dishonest practices or corruption can emerge. In this case, the creation of effective digital platforms is difficult. Thus, with all of the benefits of digital business models, it is vital not to fall into digital traps and to foresee potential issues that a company may encounter.

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The Most Successful Digital Business Models in the World and in Russia Companies that use digital business models are increasingly among the world’s leaders. In 2008, Microsoft was the sole platform company among the ten largest global corporations by capitalization. Ten years later, seven such companies had made the list: Apple, Microsoft, Amazon, Google, Facebook, Alibaba and Tencent (Table 2.3). The top ten digital companies as of July 30, 2022 is presented in Table 2.4. Among the leading Russian companies are Vk.com and Odnoklassniki.ru (social networks), Stepik.org, Universarium.org (education), Yandex.ru, Rambler.ru, Mail.ru (search engines), Yandex-taxi, Citymobil.ru (taxi services), Rutube.ru, Ivi.ru (video platforms), Ozon.ru, Ticketland.ru (e-commerce), and others. Companies that have created electronic ecosystems that are successful in a number of industries, should also be noted (Table 2.5). Table 2.3 Top ten global companies in 2008 and 2018 2008 Company (country)

2018 Capitalization, billion dollars

Company (country)

Capitalization, billion dollars

PetroChina (China) ExxonMobil (USA) General Electric (USA) China Mobile (China)

728 492 358 344

918 831 779 738

Industrial and Commercial Bank of China (China) Gazprom (Russia) Microsoft (USA) Royal Dutch Shell (Netherlands) Sinopec (China) AT&T (USA)

336

Apple (USA) Microsoft (USA) Amazon (USA) Alphabet (Google) (USA) Berkshire Hathaway (USA) Facebook (USA) Alibaba Group (China) Johnson & Johnson (USA) JP Morgan Chase (USA) Tencent Holdings (China)

400 396 391

Source Geliskhanov et al. (2018)

332 313 266 257 238

540

365 356

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Table 2.4 The world’s largest digital companies in 2022

Company

Capitalization, billion dollars

1. Apple Inc. (USA) 2. Microsoft (USA) 3. Alphabet Inc. (USA) 4. Amazon Inc. (USA) 5. Meta Platforms Inc. (USA) 6. TSMC (Taiwan) 7. Nvidia (USA) 8. Tencent (PRC) 9. Samsung (South Korea) 10. Alibaba Group (PRC)

2431 1920 1478 1155 446 406 394 394 304 276

Source Bloomberg.com

Table 2.5 An example of digital ecosystems in Russia Areas of activity

MTS

Sberbank

Tinkoff

Yandex

Mail.ru

Work Health

Worka.ru DocDoc

– Tinkoff SuperApp Tinkoff education Cashback

Yandex.Work Yandex.Health

– Health Mail.ru CookBrains, SkillBox Combo

Food

–

SberFood

Tinkoff Junior Tinkoff SuperApp –

Yandex.Children

Purchases

YouDo SmartMed 120/80 Smart University MTS Cashback MTS Develop –

Education Loyalty programme Children

Thanks from Sberbank Sber Kids SberLogistika

Yandex.Practicum, Yandex.Tutor Yandex.A plus

Yandex Market

Mail.ru Children Yula Pandao

Yandex Lavka Yandex Food

Source Compiled by the authors

Currently, digital companies are occupying a growing market share, which was also facilitated by the active transition to e-commerce in the context of the coronavirus, so further growth in the transition of companies to digital models is also expected in the future.

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Conclusions Digitalization has significantly influenced the change in business models. Customization and individualization, increasing the speed of business scalability through the use of new growth points, the use of information and big data for feedback, increasing functionality, creating positive network externalities, reducing transaction costs and environmental friendliness are key features of the new trends. New digital models include freemium, open-source, long tail, digital platforms and digital ecosystems. Digital models have a number of advantages, including improved market information transmission (mainly price signals), transaction cost reduction, better order and delivery organization, and the use of network trading advantages. Digital platforms are a flexible tool for reflecting consumer tastes and preferences, allowing manufacturers to quickly respond to changes in them. Digital ecosystems allow multiple demands to be met with a single application or device, lowering consumer costs. Thanks to digital platforms, consumers now have access to a wider range of goods and services, which expands their choice, boosts competition among manufacturing companies, and leads to an increase in the efficiency of the market mechanism. Since platforms are the backbone of the sharing economy, they contribute to saving resources and solving environmental issues. At the same time, the implementation of digital business models can also face a number of challenges. Potential risks and flaws include the issue of monitoring and regulating the activities of the platform, increased costs for maintaining and retraining staff, confidentiality, and institutional traps. The concentration of a huge amount of personal data increases the risk of it being manipulated at the expense of the user’s interests. Targeted advertising can create irrational motives in consumers that influence their choice. Positive network effects and the informational advantage of digital models generate prerequisites for monopolization, which negatively affects market efficiency. Based on current trends, existing problems and theories, the following forecasts can be made regarding the development of the platform economy. First, since platforms need to collect and process as much data as possible in order to increase their efficiency, two processes can occur: “wars” between platforms for influence and share in different markets, and the “reprogramming” of clients on platforms to make them spend as

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much time as possible on a single platform or its “ecosystem.” Second, the state regulation of platform operations, especially in the areas of privacy and employment protection, will likely expand and improve, as will antitrust regulation. Furthermore, state apparatuses can use platform developments in their own activities to improve services for the provision of public services. Third, the role of the platform will continue to evolve in its own space—from mediation to playing the role of one of the parties, primarily on the supply side. Companies that actively use digital business models in their practice are currently moving to the forefront in terms of capitalization. Their market share has grown significantly in recent years and continues to grow. This trend is common not just across the world, but also in Russia. It would be interesting to continue this research in the future, assessing the impact of institutional factors on the development of digital business models in Russia, as well as the prospects for their further development.

References Carillo, J. D., & Guofu, T. (2021). Platform Competition with Complementary Products. International Journal of Industrial Organization, 77 . Digital Transformation: A Roadmap for Billion-Dollar Organizations: Findings from Phase 1 of the Digital Transformation. (2011). Study Conducted by the MIT Center for Digital Business and Capgemini Consulting. Capgemini, MIT Sloan Management. https://www.capgemini.com/wp-content/upl oads/2017/07/Digital_Transformation__A_Road-Map_for_Billion-Dollar_ Organizations.pdf Geliskhanov, I. Z., Yudina, T. N., & Babkin, A. V. (2018). Digital Platforms in Economics: Essence, Models, Development Trends. St. Petersburg State Polytechnical University Journal. Economic Sciences, 11(6), 22–36 (in Russian). Issaeva, A. E. (2022). Digital Platform as One of the Dominant Business Models of the Digital Economy. Public Administration. Electronic Bulletin, 91, 209– 225 (in Russian). Khachaturyan, M. V. (2022). Features of Company Digital Business Models Development in Modern Conditions. Creative Economy, 16(5), 1975–1992 (in Russian). Komarovskaia, N. V., & Tyatenko, A. K. (2022). Digital Platforms and Rational Economic Choice. Russian Economic Bulletin, 5(2), 88–93 (in Russian). Kravchenko, E. S., & Ovsyannikova, V. V. (2021). The Impact of Digitalization on the Enterprise Business Model: Algorithms, Models and Tools for Digital Transformation. News of the Automobile and Road Institute, 39(4), 111–119 (in Russian).

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Ladd, T. (2021). The Achilles Heel of the Platform Business Model: Disintermediation. In Business Horizons. Kelley School of Business, Indiana University. Elsevier Inc. Leibenstein, H. (1950). Bandwagon, Snob, and Veblen Effects in the Theory of Consumers’ Demand. The Quarterly Journal of Economics, 64(2), 183–207. Linz, C., Müller-Stewens, G., & Zimmermann, A. (2019). Radical Change in Business Model, Adaptation and Survival in a Competitive Environment. Alpina (in Russian). Moazed, A., & Johnson, N. L. (2016). Modern Monopolies: What It Takes to Dominate the 21st Century Economy. Martin’s Press. Negroponte, N. (1995). Bits and Atoms. Wired, January 1. https://www.wired. com/1995/01/negroponte-30/ Osterwalder, A., & Pigneur, Y. (2010). Business Model Generation. A Handbook for Visionaries, Game Changers and Challengers (pp. 18–19). John Wiley & http://www.mega-eworld.com/upload/iblock/843/pdf_bk_1856_ Sons. postroenie_biznes_modeley_nastolnaya_kniga_stratega_i_novatora_iv_pine book.a4.pdf (in Russian) Rong, K., Li, B., Peng, W., Zhou, D., & Shi, X. (2021). Sharing Economy Platforms: Creating Shared Value at a Business Ecosystem Level. Technological Forecasting & Social Change, 169. Sasikumar, S. K., & Sersia, K. (2020, October–December). Digital Platform Economy: Overview, Emerging Trends and Policy Perspectives. Productivity, 61(3), 336–347. Selsabila, A., & Linder, N. V. (2022). Transformation of Business Models in the Context of the Digitalization of the Russian Economy. Business Strategies, 10(6), 149–154 (in Russian). Sergievich, T. V. (2021). The Impact of the Digitalization of the Economy and Society on the Transformation of Business Models of Industrial Enterprises. Technical and Technological Service Problems, 56(2), 95–101 (in Russian). Srnicek, N. (2016). Platform Capitalism. Polity Press. Stähler, P. (2002) Business Models as an Unit of Analysis for Strategizing. In Proceedings of the International Workshop on Business Models, Lausanne, October 4–5. Tapscott, D. (1997). The digital economy: Promise and peril in the age of networked intelligence. McGraw-Hill. Teece, D. G. (2010). Business Models, Business Strategy and Innovation. Long Range Planning, 43(2–3), 172–194. https://asset-pdf.scinapse.io/prod/214 0699752/2140699752.pdf Timmers, P. (1998). Business Models for Electronic Markets. Electronic Markets International Journal of Electronic Commerce & Business Media, 8(2), 3–8. Wang, C., & Wright, J. (2020). Search Platforms: Showrooming and Price Parity Clauses. The RAND Journal of Economics, 51(Spring), 32–58.

CHAPTER 3

Digital Transformation of the Russian National Payment System Svetlana Pertseva

Introduction Payment systems are an infrastructural element of the national and global economy and a channel for the circulation of money. According to the glossary of the Bank for International Settlements, a payment system is A set of instruments, procedures, and rules for the transfer of funds between or among participants; the system includes the participants and the entity operating the arrangement (BIS, 2003). What is more, payment systems are characterized by their massive scale and broad geography of their settlement operations, covering the whole world. Settlements and payments are developing rapidly today due to the influence of digital transformation. Innovative products such as cryptocurrencies, central bank digital currencies, stablecoins, etc., are appearing in the payment industry. However, digitalization is not the only factor affecting the development of the payment system. The introduction and tightening

S. Pertseva (B) Department of International Finance, MGIMO University, Moscow, Russia e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 A. Baykov and E. Zinovieva (eds.), Digital International Relations, https://doi.org/10.1007/978-981-99-3467-6_3

37

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of geopolitical sanctions are one of the key factors in the development of payment relations. Thus, our research hypothesis states that, by creating an effective Russian payment infrastructure during the sanctions, the Bank of Russia may contribute to digitalization of payment systems, thus increasing the speed and reducing the cost of the national and cross-border settlements.

Literature Review Payment systems, as one of the areas of digital transformation of the Russian financial system, have not been fully and objectively studied. Some researchers consider payment services to represent a significant part of all fintech projects. This is due to the relative simplicity of payments as financial products. First, fintech companies specializing in payments can increase their customer base relatively quickly and cheaply. Second, the current level of technological development in the area of payments allows the continuous introduction of new opportunities based on innovations. Third, payments are financial services, most popular among both legal entities and individuals (Soloviev, 2018). For instance, as of today, crossborder payments are viewed as one of the key instruments of sanctions pressure (Pertseva, 2022). Taking these factors into consideration, this paper aims to take a holistic and mainly economic, albeit critical, look at current trends in the digital development of the Russian payment system, as well as the problems it faces and its prospects for the future. The existing research on this topic can be broken down into two blocks: (1) the study of intra-country payment systems coupled with the analysis of the implementation of innovative digital solutions; and (2) the discussion of challenges and prospects of cross-border settlements and payments for overcoming the consequences of sanctions. The issues of the formation of effective payment systems are poorly studied, but in the conditions of geopolitical sanctions and the rapid introduction of digital technologies in everyday life are gaining new urgency and require an integrated approach. The works of such Russian and foreign authors as Friedrich von Hayek (1989), Milton Friedman (2008), Joseph E. Stiglitz (1998), E.S. Ulanova et al. (2021), S.V. Krivoruchko et al. (2018), S.Y. Pertseva (2022), V.M. Usoskin (2014) and others are devoted to certain issues of the construction and development of payment systems. The application of new technologies in the financial sector is reflected in the works of the following Russian

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and foreign authors: D. Tapscott and A. Tapscott (2016), Melanie Swan (2015), Jerome Powell (2017), V.V. Pshenichnikov (2022), L.V. Popova (2019), V.N. Ageyev A.V. and Vlasov (2020), S.Y. Pertseva (2022), A.A. Sitnik (2020), and O.M. Korobeynikova et al. (2021). Thus, this paper stresses that the digital transformation of the national payment system during the sanctions meets the economic interests of the Russian Federation, as the plans for economic and technological modernization that have been can hardly be implemented without efficient intra-country and cross-border payment relations built on innovative solutions.

Methodology The paper assumes that the geopolitical sanctions imposed against Russia in 2014–2022 have positively influenced the dynamics of the key indicators of the development of the national settlement and payment mechanisms. Before the sanctions were imposed, the Russian payment system was developing in accordance with global trends. It is important here to study the functioning payment industry in Russia until 2022 in greater detail. Among the payment services available for individuals, we can mention mobile wallets (for example, “Qiwi” and “Yandex.Money”), direct payments between cards of different banks (“Pay-up Payments”), currency exchange services (many online exchangers, for example, the Russian “New Line” and “ProstoCash” (“SimpleCash”) services allow people to exchange bitcoins or ethers for roubles or dollars). While there are no Russian peer-to-peer currency exchange platforms for traditional currencies, the British “Kantox” or “Wise” platforms, for example, can be used to exchange roubles for other currencies and make cross-border transfers. To a large extent, the development of fintech payment projects in Russia is associated with a large number of service providers accepting payments for their services, and with the needs of these service providers to do it more quickly and more conveniently for clients. Nevertheless, in terms of payments, transfers and currency exchange in Russia, banks that provide these services at a high level and with sufficient speed still hold the dominant position (unless we are talking about cryptocurrency exchange or cross-border transfers, where fintech services provide customers with opportunities that traditional banks

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cannot offer). Some innovative payment services based on the use of artificial intelligence have appeared recently. For example, in May 2017, Bank Otkritie introduced its “Otkritie.Payments” mobile application available for Android and iOS. One of the functions of this application is “transfer by photo,” whereby money transfers can be made by taking a photograph of the person you want to using your smartphone or selecting a photo of them from a gallery. The image is then transferred to the bank’s face recognition system, which identifies the recipient and sends their bank card details to the application. The sender selects the card from which the transfer will be made and makes the payment. In addition, the implementation of services that facilitate payments in traditional stores is also actively developing in the consumer segment. For instance, point-of-sale (POS) terminals supporting “MasterCard PayPass” and “Visa payWave” contactless technologies have become the de facto standard in Russia in record time. Today no one is surprised when a customer makes a payment by waving their smartphone that supports “Google Wallet,” “Apple Pay” or “Samsung Pay” in front of the terminal. Similar technologies have been introduced by manufacturers of the most diverse mobile electronics (for example, Garmin smartwatches with “Garmin Pay” technology). “Samsung Pay” technology has been implemented widely for the Russian “Mir” payment system. It is important to study the functioning of the Russian payment system in the new reality. At the moment, the main structural elements of the national payment system of the Russian Federation are: ● ● ● ● ●

the the the the the

Payment System of the Bank of Russia, Payment System of the National Settlement Depository, National Payment Card System, Financial Messaging Transmission System, and Faster Payments System.

It should be noted that since 2014 (when Russia first felt the effect of sanctions) the national payment system has transformed significantly towards ensuring independence and protecting the uninterrupted nature of settlements and payments. These important qualities of the Russian payment system made it possible to carry out reliable settlement operations in the conditions of 2022.

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We should of course mention the importance of the payment system of the Russian Federation, as it plays a key role in the development of: ● public finances through the implementation of monetary and fiscal policy, ● national financial markets in terms of providing them with liquidity for the implementation of the entire complex of currency, monetary, credit and insurance operations, ● the corporate segment in terms of the ability to receive working capital, settlements and payments between counterparties, ● small and medium-sized businesses through the implementation of uninterrupted settlements and payments, ● the quality and standard of living of the population. The payment system promotes the development of equipment, technologies, innovations in the field of security, information security, and risk minimization. Let us now analyse the national settlement depository (NSD), an important structural element of the national payment system and a key component of the Russian financial infrastructure. NSD is a structural element of the Moscow Exchange Group, which offers a wide range of services, including settlement services as an operator of the NSD Payment System, depository services as the Central Depository of the Russian Federation, registration and settlement of overthe-counter transactions (repository), liquidity management services and information and technological services. The quantitative characteristics of the National Settlement Depository are presented in Table 3.1. The National Settlement Depository is an infrastructural institution of the financial market of the Russian Federation, performing a wide range of activities, including the functions of a central depository, a systemically and nationally significant payment system, a clearing organization, and a trade repository. Guided by the provisions of the Order No. OD-2551 of the Bank of Russia “On Approval of the Methodology for Assessing Systemically and Socially Significant Payment Systems and Systemically Significant Infrastructure Organizations of the Financial Market (Central Depository, Central Counterparties and Repositories)” dated November 5, 2019, and the established methodology set out in the document of

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Table 3.1 NSD indicators in 2022 No

Indicator

Value

1

Total amount of client assets held in custody

2

Total volume of foreign securities held in NSD, including Eurobonds issued by the state bodies of the Russian Federation Transactions with a total volume of 3500 trillion roubles have been registered in the repository since the beginning of its work Average annual volume of settlements serviced by the settlement and payment systems On average, messages per day from clients connected to the SWIFT service bureau via NSD

69.5 tn RUB 8.7 tn RUB 250 m

3 4 5

320 tn RUB 20,000

Source Compiled by the author based on data from: https://www.nsd.ru/

the Committee on Payment and Settlement Systems of the Bank for International Settlements and the Technical Committee of the International Organization of Securities Commissions “Principles for Financial Market Infrastructures: Information Disclosure Structure and Evaluation Methodology,” NSD publishes the “Report on Compliance of NSD with the Principles for Financial Market Infrastructures” in order to: ● increase the transparency of NSD’s activities as an infrastructure organization of the financial market, ● disclose information about the activities of NSD, including rules, basic procedures and market data, to current and potential clients, counterparties, the competent authorities and the public, ● provide a sufficient volume of information in the proper form for current and potential clients and counterparties in order for them to familiarize themselves with and assess the risks associated with their interaction with NSD. The National Settlement Depository provides the Financial Messaging Platform (Transit 2.0), which allows banks and corporations to exchange financial messages and electronic documents. The solution was developed on the basis of the NSD electronic document management system.

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The Transit 2.0 service provides the operational exchange of financial messages and electronic documents: payment orders, statuses, statements and free format messages. The list of documents is constantly expanding. The service removes the need for clients to create and maintain their own IT solutions for exchanging financial messages with counterparties. The NSD system automatically recognizes the format of the sender’s electronic document and converts it to the format of the recipient. Thus, the service provides corporations and banks with a single channel for exchanging electronic documents throughout the e-document management network. The National Settlement Depository has the status of a service bureau of the Financial Messaging System (SPFS) of the Bank of Russia. The service bureau will be of interest to small and medium-sized banks in the Russian Federation, as well as EAEU banks and Russian corporations. The key advantage of the service is that it reduces costs for the customer associated with creating and maintaining the necessary infrastructure. NSD offers contact with SPFS user organizations through its own technology platform, which ensures fast and secure interaction of participants. NSD’s payment system provides for direct participation only. To become a Direct Participant in the NSD payment system, an organization must adhere to NSD’s Rules and conclude bank account agreements with it, as well as comply with all technical and technological requirements stipulated by the terms of the AEED (Agreement on the exchange of electronic documents) and the NSD Electronic Document Management Rules. Money transfers to epy NSD payment system are carried out in real time. The largest part of transfers to NSD is carried out using electronic means of payment by NSD participants (for example, Bank–Client systems). NSD continues to develop as the infrastructural basis of the financial market ecosystem, and has set itself the goal of implementing the national policy on the digitalization of the country’s economy and, in particular, the emergence of a new asset class for investors, as well as ecosystems for ICO (Initial Coin Offering) and the circulation of digital assets. The key element of the national payment market is the System for Transfer of Financial Messages, which is a Russian equivalent of the SWIFT financial transfer system, developed by the Central Bank of Russia.

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Table 3.2 Quarterly traffic dynamics of the system for transfer of financial messages (per cent)

1 2 3 4

Q Q Q Q

2017

2018

2019

2020

1.3 0.6 0.4 0.4

0.8 1.3 1.7 1.7

1.3 3.0 4.0 4.6

4.0 4.5 6.6 7.9

Source Compiled by the author based on data from the Central Bank of Russia, www.cbr.ru

It was created in 2014 as an alternative tool for protecting corporate settlements and payments in the face of sanctions risks. This system allows counterparties to exchange financial messages and interact with each other both inside and outside the country (Table 3.2). More than 300 Russian and 100 foreign companies from 12 countries work with the system. It operates according to SWIFT standards and ensures the transmission of financial messages. The cost of sending messages is 1 rouble (sending a SWIFT message costs 4 roubles). The growth of the quarterly payment traffic of the System for Transfer of Financial Messages in 2017–2020 is due to the following factors: ● ● ● ● ●

the the the the the

increase in the number of participating Russian companies, growth of foreign users of the system, low transaction cost, high geopolitical uncertainty, support from the state.

The increase in traffic of the System for Transfer of Financial Messages might be a result of the development of cross-border settlements (between the EAEU members) being remarkably vibrant between Belarus and Russia, Armenia and Russia, and Kyrgyzstan and Kazakhstan. In October 2019, a project to connect the payment systems of Russia, India and China came into fruition on the basis of the System for Transfer of Financial Messages. In India, the system is implemented directly; while existing proprietary payment systems has been connected to the Russian system in China and Iran—CIPS and SEPAM, respectively. An important element of the retail segment of settlements and payments is the Russian National Payment Card System. The system is an

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operational and payment clearing house for processing bank card transactions within Russia. It is also the operator of the MIR card payment system and the operational and payment clearing house of the Faster Payments System, wholly owned by the Central Bank of Russia. The National Payment Card system processes transactions using MIR cards and the cards of international payment systems, develops products and services offered by the MIR payment system, and, together with the Bank of Russia, develops the Faster Payments System. The importance of implementation of the National Payment Card System is that the bank card market: ● stimulates the development of retail consumption and accelerates industrial production, ● has a positive effect on economic growth and the creation of new jobs, ● contributes to the reduction of the share/scale of the grey economy, ● leads to increased tax revenues, ● provides for a significant reduction in the cost of cash transactions, ● expands consumer access to additional financial services, ● promotes the development of a competitive payment ecosystem and faster economic growth, ● stimulates the development of consumer demand and significantly increases the indicators of real consumer income. The key features of the National Payment Card System are the following: ● Since December 2015, more than 125,000,000 MIR cards have been issued; ● 85 regions of the Russian Federation are served by national payment cards; ● 10 countries of the world accept Russian cards. The company is 100% owned by the Central Bank and has been operating since 2014. Table 3.3 demonstrates that the National Payment Card system creates convenient, beneficial and available payment services to all, while at the

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Table 3.3 Dynamics of the share of international and national card payment systems in Russia in 2016–2020 (per cent)

2016 2017 2018 2019 2020

International payment card systems

National payment card system MIR

97.5 95.2 83.7 79.0 75.0

0.1 2.9 14.5 19.3 24.0

Source Compiled by the author based on data from the Central Bank of Russia, www.cbr.ru

same time supporting the country’s sovereignty and setting industry standards. Banks in six of the nine countries that signed on to MIR, set up by Russia after the first wave of US restrictions back in 2014, have dropped it in the two months since the Treasury Department issued its warning in September 2022. Over the last few months, banks in Kyrgyzstan and Tajikistan suspended the use of the cards, as did Kazakhstan’s biggest bank. One of the two institutions in Vietnam that accepted MIR cards has also abandoned it. Only Armenia, Belarus, Kazakhstan, Kyrgyzstan and Tajikistan still accept MIR cards. The MIR site no longer lists the countries where it can be used. The Central Bank of Sri Lanka said it would not accept Mir cards in its banking sector due to US sanctions. Indonesia is discussing the introduction of Mir, but US sanctions may affect the decision-making process. The Faster Payments System is a service that allows individuals to make interbank transfers using a mobile phone number. It operates 24/ 7/365. Transfer fees are either low or zero. More than 200 banks, including the largest ones, are already connected to the system. Faster Payments System users can receive payments from organizations and pay for purchases using QR codes or other instruments. The Bank of Russia is the operator and settlement centre of the Faster Payments System, and the System for Transfer of Financial Messages acts as the operations and payment clearing centre, using a phone number to transfer money via the Faster Payments System. In order to transfer money between your and/

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Table 3.4 Quarterly traffic dynamics of the Russian faster payments system in 2019–2022 (tn RUB)

1 2 3 4

Q Q Q Q

2019

2020

2021

2022

0.0005 0.01 0.02 0.03

0.04 0.07 0.22 0.46

0.64 1.01 1.39 2.00

2.40 3.00 3.9 –

Source Compiled by the author based on data from the Central Bank of Russia, www.cbr.ru

or another person’s accounts in different banks using a mobile phone number, the sender’s and recipient’s banks need to be connected to the system (Table 3.4). It is important to consider the main trends in the development of the Russian payment system in the context of the sanctions. We should note here that the key problem of the development of the Russian payment system is the implementation of the international settlements during the sanctions. The Bank of Russia and market participants launched the testing of the digital rouble platform and successfully completed the first digital rouble transfers between individuals. The creation of a prototype of the digital rouble platform was finished in December 2021. Twelve banks announced their readiness to take part in testing the platform. Three banks from the pilot group have already connected to the platform, two of which have successfully completed a full cycle of digital rouble transfers between clients using banking mobile applications. In addition to opening digital wallets on the digital rouble platform, clients were also able to exchange non-cash roubles in their accounts for digital ones, and then they transferred digital roubles between themselves. Other members of the pilot group are going to join the testing of the digital rouble platform as soon as their IT systems are finalized. Interaction between the Bank of Russia and market participants in digital rouble operations is based on a two-tier retail model approach. The Bank of Russia is the issuer of the digital rouble and the operator of the platform. Within this framework, clients open wallets and conduct operations using these wallets on the digital rouble platform through financial institutions. Thanks to the unique character of a digital rouble, clients will

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be able to access their digital wallets via the mobile applications of their respective banks. The digital rouble platform provides new opportunities for citizens, businesses and the state. The plan is for transfers in digital roubles to be free of charge and available in all Russian regions for individuals. For businesses, the platform will reduce costs and allow them to develop innovative products and services. As for the state, these transfers will serve as a new tool for earmarked payments and budget payment administration. In 2022, the Bank of Russia tested various scenarios and put the finishing touches on the digital rouble platform. Eventually, the platform will ensure seamless interaction with digital platforms and digital ecosystems. The first stage of the project includes the testing of digital roubles that have been issued, the opening of digital wallets by banks and individuals, and transfers between individuals. The second stage will involve testing payments for goods and services at retail and service companies, payments for public services, sales of smart contracts, as well as interaction with the Federal Treasury. Further suggestions include the possibility of making payments in places without access to the internet (offline mode), establishing interaction with financial intermediaries and digital platforms, and conducting transactions with digital roubles for non-resident clients. A roadmap for the implementation of the digital rouble platform will be complied as a result of this testing. The Russian Federation is integrated into the world economy and is both a systemically significant exporter and an important importer of goods, services, and capital. The ability to carry out international settlements smoothly and unhindered is an extremely important aspect from the perspective of both the national and global economies. Thus, the research has captured the upward dynamics of key performance indicators of the Russian payment industry, as well as the role of the Bank of Russia as a regulator of the financial system. More specifically, we are talking about the rapid development of the national payment system developed during the sanctions. To sum up, the positive dynamics revealed generally correlate with the overall dynamics of the national payment system in Russia. All the key elements of the Russian national payment system are focused on the domestic market, demonstrating efficiency and progressive development in the face of geopolitical pressure. An urgent problem is the possibility of international settlements by Russian companies (which has suffered

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from the overall adverse external economic conditions). As of today, the regulator is particularly concerned about cross-border payments—the settlement of monetary claims between participants in foreign economic activity. International settlements are usually carried out in non-cash form using the SWIFT system. The Russian payment industry is characterized by the high integrity of the digital financial services it provides, its sound regulator policy framework and its hi-tech infrastructure.

International Payment Systems To compare the functioning of payment systems in different countries, it is possible to calculate the “efficiency coefficient of payment systems” (Ulanova, 2022). This indicator is calculated as the ratio of the total volume of transactions carried out through the country’s payment systems to the volume of GDP. It estimates the turnover of financial assets involved in the creation of the country’s GDP, as well as the ability of payment systems to ensure a reproduction cycle. The higher the indicator value, the faster economic operations can be serviced and the production cycle can be carried out. Table 3.5 shows the efficiency coefficients of payment systems in selected countries. According to Table 3.5, the absolute leaders in the world in terms of transaction volume are the American “Fedwire Funds Service” and the Chinese “HVPS” payment systems. The efficiency indicator of the payment systems of China and the United States (61.02 and 63.34, respectively) is at a high level, which indicates the successful development of the economy in general, and the financial sector in particular. The highest value of this indicator is observed in Japan, that is, the total volume of transactions is almost 94 times higher than the country’s GDP, which indicates a high speed of development of the financial sector at a low rate of economic growth. For Japan, this is a potential signal for an increase in production and the ability of the country’s payment systems to provide and support it. As for Russia, the economy is inferior to the world leaders in terms of both the volume of transactions and the efficiency of the payment industry; the total volume of transactions is only 16.56 times higher than the volume of GDP. In terms of its future evolution, Russia should strive to develop the financial market by stimulating an increase in the volume of transactions.

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Table 3.5 Indicator of the effectiveness of payment systems in selected countries Country, payment systems

Volume, bn USD

Total volume, GDP, bn USD bn USD

Indicator

China ACH BEPS CUPS HVPS IBPS

1237 21,285 27,852 818,474 29,490

898,338

14,723

61.02

Japan BOJ-NET FXYCS Tokyo Clearing House Zengin System

405,243 41,478 740 27,423

474,884

5058

93.89

Russian Federation Bank of Russia Payment System NSD Payment System

22,902 1658

24,560

1483

16.56

UK BACS CHAPS Sterling Cheque/credit Faster Payments Service LINK

6234 117,886 330 2694 144

127,288

2760

46.12

USA Cheque clearing: Federal Reserve Cheque clearing: Private CHIPS EPN FedACH Fedwire Funds Service NSS

8101 11,399 381,869 30,180 31,678 840,483 23,465

1,327,175

20,953

63.34

Eurozone EURO1/STEP1 STEP2 SCT Service STEP2 SDD B2B Service STEP2 SDD CORE Service

46,256 16,922 849 1536

616,525

13,021

47.35

(continued)

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Table 3.5 (continued) Country, payment systems

Volume, bn USD

TARGET2

550,962

Total volume, GDP, bn USD bn USD

Indicator

Source Ulanova (2022)

To sum up, we can say that the existing payment system in Russia needs significant technological modernization. In this case, the Bank of Russia needs to accumulate the necessary technological, financial and organizational resources at the payments platform to pour them into initiatives, including infrastructural projects, that might carry a regional synergetic effect of the development of the national payment industry.

Prospects for International Settlements The issue of cross-border settlements is still relevant for Russian companies. The decision of the Indian regulator to make payments to Russian partners in Indian rupees is interesting in this respect. India’s state-run UCO Bank plans to open a special rupee account with Russia’s Gazprombank to facilitate an increase in trade between the two countries. The bank has received the necessary approval from the regulator—the Reserve Bank of India (RBI)—to open a special rupee vostro account. In the past, UCO Bank functioned as the payment bank for oil imports from sanction-hit Iran. Meanwhile, Gazprombank has thus far been spared the harsher sanctions Russia has faced in 2022. UCO Bank will put operational modalities in place before it opens the account with its Russian counterpart. There is no clear timeline for when transactions can begin. Trade between India and Russia has thrived in the past few months, despite the threat of sanctions. Total imports of items such as sunflower oil, fertilizers, silver, printed books, coriander seeds and furniture items jumped more than 61% during the April to July period to $2.1 billion, from $1.3 billion a year earlier, according to the Ministry of Commerce and Industry of India.

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Crude oil, however, continued to dominate bilateral trade and has climbed more than fivefold to $13.3 billion from $2.6 billion a year earlier. In July 2022, the RBI allowed Indian banks to open special rupee vostro accounts with lenders from other countries to settle overseas contracts in the Indian currency. A vostro account is established to enable a foreign lender to act as an agent or provide services as an intermediary for a bank back home to execute wire transfers, withdrawals and deposits for customers. The Kolkata-based bank has received about 14–15 applications from banks of different countries to open special vostro accounts under the RBI circular. This facility will be in line with RBI regulations and only for nonsanctioned banks. In September 2022, the State Bank of India (the country’s largest lender) said that it would open special rupee accounts to handle Russiarelated trade settlements in the local currency, but it would not be the main bank for such business. One of the best ways to provide a detailed overview of the options for the development of the Russian payment system in the context of the sanctions is through a SWOT analysis. It is important to consider the analysis of the legalization of foreign trade settlements using cryptocurrencies from the position of strengths, weaknesses, opportunities and threats (Table 3.6). The strengths, weaknesses, opportunities and threats of allowing nonbank credit institutions to open accounts with foreign banks for international settlements by Russian companies should also be considered (Table 3.7). A SWOT analysis of the System for Transfer of Financial Messages for the implementation of international settlements and payments is also required (Table 3.8). Thus, at the present stage, the state, represented by the regulators and the business community, are exploring alternative ways of conducting cross-border settlements. On the one hand, the options described above have the potential to support export–import operations, stimulate competition in the financial services market and even promote domestic solutions in the field of fintech. However, on the other hand, the absence of such options reflects insufficient consideration of the risks associated with their implementation in the regulatory system at both the global

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Table 3.6 SWOT analysis of cryptocurrency legalization for foreign trade settlements Strengths

Weaknesses

• Low costs of cross-border settlements; • Fast processing speed and storage of transaction information in the blockchain; • Support for export-oriented industries that have fallen under anti-Russian sanctions; • De-dollarization of the Russian economy

• Lack of international regulation of cryptocurrencies, and, consequently, the risk of regulatory arbitrage; • Fragmentation of the cryptocurrency market (prohibition of use as a means of payment in Algeria, Bolivia, Egypt, India, Indonesia, China, etc.); • Russia’s main trading partners from among friendly countries prohibit cryptocurrencies; • The existence of contradictions between the Bank of Russia and the Ministry of Finance on the regulation of cryptocurrencies; • Additional costs for hedging price volatility Threats • Tightening of sanctions and requirements in the field of AML/ CFT and compliance control; • Requirements for complete freezing (withdrawal) of funds of Russian residents from crypto wallets; • Disintermediation of traditional financial intermediaries; • Reduction of financial stability of large export-oriented companies in case of realization of price or operational risks, including cyber risks, which may cause the transmission of risks of non-financial companies to the financial system through a decrease in the creditworthiness of major corporate borrowers

Opportunities • Development of new segments of the financial market, including the crypto derivatives market; • Incentives for entering the market of fintech start-ups in the field of P2P and digital payments, which will allow for the import substitution of technologies in the future; • The exit of crypto exchanges and crypto exchangers from the shadow zone, prospects for the formation of a risk-oriented system for monitoring and regulating their activities

Source Compiled by the author based on data from the Central Bank of Russia, www.cbr.ru

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Table 3.7 SWOT analysis of the use of non-bank credit institutions for the implementation of international settlements by Russian companies Strengths

Weaknesses

• Decentralization of financial services and promotion of competition in the Russian financial market; • Maintaining access to foreign currency liquidity against the background of anti-Russian sanctions against Russian commercial banks; • Support for national exporters and importers

• Lack of a coordinated global approach to regulating the activities of non-bank credit institutions, which creates the risk of regulatory arbitrage (in particular, they are investigated within the framework of the main areas of work of the Financial Stability Board); • Revision of the current regulatory system, which prohibits non-bank credit institutions from opening accounts with foreign banks Threats • Tougher sanctions and extensions to non-bank credit organizations, which may lead to a deterioration in the financial situation of their customers; • Disintermediation of commercial banks and the reduction of their role, the outflow of customers, which can lead to problems with funding banking activities—a source of systemic risks of the banking sector; • The lack of established practice of prudential regulation of non-bank credit institutions threatens to reduce the overall quality of the regulatory system in Russia

Opportunities • Formation of a risk-oriented NBFI regulatory system, including: z The introduction of specific capital adequacy requirements; z A system for assessing procedures for preventing and reducing the risk of sudden outflow of customer funds (“run risk”); z Macroprudential policy tools to limit systemic risks (for example, capital buffers); • Creating prerequisites for the rejection of preferential bank financing and expanding opportunities for businesses to raise capital and manage liquidity

Source Compiled by the author based on data from the Central Bank of Russia, www.cbr.ru

and national levels. It is obvious that the use of cryptocurrencies and the activities of non-bank financial institutions are the issues that, due to their relevance, will require early resolution in the future and the development of a clear position on the part of regulators. In this regard, the anti-Russian sanctions may act as a catalyst for innovation in financial regulation.

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Table 3.8 SWOT analysis of the system for transfer of financial messages for the implementation of international settlements and payments Strengths

Weaknesses

• Mitigation of the negative consequences of disconnecting a number of large Russian banks from SWIFT; • Monitoring and ensuring the functioning of the System for Transfer of Financial Messages by the Bank of Russia as a mega-regulator of the financial market; • The System for Transfer of Financial Messages operates not both financial institutions and national payment systems (in China and Iran, the payment systems of these countries have been connected: CIPS and SEPAM, respectively) Opportunities • Development of payment and financial infrastructure in the EAEU space for the formation of a single financial market and strengthening integration in the Eurasian space; • Expanding the functioning of the System for Transfer of Financial Messages for cross-border payments in the future will increase the attractiveness of using the rouble in foreign trade operations

• Low interest of foreign counterparties in the Russian payment infrastructure; • Lack of serious channels of interaction with foreign organizations, which is why not all services are available to users; • The System for Transfer of Financial Messages is inferior to SWIFT in terms of functionality and technology

Threats • Insufficient consideration of possible operational shocks (including technological and cyber risks) within the current risk management system; • Reduced efficiency and increased cost of cross-border settlements; • The limited experience in the use of SSPS in international settlements threatens to create systemic risks, for example, in the event of a sharp increase in the number of messages transmitted

Source Compiled by the author based on data from the Central Bank of Russia, www.cbr.ru

Conclusions This paper argues that the payment system is one of the most promising dimensions of financial innovations in Russia despite the fact that the technological achievements of the Russian payment industry are still modest due to external shocks and the specifics of regulation-building. Nevertheless, the analysis carried out revealed that, on the whole, the payment industry reacted positively in 2014–2022 to the development of innovative mechanisms during the sanctions. Finally, the sanctions serve as a driver of the rapid development of the payment industry, bringing about the transformation of both the external

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and internal perimeters of settlement relations. The key factor in the development of an effective national payment system is to ensure its technological sovereignty, and to search for reliable partners and instruments for settling monetary claims and obligations, including alternative ones.

References Ageyev, V. N., & Vlasov, A. V. (2020). Potential Applications of Digital Financial Asets. Financial Journal, 12(6), 100–112. https://doi.org/10.31107/20751990-2020-6-100-112. (In Russian). Freedman, C. (2000). Monetary Policy Implementation: Past, Present and Future—Will Electronic Money Lead to the Eventual Demise of Central Banking? International Finance, 3(2), 211–227. Friedman, M. (2008). Milton Friedman on Economics: Selected Papers (G. S. Becker, Eds.). University of Chicago Press. Hayek, F. V. (1989). The Pretence of Knowledge (Nobel Lecture). American Economic Review, 79(6), 3–7. Korobeynikova, O. M., Korobeynikov, D. A., & Shemet, E. S. (2021). Methodology for Analysis of the Dynamics of Payment Systems in the Digital Economy. Vestnik of Lobachevsky University of Nizhni Novgorod, 4(64), 2021. https://doi.org/10.52452/18115942_2021_4_7 Krivoruchko, S., Ponamorenko, V., & Nebera, A. (2018). Central Bank Policy and Cryptocurrencies. Journal of Reviews on Global Economics, 7 , 549–561. Krivoruchko, S. V., & Shamraev, A. V. (2019). Cryptocurrencies Issued by Central Banks: Legal Aspects of Tokenization. Bankovskoe Pravo, 4, 15–28. https://doi.org/10.18572/1812-3945-2019-4-15-28 Official Website of the Central Bank of Russian Federation. www.cbr.ru Official Website of the National Settlement Depository. https://www.nsd.ru/ Payment and Settlement Systems in Selected Countries. (2003, April). “The Red Book”: Part 17, Glossary_CPSS. https://www.bis.org/cpmi/publ/d53p17. pdf Pertseva, S. Y. (2022). Transformation of the Payment System of Russia during the Sanctions. Bulletin of the Altai Academy of Economics and Law, 10(2), 291–298. https://doi.org/10.17513/vaael.2462; https://vaael.ru/ ru/article/view?id=2462. (In Russian) Popova, L. V. (2019). FDI Motivation and Entry Strategies of Russian Companies in the Chinese Market. In Proceedings of the Third International Economic Symposium (IES 2018) (pp. 439–447) (Advances in Economics, Business and Management Research; 104). Powell, J. H. (2017, March 3). Blockchain: The Future of Finance and Capital Markets? The Yale Law School Center for the Study of Corporate Law, New Haven, Connecticut. Innovation, Technology, and the Payments System.

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Washington, DC: Board of Governors of the Federal Reserve System. https:/ /www.federalreserve.gov/newsevents/speech/powell20170303b.pdf Principles for Financial Market Infrastructures. (2012). Bank for International Settlements and International Organization of Securities Commissions. https://www.bis.org/cpmi/publ/d101a.pdf Pshenichnikov, V. V. (2022). Retrospective Analysis Based Identification of Potential Sources of Value and Purchasing Power of Digital Currencies. π -Economy, 15(4), 21–35. https://doi.org/10.18721/JE.15402 Sitnik, A. A. (2020). Digital Currencies of Central Banks. Courier of Kutafin Moscow State Law University (MSAL), 9, 180–186. https://doi.org/10. 17803/2311-5998.2020.73.9.180-186. (In Russian). Soloviev, V. (2018). Fintech Ecosystem and Landscape in Russia. Journal of Reviews on Global Economics, 7 , 377–390. Stevens, A. (2017). Digital Currencies: Threats and Opportunities for Monetary Policy. NBB Economic Review. https://www.nbb.be/doc/ts/publicati ons/economicreview/2017/ecorevi2017_h5.pdf Stiglitz, J. (1998). Distinguished Lecture on Economics in Government: The Private Uses of Public Interests: Incentives and Institutions. The Journal of Economic Perspectives, 12(2), 3–22. https://doi.org/10.1257/jep.12.2.3 Swan, M. (2015). Blockchain. O’Reilly Media. Tapscott, D., & Tapscott, A. (2016). The Blockchain Revolution: How the Technology Behind Bitcoin is Changing Money, Business, and the World. Penguin Books. Ulanova, E. S., Trachenko, M. B., & Kozhanova, A. V. (2020). Financing of Development of the Digital Infrastructure of “Smart” Cities. In E. Popkova & B. Sergi (Eds.), Artificial Intelligence: Anthropogenic Nature vs. Social Origin (ISC Conference—Volgograd 2020. Advances in Intelligent Systems and Computing, 1100) (pp. 111–122). Ulanova, E. S., Trachenko, M. B., & Kozhanova, A. V. (2021). The Financial Sector Disintermediation as a Driver for the New Financing Model for StartUps. In A. V. Bogozin (Ed.), Complex Systems: Innovation and Sustainability in the Digital Age (Vol. 2). Springer. Usoskin, V. M. (2014). Correspondent Agreements in the System of Interbank Settlements. Money and Credit, 3, 17–21. World Bank. (2010). Payment Systems Worldwide—A Snapshot—Outcomes of the Global Payment Systems Survey 2010. http://documents.worldbank. org/curated/en/441671468332987906/Payment-systems-worldwide-A-sna pshot-Outcomes-of-the-global-payment-systems

CHAPTER 4

Artificial Intelligence Politics and Sanctions: Comparing the Cases of Russia and Iran Radomir Bolgov

Introduction Leading countries today are moving towards modernization through new technologies, including artificial intelligence (AI). Of course, the cooperation of countries on AI is strategically necessary. However, the current dynamics in relations between the leading countries (Bolgov et al., 2018) creates the threat of digital decoupling. The COVID-19 pandemic has exacerbated the situation. States are trying to solve the problems that arise in cyberspace on their own. States use unilateral economic sanctions to force individual countries or persons to change their behavior or to inflict damage in return. The only universal institution with unchallenged legitimacy is the UN. The UN Security Council has sanctions mechanisms, the implementation of which is mandatory for all member states of the Organization. At the same time, the high level of the UN Security Council’s legitimacy is not supported by sufficient tools for decision

R. Bolgov (B) Saint Petersburg State University, Saint Petersburg, Russia e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 A. Baykov and E. Zinovieva (eds.), Digital International Relations, https://doi.org/10.1007/978-981-99-3467-6_4

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implementation, moreover, the veto mechanism often blocks the decisionmaking process. In addition, the Organization does not have an ICTs or AI-specific sanctions mechanism. The purpose of this study is to identify similarities and differences in the AI policies of the States claiming global (Russia) and regional (Iran) influence. The context of this study is the sanctions of Western countries, which significantly influenced the AI policies of these States. The research methodology is based on the principles of comparative analysis. We analyze legislation and strategic documents, as well as institutions and practices in the field of artificial intelligence development in these states. Identifying national AI policy patterns can be an important predictive tool. In order to conduct a comparative analysis of legislation, we developed a set of parameters for comparison: (1) AI development goals, (2) authorities responsible for the implementation of AI projects, (3) AI development priorities, (4) positions of countries in the global AI development rankings. The study is based on the analysis of AI development indices (Government AI Readiness, 2021 by Oxford Insights, Nature Index, 2020 Artificial Intelligence, and Global AI Index, 2021 by Tortoise Media), official statistics, national legislation, and media publications.

Methodology of Case Selection Before the sanctions imposed against Russia in 2022 in the context of the conflict in Ukraine, it was Iran that for 40 years occupied first position in the world in terms of the number of restrictions imposed against it (Russia…, 2022). At the same time, direct parallels should not be drawn. Unlike Russia, Iran is a theocratic state headed by a religious leader. Sanctions against Iran were introduced gradually over decades, while in Russia it was a one-time shock imposition of sanctions. At the same time, there are many similar things, especially when it comes to sanctions. In both countries, the assets of the Central Banks are blocked. Almost all the Western brands left these countries (as declared). SWIFT international payment system does not work. Western countries have banned the supply of technologies. Internet is filtered. The oil embargo prevents large quantities of oil from being sold abroad, which means it deprives countries of the foreign exchange earnings needed to import technology that cannot yet be developed in-house.

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Theoretical Framework The growing confrontation between the political regimes and military machines of Western countries and Russia shifts to the technological sphere (Bolgov et al., 2019). Several experts consider the conflict of the modern superpowers for the leading position in the field of new technologies as a manifestation of techno-nationalism (Tkachenko et al., 2021), a new type of mercantilism that plays a key role in industrial policy and world trade of the world’s leading economies (Nakayama, 2012). Proponents of this approach rightly believe that there is a strong relationship between innovations in advanced technologies, on the one hand, and national security, economic well-being, and social stability in the country, on the other hand (Capri, 2020). Some experts believe that this process solves the issue of global economic leadership (Brooks & Wohlforth, 2016), so that decoupling in the high-tech sector will inevitably be followed by other sectors of the economy (Bergsten, 2018). Valdai Club experts note that there are only two technological platforms in the world (American and Chinese) and consider it a priority for the Russian Federation and Iran to decide whether to join one of these platforms or build their own, competing with the two already established ones (Bezrukov et al., 2021). The problem of sanctions effectiveness in technology was discussed by Tkachenko and colleagues (Tkachenko et al., 2021). World practice shows that sanctions, as a rule, do not achieve their goals of changing regimes and reducing the level of well-being of elites, leading to the opposite result—worsening the lives of ordinary people (Chen, 2017). Sanctions can be maintained even after achieving the goal for which they were introduced since usually there is no mechanism for their cancellation anywhere. The oppression of sanctions, on the contrary, is used by the State in order to strengthen the image of the West as a vile enemy and rally the people against it (Shaw, 2022). In addition, as a retaliatory measure, Russia may limit the export to Western countries of chemical elements on which the production of semiconductors depends. 35 percent of the palladium in the United States comes from Russia, and more than 90 percent of the neon comes from Ukraine, where it is delivered for cleaning again from Russia. Currently, Russia produces 80 percent of sapphire substrates, which are used in microelectronics to build up silicon layers. They are used in every processor, including AMD and Intel. Only

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Apple purchases in Russia over 20 types of parts and consumables for its products, including, for example, special ultra-pure tin for soldering and power tantalum capacitors (Hitting…, 2022).

AI Development Experience in Russia and Iran Russia We found 11 policy initiatives in the field of AI in Russian policy papers on the Russian government website (government.ru). The National Technology Initiative, adopted in 2015, brings together design and creative teams, dynamically developing companies, leading universities, research centers, academic institutions, business associations, etc. NTI activities are organized around 9 new markets (EnergyNet, FoodNet, SafeNet, HealthNet, AeroNet, MariNet, AvtoNet, FinNet, and Neuronet). The latter is focused on the study and development of distributed artificial elements of consciousness and psyche. Among the priority technologies within the NTI are also artificial intelligence and control systems. Responsible authorities are the Ministry of Science and Higher Education of the Russian Federation and the Russian Venture Company. In addition, in 2019, the “Center for Artificial Intelligence. Leading research centers” (end-to-end digital technology “artificial intelligence”) was launched. This is an experiment that aims to create a favorable legal environment for the development of AI-related technologies and the testing of AI-based applications. The responsible body is the Ministry of Digital Development, Telecommunications and Mass Media of the Russian Federation. It is impossible not to mention the National Program “Digital Economy,” which is a comprehensive program aimed at achieving national goals in the field of digital development (National Program…, 2019). It touches on a number of aspects related to the development of AI. As part of the Digital Economy of Russia program, a multilateral body has been created that is responsible for coordinating the development of AI in Russia and the implementation of the National Strategy for the Development of AI. The subcommittee was established in 2019 under the Government Commission on Digital Development and the Use of ICT to Improve the Quality of Life and Business Conditions. The Ministry

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of Economic Development and the Ministry of Digital Development, Communications and Mass Media are responsible for the initiative. In 2019, the National Strategy for the Development of Artificial Intelligence (AI) was approved (Decree of the President of the Russian Federation, 2019). It has the following goals: Research in the field of algorithms and mathematical methods; AI software development; Collection, storage, and processing of data for R&D and implementation of AI; Increasing the availability of specialized software; Improving the quality and quantity of training for AI; Development of regulations for the AI ecosystem. The responsible body is the Ministry of Digital Development of the Russian Federation. The Technical Committee for Standardization “Artificial Intelligence” (TK 164) was established in 2019 on the basis of the Russian Venture Company in accordance with the order of Rosstandart to improve the efficiency of the development of the regulatory and technical base in the field of AI. In 2020, the Concept for the development of regulation of relations in the field of artificial intelligence technologies and robotics for the period up to 2024 was adopted (Decree of the Government of the Russian Federation, 2020). The purpose of the Concept is to lay the foundations for the legal regulation of social relations arising in connection with the development and application of systems using AI, including the creation and use of robots. The responsible body is the Ministry of Economic Development. The promising standardization program in the priority area “Artificial Intelligence” for the period 2021–2024 includes 217 documents and is designed for 4 years, standardization will affect the introduction of AI in various areas, such as transport, medicine, education, construction and a number of others (A Promising…, 2022). The program is designed to overcome existing regulatory and technical obstacles to the implementation of the federal project “Artificial Intelligence” in Russia. In addition, Vladimir Putin formed an interdepartmental commission of the Russian Security Council to ensure technological sovereignty in the development of IT infrastructure, which will be headed by Deputy Security Council Chairman Dmitry Medvedev. The Ministry of Economic Development also plans to create “sandboxes” that will become experimental platforms for testing innovative digital technologies. The sanctions forced the Russian government to announce its desire for technological sovereignty (Maria Zakharova…, 2022). In the view of

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the Russian authorities, the key parameters of technological sovereignty are, firstly, “the presence of their own bases, platforms, which are provided with their own” software, hardware “and technologies that are not completely dependent on other corporations and countries. Secondly, this is legislation that is flexible, nuancedly regulates online, protecting where necessary from outside aggression, docking with the environment for which it is beneficial, ensuring the technological process. At the same time, no country should be able to censor and moderate someone else’s space, based on own vision” (Maria Zakharova…, 2022). According to the representative of the President of the Russian Federation for digitalization Dmitry Peskov, in order to achieve technological sovereignty in 10–20 years, it is necessary to create a fund for several dozen of our own developments (There is…, 2022). But so far, the share of researchers and developers per thousand population in Russia is 16 times less than in China. In recent years, the Russian Federation has maintained a steady downward trend in the total number of scientists and scientific and technical personnel involved in research and development. In 2000, there were 888 thousand people in the domestic field of research and development. In 2010 and 2019, these figures were 737 thousand and 682 thousand people, respectively. In the US, spending on science is 2– 3% of GDP. In Russia, spending on science is a little more than 1% of GDP. “Preservation of technological sovereignty requires an aggregate level of R&D spending at the level of 2.2–2.5% of GDP. Such requirements require cooperation in research with friendly countries,” said Alexander Shirov, director of the Institute for National Economic Forecasting. According to him, Russia now has no alternative to strengthening scientific and technological development, since the main sanctions restrictions are related to the separation of Russia from the most effective results of research and development (There is…, 2022). A number of AI-based IT services left Russia after February 24, 2022, in particular, the Spotify music service with an audience of 2.1 million Russians. However, the recommendation algorithms of the Russian Yandex.Music service have been well pumped in recent years. The resource can automatically generate playlists based on user preferences. In addition, with the help of a neural network, this service recognizes what music is playing near you. YouTube and Apple have not formally stopped working in Russia, but users have experienced serious difficulties with monthly payments. This happened after Visa and Mastercard suspended their activities in

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the country. But you can also watch and upload videos on Yandex.Zen. The platform has an advanced recommendation system based on smart algorithms. In the Odnoklassniki service in February 2022, user correspondence was protected using artificial intelligence from obscene photos of strangers: now they come blurry. Russia purchases almost 85% of IT products in Asia, but often its quality leaves much to be desired (for example, among Chinese chips purchased by Russia, which Iran also buys, 40% turn out to be defective) and they are based on technologies from foreign companies that can limit exports and impose anti-Russian “secondary sanctions.” To get out of this situation, support for domestic software is needed, including a guaranteed order from large businesses and government organizations, as well as cooperation with friendly countries in the digital sphere. A striking example of restrictive measures for military-political purposes is the US sanctions against the Russian company Kaspersky Lab. In 2018, a ban was introduced on the use of Kaspersky Lab software products in US federal networks, while there was no evidence of the company’s involvement in malicious activities (National Defense, 2018). According to the United States, this will, among other things, resolve the issue of stimulating American manufacturers by closing the digital services market for “competitive but unreliable suppliers.” Iran Over the past decades, Iran has created a whole system to counter the economic blockade. In 2010, Ayatollah Khamenei announced the country’s transition to a “resistance economy,” the meaning of which is the transformation of sanctions into new opportunities. China has become one of the main importers of Iranian energy resources and a supplier of computers, smartphones, and chips (China–Iran). At the end of 2006, UN Security Council Resolution 1737 was adopted, according to which the supply of goods and other equipment that could be used in Tehran’s military and nuclear missile program was prohibited. This includes AI technologies. An important tool for Iran to circumvent sanctions was the legalization of cryptocurrency in 2019. In fact, the country has a way to exchange oil for foreign goods, bypassing the dollar and its associated restrictions. Iran extracts oil, which is converted into electricity using oilfired power plants, which allows the state to give a huge discount on the

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payment of electricity for mining farms. These enterprises rent bitcoins and other cryptocurrencies to the Central Bank of Iran and keep part of it as payment. The Central Bank, in turn, buys high-tech products abroad with cryptocurrency. It is curious that there are mining farms in a number of mosques in Iran since mosques are exempt from paying taxes and electricity for them is practically free. In 2020, 4.5% of the world’s Bitcoin mining was in Iran. An example of success is the artificial intelligence-powered navigation app BALAD, which was downloaded 1.2 million times in a few days after its launch in March 2019 (Pargoo, 2019). Cafe Bazaar, the Iranian version of the Google Play Store, is working on Persian speech recognition technology (although Google already has 10 years of experience in this and much more investment). Before that, Google banned the Iranian ridesharing company Snapp from using Google Maps in its apps. Snapp Tehran has reached 2 million rides per day, more than any Uber city. But this is not about popular applications. The end result is determined by the state of the entire science management system and the interaction between the business of the state and scientific organizations. Iran has another advantage in AI research: it is the fifth largest producer of STEM (science, technology, engineering, and mathematics) graduates with 335,000 graduates per year after China, India, the US, and Russia. Most of these graduates are engineers who can contribute to AI research (Pargoo, 2019). Iran ranks 14th in the world in terms of research capacity in the field of artificial intelligence. It ranks higher than Turkey, Brazil, Taiwan, and South Korea. In addition to AI research, many applications have been developed domestically. Traffic management in Tehran relies heavily on License Plate Recognition (LPR) technologies developed domestically over the past decade based on pattern recognition, machine learning, and neural networks. Some companies have developed facial recognition software (Pargoo, 2019). Iran has also directed investment in AI to the military. There is news about the Iranian army of robots, including suicide robots, automatic mine detectors, and automatic machine guns. There are allegations that Iran tested some of its military robots in the battle against ISIS in Iraq. After the use of Iranian UAVs by Russia in the conflict in Ukraine, 24 countries expressed a desire to acquire Iranian Shahid combat drones.

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Thus, the main obstacles for Iran in bridging the gap with the world leaders in the development of AI are the lack of foreign investment, the lack of a national strategy, and weak external ties. The development of AI is still limited to the development of local applications that are inferior to world leaders, and the labor-intensive production of robots.

AI Development in Russia and Iran from a Comparative Perspective Table 4.1 shows the positions of the three countries under consideration in the international AI development indices. Table 4.1 Positions of China, Russia, and the United States in the international rankings of AI development (compiled by the author)

Indicators in three areas: Public administration; Technology sector; Data and infrastructure (Government AI Readiness, 2021) Global Position

Country

1 15 38 72

USA China Russia Iran

Overall Score 88.16 74.42 61.93 46.23

Indicators: Talent, infrastructure, operating environment, research, development, government strategy, commercial activity (Global AI Index, 2021) Position

Country

1 2 32 No data

USA China Russia Iran

Indicator: total number of publications (# publications) in the field from 2015 to 2019 (Nature Index, 2020) Position

Country

1 2 13 16

China USA Iran Russia

Score 318,534 275,916 30,221 22,344

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Table 4.2 compares the policy initiatives of the countries under consideration for AI development. Thus, we can see that Iran and Russia are not among the world leaders in AI and are just starting to lay the foundations for the development of AI, while China and the United States are already global leaders in this area. Both countries do not have a dedicated ministry of artificial intelligence, although there is talk of establishing one in Iran (Pargoo, 2019). As for the responsible authorities, in Russia these issues are dealt with at the federal level by the Ministry of Economic Development and the Ministry of Digital Development, as well as security services. Large businesses are also involved in the projects, in particular, Yandex and Sberbank (Agreement…, 2019). In addition, a number of projects are tested first at the regional level (in particular, an experiment on the trial Table 4.2 Political initiatives on AI in China, Iran, Russia, and the United States (compiled by the author)

Number of political initiatives Responsible authorities

Goals

China

Russia

USA

Iran

22

11

55

7

National Committee for the Management of New Generation Artificial Intelligence, Ministries of Science and Technology Integrate ethics into the entire AI life cycle By 2025, achieve “world leadership” in some areas of AI. By 2030, become a “primary” hub for AI innovation

Ministry of Digital Development, Ministry of Economic Development, Rosstandart (standardization agency)

Ministry of Commerce; Interdepartmental Council for Statistical Policy; National Institute of Standards and Technology, etc

Ministry of Commerce; Ministry of Defense, Ministry of Health, etc Committee on artificial intelligence

accelerate the pace of development of robust, reliable, and trustworthy AI technologies, expansion of public–private partnership

laying the foundations for the legal regulation of social relations arising in connection with the development and application of systems using AI, including the creation and use of robots

accelerate the pace of development of artificial intelligence technologies

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operation of highly automated vehicles on public roads in Moscow and the Republic of Tatarstan) (Decree of the Government of the Russian Federation, 2018), and only then a decision is made to replicate the experiment to other regions (Bolgov et al., 2014). In Iran, in the system of bodies responsible for the development of AI, powers are divided between line ministries and departments (Ministry of Trade, Ministry of Defense, Ministry of Health, etc.). A number of departments (in particular, the Ministry of Defense) have their own AI development strategies. In addition, a number of interdepartmental committees and special bodies have been created (in particular, the Committee on Artificial Intelligence), and public–private partnership tools are also actively used. At the same time, both countries have adopted a number of special documents regulating the development of AI. In addition, a number of broader initiatives and programs are already addressing aspects of AI development (in particular, the Russian National Program “Digital Economy”).

Conclusion Thus, since Russia is larger and stronger economically and technologically than Iran, technology sanctions will not have the same devastating impact on the Russian economy as on the Iranian one. But if Russian IT professionals decide to cut ties with Russia, the Russian economy could face consequences and the educational system should be ready for it, by intensive teaching in the IT field. The Iranian experience shows that the legal and regulatory framework in the initiating countries takes on the character of a “web of laws” (Timofeev et al., 2022). More and more restrictive US measures will be recorded in the form of statutes, limiting the executive branch from lifting sanctions even when there are prerequisites for this. This problem exists at the level of the European Union. Here, the lifting or even mitigation of sanctions will require a unanimous decision of the EU Council. The Iranian theme can hardly be considered a stumbling block in the ranks of the EU. But the policy towards Russia can become such. As an attempt to get out of this situation, one can consider Russia’s cooperation with Iran in this area, in particular, Russia’s purchase of Iranian UAVs or other common technological projects. Moreover, sanctions intensify Russian technological cooperation with China, which is another country facing Western sanctions.

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References A Promising Standardization Program in the Priority Area “Artificial Intelligence” for the Period 2021–2024. (2020). https://www.economy.gov.ru/ material/file/28a4b183b4aee34051e85ddb3da87625/20201222.pdf Agreement of Intent Between the Government of the Russian Federation and the Joint Stock Company “Managing Company of the Russian Direct Investment Fund” for the Development of the High-Tech Field “Artificial Intelligence” in the Russian Federation. (2019). N 1964-r. https://docs.cntd.ru/document/ 561124424 Bergsten, C. F. (2018). China and the United States: The Contest for Global Economic Leadership. China & World Economy, 26(5), 12–37. Bezrukov, A., Mamonov, M., Suchkov M., & Sushentsov, A. (2021). International Competition and Leadership in the Digital Environment. Valdai Club. https://valdaiclub.com/files/33065/ Bolgov, R., Chernov, I., Katsy, D., & Ivannikov, I. (2019). Battle in Twitter: Comparative Analysis of Online Political Discourse (cases of Macron, Trump, Putin, and Medvedev). International Conference on Electronic Governance and Open Society: Challenges in Eurasia, EGOSE (2018). Communications in Computer and Information Science, 947 , 374–383. https://doi.org/10. 1007/978-3-030-13283-5_28 Bolgov, R., Chugunov, A., Filatova O., & Misnikov, Y. (2014). Electronic Identification of Citizens: Comparing Perspectives and Approaches. ACM International Conference Proceeding Series. 8th International Conference on Theory and Practice of Electronic Governance, ICEGOV 2014; Guimaraes; Portugal; 27 October 2014 through 30 October 2014, 484–485. https://doi. org/10.1145/2691195.2691245 Bolgov, R., Filatova, O., & Yag’ya, V. (2018). The United Nations and Russian Initiatives on International Information Security. Proceedings of the 13th International Conference on Cyber Warfare and Security, ICCWS 2018, 31–38. Brooks, S. G., & Wohlforth, W. C. (2016). The Rise and Fall of the Great Powers in the Twenty-First Century: China’s Rise and the Fate of America’s Global Position. International Security, 40(3), 7–53. Capri, A. (2020). Techno-nationalism: The US-China Tech Innovation Race. Hinrich Foundation, August. https://cvdvn.files.wordpress.com/2020/08/ hinrich-foundation-techno-nationalism-and-the-us-china-tech-innovationrace-alex-capri-august-2020.pdf Chen, J. (2017). Why Economic Sanctions on North Korea Fail to Work? China Quarterly of International Strategic Studies, 3(4), 513–534. https://doi.org/ 10.1142/S2377740017500300 China–Iran. OEC. https://oec.world/en/profile/bilateral-country/chn/partne r/irn

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Decree of the Government of the Russian Federation. (2018). No. 1415. http:/ /government.ru/docs/34831/ Decree of the Government of the Russian Federation. (2020). N 2129-“On approval of the Concept for the Development of Regulation of Relations in the Field of Artificial Intelligence Technologies and Robotics Until 2024”. http://www.consultant.ru/document/cons_doc_LAW_360681/7f2 affb15ff9b9d6f75a9aa566d1b0646b3d2e94/ Decree of the President of the Russian Federation. (2019). No. 490 “On the Development of Artificial Intelligence in the Russian Federation”. Global AI Index. (2021). Tortoise Media. https://www.tortoisemedia.com/intell igence/global-ai/ Government AI Readiness. (2021). Oxford Insights. https://www.oxfordinsights. com/s/Government_AI_Readiness_21.pdf Hitting the Number. What Anti-Russian Sanctions in the Field of IT Can Turn Out to be for the West. (2022) Lenta.ru, 04/22/2022. https://lenta.ru/art icles/2022/04/22/itprblms/ Maria Zakharova at PHDays 11. Interview at the Positive Hack Days-2022 Cybersecurity Forum at WTC Moscow. (2022). https://wtcmoscow.ru/com pany/news/1495/ Nakayama, S. (2012). Techno-Nationalism Versus Techno-Globalism, East Asian Science. Technology and Society: An International Journal, 6(1), 9–15. National Defense Authorization Act. Section 1634 of the National Defense Authorization Act for Fiscal Year 2018. H.R.2810 – National Defense Authorization Act for Fiscal Year 2018. https://www.congress.gov/bill/115th-con gress/house-bill/2810/text National Program “Digital Economy of the Russian Federation”. (2019). http:/ /government.ru/info/35568/ Nature Index. (2020). Artificial Intelligence. https://www.natureindex.com/sup plements/nature-index-2020-ai/tables/countries Pargoo, M. (2019). Sanctions Propel Iran in the Global Race for TerminatorLike AI. Atlantic Council, April 2. https://www.atlanticcouncil.org/blogs/ iransource/sanctions-propel-iran-in-the-global-race-for-terminator-like-ai/ Russia is Now the World’s Most Sanctioned Country. (2022). Castellum.AI . https://www.castellum.ai/insights/russia-is-now-the-worlds-most-sancti oned-country Shaw, M. (2022). The Abyss Gazes Back: How North Korean Propaganda Interprets Sanctions, Threats and Diplomacy. The Pacific Review, 35(1), 202–228. There is No One to Ensure the Technological Sovereignty of Russia yet. (2022) Nezavisimaya Gazeta, 06/29/2022.

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Timofeev, I., Sokolshchik, Y., & Morozov, V. (2022). Sanctions Against IRAN: Lessons for Russia in the New International Context. Vestnik of Saint Petersburg University. International Relations, 15(4), 405–420. https://doi.org/ 10.21638/spbu06.2022.404 Tkachenko, S., Zhiglinskaya Wyrsch, N., & Zheng, C. (2021). Technology Platform Competition Between the United States and China: Decoupling and Sanctions Against Huawei. Vestnik of Saint Petersburg University. International Relations, 14(4), 378–392.

PART II

Sovereignty in the Digital Space

CHAPTER 5

Sovereignty as Practice in Digital Age Elena Zinovieva and Sergey Shitkov

Introduction In the context of the global digital transformation, the category of state sovereignty is being supplemented by the digital dimension. Digital sovereignty, which in the broadest sense is understood as the independence of the state in domestic and foreign policy in the digital sphere, becomes the most important measure of stateness, security and economic potential of a state. Studies of sovereignty go as far back as Jean Bodin’s Les Six livres de la République (“The Six Books of the Commonwealth”) published in 1575, in which he defines sovereignty as the highest absolute power over citizens and subjects possessed by the monarch as God’s representative on earth (Bodin, 1956). The category of state sovereignty was originally closely related to control over a certain territory exercised by the monarch, who was the supreme sovereign in the state. The works of Hugo Grotius,

E. Zinovieva (B) · S. Shitkov MGIMO University, Moscow, Russia e-mail: [email protected] S. Shitkov e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 A. Baykov and E. Zinovieva (eds.), Digital International Relations, https://doi.org/10.1007/978-981-99-3467-6_5

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Thomas Hobbes and John Locke contributed greatly to the development of the theory of sovereignty in the political and legal sciences. According to the most common definition, sovereignty is understood in international studies as the state’s full authority within its borders and independence in the international arena. There is a consensus in political science that sovereignty came to play a defining role in world politics after 1648, when the Peace of Westphalia was signed, laying the foundations of the Westphalian political system that still remains relevant today. Sovereignty has become the most important common denominator defining the equality of states in world politics. Although political science subsequently debated the transformation and erosion of sovereignty in the 1990s and 2000s (Krasner, 2004), it is now recognized that sovereignty is an essential and inalienable property of the state. It is important to mention that sovereignty has never been a static category. Rather, it has evolved and now includes not only territorial sovereignty, but also sovereignty over territorial waters, state airspace, monetary sovereignty and some other components. At the present stage of technological development, digital sovereignty is of paramount importance. Attention to this category in the practice of international relations and in the academic literature is due to the radical transformation of economic and technological patterns, social relations and political life caused by the global digital transformation. These changes have also manifested themselves in the sphere of international relations, as the digital space has become a field of geopolitical contradictions, and the level of digitalization is emerging as an important factor determining the country’s position in the international arena and the range of foreign policy opportunities available to it.

Literature Review Research on digital sovereignty is closely related to the analysis of technological sovereignty, which is understood as ensuring independence in scientific research, defining standards, and safeguarding the physical infrastructure of communications (Globerman, 1978; Grant, 1983). Many authors also link the issue of digital sovereignty to questions of information security (Kerttunen & Tikk, 2020). A separate issue is the problem of digital interference as a violation of the sovereignty of states, a problem considered by both Russian (Zinovieva, 2021) and foreign scholars. We must also mention the research on technological modes by

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economic scholars, which emphasize the economic potential of digital technology during the transition to the Fourth Industrial Revolution (Glaziev, 2016; Schwab, 2017). There are also certain terminological differences. For example, in the Russian academic discourse, the term “information sovereignty” is more commonly used to emphasize the importance of control not only over technical infrastructure for sovereignty purposes but also over crossborder content (Efremov, 2017). Western authors prefer the terms digital sovereignty or cyber sovereignty, which are viewed through the lens of state jurisdiction over infrastructure, software and data (Pohlman et al., 2014), and are less concerned with control over the flow of information across borders. Among Russian authors, the problem of information sovereignty has been studied by Mikhail Kucheryavy (Kucheryavy, 2014), Alexander Sergunin (Sergunin, 2010), V.N. Suprun (Suprun, 2010), and Vladislav Bukharin (Bukharin, 2016). They view sovereignty through the prism of threats in the sphere of information security. Dmitry Vinnik links digital sovereignty with the political and legal regimes of data processing on the internet (Vinnik, 2014: 97). Mikhail Kucheryavy defined information sovereignty as the supremacy and independence of state power in the development and realization of information policy in the national segment and the global information space. Russian scholar Vladislav Bukharin singles out the following components of Russia’s information sovereignty “technically ensuring national security: search engines, social networks, operating systems and software, microelectronics, network equipment, the national segment of the internet, payment systems, homegrown security measures, cryptographic algorithms and protocols, and navigation systems” (Bukharin, 2016). Analysing the approaches of European authors, Anastasia Tolstukhina found that some scholars believe “technological sovereignty” can be interpreted as “the need for a country to develop or maintain its own autonomy in relation to key technologies, or to have the lowest possible level of structural dependence.” Others see this as “the ability of a country (or group of countries) to autonomously generate technological and scientific knowledge or use technological capabilities developed by external players through the activation of reliable partnerships” (Tolstukhina, 2022). Another distinctive feature of the European academic discourse is the concept of personal digital sovereignty. Personal digital sovereignty refers

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to the security of personal data and protection against negative information impact and misinformation, as well as protection against the practice of “surveillance capitalism” by IT giants, which means the collection of personal data and its subsequent use to influence user preferences. At the initiative of Chinese scholars, the concept of “internet sovereignty” has been introduced into the academic discourse to mean the right of the state to establish its own rules for the functioning of the internet space that meet national interests and traditions (Jiang, 2010; Shen, 2016). The U.S. academic literature has long been critical of the category of digital sovereignty itself, pointing to its connection with censorship (Mueller & Badiei, 2016). This approach continues to prevail in the country’s foreign policy practice. At the same time, some authors argue that this approach to sovereignty, and not only in the digital space, can be explained by the desire for extraterritorial dissemination of state sovereignty both in political (Kahler & Walter, 2006), and legal dimensions (Woods, 2018). Thus, there are several different approaches in the scientific literature to defining the content of “digital sovereignty” concept. This is largely due to political contradictions between countries, differences in political regimes and cultures, and the level of digital technology development (Rebro et al., 2021). However, it is important to mention a number of specific features relating to digital technologies that do not permit one to simply extrapolate the category of sovereignty from the real to the virtual space. These features include the cross-border nature of information and data flows, the significant role of private companies and individual users in content creation, and the difficulty of defining the limits of state jurisdiction over data, as well as a number of other features that should be taken into account when defining the essential characteristics of the concept of digital sovereignty in international relations and international law (Loffler, 2020). Unlike other spaces previously subject to state jurisdiction, the digital realm is man-made. Digital technology is evolving very rapidly, making the current characteristics of the environment highly fluid. In particular, the current trend of the last few years has been the formation of meta universes, the development of virtual and augmented reality technologies, and the widespread use of cryptocurrencies. In this situation, the concept that digital sovereignty is by nature a non-static, dynamic

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category seems very relevant. As defined by a team of authors led by Vyacheclav Nikonov, digital sovereignty is an emergent property of the state as a complex system and changes along with the development of state policy and technological progress (Nikonov et al., 2021).

Methodology Methodologically the paper is based on the conceptual approach to the analysis of State sovereignty by St. Krasner (2004), who considered sovereignty to be a basic characteristic of a State in the contemporary international system. Also, the paper uses methodological foundations of the Russian school of International law (Streltsov, 2017), which considers state sovereignty as a pillar of the contemporary system of international law. The analysis of the role of digital sovereignty in international relations is based on the concept of practice (Bigo, 2011), which considers international practices as social structures, constructed by international actors. According to this approach digital sovereignty emerges as a practice in contemporary international relations.

State Sovereignty in International Law: New Challenges of the Digital Environment International law already contains a number of provisions regarding state sovereignty, which, if not literally, then at least theoretically are quite applicable to the global information space. Article 2 of the 1945 UN Charter defines the principle of sovereign equality of states as a fundamental principle of international law. This principle also applies to the digital sphere. Pursuant to the Declaration on Principles of International Law and the 1975 Helsinki Act, every state has the right to ensure its security without prejudice to the security of other states. These rights and obligations arising from sovereignty also seem to be fully applicable to the global information space. The sovereign equality of states manifests itself in the immunity of each of them from the jurisdiction of any other state. However, the spatial limits of state sovereignty on the internet are not currently defined. According to the renowned Russian lawyer Anatoly Streltsov, the ICT environment as an object of international relations is a legal fiction, which lies in the fact that the relevant totality of devices and means of communication, local area networks, information systems,

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existing digital identifiers and protocols of their interaction, as well as entities ensuring the coordinated functioning of dedicated devices, facilities, networks and systems within the global ICT environment, is considered as a component of the state territory, which makes it possible to extend the concepts of “state sovereignty” and “state jurisdiction” to the ICT environment (Streltsov, 2017). However, a number of technical possibilities of modern digital technology complicate the unambiguous correlation of data, software, etc., with the territory of a particular state and does not allow for an unambiguous definition of a given category. An important contribution to the development of the digital sovereignty category can also be made through studying the law of mass information, which also deals with the cross-border nature of communications. In particular, according to the relevant United Nations General Assembly Resolution, information disseminated across borders should not constitute interference in the internal affairs of sovereign states. At the same time, the independence of the media must not negate the principle of the international responsibility of states for the activities of their national media at the transboundary level. The right to seek, receive and impart information and ideas regardless of frontiers (Article 19), proclaimed in the 1946 Universal Declaration of Human Rights, is not absolute and is limited by the right of the state to legally restrict the freedom of information in order to protect national security, health and morals as stated in Article 19 of the 1966 International Covenant on Civil and Political Rights. This approach seems to be fully applicable to modern digital media and can even serve as a basis for international discussions on international norms and rules governing the activities of global digital platforms and IT giants. Thus, the foundations have already been laid in international law for the further development of the principle of state digital sovereignty in correlation with the principle of non-interference in internal affairs. However, recent years have seen a growing tendency towards intrusion into the information space of various countries, both by other states and by non-state actors, and the motives for such intrusion (gathering information, influencing a country’s information policy, disruption of information infrastructures) are quite difficult to determine. In the relevant literature, this situation is referred to as the “digital security dilemma” and is widely described in the works by Russian (Zinovieva, 2020a, 2020b) and foreign authors (Buchanan, 2016). In general, this situation serves to destabilize international security by increasing the

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mutual distrust of states and pushing them to unilateral actions in the information sphere, which in turn highlights the need for international cooperation in the field of information security based on the principles of respect for state sovereignty. To better understand the features of digital sovereignty, let us examine the approaches to its definition in the public policy of states and regional structures, and look at selected international documents that have already captured the specific property of the sovereignty of states in the digital environment.

Digital Sovereignty in the Practice of International Relations: Approaches of States and International Organizations The Russian Federation was the first to draw international attention to the importance of ensuring information sovereignty in the context of international information security. Since 1998, Russia has been actively promoting an initiative to develop rules of responsible state behaviour in the field of international information security, steering the international community towards the prevention of threats to international information security in the military, political, terrorist and criminal spheres, with due account of the principles of equal rights and sovereign equality of states. In 2000, the first edition of the Information Security Doctrine of the Russian Federation was published, emphasizing the importance of ensuring sovereignty and territorial integrity in the information sphere. Among the first international documents to mention state sovereignty in the digital sphere were the Outcome Documents of the World Summit on the Information Society (WSIS, 2005), held under the auspices UN in Geneva in 2003 and Tunisia in 2005. These documents highlighted the importance of state sovereignty in terms of control over the national segments of the internet. The 2005 Tunis Agenda for the Information Society laid down that “policy authority for Internet-related public policy issues is the sovereign right of States” (WSIS, 2005). This was an important step towards recognizing that state sovereignty and the rights and responsibilities arising from it also apply to the global information space. However, it was only later that issues of digital sovereignty came to the forefront in the broader practice of international relations. The events of

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the Arab Spring played an important role here, demonstrating the importance of cross-border political communication for the security and stability of political regimes. After the Arab Spring, in which a significant role was played by U.S. digital diplomacy programmes that relied on the use of U.S.-based social networks, states began to view their activities as interference in internal affairs and a violation of sovereignty. In addition, the Stuxnet virus attacks on Iran’s nuclear facilities also occurred during the same period, which further reinforced the desire of states to ensure their information security and strengthen their borders in the digital realm. The work of the UN Group of Governmental Experts on Developments in the Field of Information and Telecommunications in the Context of International Security on International Information Security, which has repeatedly convened to discuss international cooperation in the field of digital threat prevention, has made a significant contribution to the international legal establishment and development of the category of digital sovereignty (UNGA, 2010; UNGA, 2013). The 2015 report of the Group of Governmental Experts says that the behaviour of states in the information space is subject to state sovereignty and international norms and principles that flow from sovereignty. According to the document, sovereignty also extends to the jurisdiction of states over ICT infrastructure on their territory (UNGA 2015).1 Similar wording is also found in other reports by the GGE (UNGA 2010, UNGA, 2013). In Russia, a law was introduced in November 2019 that creates a legal framework for the centralized management of the internet within state borders—the Sovereign internet Law—the informal name of the Federal Law dated 1 May 2019 No. 90-FZ “On Amendments to the Federal Law ‘On Communications’ and the Federal Law ‘On Information, Information Technologies and Information Protection’.” A number of platforms were banned in Russia in 2022, which was yet another step towards strengthening digital sovereignty. According to Alexei Drobinin, “the sovereignization of all areas of life … with openness to the broadest mutually enriching equal international cooperation, can guarantee Russia’s sustainable development and a worthy place for our country in a multipolar world order” (Drobinin, 2022). 1 Report of the Group of Governmental Experts on Developments in the Field of Information and Telecommunications in the Context of International Security dated 22 July 2015, §§ 26, 27, 28(b). https://documents-dds-ny.un.org/doc/UNDOC/GEN/ N15/228/35/PDF/N1522835.pdf?OpenElement (hereinafter, the 2015 GGE Report).

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China’s position is similar to that of Russia. In May 2015, Russia and China signed a bilateral agreement on cooperation in international information security. In June 2016, Vladimir Putin and Xi Jinping signed a joint statement on cooperation in developing the information space. Both leaders emphasized that they uphold the principle of respect for national sovereignty in the information space and are exploring the possibility of developing universal rules of responsible behaviour in the information space within the UN system. The concept of a sovereign internet was first introduced by Fang Binxing, known as the Father of China’s Great Firewall, in a speech at the 2011 International Symposium on Information Security in Changsha. The ideas of cyber sovereignty are based on four principles: every country should have full control over its segment of the internet; the state should be able to protect its segment of the internet from any external attacks; all countries should have equal rights to use internet resources; other countries should not control the root DNS servers through which the national segment of the internet is accessed. In recent years, China has demonstrated its resolve to protect digital sovereignty in various areas. In December 2017, it released the document on implementing the national strategy for big data and accelerating the construction of a digital China, which regulates digital sovereignty at the national level. China’s approach to digital sovereignty is based on the premise that digital technology and the internet are essential elements for achieving geopolitical leadership. This leads to a focus on government support for the digital industry to provide technical leadership and protect data security as a key resource of today’s digital economy. What is so special about China’s development model is that, with all its homegrown versions of well-known international IT giants, such as Google, WhatsApp, Wikipedia, Quora, YouTube, etc., the Chinese internet has been able to develop as a “thing in itself” within the digital boundaries of the state. China enacted the Data Security Law and the Personal Information Protection Law in 2021. According to these laws, data is regarded as a national asset, another factor of production along with labour, land, capital and technology. China’s foreign policy priorities for the digital environment are reflected in the Global Initiative on Data Security launched by the Ministry of Foreign Affairs of the People’s Republic of China in 2020, which stipulates that “states should respect the sovereignty, jurisdiction and governance of data of other States.”

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It is worth noting that the rapid growth of China’s technology companies has prompted the United States to focus on technological and digital sovereignty. Initially, the United States, as the country that developed the internet and helped spread it around the world, actively supported the vision of an internet free of state borders and equated the desire of states for information sovereignty with acts of censorship. Indicative from this point of view is the 2011 International Strategy for Cyberspace, which does not mention the term “sovereignty,” but emphasizes the free nature of the internet and the inadmissibility of strengthening state control in this area. However, later, in response to the strong presence of Chinese social networks and technology companies in the United States, the Donald Trump administration made it illegal for U.S. residents to “do business” with the Chinese-owned TikTok app and WeChat messenger under the pretext of protecting the country’s technological sovereignty. The United States has banned the sale of telecommunications equipment made by Huawei, ZTE and three other Chinese companies under the pretext of protecting the country’s national security. Washington has also put pressure on its partners to abandon the use of Huawei’s 5G technology. Such actions by the United States reflect a new approach to the management of the global information space, namely that the rapidly militarizing information sphere, growing competition from China’s hitech companies, and fragmented digital reality, mean that the rules and regulations should only be followed in relation to friendly states, while a tough stance should be maintained against rivals and competitors. The Declaration views the actions of Russia and China in the global information space as a threat to the United States, and to cyberspace as a whole. Tellingly, this document does not use the term “sovereignty” either. This may be due, among other things, to the desire to disseminate the norms and practices of U.S. domestic policy globally (Kahler & Walter, 2006). A distinctive feature of the U.S. approach is that it delegates significant powers and tasks in the field of security and data management to the private sector. The United States is increasingly focusing on unilateral measures, and its policy of forming a “rules-based order” among allies of convenience and deterrence in the information space is provoking international conflicts in this area. However, there is no consensus among U.S. allies on the issue of digital sovereignty. For example, in recent years, the European Union has been increasingly promoting the idea of the EU’s “digital sovereignty” at the

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regional level (Zinovieva & Bulva, 2021). In many ways, this is a response to the European Union’s growing dependence on American IT giants and the poor performance of the European digital economy. The concept of digital sovereignty for Europe is outlined in the document “Digital Sovereignty for Europe” issued by the European Parliament in 2020, stating that digital sovereignty “refers to Europe’s ability to act independently in the digital world” (European Commission, 2020). The European Cloud Initiative Gaia-X project was announced jointly by Germany and France and involves the creation of a federated data infrastructure at the European level starting in 2020, which is seen as an important component of digital sovereignty. According to Anastasia Tolstukhina, the practice of EU digital sovereignty at the regional level is now shifting towards an understanding of the need for “strategic autonomy” (Tolstukhina, 2022). Strategic autonomy means primarily technological independence and security, including in the field of digital technology. Many developing countries are also paying increasing attention to digital sovereignty. In Brazil and Indonesia, for example, discussions on this issue centre around the problem of bridging the digital divide and imply the need for sovereign control and security of the critical information infrastructure. In general, as UNCTAD analysts point out, the problem of digital sovereignty in developing countries is closely linked to the problems of overcoming neo-colonialism, including in the field of high technology, and creating the conditions for autonomous, independent development (UNCTAD, 2021; Pinto, 2018). Thus, the approach of developing countries to the practice and understanding of digital sovereignty cannot be viewed in isolation from global developments, where the attempts of countries to assert their independence in the internet environment can be seen as a refusal to legitimize American hegemony and a desire to restructure the world order on more equitable foundations. Digital sovereignty has received a great deal of attention in the official documents of international organizations, especially the United Nations, over the past few years. In particular, according to the 2021 Report of the UN Open-Ended Working Group on Developments in the Field of Information and Telecommunications in the Context of International Security, “ICT activity contrary to obligations under international law (…) could pose a threat (…) to State sovereignty”. Particular emphasis was placed on the needs of developing countries, stating that “capacity-building should

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be undertaken with full respect for the principle of State sovereignty.” Parallel to the OEWG, the U.S.-initiated GGE also published a final report that contains six references to the term “sovereignty,” in particular reaffirming that “State sovereignty and international norms and principles that flow from sovereignty apply to the conduct by States of ICT-related activities and to their jurisdiction over ICT infrastructure within their territory,” and that “respect for sovereignty and human rights and fundamental freedoms, as well as sustainable and digital development remain central” to the UN’s efforts to regulate digital technologies. The problems of information security and digital sovereignty are high on the agenda of regional organizations that involve Russia. In particular, documents confirming the importance of this category to the digital environment have been adopted by the Shanghai Cooperation Organisation (SCO) and the Collective Security Treaty Organization (CSTO). The final declaration of the 2022 SCO Summit in Samarkand specifically states that the “principles of mutual respect for sovereignty, independence and territorial integrity of States (…) are the basis for sustainable development of international relations,” with special emphasis on two dimensions of digital sovereignty: sovereignty in the context of developing rules for responsible behaviour of states in the information space and the importance of ensuring equal rights for all countries to regulate the internet and the sovereign right of states to manage it in their national segment (SCO, 2022).

Conclusions So, we can agree that the category of digital sovereignty has a complex multi-component nature and its content in the academic literature and the practice of international relations depends largely on national interests, the characteristics of state policy, and the political culture, foreign policy guidelines and priorities of the state. Yet, it evolves with the development of technology, and it is likely that the category of financial sovereignty will be supplemented by a new digital dimension in the future, and that the question of the boundaries of state sovereignty in metacommunities will also become relevant. In recent years, however, there has been growing tension between the leading actors in the global information space in the context of the major restructuring of the international system. More and more researchers are looking at the problem of internet fragmentation. Under

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these conditions, there is a particular need for norms and rules of state behaviour in the global information space, including the development of international norms based on the fundamental norms and principles of international law, such as non-interference in internal affairs, respect for state sovereignty, the non-use of force and the threat of force in international relations. An important condition for the development of dialogue on digital issues is mutual respect and recognition of its subjects, especially sovereign states. The desire of the United States to extend its norms beyond its borders is resented even by its closest allies, above all the European Union, which promotes its own vision of digital sovereignty and strategic autonomy. The development of international law in this direction is an important step towards reducing conflicts. At the same time, it is important to guide the international community to a further debate on the content of the concept of sovereignty in the global digital space.

References Bigo, D. (2011). Pierre Bourdieu and International Relations: Power of Practices, Practices of Power. International Political Sociology, 5(3), 225–258. Bodin, J. (1956). Six Books of the Commonwealth. Abridged and translated by M. J. Tooley. Basil Blackwell Oxford. Buchanan, B. (2016). The Cybersecurity Dilemma: Hacking. Oxford University Press. Bukharin, V. V. (2016). Components of the Digital Sovereignty of the Russian Federation as a Technical Basis for Information Security. MGIMO Review of International Relations, 51(6), 76–91. Drobinin A. (2022). The Image of History and Lessons for the Future: Reflections on Russia’s Foreign Policy. Mezhdunarodnaya zhizn (The International Affairs), 8. (In Russian) Efremov, A. A. (2017). Formation of the Concept of Information Sovereignty of the State. Law Journal of the Higher School of Economics, 1, 201–215. European Commission. (2020). European Data Strategy, February. https:// ec.europa.eu/info/strategy/priorities-2019-2024/europe-fit-digital-age/eur opean-data-strategy_en Glaziev, S. Yu. (2016). New Paradigm in Economic Science. Public administration. Electronic Bulletin, (56), 5–39. (in Russian). Globerman, S. (1978). Canadian Science Policy and Technological Sovereignty. Canadian Public Policy/Analyse De Politiques, 4(1), 34–45. Grant, P. (1983). Technological Sovereignty: Forgotten Factor in the “Hi-Tech” Razzamatazz. Prometheus, 1(2), 239–270.

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Jiang, M. (2010). Authoritarian Informationalism: China’s Approach to Internet Sovereignty. SAIS Review of International Affairs, 30(2), 71–89. Kahler, M., & Walter, B. F. (Eds.). (2006). Territoriality and Conflict in an Era of Globalization (pp. 1–21). Cambridge University Press. Kerttunen, M., & Tikk, E. (2020). The Politics of Stability: Cement and Change in Cyber Affairs. In Routledge Handbook of International Cybersecurity (pp. 52–64). Routledge. Krasner, S. D. (2004). Sharing Sovereignty. New Institutions for Collapsed and Failing States. International Security, 29(2), 85–120. https://doi.org/10. 1162/0162288042879940. Accessed 29 Sept 2020. Kucheryavy, M. M. (2014). State Policy of Russia’s Information Sovereignty in the Modern Global World. Upravlencheskoye konsultirovaniye (Management Consulting), 9. https://cyberleninka.ru/article/n/gosudarstvennaya-politikainformatsionnogo-suvereniteta-rossii-v-usloviyah-sovremennogo-globalnogomira-1. Accessed 29 Sept 2020. Loffler, M. (2020). Governments are Erecting Borders for Data. The Economist, 20th Edition (February 2020). https://www.economist.com/special-report/ 2020/02/20/governments-are-erecting-borders-for-data. Accessed 29 Sept 2020. Mueller, M. L., & Badiei, F. (2016). Governing Internet Territory: ICANN, Sovereignty Claims, Property Rights and Country Code Top-level Domains. Colum. Sci. & Tech. L. Rev., 18, 435. Nikonov, V. A., Voronov, A. S., Sazhina, V. A., Volodenkov, S. V., & Rybakova, M. V. (2021). Digital Sovereignty of the Modern State: Content and Structural Components (Based on Expert Research). Bulletin of Tomsk State University. Philosophy. Sociology. Political Science, (60), 206–216. (in Russian) Pinto, R. A. (2018). Digital Sovereignty or Digital Colonialism? Internet and Democracy. https://sur.conectas.org/wp-content/uploads/2018/07/ sur-27-ingles-renata-avila-pinto.pdf. Accessed 29 Sept 2020. Pohlmann, N., Sparenberg, M., Siromaschenko, I., & Kilden, K. (2014). Secure Communication and Digital Sovereignty in Europe. In H. Reimer, N. Pohlmann, & W. Schneider. ISSE 2014 Securing Electronic Business Processes. Highlights of the Information Security Solutions Europe 2014 Conference. Springer Fachmedien Wiesbaden. https://link.springer.com/content/ pdf/10.1007%2F978-3-658-06708-3.pdf. Accessed 29 Sept 2020. Rebro, O., et al. (2021). The Category of “Digital Sovereignty” in Contemporary World Politics. Mezhdunarodnye Protsessy (international Processes), 19(4), 67. Schwab, K. (2017). The Fourth Industrial Revolution. Currency. SCO. (2022). The Samarkand Declaration of the Heads of State Council of the Shanghai Cooperation Organisation.

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Sergunin, A. (2010). Sovereignty: Evolution of the Concept. POLITEKS (political Expertise), 4, 5–21. (in Russian). Shen, Y. (2016). Cyber Sovereignty and the Governance of Global Cyberspace. Chinese Political Science Review, 1, 81–93. Streltsov, A. (2017). State Sovereignty and Jurisdiction in the Environment of Information and Communications Technologies in the Context of International Security. Mezhdunarodnaya zhizn (The International Affairs), 2. (In Russian) Suprun, V. (2010). Theoretical and Legal Foundations of Information Sovereignty. Dissertation for the Degree of Candidate of Legal Sciences. Kharkiv National University of Internal Affairs. Tolstukhina A. (2022). Technological Sovereignty of the EU and Its Limits. Russian Council on International Affairs (in Russian). UNCTAD. (2021). Digital Economy Report. Cross-border Data Flows and Development: For Whom the Data Flow. UNCTAD/DER/2021. United Nations General Assembly (UNGA). (2010). Group of Governmental Experts on Developments in the Field of Information and Telecommunications in the Context of International Security. A/65/201 (July 30). United Nations General Assembly (UNGA). (2013). Group of Governmental Experts on Developments in the Field of Information and Telecommunications in the Context of International Security. A/68/98 (June 24). United Nations General Assembly (UNGA). (2015). Group of Governmental Experts on Developments in the Field of Information and Telecommunications in the Context of International Security. Vinnik, D. (2014). Digital Sovereignty: Political and Legal Regimes of Data Filtering. Filosofiya Nauki (philosophy of Science), 61(2), 95–113. (In Russian). Woods, A. (2018). Litigating Data Sovereignty. The Yale Law Journal, 128(2), 328–406. https://www.yalelawjournal.org/pdf/Woods_i233nhrp. pdf. Accessed 29 Sept 2020. WSIS. (2005). World Summit on Information Society. Tunis Agenda for the Information Society. WSIS-05/TUNIS/DOC/6(Rev. 1)-E Zinovieva, E. (2021). The Issue of “Digital Interference” in US— Russain Cyber-relations // Russian Council on International Affairs (in Russian). https://russiancouncil.ru/analytics-and-comments/analytics/ problema-tsifrovogovmeshatelstva-v-rossiysko-amerikanskikh-otnosheniyakh/ Zinovieva, E. (2020). Problems of International Internet Governance in the Context of Digital Sovereignty. Mezhdunarodnaya zhizn (The International Affairs). Special issue, 133–137. (In Russian). Zinovieva, E. (2020b). Regional Sovereignty over Data as a Claim for Global Leadership? Valdai Club: Expert Opinions, February 27, 2020b. https:/ /ru.valdaiclub.com/a/highlights/dannye-eto-novaya-neft/. Accessed 1 Oct 2020.

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CHAPTER 6

Principle of the Sovereign Equality of States in the Digital Realm Vera Rusinova

Introduction The stance that “cyberspace” is governed by non-cyber specific norms of international law, and in particular the Charter of the UN, is well represented in legal scholarship (Dinstein & Dahl, 2020; Gow et al., 2019; Schmitt, 2017) and—at least, as a matter of principle—affirmed by states.1 The clarification of how these norms are applicable with respect to information and communication technologies (hereinafter: ICTs) takes place in the ex cathedra managerial (or interventionist) form of the logical adaptation and the detailing of general norms by experts and scholars (Dinstein & Dahl, 2020; Schmitt, 2017), or originates from 1 The General Assembly welcomed this affirmation of the Group of Governmental Experts on Developments in the Field of Information and Telecommunications in the Context of International Security (GGE) on numerous occasions: see UNGA Res A/70/ 455 (23 December 2015). Significant number of states confirmed this applicability during the sessions of the OEWG.

V. Rusinova (B) National Research University Higher School of Economics, Moscow, Russia e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 A. Baykov and E. Zinovieva (eds.), Digital International Relations, https://doi.org/10.1007/978-981-99-3467-6_7

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state behaviour shaping either law-making or law-interpreting (as the subsequent application of the relevant rules) paths. The challenges underpinning the managerial path are well reported and lie either in the thresholds or in the limited scope of the application of lex lata, which lead to its under-inclusivity or inadequacy in respect of allegedly interstate cyber operations (D’Aspremont, 2016: 580), or in the contested applicability of general, non-cyber specific rules in a cyber context. In general, malicious inter-state ICTs operations can breach a number of primary rules of International law, including the obligation to respect the sovereignty of other states, the principle of non-intervention in domestic affairs, international human rights law, the prohibition to use force, norms of international humanitarian law and obligations of due diligence2 (Coco & Diaz, 2021: 804). This paper seeks to address the question of whether and to what extent the principle of sovereign equality of states, which is one of the basic principles of international Law, is applicable and able to effectively deter so-called “low-intensity” cyberintrusions, i.e. computer network attacks which do not fall under the notion of “use of force.”

Methodology The methodological approach of this paper has three prongs. First, the paper considers an already stigmatized approach to deal with the issue of application of international law to inter-states ICTs operations as represented by “whether” and “how” questions as one of the implications of the positivistic discourse and seeks to consider its results with full awareness of its boarders, blind spots and biases. Secondly, the comprehensive evaluation and theoretization of the processes related to the application of international law in the ICT context when guided by positivistic methodology are implicitly framed by positivistic ideology, which produces results not responsive to reality, and, once being used as a starting point for any further intellectual operations, multiply biases, unverified presumptions and implied conclusions. The paper invites us to break free from these frames, turning to the legal-philosophical theories conceiving sovereignty. It is assumed that by making use of this approach to the appreciation of the nature of 2 International Court of Justice, Corfu Channel case (United Kingdom v Albania), Judgment [1949] Rep 4.

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sovereignty and the use of functional theory in addition to the concept of “territorial sovereignty,” it is possible to advance new ways for the formalization of sovereignty in cyberspace. Thirdly, this paper takes into account the official positions of the states with respect to the applicability of international law in the ICT context, bearing in mind that the current stage of legal affairs drifts between an acknowledgement of the applicability of international law and precision of the existing and non-cyber-specific legal norms. The former culminated in the Group of Governmental Experts on Advancing Responsible State Behaviour in Cyberspace in the Context of International Security (hereinafter: the GGE) reports of 2015 and 2021, thus, serving as a response to the “whether” question. The latter adopted the form of individual interpretation by states on the one hand (Australia, 2017, 2019; Finland, 2020; France, 2019; Hollis, 2020: 5; Koh, 2012; Netherlands, 2019; Official Compendium, 2021; Schondorf, 2020; UK, 2021) and their collective elaboration of the standards on the other hand, addressing the “how” question.

Relationship Between the Principles of the Sovereign Equality of states and Non-intervention in Internal Affairs The attitudes of states towards the application of two basic principles of international law—the principle of sovereign equality of states and the consequent principle of non-intervention in internal affairs—to cases of malicious use of ICTs reflect very clearly the dichotomy between, on the one hand, those interventions that states are unwilling to allow against themselves and, on the other, those that they wish to be able to use against others (Rusinova, 2018: 41–49). This has manifested itself in the fact that, with regard to applying the principle of non-intervention in internal affairs outside the context of ICTs, states have set a rather high and difficult-to-reach minimum threshold. The quintessence of this approach is the two-prong test formulated by the International Court of Justice in the 1986 Nicaragua v.

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United States case.3 Thus, the principle of non-intervention is considered violated if, first, the intrusion occurs in respect of “matters in which each State is permitted, by the principle of State sovereignty to decide freely” (or “domaine réservé”),4 and second, if it uses “methods of coercion in regard to such choices, which must remain free ones.”5 This is comparable to casting a net with very wide meshes. The same approach applies to ICT use cases. Hence, the principle of non-intervention, with its limited scope of application, becomes practically useless in the Context of ICT. This stems from the fact that most malicious uses of such technology lack an element of coercion: attacks on computer networks aimed at causing damage, demanding ransoms, taking revenge for actions or obtaining information do not meet this criterion. However, some states have attempted to interpret the criterion of domaine réservé not only as a narrow sphere relating to the exercise of power by the state but also as a shield covering whole areas of politics (Ziegler, 2012: 213). This is primarily due to the efforts of states to guard themselves against interference in elections. Just how far this approach can go can be seen from the example of Norway, which has declared that it is illegal to interfere in internal affairs by “unduly influencing public opinion” (Official Compendium, 2021: 69). However, so far such attempts remain sporadic: even when states do single out election interference, most still indicate the need to apply a general two-pronged test to this type of interference (Official Compendium, 2021: 19). In general, however, the role of the non-intervention principle in assessing the legitimacy of the malicious use of ICTs is rather modest, and to date, election interference is probably the only example that illustrates attempts to modify the general scope of this principle. Hence, the principle of respect for sovereignty, derived from the principle of sovereign equality of states, comes to the fore when assessing the legitimacy of the use of ICTs in the light of international law. Although this principle is closely linked to the principle of non-intervention in internal affairs, it is clear from the decision of the International Court of Justice in Nicaragua v. United States that their content is not identical, 3 International Court of Justice, Case Concerning Military and Paramilitary Activities in and against Nicaragua (Nicaragua v. United States of America). Judgment of 27 June 1986. I.C.J. Reports. 1986, p. 14. § 205. (Hereinafter Nicaragua v. United States ). 4 Ibid. 5 Ibid.

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and the principle of respect for territorial sovereignty may be violated by actions that do not qualify as violations of the non-intervention principle. In particular, overflights by US aircraft over Nicaraguan territory were found to constitute such a violation.6 However, no general test of compliance with this principle, unrelated specifically to ICT relations, as opposed to individual rules derived from it, such as the principle of nonintervention in internal affairs, immunities of states and officials and the principle of territorial integrity, has been developed in either state practice or doctrine. Although the GGE affirmed the applicability of the principle of sovereign equality of states in the context of ICT, it did not expand on the specific application of this principle, merely noting its importance as well as the applicability of both the principle itself and its resulting “international norms and principles” to “the conduct by States of ICT-related activities and to their jurisdiction over ICT infrastructure,” and stressing an obligation to respect this principle in the use of ICTs (GGE Report, 2015: 26, 27, 28(b)). The report of the first Open Ended Working Group (hereafter OEWG) was even more cautious and restrained in its wording regarding the application of this principle to ICT relations (The OEWG, 2021: 19, 56).

Sovereignty as a Rule or Principle: The Unity of Opposites The application of the principle of sovereign equality of states in the context of ICT raises the problem of the uncertainty of its content, including, but not limited to, the range of elements of misconduct, their minimum threshold and the scope of the concept of protected (critical) infrastructure (Schmidt, 2017: 20–27). States disagreed on the key question about the legal nature of this principle when determining whether it is only a general guideline and direction (i.e. is a principle but not a rule), or has its own normative content (i.e. is both a rule and principle). In particular, the United and the United Kingdom have stated that the principle of respect for sovereignty applies as a “general principle” and “a fundamental concept of international law,” but not a rule (Schmitt, 2017: 20–27). In other words, this principle is not a separate rule that

6 Nicaragua v. United States. §§ 251, 292.

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can be violated. Accordingly, the use of ICTs can be qualified as a violation of the principle of non-intervention in internal affairs, which is a rule of international law. In response, some states have argued for the normative nature of the principle of respect for sovereignty. The Netherlands, Finland and Switzerland referred to an approach reflected in the 2017 Tallinn Manual, according to which the principle would be violated if there was an infringement of territorial integrity or usurpation of or interference with state functions (Official Compendium, 2021: 20), and stressed the need for a minimum threshold (Finland, 2020; Netherlands, 2019; Schmitt, 2019). Some countries, including Brazil, France and Norway, have tried to reserve the broadest possible approach to the content of this principle. As pointed out by the French Ministry of Armed Forces, the sovereignty of the state is violated by any cyberattack on (1) “information systems located on its territory,” including “equipment and infrastructure located on national territory, connected objects, logical components” (2) “content operated or processed via electronic communication networks which cover the national territory or from an IP address attributed to France”; and (3) “domains belonging to national registers” (France, 2019: 9–10). A similar stance was taken by Norway (Official Compendium, 2021: 68), and Brazil’s very broad approach is evident from its reference to the “interceptions of telecommunications” as an example of a violation of state sovereignty (Official Compendium, 2021: 18). On the one hand, the approach to sovereignty as a principle is based on the fact that at present there is no such general rule in international law, and special (i.e. created specifically for the regulation of ICTs) norms have not yet been developed. At first glance, this statement, while insisting that there are no lex lata rules, ignores the fact that “territorial sovereignty” was determined to be a substantive element of sovereignty by the International Court of Justice.7 Indeed, this approach proceeds from the assumption that the rules of international law regarding ICTs do not exist and can only be created by states in the future. However, the opposite approach—applying sovereignty as a rule to cases of malicious use of ICT—seems to overestimate the territorial dimension of sovereignty and, in the absence of consensus among states as to the details or criteria for its application to such relations, faces all

7 For a critique of this position see: Schmitt, Vihul (2017: 1639–1670).

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the limitations and disadvantages associated with recourse to the deduction. In order to overcome these problems, countries and experts offer several basic methods. These are, first, attempts to justify the existence of an “extended principle of non-intervention in internal affairs” by linking the scope of applying territorial sovereignty (at least in part) to the exercise of state functions. This approach suggests that sovereignty can be violated if ICT-based intervention occurs in relation to the scope of government functions. Second, it is proposed to resort to the logical technique tested by the International Court of Justice in Nicaragua v. United States, which consists in justifying the formation of a rule of international law by pointing to the absence of a contrary opinio juris (Official Compendium, 2021: 18). However, whatever the use of territorial sovereignty, it must be borne in mind that in the air, space or sea, sovereignty has been “applied differently by the international community depending on the practice of states across these domains, resulting in disparate legal paradigms” (Jensen, 2017: 742–743). However, the search for possible criteria and the articulation of any version of the scope of applying the principle of respect for sovereignty to ICTs is normative in nature. The examples cited by the International Court of Justice as violations of territorial sovereignty can confirm the possibility of only a limited application of this rule to actions involving the use of ICTs. It follows that the two approaches—both denying and recognizing the normativity of the principle of respect for sovereignty— while positioned as antagonistic, nevertheless converge on the need for international law-making. The only difference is that in the first case, this conclusion is explicit, while in the second it is implicit since the variety of approaches to the content of the principle of respect for sovereignty proclaimed by those states that insist on the normativity of this principle ultimately demonstrates that there is no rule per se that can be applied to ICTs. Regardless of whether or not the OEWG or any other international group can specify the application of sovereignty to ICTs, law-making is already underway, as individual states have begun to formulate their legal positions on the scope of applying this principle. However, the polyphony of opinions does not bode well for the possibility of reaching a consensus on this issue in the foreseeable future.

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Sovereignty as a Prohibitive Norm: Problems of International Law-Making Several problems arise on the way to crystallizing a special rule (based on the principle of the sovereign equality of states) of international law prohibiting certain behaviours in the use of ICTs against other states, regardless of which approach the future test will be based on: the nature of the functions whose performance will be hindered by such actions, or the concept of “critical infrastructure”—and whether a minimum threshold will be applied. The first hurdle is the need for states to move away from an egocentric articulation of the content of the sovereignty rule, focusing on what states view as a violation of their own sovereignty, to a self-transcendent approach focusing on what states see as a violation of the sovereignty of other states. Examples of egocentricity in the position papers of states include self-centred language that outlines the parameters of actions in cyberspace that would violate their sovereignty (France, 2019: 6), the use of an extended range of malicious acts using ICTs to impose unilateral coercive measures (sanctions)8 and avoiding discussions on the minimum threshold for prohibited interferences with sovereignty (Official Compendium, 2021: 87–88; The Netherlands, 2019: 2). The application of a self-centred approach when specifying the scope of application of the principle of respect for sovereignty to behaviour involving the use of ICTs as a rule may be due to several reasons. This, let us note, the very broad approach performs a deterrent (preventive) function, serves as the basis for “political attribution” (the political equivalent of legal imputation) and the application of a “denunciation policy,” and supports the legitimacy of recourse to unilateral or collective coercive measures in response to the relevant harmful acts. However, this position does not imply a willingness to be bound by the same (reciprocal) obligations to other states. The same difficulty arose on the way to forming the content of the principle of non-intervention in internal affairs, which led to the enshrinement of this international legal norm in a very narrow scope.

8 US Executive Order No. 13694, 80 F.R. 18077 (1 April 2015); Countering America’s Adversaries Through Sanctions Act, H.R. 3364, Pub.L. 115–144 (2017); EU Council Regulation 2019/796 Concerning Restrictive Measures against Cyber Attacks Threatening the Union or Its Member States, art. 14, 13 (1–3), O.J. L 129I (17 May 2019).

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The second obstacle is related to the problem of the compatibility of sovereignty as a principle with an independent normative content that goes beyond the principle of non-intervention in internal affairs, with the general admissibility of espionage, which is criminalized only at the national level and is lawful in the light of international law insofar as it does not violate a particular norm. Interception of information and interference with information and communication systems fall under the concept of espionage, and accordingly, this would present states with a difficult choice: to ban espionage, which would be an idealistic scenario, or to accept a very limited amount of interference that is prohibited by sovereignty as a norm. It is by no means an accident that those states that have fixed very broad approaches to the application of sovereignty as a rule in the context of ICT have not disclosed their position on how this rule relates to espionage.9 Accordingly, the self-centred positions of states must be considered in conjunction with the permissibility of espionage. A third problem arises from the dual function played by the concept of “critical infrastructure.” One approach to establishing the content of sovereignty as a norm is to refer to this notion in order to determine the range of facilities that would be considered unlawful to attack. However, in parallel, the same concept is used by states at the national level to enhance the protection of the most critical infrastructure, both public and non-public. Note that invoking the concept of critical infrastructure in this sense is also a manifestation of sovereignty as a responsibility to protect a country’s own population and critical infrastructure (The GGE, 2015: 8; 2021: 13). The dual function of this term, however, leads to gaps between the national and international levels of understanding of its meaning and casts doubt on the feasibility of the approach to defining the content of the emerging international rule of respect for sovereignty through the definition of the scope of critical infrastructure. Finally, a fourth obstacle to the extension of “territorial sovereignty” to ICT-based relations is the need to clarify the concept of “cyber borders” (Franzese, 2009: 1–42). There is a gap between these “boundaries,” 9 Tellingly, in Compendium 2021, no state mentions the relationship between sovereignty as a legal norm and the permissibility of espionage. Moreover, Norway specifically emphasized that its “position paper does not contain any specific analysis of cyber espionage, that is cyber operations whose purpose and effect is limited to the mere collection of information for use by the authorities, which is not in itself illegal under international law. However, certain aspects of such intelligence operations could violate specific rules of international law” (Official Compendium, 2021: 66).

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technically related to information and communication systems, and the concept of “territoriality.” The paradigm established for postal, telephone and telegraphic communications cannot be automatically transferred to ICTs because of both the institutional and technical features of these technologies.

New Ways of Legally Formalizing Sovereignty in the Context of ICTs Resources for crystallizing new approaches to the legal formalization of sovereignty with respect to ICTs can be found in philosophical and legal theories that interpret the essence of sovereignty through the concepts of ownership, competence and functions.10 Both approaches to the normativity of sovereignty (sovereignty as either a principle or a rule) are based on the theory of territory as an object owned by the state, and thus fall into a kind of “territorial trap” (Agnew, 1994: 53, 54). Another theory, which is better suited to explain the nature of territory in contemporary international law in general, and to justify the applicability of territorial sovereignty in particular, is the theory of competence,11 which was developed by representatives of the “pure theory of law.”12 According to this theory, a state’s territory is understood not as its geographical manifestation but as certain areas in which the state exercises its coercive legal order (Kelsen, 2007: 211; Oppenheim & Lauterpacht, 1955: 452). Under this approach, the main role of the territory is to limit the jurisdiction exercised by different states (de Vattel, 1883: 154; Milano, 2006: 66; Shaw, 1982: 76). Moreover, according to this theory, the nature of sovereignty requires to be viewed through the prism of state competencies without being reduced to their specific historical sum (Verzijl, 1970: 12–13). The state exercises its sovereign competence in three spheres: spatial, personal and substantive (material). At the same 10 The conclusions on the application of philosophical and legal concepts of sovereignty to relations in the field of ICT are based on the article: Rusinova, Assaf, Moshnikov 2020: 55–66. 11 ICJ, Case Concerning Maritime Delimitation and Territorial Questions between Qatar and Bahrain (Qatar v. Bahrain). Judgment of 16 March 2001. § 101; ICJ, Sovereignty over Pedra Branca/Pulau Batu Puteh, Middle Rocks and South Ledge (Malaysia/Singapore). Judgment of 23 May 2008. § 273–277. 12 For more on the theory of competencies, see: Milano (2006: 68).

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time, the initial universal material competence is limited to the domestic law of each state and international law. The main reason for criticizing the theory of competence was its inherently monistic approach to the relationship between international and national law (Conforti, 1995: 74–77). This critique gave birth to a functional theory based on a dualistic approach, pursuant to which the state is endowed with multiple powers and competencies protected by international law. Accordingly, state competencies are not based on international law but are the subjective right of states to exercise their authority within the limits recognized by international law (Conforti, 1995: 74–77). The territory of a state is defined according to the function performed by the corresponding sovereign. The functional theory, an offshoot of the theory of competence, allows the state to establish powers based on its purposes and interests. The functional theory, however, does not presume the permanent existence of jurisdiction (Conforti, 1995: 70–77). This is achieved by supplementing the spatial and personal dimension of competence with a functional one, which is aimed at the realization of individual and public interests. Functional competence becomes particularly relevant when the goals require joint efforts by the community of states as a whole, such as in matters of environmental protection or the fight against piracy and terrorism, that is, when the application of spatial or personal powers proves insufficient (Milano, 2006: 69–67). The Tallinn Manual uses a mixed approach to determine the territorial and extraterritorial jurisdiction of states in cyberspace, which is a fusion of the property theory and the theory of competence (Schmitt, 2013: 55, 61). In version 2.0, the authors of the manual emphasized that the legal concept of cyberspace should correspond to the material concept of territory as a geographical sphere. (Schmitt, 2017: 12). In the first version of the Tallinn Manual published in 2013, experts also attempted to address the issue of regulating cyberspace through the lens of state jurisdiction and the use of territoriality, pointing out that “actual physical presence is required, and sufficient, for jurisdiction based on territoriality; spoofed presence does not suffice” (Schmitt, 2013: 115–116). However, this approach has been criticized for failing to reflect the etheric nature of cyberspace, because it implicitly assumed that the Internet will certainly always exist “somewhere,” in some particular place (Boer, 2017: 137, 142). A solution to this problem could be the functional theory that defines cyberspace as a legal category that falls under state sovereignty. In such

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a case, the use of functional theory does not presuppose the prior establishment of state jurisdiction. In addition to its theoretical and practical convenience, the functional theory provides a comfortable environment for states to engage in managing the implementation of their functions in cyberspace. This approach makes it possible to distinguish the possibility of using the instruments of legal regulation to implement its functions, on the one hand, and the painful issue for many states of governance of the Internet itself, on the other. The application of the functional theory will require further concerted efforts to define both the range of legitimate state interests—functions that can be protected under international law— and the threshold for violations of such interests that would qualify as internationally wrongful acts. This approach does not negate the importance of delineating the functional jurisdiction of the various states. It seems that suggestions as to exactly how these issues might be addressed could lead to the development of soft law instruments. This approach has a number of practical advantages. First, the theory of competence and functional theory help shift the focus from delineating “cyber boundaries,” which by definition can only be done partially, to the implementation of specific functions. On the one hand, it overcomes the limitations associated with the use of deduction in addressing sovereignty and emphasizes the need for law-making, be it the inductive way of crystallizing an international custom (the practice of states accompanied by opinio juris) or the conclusion of international treaties. On the other hand, this approach makes it possible to define the parameters of state competencies and functions on the basis of existing norms of international law. Second, sovereignty over ICTs, subject to the application of the theory of competence or functional theory, does not imply the exclusive exercise of sovereignty, allowing areas protected by this principle to overlap and coexist with respect to different states. Third, this approach focuses on the rights of states in their own territory and abroad but does not oblige them to refrain from activities that may infringe on the sovereignty of other states (Corn & Taylor, 2017: 209) to the extent not prohibited by existing rules of international law or the principle of non-intervention in internal affairs, or which may be prohibited by international law in the future.

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References Agnew, J. (1994). The Territorial Trap: The Geographical Assumptions of International Relations Theory. Review of International Political Economy, 1, 53–80. Australia. (2017). Australia’s Cyber Engagement Strategy. Annex A: Australia’s Position on How International Law Applies to State Conduct in Cyberspace. Retrieved from https://www.internationalcybertech.gov.au/sites/ default/files/2020-11/The%20Strategy.pdf Australia. (2019). Department of Foreign Affairs and Trade. Australia’s Cyber Engagement Strategy. Annex A: Supplement to Australia’s Position on the Application of International Law to State Conduct in Cyberspace. Retrieved from www.auswaertiges-amt.de/blob/2446304/32e7b2498e10b74fb1720 4c54665bdf0/on-the-application-of-international-law-in-cyberspace-data.pdf Boer, L. (2017). “Spoofed Presence Does Not Suffice”: On Territoriality in the Tallinn Manual. Netherlands Yearbook of International Law (2016: The Changing Nature of Territoriality in International Law). The Hague: T.M.C. Asser Press, 131–145. Coco, A., & de Souza Dias, T. (2021). ‘Cyber Due Diligence’: A Patchwork of Protective Obligations in International Law. European Journal of International Law, 32, 771–806. Conforti, B. (1995). The Theory of Competence in Verdross. European Journal of International Law, 6(1), 70–77. Corn, G., & Taylor, R. (2017). Sovereignty in the Age of Cyber. American Journal of International Law (unbound), 111, 207–212. D’Aspremont, J. (2016). Cyber Operations and International Law: An Interventionist Legal Thought. Journal of Conflict & Security Law, 21(3), 575–593. de Vattel, E. (1883). The Law of Nations. T. & J. W. Johnson & Co. Dinstein, Y., & Dahl, A. W. (2020). Oslo Manual on Select Topics of the Law of Armed Conflict: Rules and Commentary. Springer. Finland. (2020). Finland’s National Positions, International Law and Cyberspace. Retrieved from front.un-arm.org/wp-content/uploads/2020/10/finlandviews-cyber-and-international-law-oct-2020.pdf France. (2019). Ministère des Armées. France. International Law Applied to Operations in Cyberspace. Retrieved from https://www.defense.gouv.fr/con tent/download/567648/9770527/file/international+law+applied+to+operat ions+in+cyberspace.pdf Franzese, P. W. (2009). Sovereignty in Cyberspace: Can It Exist? Airforce Law Review, 64, 1–42.

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GGE Report. (2015). Report of the Group of Governmental Experts on Developments in the Field of Information and Telecommunications in the Context of International Security, 22 July 2015. Retrieved from https://documents-ddsny.un.org/doc/UNDOC/GEN/N15/228/35/PDF/N1522835.pdf?Ope nElement GGE Report. (2021). Report of the Group of Governmental Experts on Advancing Responsible State Behaviour in Cyberspace in the Context of International Security dated 14 July 2021. A/76/135. Retrieved from https://documentsdds-ny.un.org/doc/UNDOC/GEN/N21/075/86/PDF/N2107586.pdf? OpenElement Hollis, D. (2020). Improving Transparency. International Law and State Cyber Operations. Fourth Report to the Organization of American States. Retrieved https://ceipfiles.s3.amazonaws.com/pdf/CyberNorms/LawStatem from ents/Improving+Transparency+International+Law+and+State+Cyber+Operat ions_+Fourth+Report.pdf Jensen, E. (2017). The Tallinn Manual 2.0: Highlights and Insights. Georgetown Journal of International Law, 48, 735–778. Kelsen, H. (2007). General Theory of Law & State. Transaction Publishers. Koh, H. H. (2012). International Law in Cyberspace. Harvard International Law Journal Online, 54, 1–12. Milano, E. (2006). Unlawful Territorial Situations in International Law: Reconciling Effectiveness, Legality and Legitimacy. Martinus Nijhoff Publishers. Netherlands. (2019, July 5). Ministry of Foreign Affairs. Letter to the Parliament on the International Legal Order in Cyberspace. Retrieved from https://www. government.nl/ministries/ministry-of-foreign-affairs/documents/parliamen tary-documents/2019/09/26/letter-to-the-parliament-on-the-internationallegal-order-in-cyberspace Official Compendium (2021) of voluntary national contributions on the subject of how international law applies to the use of information and communications technologies by States submitted by participating governmental experts in the Group of Governmental Experts on Advancing Responsible State Behaviour in Cyberspace in the Context of International Security established pursuant to General Assembly resolution 73/266. (A/76/136). Retrieved from https://www.un.org/disarmament/group-of-governmental-experts/ Oppenheim, L., & Lauterpacht, H. (1955). International Law: A Treatise (Vol. 1, 8th ed.). Longmans, Green & Co. Routledge Handbook of War, Law and Technology. (2019). In J. Gow, E. Dijxhoorn, R. Kerr, & G.Verdirame (eds.). Routledge. Rusinova, V. (2018). The International Legal Principle of Non-Interference and Cyber-Operations: Unjustified Expectations? Mezhdunarodnoe Pravosudie, 1, 38–52. (In Russian).

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Rusinova, V., Assaf, A., & Moshnikov, D. (2020). Dispute on Sovereignty in Cyberspace: Content, Limits, and Prospects for the Development of Positivistic Discourse. Mezhdunarodnoe Pravosudie, 10(3), 55–66. (In Russian). Schmitt, M. (2013). Tallinn Manual on the International Law Applicable to Cyber Warfare. Cambridge University Press. Schmitt, M. (2017). Tallinn Manual 2.0 on the International Law Applicable to Cyber Operations (2nd ed.). Cambridge University Press. Schmitt, M. (2019). The Netherlands Releases a Tour de Force on International Law in Cyberspace: Analysis. Retrieved from www.justsecurity.org/66562/ the-netherlands-releases-a-tour-de-force-on-international-law-in-cyberspaceanalysis Schmitt, M., & Vihul, L. (2017). Respect for Sovereignty in Cyberspace. Texas Law Review, 95(7), 1639–1670. Schondorf, R. (2020). Israel’s Perspective on Key Legal and Practical Issues Concerning the Application of International Law to Cyber Operations. Retrieved from https://www.ejiltalk.org/israels-perspective-on-key-legal-andpractical-issues-concerning-the-application-of-international-law-to-cyber-ope rations/ Shaw, M. (1982). Territory in International Law. Netherlands Yearbook of International Law, 13, 61–91. The Netherlands. (2019). Ministry of Foreign Affairs. Letter to the Parliament on the International Legal Order in Cyberspace of 26 September 2019. Retrieved from www.government.nl/ministries/ministry-of-foreign-affairs/documents/ parliamentary-documents/2019/09/26/letter-to-the-parliament-on-the-int ernational-legal-order-in-cyberspace The OEWG. (2021). Final Substantive Report of 10 March 2021. A/ AC.290/2021/CRP.2. Retrieved from https://front.un-arm.org/wp-con tent/uploads/2021/03/Final-report-A-AC.290-2021-CRP.2.pdf U.K. Mission to the United Nations. (2021). U.K. Statement on the Application of International Law to States’ Conduct in Cyberspace, June 3, 2021. Retrieved from https://assets.publishing.service.gov.uk/government/uploads/system/ uploads/attachment_data/file/990851/application-of-international-law-tostates-conduct-in-cyberspace-uk-statement.pdf Verzijl, J. (1970). International Law in Historical Perspective (Vol. 3). A. J. Sijthoff Printing Division. www.government.nl/ministries/ministry-of-for eign-affairs/documents/parliamentary-documents/2019/09/26/letter-tothe-parliament-on-the-international-legal-order-in-cyberspace Ziegler, K. S. (2012). Domaine Réservé. In R. Wolfrum (ed.), The Max Planck Encyclopedia of Public International Law (Vol. III, pp. 206–215). Oxford University Press.

PART III

Digital Dimensions of International and National Law

CHAPTER 7

Problems of Legal Regulation of Digitalization (the Case of AI) Nikita Molchakov, Ekaterina Ryzhkova, and Evgeniya Ryzhkova

Introduction The global challenges of the XXI century have led to an increase in the growth and strengthening of the position of digital technologies. Traditional forms of relations in law are being encoded and translated into a digital environment. At the same time, it should be noted that the law does not keep up with the development of new technologies, and many relationships remain without proper regulation. The second

N. Molchakov (B) Department of Constitutional Law, MGIMO University, Moscow, Russia e-mail: [email protected] E. Ryzhkova · E. Ryzhkova Department of Legal Theory and Comparative Law, MGIMO University, Moscow, Russia e-mail: [email protected] E. Ryzhkova e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 A. Baykov and E. Zinovieva (eds.), Digital International Relations, https://doi.org/10.1007/978-981-99-3467-6_8

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problem lies in the lawyers’ lack of special knowledge that reveals the essence of the figure. Most legal scientific papers and legal norms do not take into account the peculiarities of digitalization and its processes. The absence of technocrats in lawmaking leads to a legal vacuum. The need to develop an adequate legal regulation of relations developing in the digital sphere, the definition of the boundaries and capabilities of artificial intelligence involved in solving diverse tasks, is today a priority direction for the development of law, its theoretical foundations and practical aspects in technologically developed countries of the world. In the Russian Federation, the legal basis for such decisions is the Decree of the President of the Russian Federation from 09.05.2017 No. 203. “On the Strategy for the development of the Information Society in the Russian Federation for 2017–2030”. Decree of the President of the Russian Federation dated May 9, 2017 No. 203, in which the development of the information society, the formation of the national digital economy, ensuring national interests and the implementation of strategic national priorities are defined as the direction of the internal and foreign policy of the state. The progress of information technologies stimulated the development of law, forming its new institution—digital law. However, due to the lack of a clear distinction between the concepts of “digitization” and “digitalization”, the essence of digital law in a broad sense is reduced to regulating a new digital form of old relations, which does not reflect the true content of the phenomenon and does not allow separating fundamentally new institutions that are the product of digitalization from progressive forms of recording. Taking into account the fact that the concept of digitalization has not yet been defined in legal science, the problems that unite this phenomenon today do not reflect its essence from a legal point of view. The classical approach to digital relations reflects only the form, but not the content. In connection with the above, it seems necessary to develop new criteria for identifying digital relations, taking into account the characteristics of the object and subject. The peculiarity of digital relations is the emergence of a new participant who is not endowed with legal status. The attitude to artificial intelligence only as an object of relations does not seem logical. Due to the fact that modern artificial intelligence uses self-learning, the basis of which is all accumulated data, regardless of their source, it seems promising to endow artificial intelligence with legal personality, and in particular, tort capacity, taking into account the fact that the use of artificial intelligence can cause

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socially significant and property damage to individuals, the question of the reimbursement of which remains open to date. It seems justified to single out a new subject of law—a digital personality.

Methodology The methodological basis of the study was the works of Russian and foreign scientists in the field of law and technology. Taking into account the fact that digitalization is an intersectoral concept, it is necessary to use an integrated approach to determine the optimal direction for the development of legal science and practice. The main problem is the lack of special technical knowledge of lawyers to regulate relations in the field of digital technologies, and therefore the subject of digital law is more digitization than digitalization. In addition, it should be noted that in the field of information technology, the state today plays the role of a catchup, not a leader. First of all, such an unseemly role went to the state due to the fact that the research and development of innovative technologies require huge financial costs. Having given the private sector the prerogative in creating new tools, the authorities have focused on regulating the activities of IT companies, not their product, in particular, there is almost no adequate regulation of artificial intelligence, and the existing norms are devoted to the form, not the content of digital relations. However, it should be noted that the philosophical foundations of artificial intelligence were laid by the French scientist Rene Descartes in the mechanistic theory, according to which any living organism is a mechanism controlled by the soul, the only property of which is the ability to think (Descartes, 2018). At the same time, Descartes considered all animals to be machines whose behavior is determined by the mechanical functioning of their nervous system. So, he hypothesized that a person can control his behavior, and only the body was responsible for this control, without any participation of the soul. Thus, in the mechanistic theory, for the first time, a hypothesis was put forward that the behavior of a mechanism (or computer) is influenced not so much by its internal structure (or algorithms) as by the impact to which it is exposed. A modern continuation of the mechanistic theory can be considered the works of Larry Tesler, who notes that “AI is whatever hasn’t been done yet”, which is now widely known as later called “Tesler’s theorem” (McCorduck, 2004). This idea has been called the “artificial intelligence effect”, meaning that AI is inferior to real intelligence, and is actively developing in the works

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of modern scientists, in particular D. R. Hofstadter, A. D. Anderson, P. McCorduck, etc. (Anderson, 1994; Hofstadter, 2000; McCorduck, 2004). It should be particularly noted that the methodological basis of research in the field of the legal status of artificial intelligence is contained in the works of science fiction and futurologists, in particular, one can recall such books as “Frankenstein” by Mary Shelley and “Rossum Universal Robots” by Karel Chapek. However, Isaac Asimov’s novel “I, robot” deserves the most attention, where the “three laws of robotics” are formulated, a reference to which is contained in the the European Parliament Resolution of February 16, 2017 2015/2013 (INL). Thus, an innovation in the field of methodology of legal science is the formation of a rule of law based on those formulated in a literary work and not tested in practice, in other words, on fiction, not reality.

Results The transition to a post-industrial society has created a number of new relations, the regulation of which has not yet been consolidated in law. Initially, the rules for handling new technologies were considered technical norms, the relations arising in the process of applying new methods, mechanisms and machines fit into the established framework, only their form itself was innovative, but not the content. Over time, digital transformation has also reached the law. New phenomena and processes have changed the existing legal reality, made adjustments to the composition of legal relations, changed the characteristics of the object, and laid the foundation for the creation of a new participant. The transition of relations to a technological environment, the use of the Internet and cloud storage systems, the introduction of innovative algorithms force lawyers to create an adequate regulatory tool, in particular, a model for solving conflicts of digitization and digitalization, anonymity and anonymization, the status of artificial intelligence. So, the first thing a person expects from a machine is process optimization. At the initial stage of the introduction of information technologies, this was expressed in the translation of a number of characteristics of the objects of relations into digital form, i.e. in giving them a new form for recording and storing on electronic media, or digitization. The second stage consisted of further automated data processing, or digitalization. The next stage is the involvement of a machine for autonomous

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decision-making, which is implemented through artificial intelligence, whose activities should be subject to human control and supervision. In parallel, in connection with the transfer of most of the data to the digital environment, the question arises about their safety and protection, as well as the possibility of maintaining anonymity. In this regard, it is necessary to distinguish between two close concepts “digitization” and “digitalization”, which, while not synonymous, are at the same time deeply interrelated. Thus, digitization is the translation of oral and written data into digital, i.e. into a record using computer code, using any platform, algorithm and language. Moreover, the means of digitization are not essential for the further extraction and use of data and do not carry a semantic load for the user, who should not understand the technical component of this procedure. It should be noted that most modern research in the field of digital technologies is reduced to the study of a new form, not content, in particular, we are talking about blockchain technology and smart contracts. However, in these relations, only the form is digital, but not the content, the algorithm does not change the essence of these institutions. However, digitization is one of the first steps for digitalization. Digitalization is a data processing process that can either be limited to systematization or will end with the adoption of an independent decision. It is noteworthy that the mechanism of artificial intelligence is used at all stages of digitalization. It is assumed that the phenomenon of artificial intelligence is a complex mechanism used in the high-tech field to solve super-tasks. However, in reality, the sphere of artificial intelligence covers all the processes produced by the program, because the essence of the program itself is to perform a specific task by a machine according to an algorithm set by a person. So, the familiar calculator with handwriting recognition is already an artificial intelligence, because it performs a “mental” function, unlike a robot created for mechanical work. Thus, a robot is an improved machine tool, a product of the industrial revolution, and a calculator is a phenomenon of the post-industrial revolution. The transition to systems capable of self-learning should be considered as a digital revolution, because this is where a qualitatively new leap in technology development is taking place—the transition from digitization to digitalization. How does this affect the law? The protection of personal data is one of the prerogatives of the modern legislation of any state. Since the birth of society, personal information has been the key to its management.

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In addition to espionage activities designed to find levers of influence on a particular person, condemned from the point of view of the law, but supported by the authorities in the public interest in the form of intelligence activities, the state simultaneously collects information for its own purposes: registration and population census, maintaining registers, etc., the main purpose of which is to control and supervise the observance of law and order in society. Some functions have been transferred to private individuals providing services to the public. At the same time, the legislation strictly regulates the scope of permissible interference with the personal data of persons. Without a single system that has access to all registries and is capable of ultra-fast data processing, such interference does not pose a danger to humans. However, with the transition of information technology to a new level and the ability of the machine to analyze and synthesize, vulnerabilities of the existing personal data processing system are revealed. If a machine is allowed to access cloud storage, which today is presented as the most reliable way to store information, all the restrictions provided for in the law lose their meaning, because the amount of information posted by a person both independently and through collection provides an opportunity to compile a complete portfolio on a person and his environment. Harmless functions for location determination, navigation, cost control, use of search engines, time planning in a compartment with banking and cash services and state registration provide an excellent opportunity for artificial intelligence to fully identify an individual beyond the control of the law that exists today. And this is just one of the aspects of modern relations that, in pursuit of control in the field of digitization, have completely fallen out of legal regulation. Note also that digitalization has no territorial boundaries. Unlike digitization, which is regulated by national legislation, which also provides for the type of data to be protected, the circle of persons who have access to them, the procedure for handling these data, digitalization uses any source of information available to the system. With regard to digitization, the law requires that the data of not only individuals but also legal entities, both consumers of services and those who provide them, including the state, be protected. Access to personal data should be strictly regulated by law, however, a huge number of sites and platforms working with personal data are not subject to regulation by legislation on the protection of personal data, largely due to the fact that information is posted by individuals independently (social networks, registration in stores, discount

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programs, online payments, etc.). data can lead to increased technology costs, which will require an expanded storage infrastructure and more efficient search and indexing protocols. One of the solutions to the problem of the growing cost of data storage is the wider use of cloud technologies, which, however, creates both advantages and problems. In particular, the solution of the “public cloud”, outsourcing data storage can increase their cyber vulnerability if authorities and regulated institutions do not conduct an independent assessment of potential risks. The use of cloud storage, used by both private individuals and government agencies for the purpose of storing information, is currently not subject to legal regulation. At the same time, the States are already taking the first steps to solve this problem. In the EU in 2016 Regulation (EU) 2016/679 of the European Parliament and of the Council of 27 April 2016 on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, which is mandatory for application throughout the European Union and does not require its adaptation to national legislation, was adopted, and repealing Directive 95/46/EC (General Data Protection Regulation) and Directive (EU) 2016/680 of the European Parliament and of the Council of 27 April 2016 on the protection of natural persons with regard to the processing of personal data by competent authorities for the purposes of the prevention, investigation, detection or prosecution of criminal offenses or the execution of criminal penalties, and the free movement of such data, and repealing Council Framework Decision 2008/977/JHA. It is noteworthy that according to the provisions of the Regulation “The right to the protection of personal data is not an absolute right; it must be considered in relation to its function in society and be balanced against other fundamental rights, in accordance with the principle of proportionality”. And here we are faced with the following problem—the identification of the subject, which is directly related to concepts such as anonymity and anonymization. Modern technologies used on the Internet provide for the possibility of depersonalization of the subject. The main method of customer identification on the Internet is data encryption, which is aimed at protecting customer data from outside influence by changing or erasing the identity of the person and his connection with the stored information. One of the main purposes of encryption is client authentication. Anonymization saves data, while simultaneously guaranteeing the anonymity of the source. And if this procedure is necessary to preserve

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confidentiality, for example, in the field of healthcare, then the question of its validity when concluding various kinds of transactions and making payment transactions on the Internet remains debatable. The most striking example is the Tor software (The Onion Router), which allows you to establish an anonymous network connection protected from eavesdropping, which makes it attractive for criminal activity. Thus, in a relationship concluded using this technology, if the client is unwilling, it is impossible to determine the subject of the relationship. And today there is no regulatory solution to this problem. In a world where personal information is protected by constitutions, it is impossible to solve this problem without violating fundamental human and civil rights and freedoms. The only way out that is used today is a ban on the use of personal information under the threat of criminal prosecution. But such an approach, alas, does not guarantee a law-abiding person from encroachments on his information and its use by criminal elements. However, the solution to this problem is possible, but it requires high costs and unification of legislation on a global scale, which is very problematic today because, from the position of the authorities and the market, information is the highest value. Processing and analyzing data hosted in a digital environment requires enormous resources. Many processes have already gone beyond human capabilities and are carried out by a machine, artificial intelligence, which is “a set of technological solutions that makes it possible to simulate human cognitive functions (including self-learning and seeking solutions without a predetermined algorithm), as well as to obtain results during the performance of specific tasks that are at least comparable to the results of human intellectual activity” (Decree of the President of the Russian Federation from 10.10.2019 No. 490. “On the development of artificial intelligence in the Russian Federation”, 2019). However, it should be noted that the process of imitation of human intelligence has reached such a level today that the functions of not only data processing, but also analysis and decision-making are assigned to the machine. At the same time, it is necessary to take into account the “effect of artificial intelligence” (McCorduck, 2004), according to which the solution of a given task by a machine is no longer recognized as an intellectual activity and is considered as a technical purpose of the machine. At the same time, the issue of the consequences of such actions has not been settled. The problem is aggravated by the transition of machine learning to the level of selflearning, which is confirmed by the negative experience of such systems

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as Norman, Nightmare Machine, Microsoft Tay chatbot, etc (Grossman, 2016; Lee, 2016). Considering that until today the law did not know the concepts of machine learning, within the framework of the legal system, the creation of a new complex legal institute of artificial intelligence is justified, which is a set of norms regulating public relations in the field of creation, training, testing, application, implementation, control and responsibility of artificial intelligence, and related personal and property rights. It should be noted that the issue of endowing artificial intelligence with legal personality will become one of the key ones in the next decade due to the fact that modern artificial intelligence uses self-learning, the basis of which is all accumulated data, regardless of their source. The rapid development and application of new technologies require thorough regulation, and first of all, in matters of responsibility for the negative consequences of artificial intelligence, given that from a certain point, after setting up the self-learning algorithm, the machine can get out of human control due to the fact that the speed of information processing, analysis and decision-making the machine is not comparable with similar human parameters. Thus, the issue of control and supervision of artificial intelligence should be determined not only by legal criteria, but also by technical parameters that set the boundaries of the algorithm itself and its solution. The European Parliament Resolution of February 16, 2017 (2015/2013 (INL)) in subparagraph 59.f allows to endow robots with a special legal status in the future. In particular, we are talking about the possible creation of electronic persons capable of independently bearing responsibility. Legal gaps in the regulation of digitalization have led to the formation of a new direction in legal science—digital law. Today, most studies are of an industry or institutional nature and are devoted to a specific type of relationship. However, one of the key ones should be considered the definition of the very concept and content of digital law. There are three main approaches to its identification. The classical approach proceeds from the fact that the digital space is only a new type of information carrier, the task of law is to select a suitable regulatory mechanism from the position of fundamental norms and principles. The digital society itself can at the same time establish its own regulatory norms, which, however, must be strictly controlled by the state (Poullet, 2000). Undoubtedly, the positive aspects of this approach should include the stability of the legal system, the universality of norms that allow adapting the changing reality to the usual regulation without shocking innovations

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in law. At the same time, the silence of the problem does not exclude the problem itself, the essence of which is that digital relations themselves do not develop according to established rules, but spontaneously. Ignoring innovations by the state leads to the formation of parallel regulation, the nature of which depends on the legal awareness of the participants in the relationship. So, today we are forced to recognize the existence of the DarkNet, which is a form of social deviation, subject to its own norms and rules. Taking into account the classical approach, legal regulation here is limited only to the prohibition of this type of activity under the threat of criminal prosecution, i.e. the state recognizes the existence of the problem as illegal activity, but does not attempt to bring this activity into the legal field with the possibility of its suppression even at the stage of creation, applying strict regulation of the algorithms themselves, which are the technical basis for the existence of illegal reality. The law plays the role of a hopelessly lagging participant in the relationship, trying to organize movement in an acceptable direction with instructions and threats. The modernist approach to digital law insists on the priority of algorithmic code, which, in fact, is the law (Godefroy, 2018). Its motto is “Code is law”. Undoubtedly, with this approach, it is possible to take into account all the changes made by information technologies in a timely manner, track them at the stage of creation and regulate the activity itself in the digital environment. With this approach, the law develops in parallel with the innovations themselves, which makes it possible to track illegal behavior when using new technologies to protect the interests of a person, society and the state. However, the code itself is a system of commands for the machine, i.e. a technical norm, the essence of which is accessible only to persons with special skills, and, as a rule, it does not contain a generally binding rule of conduct, the participants of which are persons. Thus, the code does not have one of the features of the rule of law. In addition, this approach encourages the development of technocracy, which may contradict the principle of democracy. Also, the state may become dependent on the people who create the technologies themselves, given that most innovations are created in the private sector, which, with a modernist approach, will create legal norms that meet, first of all, the interests of the technocracy. Thus, an algorithm is only a way to solve a problem, not a rule. In these conditions, the third approach embodying compromise is optimal (Kablan, 2008). The state, together with experts in the field of information technology, develops norms of behavior in the digital

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environment, clearly regulating not only the consequences of using technologies but also their very creation and application. The symbiosis of law and digital innovation will allow, firstly, to track the main directions of technology development, which, as already noted, are emerging and developing in the private sector. Secondly, with this approach, the private sector will be forced to share its advanced achievements with the state, and the state itself can become an active participant and locomotive of technology development in the areas it needs, taking into account its own interests and the interests of individuals and society as a whole without burdensome material costs for the authorities. In part, this approach will be utilitarian for the state, but the symbiosis of interests will not allow the superiority of the authorities in regulating digital relations, but on the contrary, will contribute to the introduction of innovations in life. Another question is what kind of society will be built as a result. After all, the achievements of digital technologies and the transformations caused by them are already called the “third industrial revolution'' (Rifkin, 2013), the robot has replaced the machine. But with the development of artificial intelligence and its widespread use, the world found itself on the threshold of the fourth revolution. What it will bring should be determined today, and not only the state but also society should do it. In practice, states today have chosen the first approach, trying to fit new relations into old forms. Thus, the choice of approach to the definition of digital law is far from a theoretical question, because the consequences of this step will determine the development of society and its future.

Conclusions In connection with the global penetration of information technologies into all spheres of society, the transformation and subordination of established relations to the new digital order, it seems necessary to form a new comprehensive institute of law—digital law. The lack of a unified approach to the subject, based primarily on the mixing of the concepts of digitization and digitalization, the lack of lawyers’ special technical knowledge and skills in the field of information technology has led to the fact that in modern legal science, the essence of digital law is reduced to the regulation of a new digital form of old relations. Adherence to tradition in law makes it difficult to introduce new phenomena, does not reflect the true content of these technologies and does not allow

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separating fundamentally new institutions that are the product of digitalization from progressive forms of recording. Thus, today the law regulates digital relations from the position of the form of communication, but not the content of communication. In connection with the above, it seems necessary to develop new criteria for identifying digital relations, taking into account the characteristics of the object and subject, to shift digital algorithms into legal norms in order to protect the rights and freedoms of man and citizen, public and private interests of man, society and the state. The institute of artificial intelligence, the regulation of which is only at the initial stage, should be considered innovative sphere of legal regulation. Considering that until today the law did not know the concepts of machine learning, within the framework of the legal system, the creation of a new complex legal institute of artificial intelligence is justified, which is a set of norms regulating public relations in the field of creation, training, testing, application, implementation, control and responsibility of artificial intelligence, and related personal and property rights. It should be noted that the issue of endowing artificial intelligence with legal personality will become one of the key ones in the next decade due to the fact that modern artificial intelligence uses self-learning, the basis of which is all accumulated data, regardless of their source. The rapid development and application of new technologies require thorough regulation, and first of all, in matters of responsibility.

References Anderson, A. J. (1994). Foundations of Computer Technology. CRC Press. Descartes, R. (2018). Meditations on First Philosophy, in Which the Existence of God and the Immortality of the Soul are Demonstrated. Studium Publishing. European Parliament. (2016). Regulation 2016/679 on the Protection of Natural Persons with Regard to the Processing of Personal Data and on the Free Movement of such Data, and Repealing Directive 95/46/EC (General Data Protection Regulation). Available at https://eur-lex.europa.eu/eli/reg/2016/679/ oj. Accessed 4 Aug 2022. European Parliament and of the Council. (2016). Directive 2016/680 on the Protection of Natural Persons with Regard to the Processing of Personal Data by Competent Authorities for the Purposes of the Prevention, Investigation, Detection or Prosecution of Criminal Offences or the Execution of Criminal Penalties,

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and on the Free Movement of such Data, and Repealing Council Framework Decision 2008/977/JHA. Available at https://eur-lex.europa.eu/legalcontent/EN/TXT/?uri=CELEX%3A32016L0680. Accessed 8 Aug 2022. European Parliament. (2017). European Parliament Resolution with Recommendations to the Commission on Civil Law Rules on Robotics (2015/ 2103(INL). Available at https://eur-lex.europa.eu/legal-content/EN/TXT/ ?uri=CELEX%3A52017IP0051. Accessed 4 Aug 2022. Godefroy, L. (2018). The Algorithmic Code at the Service of Law. Recueil Dalloz, 14, 734–740. Grossman, D. (2016). ‘Nightmare Machine’ AI Can Make Any Face Horrifying It Can Haunt Your Dreams All by Itself! Available at https://www.popularmechanics.com/technology/robots/a23637/nightm are-machine-neural-network-ai/. Accessed 17 Sep 2022. Hofstadter, D. R. (2000). Gödel, Escher, Bach: An Eternal Golden Braid. Penguin Books Ltd. Kablan, S. A. (2008). For an Evolution of Contract Law: The Electronic Contract and Intelligent Agents. Available at https://www.collectionscanada.gc.ca/ obj/s4/f2/dsk3/QQLA/TC-QQLA-25221.pdf. Accessed 9 Sep 2022. Lee, P. (2016). Learning from Tay’s Introduction. Available at https://blogs.mic rosoft.com/blog/2016/03/25/learning-tays-introduction. Accessed 1 Oct 2022. McCorduck, P. (2004). Machines Who Think: A Personal Inquiry into the History and Prospects of Artificial Intelligence. A K Peters. Poullet, Y. (2000). The Various Techniques of Internet Regulation: Selfregulation and the Role of State Law. Ubiquité, 5, 55–68. President of the Russian Federation. (2017). Decree of the President of the Russian Federation from 09.05.2017 No. 203 “On the Strategy for the Development of the Information Society in the Russian Federation for 2017–2030”. No. 20. Art. 2901. President of the Russian Federation. (2019). Decree of the President of the Russian Federation from 10.10.2019 No. 490 “On the Development of Artificial Intelligence in the Russian Federation”. Rifkin, J. (2013). The Third Industrial Revolution. Actes sud.

CHAPTER 8

Digitalization of the Tax Sphere in Russia Gennadi Tolstopyatenko and Dina Osina

Introduction Digital technology now permeates almost every aspect of society, from education (Osina et al., 2021), medicine, and healthcare (Platonova, 2021) to economics (Vaipan, 2018). Taxation has not escaped the march of digitalization. Due to digitalization, modern states can exercise tax control and implement measures to combat tax evasion more effectively, reduce the cost of tax administration, and simplify interaction with taxpayers. For example, the United States has used the Discriminant Inventory Function System since 1969, which allows the tax authorities to establish a risk-oriented

G. Tolstopyatenko Administrative and Financial Law Department, International Law School, MGIMO University, Moscow, Russia e-mail: [email protected] D. Osina (B) Department of Legal Theory and Comparative Law, International Law School, MGIMO University, Moscow, Russia e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 A. Baykov and E. Zinovieva (eds.), Digital International Relations, https://doi.org/10.1007/978-981-99-3467-6_9

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approach in tax control (Osina, 2021).1 Some countries have started the digitalization process relatively recently, including Russia. However, Russia has already achieved visible success in digitizing the activities of tax authorities (Efremova, 2021). For this reason, there is growing interest in studying the relevant experience of tax authorities in their relations with taxpayers. This article will provide a comprehensive review of the main tools used for digitalizing taxation in Russia and an analysis of the possible future impact of digitalization on the tax sphere.

Materials and Methodology This study is based on the analysis of an extensive legal framework. In addition to tax legislation and other federal laws, the orders and letters of the Federal Tax Service of the Russian Federation (hereinafter—FTS of Russia), as well as extensive analytical and scientific materials were carefully analysed. The research methods used include, in addition to formal logic, special legal methodology (formal legal and comparative legal methods). The authors also used the critical-legal method (Malinovsky, 2016) in order to critically evaluate the ongoing changes and assess innovations in terms of their ability to positively affect further development of the tax sphere in Russia. In preparing the study, a significant amount of information was obtained from various legal research services such as ConsultantPlus and Garant.

Results The practical basis for the current stage of digitalization of the Russian tax sector was established by Decree No. 995 of the Government of the Russian Federation dated December 5, 2011, according to which funds were allocated from the federal budget for the design and construction of data centres for the FTS of Russia. Currently operating data centres include the dedicated infrastructure necessary for the operation of the information systems of the FTS. The main system is Automated Information System of the FTS of Russia (AIS Nalog-3), the regulation of which was approved by Order 1 A special computer program is used that has made it possible to effectively select tax returns for audit.

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No. MMV-7-12/134 of the FTS of Russia dated March 14, 2016. This system forms the single information space of the FTS of Russia and was created to streamline the performance of all its functions, including receiving, processing, and providing data, analysing information, creating information resources for the tax authorities, and generating statistical data. The intention behind AIS Nalog-3 is to reduce the costs of tax administration by creating and implementing an electronic system for the mass processing of information received by the tax authorities. This system greatly simplifies the taxpayer’s interaction with the tax authorities by allowing the necessary procedures to be carried out in electronic form. The system accumulates the full range of information available on each taxpayer, including information that enables timely detection of signs of tax evasion. AIS Nalog-3 significantly reduces the labour costs of tax authorities involved in the daily collection, processing, and verification of tax returns; the procedures of tax assessment; and the interdepartmental exchange of information. One of the components of AIS Nalog-3 is the Automated Control System “VAT-2” (ACS VAT-2), which was first launched in certain regions of Russia on the basis of Order No. MMV-7-6/68@ of the FTS of Russia dated February 13, 2015. Then the system was put into operation nationwide in accordance with Order No. MMV-7-15/176@ of the FTS of Russia dated February 10, 2017. The functional purpose of the corresponding software is to automate cross-verification of value-added tax (VAT) returns based on information from purchase and sales ledgers and registers of issued and received invoices. In accordance with Letter No. 03-01-11/26624 of the Ministry of Finance of the Russian Federation dated April 15, 2019, this system automatically detects tax gaps in the chain of relationships between taxpayers and counterparties and does not allow for illegal VAT deductions. Also, in Letter No. ED-4-15/ 9933@ dated June 3, 2016, the FTS of Russia explained that ACS VAT2 includes a risk management system that uses the information available to the tax authorities to automatically sort taxpayers who have submitted VAT returns into three categories depending on the existing tax risks: high (shell companies), low (bona fide businesses), and medium (companies not included in the previous categories). Thus, ACS VAT-2 allows the tax authorities to streamline their control activities by using a riskbased approach and auditing only those taxpayers and transactions that fall into the risk zone. The use of ACS VAT-2 reduced the number of VAT refund claims from high-risk organizations by almost eight times.

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At the same time, the number of shell companies used to evade VAT decreased by a factor of 2.5 (from 1.8 million in 2011 to 700,000 in 2016) (Timoschenko, 2017). A key component of digitalization in the tax sphere is the creation and development of the Taxpayer Personal Office. Federal Law No. 347-FZ dated November 4, 2014, introduced Article 11.2 into the Tax Code of the Russian Federation, providing the legal basis for the operation of this institution. In order to ensure and facilitate its application and development, the FTS of Russia issued numerous orders (Order No. MMV-7-6/595@ dated December 16, 2013; Order No. MMV-76/102@ dated March 12, 2015; Order No. 7-6/125@ dated March 10, 2016; Order No. SA-7-6/220@ dated March 17, 2017; and Order No. MMV-7-17/617@ dated August 22, 2017). The Taxpayer Personal Office is an information resource which main purpose is to simplify the interaction between the tax authorities and the taxpayer by converting it into electronic form. This resource enables the taxpayer to receive and transfer documents (information) to and from the tax authorities. There are currently five types of Taxpayer Personal Office: for individuals, for legal entities, for professional income taxpayers (self-employed), for individual entrepreneurs, and for foreign organizations. The Personal Office offers different functionalities for each of these categories of taxpayers. For example, individuals can use their Personal Office to pay taxes and file tax returns, legal entities, and individual entrepreneurs can reconcile accounts with the budget, foreign organizations can file VAT tax returns, and selfemployed taxpayers can generate and send receipts to clients, as well as monitor income and tax accruals. It is important to note that the FTS of Russia has developed and successfully operates mobile applications for the respective categories of taxpayers (mainly individuals, self-employed persons, and individual entrepreneurs). R.G. Domov reasonably notes that the Taxpayer Personal Office enables electronic document flow and ensures that all processes are carried out in electronic form, thus greatly reducing the costs that traditional paper record keeping entails for all parties, and making the relationship between tax authorities and taxpayers more transparent, which leads to an increased trust in the work of tax authorities (Domov, 2020). Order No. MMV-7-6/573@ of the FTS of Russia dated October 19, 2016 put the Automated Control System of Cash Registers (ACS KKT) into nationwide commercial operation, allowing tax authorities to receive data from cash registers in real time. ACS KKT consists of three

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subsystems: (1) for registering cash registers in electronic form; (2) for ensuring the verification of cash receipts and filing of complaints with the tax authorities regarding the incorrect use of cash registers; and (3) for receiving fiscal data. A special section for this system (https://kkt-online. nalog.ru/) has been created on the official website of the FTS of Russia, as well as a mobile application for customers to check receipts from online cash registers, store receipts, and file complaints with the tax authorities about the incorrect use of cash registers. In accordance with Federal Law No. 348-FZ dated November 4, 2014, a new form of tax control was introduced into Russian tax legislation, namely tax monitoring. The FTS of Russia issued the orders necessary to implement the provisions of the corresponding section V.2 of the Tax Code of the Russian Federation (Order No. ED-7-23/476@ dated May 11, 2021 (to replace Order No. MMV-7-15/323@ dated April 21, 2017), Order No. ED-7-23/518@ dated May 25, 2021 (to replace Order No. MMV-7-15/509@ dated June 16, 2017), Order No. MMV-73/1065@ dated December 15, 2017, Order No. MMV-7-2/628@ dated November 7, 2018, Order No. ED-7-23/477@ dated May 11, 2021, and Order No. ED-7-23/1142@ dated December 23, 2021). In terms of functionality, tax monitoring is a method of enhanced information exchange where the organization provides the tax authority with real-time access to its accounting and tax accounting data (i.e. relevant documents and information, see Letter No. ED-4-2/26194 of the FTS of Russia dated December 17, 2014, and Letter No. SD-4-23/831@ of the FTS of Russia dated January 27, 2021) in electronic form via telecommunication channels (until 2024) and/or through the organization’s information systems. As rightly noted by researchers (Kovalenko & Leonov, 2021), this kind of remote access provided to the tax authority even extends to primary accounting documents, where an inspector examining a line in the tax return can actually access the primary document relating to the transactions reflected in that line. Tax legislation provides for the use of advanced information technologies by participants in tax monitoring, namely an automated information system for calculating and paying taxes, which the tax authority can access remotely, as well as an internal control system meeting the requirements of the FTS of Russia that verifies business transactions and the correctness of tax calculations. Tax monitoring is developing rapidly. A total of 448 companies will be covered by tax monitoring starting in 2023, compared to 209 in 2021,

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44 in 2019, and 7 in 2016.2 Increasing the role of tax monitoring and the number of taxpayers covered by such monitoring will reduce the number of tax disputes and could facilitate more efficient interaction between the state and taxpayers. At the same time, it is important to understand that the development of tax monitoring is absolutely impossible without improving the digitalization of tax administration, since this method of tax interaction between the state and the taxpayer requires the availability and use of modern information technologies. The FTS of Russia is also actively implementing electronic services for the pre-trial settlement of tax disputes (Golubitchenko & Galanova, 2022). Taxpayers can prepare and file complaints against decisions or acts or omissions of tax authorities, as well as other appeals, in electronic form.3 The complaint form, the procedure for filling it out, and the formats and procedure for its submission are approved by Order of the FTS of Russia No. MMV-7-9/645@ dated December 20, 2019. In addition, the service “Information about your complaint” has been put into operation,4 which allows taxpayers to obtain information about the progress of their appeals (complaints, statements, proposals). The service “Decisions on complaints”5 has also been launched, which provides information on the results of consideration of taxpayers’ complaints. The FTS of Russia also provides electronic services for business registration and verification, namely, registering a business online,6 checking an existing business for tax risks,7 as well as retrieving information from various state registries in electronic form.

2 These dynamics can be tracked through publications on the official website of the FTS of Russia. https://www.nalog.gov.ru/rn77/news/activities_fts/12789356/ (in Russian), https://www.nalog.gov.ru/rn77/news/activities_fts/10222192/ (in Russian). https://www.nalog.gov.ru/rn77/news/activities_fts/8785782/ (in Russian), accessed November 21, 2022. 3 https://www.nalog.gov.ru/rn77/apply_fts/complaint/ November 21, 2022.

(in

Russian),

accessed

4 https://service.nalog.ru/complaints.do (in Russian), accessed November 21, 2022. 5 https://www.nalog.gov.ru/rn77/service/complaint_decision/ (in Russian), accessed

November 21, 2022. 6 https://service.nalog.ru/gosreg/#ip (in Russian), accessed November 21, 2022. 7 https://pb.nalog.ru/index.html (in Russian), accessed November 21, 2022.

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An important part of the digitalization of tax administration is the transfer of taxpayer reporting to electronic form. In accordance with Paragraph 5 of Article 174 of the Tax Code of the Russian Federation, a VAT return can only be submitted electronically, in the form and format established by the tax authorities. Among other things, this requirement ensures that ACS VAT-2 is filled with the information necessary for its operation and functioning. In addition, the tax authorities are currently conducting a pilot project that allows taxpayers to submit tax and accounting reports in electronic form through the official website of the FTS of Russia.8 Continuing on this topic, it is necessary to mention the Concept of Electronic Document Management in Business Activities, which, together with a plan for its implementation, was approved by the Presidium of the Government Commission on Digital Development and the Use of Information Technologies to Improve the Quality of Life and Business Conditions. The concept was developed by the FTS of Russia together with the relevant government agencies and representatives of the business community (see Minutes of the Presidium of the Government Commission on Digital Development and the Use of Information Technologies to Improve the Quality of Life and Business Conditions No. 34 dated December 25, 2020). The Concept provides for a comprehensive approach to regulating the use of electronic signatures, the archival storage of electronic documents, and ensuring the legal validity of electronic document management in the field of economic activity with due regard to the interests of all persons concerned. In particular, the Concept provides, with a number of exceptions, for the digitalization of 95% of invoices issued by business entities by the end of 2024 (Maksimchuk et al., 2021). An equally important part of the digital optimization of tax administration is the abolition of certain obligations of taxpayers due to the assumption of relevant functions by tax authorities. Researchers rightly point out that the digitalization of tax relations leads to the transformation of their legal content, reducing the scope of the taxpayer’s obligations, and increasing the scope of the duties of the tax authorities proportionally (Krasyukov, 2022). Examples include the abolition of the obligation of individual taxpayers to calculate tax and submit tax 8 https://www.nalog.ru/rn77/service/pred_elv/ (in Russian), accessed November 21, 2022.

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returns for property taxes (personal property tax, transport, and land taxes) (Lyutova, 2021), as well as the initial absence of the obligation to calculate tax and submit tax returns for payers of the professional income tax, who are instead notified by the tax authority of the amount of tax due and the deadline for paying it through the Moi Nalog (“My Tax”) mobile application (Article 11 of the Federal Law No. 422-FZ “On the Experiment of Introducing the Special Tax Regime ‘Professional Income Tax’” dated November 27, 2018). At the same time, the tax service is also developing services for international taxation, notably the VAT Personal Office for internet companies, which allows foreign providers of electronic services to check whether they need to register with the tax authorities in Russia and, if necessary, file an appropriate application and use its foreign organization personal account. It is also possible to use electronic services to confirm the status of a Russian tax resident, send a notification about foreign taxpayer clients, or send a report on foreign clients according to the Common Reporting Standard (CRS) of the Organisation for Economic Co-operation and Development. In addition, the FTS which actively cooperates on the basis of agreements, the Tax Code (section VII.1) and also participates in international exchange of information.

Plans for Further Tax Digitalization Based on our study of the main directions of tax digitalization in Russia, we can see that a significant part of the activities of the FTS of Russia has been automated and converted into electronic form. This has significantly reduced the costs of tax administration and improved its quality (Barakina, 2022) by eliminating the factor of human error. It should be emphasized that the introduction and use of information systems changed the very model of control activities of the FTS of Russia. Now its priority is not to cover the maximum number of taxpayers with tax audits (as was the case before) but to exercise a risk-based approach that makes it possible to identify the riskiest transactions and/or taxpayers and audit them. As a result of this approach, the number of disputes between the tax authorities and taxpayers has decreased significantly both in court and at the pre-trial stage. Despite a significant reduction in the number of tax audits and tax disputes, their effectiveness for the tax authorities has only increased. That is, the additional assessment of tax, interest, and penalties due by the tax authorities based on the results

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of audits are either not disputed by taxpayers or are recognized by the courts as lawful. In this regard, D.M. Moshkova rightly points out that the administrative burden on business has been reduced due to a change in the format of control and supervisory activities of the tax service, which is now focused only on potential violators or those who are not covered by the platform (Moshkova, 2021). The introduction and use of the institution of tax monitoring also change the traditional model of tax control activities from post factum control to ongoing control (Duyunov, 2015), which is carried out online, with the taxpayer’s activities being transparent for the tax authority. Additionally, this, as a rule, does not require subsequent tax audits at the end of the tax period. The FTS has also developed an Action Plan for moving forward.9 One goal outlined in the plan is to increase the number of and improve the quality of services provided in electronic form, which should lead to an increase in the share of taxpayers applying for public services in electronic form. In our opinion, it is important to preserve a number of different methods for the tax service to provide its services, as traditional forms of communication with the tax authorities are more convenient for certain categories of taxpayers. This is confirmed by the experience of other states. For example, the Australian Taxation Office (Anisimova, 2022), while improving the quality of its services through digital channels, has chosen not to close existing traditional channels because the traditional methods of interacting with the tax authorities are also in demand and in some cases are more convenient. One of the directions for the improvement of AIS Nalog-3 is the development of a concept for the corresponding fourth-generation system (AIS Nalog-4). This is necessary due to the need to use import substitution technologies in a dynamic external environment, which is especially important in today’s complex geopolitical situation and Russia’s limited access to certain modern information technologies. Decree No. 381-r of the Government of the Russian Federation dated February 21, 2020, approved the Concept for the Development and Operation of the Tax Monitoring System in the Russian Federation. 9 Annex No. 3 to the Minutes of the Meeting of the Public Council under the FTS of Russia No. 4 dated January 18, 2022. https://www.nalog.gov.ru/html/sites/www.new. nalog.ru/docs/obchest_sovet/p3_4_18012022.pdf (in Russian), accessed November 21, 2022.

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Paragraph 3 of this document defines the main goal of tax monitoring as digitizing tax control based on the implementation of a risk-based approach aimed at the verification of high-risk transactions of taxpayers, taking industry specifics into account, with the subsequent integration of the state tax control function into taxpayers’ corporate information systems. The FTS of Russia has set the goal of launching its Tax Monitoring software into operation, which will enable enhanced information exchange between taxpayers and the tax authorities. To help achieve this goal, the Tax Monitoring of AIS Tax-3 subsystem was completed in 2021, which makes it possible to fully automate the exchange of documents between those involved in tax monitoring and the tax authorities (Krasheninnikova, 2021). The overall concept of this subsystem provides for its full integration with taxpayers’ accounting systems, which will make it possible to check the correctness of the data reflected in their accounting systems and tax returns, including automatic control with the use of online services developed by the FTS of Russia (Krasheninnikova, 2020). Based on the above and in accordance with Order No. ED-723/1142@ of the FTS of Russia dated December 23, 2021, accounting IT systems of taxpayers participating in tax monitoring are subject to mandatory integration with the AIS Tax-3 system of the FTS of Russia starting from January 1, 2023. However, this deadline was later extended to January 1, 2024, in order to ensure a more efficient transition to enhanced information exchange with the tax authorities.10 In terms of improving the procedure for pre-trial settlement of disputes, the FTS of Russia has the following tasks: ● to expand the functionality of the Taxpayer Personal Office for Individuals to allow structured complaints to be filed, as well as implement a simplified procedure for considering complaints filed by individuals through the personal office, which will reduce the time needed to review some complaints and simplify the procedure for resolving the corresponding disputes; ● to transfer the process of pre-trial appeal into a purely electronic format;

10 https://www.nalog.gov.ru/rn77/news/activities_fts/12395477/ accessed November 24, 2022.

(in

Russian),

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● to allow remote pre-trial appeals to take place via videoconference. The authorities are also developing a plan for the further digitalization of tax administration by expanding the practice of transferring tax assessment functions to tax authorities. As mentioned earlier, most property taxes for individuals have already been covered by this practice. Current developments include a technology to levy a digital excise tax on tobacco and beer, which will allow the tax service to automatically calculate tax liabilities when products are released onto the market based on the information on tobacco and beer labelling available in digital systems, thus further reducing the number of disputes between taxpayers and tax authorities.11 In accordance with the Federal Law No. 305-FZ dated July 2, 2021, starting from January 1, 2023, the tax authorities will perform the function of assessment of corporate property tax on property the tax base on which is defined as its cadastral value. The obligation of taxpayers to declare the relevant property has been abolished. The tax authorities will send taxpayers electronic notifications of the amounts of tax due. These notifications will be generated by the tax authorities on the basis of information submitted to them as part of interdepartmental interaction with the Federal Service for State Registration, Cadastre and Cartography (Rosreestr), the executive bodies of the constituent entities of the Russian Federation, etc.12 Other plans include automating and expanding the possibilities of information exchange between the tax authorities and credit institutions for the purpose of creating the following services: ● a service for banks to provide information on accrued interest earned on deposits held by individuals in order to ensure that it is properly taxed;

11 Official Website of the Ministry of Finance of the Russian Federation. Speech of the Secretary of State—Deputy Minister. November 18, 2022. https://minfin.gov.ru/ru/ press-center?id_4=38245-aleksei_sazanov_provel_vstrechu_s_inostrannym_biznesom_na_p loshchadke_amerikanskoi_torgovoi_palaty_v_rossii_amcham_i_obsudil_s_uchastnikami_vop rosy_nalogovoi_politiki (in Russian), accessed November 23, 2022. 12 https://www.nalog.gov.ru/rn77/news/activities_fts/12875477/ accessed November 24, 2022.

(in

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● a service for the simplified (automatic) provision of property and investment tax deductions to individuals in order to address the current situation where obtaining the relevant tax deductions involves the collection of a large number of documents and significant time costs for the taxpayer. FTS plans for the development of electronic document management are also worth noting here. These include: ● Creating and launching electronic document management services for business activities, including the digitization of invoices issued by business entities. This is done by the tax service, among other things, to simplify the administration of VAT and the monitoring of its payment. At the same time, the FTS of Russia already operates an electronic service to check that invoices have been filled in correctly.13 ● Introducing electronic document exchange with the judicial authorities, primarily with courts of general jurisdiction, in order to increase the efficiency of debt collection from individuals. ● Creating a single national format for a machine-readable power of attorney,14 which would simplify document flow not only in government bodies, but also in business interactions. The information systems operated by the tax service provide for the verification of the document signer’s credentials, as well as ensure the verification of data. The FTS of Russia plans to improve its international tax services by: ● creating an automated service for identifying persons whose financial account information is received as part of the automatic exchange of information, as well as creating an analytical application that makes it possible to identify risks of non-compliance with tax laws; ● automating on-request information exchange with the competent authorities of foreign states, which includes the development of an 13 http://npchk.nalog.ru/ (in Russian), accessed November 24, 2022. 14 https://www.nalog.gov.ru/rn77/news/activities_fts/12862375/ (in

accessed November 24, 2022.

Russian),

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“International Information Exchange” software component for AIS Nalog-3, facilitating all stages of interaction between participants in the process within Russia. In conclusion, it should be noted that the FTS of Russia is currently Russia’s largest operator of up-to-date data on taxpayers, data that is well structured and systematized. In this regard, the tax service plans to create a digital platform for assessing taxpayers. In particular, it intends to provide credit institutions with relevant information on taxpayers for risk assessment when providing financial services to taxpayers, such as opening current accounts, issuing loans, and granting subsidies.

Conclusions The study of the experience of digitalization in the various spheres of activity of the FTS of Russia shows that the level of digitalization that has been achieved allows the tax service to perform its control functions more effectively, which increases the level of tax compliance among taxpayers. For example, the use of ACS VAT-2 in the work of the tax authorities has ensured the effective identification and neutralization of tax evasion schemes and the unlawful VAT refunds from the budget (Rodygina, 2018). Using the Taxpayer Personal Office and corresponding mobile applications allows taxpayers to pay taxes and check the correctness of their calculations without having to physically visit the tax authorities. ACS KKT has made it possible to bring a large amount of transactions carried out in the country from the shadow economy and control them effectively. The dynamic expansion of tax monitoring contributes to the further digitalization of tax administration and the use of modern information technologies. It is important to emphasize that tax monitoring, both as a legal institution and as a technology for enhanced information exchange between the tax authorities and taxpayers, has great potential for introducing these information systems into everyday life. The improvement of the model of control activities of the tax service, namely the replacement of post factum control with ongoing control, as well as the introduction of the function of state tax control into the corporate information systems of taxpayers participating in tax monitoring, allows the state to test digital tax control technologies for wider application in other areas of public life.

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References Anisimova, A. A. (2022). The Quality of Tax Administration in the Context of the Digitalization of the Economy: World Experience. Accounting in Budgetary and Non-Profit Organizations, 16, 35–47. Barakina, E. Y. (2022). Digitalization of Tax Administration in the Russian federation. Jurist, 4, 51–55. Domov, R. G. (2020). Digitalization of Interaction Between Tax Authorities and Taxpayers: A Problematic Commentary on Article 11.2 of the Tax Code of the Russian Federation. Nalogi, 1, 10–14. Duyunov, A. G. (2015). Tax Monitoring as a New Form of Control. Nalogoved, 2, 33–39. Efremova, T. A. (2021). Digitalization of Tax Administration in Russia: Problems and Prospects. Nalogi, 1, 17–20. Golubitchenko, M. A., & Galanova, I. S. (2022). Pre-trial settlement of tax disputes: Prospects in the era of digitalization. Electronic Supplement to the Russian Legal Journal, 2, 39–45. Kovalenko, N. S., & Leonov, E. M. (2021). Tax Monitoring as a Tool for Tax Digitalization. Zakon, 4, 50–59. Krasheninnikova, M. A. (2020). Now the Actions of the Federal Tax Service of Russia are Aimed at the Digitalization of Tax Control: Interview. Tax Policy and Practice, 5, 14–17. Krasheninnikova, M. A. (2021). Tax Monitoring: Results of the 2020 Application Campaign and Prospects: Interview. Tax Policy and Practice, 2, 12–17. Krasyukov, A. V. (2022). Transformation of the Tax Obligation Within the Framework of the Automated Simplified Taxation System. Nalogi, 4, 10–13. Lyutova, O. I. (2021). The Obligation to Provide Tax Reporting in the Context of Digital Transformation. Nalogi, 5, 22–24. Maksimchuk, O., Borisova, N., Ereshchenko, T., & Klyushin, V. (2021). Digital Technologies in the Tax Sphere as a Factor in the Sustainability of Economic Activity. E3S Web of Conferences, 274, 10002. https://doi.org/10.1051/e3s conf/202127410002 Malinovsky, A. A. (2016). Critical Legal Method in Jurisprudence. Russian Journal of Legal Research, 2(7), 54–61. Moshkova, D. M. (2021). Transformation of Tax Legal Relations in the Context of the Digitalization of the Russian Economy. Law and Digital Economy, 4, 56–62. Osina, D. M. (2021). Legal Regulation of Liability for Violation of Tax Laws in the United States of America (Dissertation for Candidate of Juridical Sciences). Osina, D. M., Tolstopyatenko, G. P., & Malinovsky, A. A. (2021). Digitalization of Higher Legal Education in Russia in the Age of COVID-19. In S. Ashmarina, V. Mantulenko, & M. Vochozka (Eds.), Engineering Economics: Decisions

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and Solutions from Eurasian Perspective. Engineering Economics Week 2020. Lecture Notes in Networks and Systems, 139. Springer. https://doi.org/10. 1007/978-3-030-53277-2_47 Platonova, N. I. (2021). Digitalization of the Healthcare System During the Pandemic. Jurist, 1. Rodygina, V. E. (2018). Digitalization of VAT Tax Control: Legal Implications and Prospects. Financial Law, 9, 31–34. Timoschenko, V. A. (2017). Improving Control over the Calculation and Payment of VAT on the basis of ACS VAT-2. Law and Economics, 11. Vaipan, V. A. (2018). Legal Regulation of the Digital Economy. Entrepreneurial Law. Supplement: Law and Business, 1.

CHAPTER 9

Financial Law in the Era of Digital Economy Lana Arzumanova

Introduction Much has been said and written over the past decade about the digitalization of the economy in various fields of life. The term “digital law” has started to appear with increasing frequency, although it is difficult to agree with this wording, because the law was, is, and remains a living instrument, reacting to objectively changing social relations, including the trends of digitization of social processes. The author’s position is that we can only talk about the digitization of legal norms and processes that cover an increasing number of subjects and relevant objects of regulation. Nevertheless, the active introduction of technology has also had a positive effect on the sphere of public, financial, and legal services, which has led to the need to modernize existing procedures that have not been subject to transformation for a long time. In particular, we can talk about the technification of processes at all levels of the judicial system, in the central and local authorities—for example, the advent of e-budgets, the online registration of taxpayers, and the subsequent introduction of digital taxation and control measures—and on the financial markets, including

L. Arzumanova (B) Kutafin, Moscow State Law University, Moscow, Russia e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 A. Baykov and E. Zinovieva (eds.), Digital International Relations, https://doi.org/10.1007/978-981-99-3467-6_10

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the formation of the concept of the digital rouble and the recognition of digital financial assets at the state level, etc. Thus, the introduction of digitalization, which affects the sphere of public finance (and thus financial law), gradually led to the transformation of social relations and the need to establish new formats of legal regulation of existing relations. It is noteworthy that in the Russian Federation digital economy is based on the concept of comprehensive legislative regulation of relations, providing a favourable regime for the emergence of modern technologies and economic activity related to the use of such technologies (CL RF, 2022). The advent of such a model of the digital economy was formed as a result of Decree No. 204 of the President of the Russian Federation dated 07.05.2018 (CL RF, 2018) and Decree No. 474 of the President of the Russian Federation dated 21.07.2020 No. 474 (CL RF, 2020). So, having outlined the subject of this study, let us now move on to consider a number of aspects of financial and legal science, which have received a new impetus with the technification of social processes, as well as in conditions of the sanctions policy applied to Russia.

Methodology This study is based on various international sources and data from international organizations, national legislation, and academic literature. As part of the study, we analysed initiatives and policies aimed at assessing the criminal law risks associated with the use of digital technologies for criminal purposes and hindering the development of the digital economy. The research methodology includes a systematic approach and historical, comparative, formal-legal, and functional methods.

Results The Law of Money Circulation and Transformation Trends P.M. Godme wrote that public finances are connected to the monetary system, which is more or less managed by the state, while this monetary system does not depend on the will of the private owner managing his finances (Godme, 1978: 42). At the same time, from the traditional perception of the essence of money (both cash and non-cash), the concept of “digital currency”

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has entered the legal field. Today, digital currencies share the following features: ● There is no central issuer ● Monetary transactions are carried out anonymously ● Their issue and circulation are not controlled. Back in 2016, Elvira Nabiullina said that “regulators in almost all countries do not know what to do about this. We are used to being a monopoly issuing centre” (Bank of Russia …, 2021). However, years have passed and the position of states on virtual currencies has started to change dramatically—from its full recognition to outright prohibition. Here we can quote the author’s point of view, which states that, “… the financial and monetary authorities of most developed countries are aware that the emergence of virtual currencies carries certain risks, which in the future may cause significant damage to the stability of the global monetary system and lead to changes in global economic relations” (Sitnik, 2020: 224). At the same time, we see the need to determine the context of the categorical framework used by different state bodies. For example, in the Information of the Bank of Russia dated 27.01.2014 “On the Use of ‘Virtual Currencies’ in Transactions” (Herald of the Bank of Russia, 2014), the regulator writes about virtual currencies, while the Information Message of Rosfinmonitoring (the Federal Financial Monitoring Service of the Russian Federation) dated 06.02.2014 “On the Use of Cryptocurrencies” uses different terminology, namely “cryptocurrency” (GARANT Legal Reference System, 2014). Analysing the nature of virtual currencies, we can cite a study that highlighted two groups of risks when using new tools: ● Private, related to the protection of the rights of holders of cryptocurrencies; ● Public, which includes adverse consequences for the monetary system of the country and the economy as a whole (Sitnik, 2020: 226–227).

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Moreover, in 2020, Russia published a report of public consultations entitled “Digital Rouble” (Report …, 2022), which suggests that the monetary circulation system should meet the needs of citizens and the business community and promote innovative approaches in the financial services market. The main point from which the regulator proceeds is that the digital rouble is the third form of the rouble, and that the Bank of Russia will be its issuer. We can state unequivocally that the digital rouble will not be the same as a virtual currency, because its legal nature differs from the essence of virtual currencies in terms of how it is issued and circulated. At present, the undoubted advantages of the virtual rouble include the following: ● Privacy, ● Integration with digital platforms, and ● Online and offline capabilities. At the same time, the introduction of the digital rouble means the need for an appropriate legal and regulatory framework. In particular, the legal status of money is defined within the law in Article 75 of the Constitution of the Russian Federation (http://www.pravo.ru). The regulator’s digital currency will be considered as an obligation of the Bank of Russia. So, having outlined the trend in the development of monetary circulation, we should note that there is an obvious tendency towards the digitalization of currency, as countries are gradually solving the issues of procedural interaction of virtual currencies in different ways: through regulation, prohibition, or non-interference. Currency regulation in the era of the formation of the new world order. The emerging format of geopolitics is an integral part of the processes associated with the creation of a model of a simultaneously existing financial system based on regional unions. A little background on the issue we are looking at. After World War II there were two parallel currency systems—the American and the Soviet. After the collapse of the USSR, Russia joined the IMF. At its core was the “petrodollar”, when the US dollar, used to pay for hydrocarbons, became the monopolistic currency in foreign economic settlements.

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There is no doubt that the modern international monetary system is based on fiat money—monetary symbols that are not secured by any precious metals. Taking the current global situation and the sanctions policy against Russia into account, we can cite a quotation from a few years ago that predicted how the geopolitical situation we are currently facing would unfold: “Russia should use rouble payments for hydrocarbon supplies that it makes to third countries. Meanwhile, such attempts will undoubtedly meet resistance from importing countries and, above all, from the countries of Western and Eastern Europe, members of the Eurozone. At the initial stage, we should expect to talk about the Russian rouble only starting to be used as a settlement currency. Meanwhile, the very fact that settlements on foreign trade contracts can be made in Russian roubles will mean quite a lot. In our opinion, the only thing that prevents the implementation of this plan is the lack of strong political will” (Artemov et al., 2011). At the same time, N.M. Artemov raised the issue of the gold security of the rouble, noting that “it automatically removes all existing restrictions on the convertibility of the Russian currency and strengthens confidence in it abroad, because there is no better guarantor than gold” (Artemov, 2009: 16). According to Secretary of the Security Council of the Russian Federation Nikolai Patrushev, a so-called dual circuit currency and financial system of Russia is being developed in which the rouble will be secured by both gold and a group of goods that have currency value. The implementation of this project will make it possible to “untie” the rouble exchange rate from the dollar and make it correspond to the real purchasing power parity of the Russian currency. Thus, money will have intrinsic value once again (Security Council …, 2022). Finally, another trend that has emerged is the transition from the command system of management to management through the coordination of multipolarity of interests, which is clearly manifested in the interests of a number of authorities in the study and subsequent application in practice of alternative formats of interaction in resolving conflicts that affect the public-law aspect of relations. And in this part, we should pay attention to mediation as one of the options of an alternative method of conflict resolution, which for a long time did not find a place in the financial and legal science and was considered to be the subject of the study of civil proceedings. At the same time, the trend is developing in

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such a way that, at present, the legislation makes it possible to resolve disputes arising in the financial and legal field, including with the involvement of a mediator, i.e. without resorting to administrative or judicial procedures. Alternative ways of settling financial disputes. An important and relatively new area, in which the Bank of Russia (thus far at the theoretical level only) and the Federal Tax Service (by piloting the procedure) have become interested in, is mediation as a negotiation technology in conflict resolution with the involvement of public authorities. The term “alternative dispute resolution” first appeared in the mid1970s. At that time, mediation was an informal procedure to which the parties resorted exclusively to their own initiative. For example, Christoph Besemer writes that mediators-facilitators help disputants find a mutually acceptable solution to their problems (Besemer, 2004: 14). These are people who have the power to create prerequisites for the active participation of the parties in the development of final agreements. Here we can also agree with the position of M.V. Arakelova, who presented the concept of “alternative forms of pre-trial settlement of disputes arising from tax legal relations”, which outlines legal methods (means) that people subject to taxation can use to prevent and (or) settle a tax dispute before it goes to trial (Arakelova, 2017: 8, 9, 22). Moreover, in the Russian legal framework, Federal Law No. 193-FZ “On an Alternative Procedure for Resolving Disputes with the Participation of an Intermediary (Mediation Procedure)” dated July 27, 2010 (CL RF, 2010.), which in paragraph 1 of Art.1 sets forth that the goal of an alternative dispute settlement procedure with the participation of an independent party, i.e. a mediator, in Russia is recognized as the promotion of partnership business relations and the formation of business ethics, as well as the harmonization of social relations. The phrase “administrative and other public” legal relations is used to explain the purpose of the law, which was only introduced in 2019 in accordance with amendments to the current legal act, Federal Law No. 197-FZ “On Amendments to Certain Legislative Acts of the Russian Federation” dated July 26, 2019. (CL RF, 2019) (letter “a”, p. 1, art. 7), which entered into force on October 25, 2019. Thanks to these clarifications, financial, and in particular tax and legal regulation are included in the scope of the Law.

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Thus, before the adoption of the relevant changes, the Law did not apply to public-law relations. At that time, the tax practice already had a positive experience with alternative judicial procedures for the settlement of tax disputes. M.V. Arakelova also concludes that the use of mediation in the area of civil legal relations significantly limits the scope of alternative tax procedures for dispute resolution. Supporting in general the idea of the application of mediation in the resolution of tax conflicts in the framework of “… a qualitatively constructed and effectively functioning system of interaction between tax authorities and taxpayers” she states that “there is no imbalance of interests of private and public participants of disputes” (Ibid.). It should be noted that the first experience in settling a tax dispute was mediation between Inter-District Tax Inspectorate No. 21 of the Federal Tax Service of the Russian Federation and RIF LLC, where the participants agreed to clarify the tax liabilities of the taxpayer and the payment of the appropriate amount of taxes in a convenient time for the payer. In particular, representatives of the tax authority commented on the pilot project, noting: “… One of the new mechanisms of control and analytical work may be a mediation procedure under the pre-trial protocol. The essence of the mediation mechanism is to involve a third party (mediator), i.e. an independent expert who helps the parties work out a certain agreement on the dispute (in this case on claims of the tax authorities regarding the economic activities of the organization), while the parties fully control the decision-making process to resolve the dispute and the terms of its resolution” (Mediation …, 2022). In fact, the mediation procedure solved two fundamental problems: it saved the taxpayer and compensated for the losses suffered by the budget. We could say that the mediation procedure has eliminated all possible and related risks arising between the tax authority and the taxpayer, including time, financial, emotional costs, and labour resources. At the same time, some experts argue that the mediation mechanism may be referred to as a pre-trial dispute resolution procedure, which we cannot agree with because: ● Mediation may also be used at the stage of court proceedings, unlike the traditional pre-trial settlement of a conflict situation, which is applicable only before trial.

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● In accordance with p. 1 of Art. 138 of the Tax Code of the Russian Federation, the right of pre-trial appeal against the non-normative actions of the tax authorities or the actions (inaction) of their officials is prescribed by law. In mediation procedures, unlike pre-trial appeals, the mediator is an independent person, which directly determines their legal status in accordance with art. 3 of the Law on Mediation. In pre-trial appeal of a tax dispute, the person concerned is the tax authority, which is directly involved in conflict resolution. ● A mediation procedure shall be based on the mutual expression of the will of the parties, which are also guided by the principles of voluntariness, confidentiality, cooperation and equality of the parties, and impartiality. These principles should guide the mediator and the participants in the process, which allows each party to leave at any stage if they are not satisfied, if the principles of mediation are violated, or if, for example, the mediator realizes that the conflicting parties do not intend to resolve the dispute and that the procedure they are engaging in is used only to prolong the dispute or for other purposes aimed at preventing the resolution of the situation. Thus, the pre-trial procedure is a compulsory claim procedure, preceding the initiation of litigation, which is enshrined in the Russian procedural legislation, often used formally, only to comply with regulatory requirements. The parties to a pre-trial settlement of a tax dispute do not have such opportunities within the procedure described in the Tax Code of the Russian Federation.

Conclusions To summarize the conducted legal excursus, it should be noted that the development of financial and legal regulation in the digital economy has only just begun, and this is an inevitable process that, on the one hand, simplifies the procedural aspects of interaction, and, on the other, creates new growth points for maintaining the security and confidentiality of social relations. This is precisely the task that the state will solve in the near future. And, above all, there is a huge need for the formation of a legal framework that would allow for adequate implementation of the tasks and goals of state and municipal regulation. In turn, it is necessary to introduce into public legal relations a system of measures aimed at the bloodless settlement of disputes, the subjects

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of which in financial relations are the dominant authority and the person under its control (whether legal or physical). After all, the main task in current circumstances is to ensure the peaceful coexistence of the population and the state, which is created and should act in the interests of its citizens, establishing and guaranteeing the safety of financial processes and the system of rapid response to the demands of the consumer market.

References Arakelova, M. V. (2017). Alternative Forms of Pre-Trial Dispute Settlement Arising from Tax Legal Relations. Author’s Abstract for the Candidate of Legal Sciences Degree. Artemov, N. M., Arzumanova, L. L., & Sitnik, A. A. (2011). Monetary Law (Financial and Legal Regulation of National and Foreign Currency Circulation in the Russian Federation). Collective Monograph. Artemov, N. M. (2009) On the Convertibility of the Russian Rouble. In: Materials of International Scientific and Practical Conference State and Law: Challenges of the XXI Century (Kutafin Readings). Abstracts of Reports on the Financial Law and Accounting Department. Publishing House Elit LLC. Bank of Russia. (2014). Information of the Bank of Russia Dated 27.01.2014. Herald of the Bank of Russia, 14. Bank of Russia Sees Possible Risks of Cyber-Fraud in the Banking Sphere. (2021). https://tass.ru/ekonomika/2269404. Accessed 17 June 2021. Besemer. (2004). Mediation. In: Agency Work in Conflicts (p. 140). CL RF. (2010). Federal Law No. 193-FZ “On an Alternative Procedure for Resolving Disputes with the Participation of an Intermediary (Mediation Procedure)” Dated July 27, 2010. No. 31. Art. 4162. CL RF. (2018). Decree No. 204 of the President of the Russian Federation Dated 07.05.2018. No. 20. Art. 2817. CL RF. (2019). Federal Law No. 197-FZ “On Amendments to Certain Legislative Acts of the Russian Federation” Dated July 26, 2019. CL RF. 2019. 30. Art. 4099. CL RF. (2020). Decree No. 474 of the President of the Russian Federation Dated 21.07.2020. No. 30. Art. 4884. CL RF. (2022). Decree No. 2609 of the Government of the Russian Federation Dated 31.12.2021 No. 3. Art. 581. GARANT Legal Reference System. (2014). Information Message of Rosfinmonitoring Dated 06.02.2014. Godme, P. M. (1978). Financial Law. [Finansovoe Pravo] Progress. (In Russian) Mediation – A New Word in Tax Control. (2022). https://www.nalog.ru/rn78/ news/activities_fts/10194093/. Accessed 17 June 2022.

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Report of Public Consultations. (2022). Digital Rouble. https://cbr.ru/analyt ics/d_ok/dig_rouble/. Accessed 17 June 2022. Security Council Considers Securing Rouble with Gold and Goods. (2022). https://1prime.ru/finance/20220426/836758001.html. Accessed 17 June 2022. Sitnik, A. A. (2020). Financial Control and Supervision in the Field of Monetary Circulation in the Russian Federation. Monograph (p. 224). Prospect.

CHAPTER 10

International Criminal Assessment of the Risks Associated with the Use of Digital Technologies for Criminal Purposes Elina Sidorenko and Zarina Khisamova

Introduction The digital space and its elements have long been an integral part of the economic activity of states around the world. The volume of GDP associated with the use and production of digital technologies is estimated at trillions of millions of US dollars. Meanwhile, despite the global growth and development of the digital economy, cybersecurity issues remain quite

E. Sidorenko (B) MGIMO University, Moscow, Russia e-mail: [email protected] Z. Khisamova Krasnodar University of the Ministry of Internal Affairs of Russia, Krasnodar, Russia e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 A. Baykov and E. Zinovieva (eds.), Digital International Relations, https://doi.org/10.1007/978-981-99-3467-6_11

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acute (Siregar & Sinaga, 2021), moreover, the global damage from cybercrime is already approaching 10.5 trillion. US dollars, which is comparable to the volume of the world’s leading economies China and the United States (Morgan, 2020). By the end of 2022, the damage from cybercrime is estimated at $8 trillion per year (Oshanina, 2023), and by 2030 it will reach $90 (TASS, 2020). The growth of social and global political tension in the world has become an additional catalyst for the growth of crime. WEF experts in the annual Global Cybersecurity Outlook for 2023 also note that geopolitical instability will contribute to the growth of cyber risks around the world. In their opinion, the variability of the nature of cyber threats, the variety of types of malware and cyber attacks make their prevention extremely difficult (WEF, 2023). Key challenges associated with digital transformation include: 1. The problem of ensuring information security; 2. The confidentiality of the data collected; 3. The rise in the number of potential cyberattacks; 4. Increased social and economic damage resulting from cyberattacks; 5. The increased complexity of cyberattacks. Cyber threats and risks are of a global nature both for government agencies and for businesses and ordinary citizens. A significant increase in the number of cyber incidents, related fines, investigations, and interactions between private companies and law enforcement agencies has increased the perception of regulations as a critical factor influencing the cyber resilience of organizations. Despite persistent compliance issues, laws are nonetheless seen as an effective cybersecurity measure to mitigate cyber risks. The WEF forecast for 2023 shows that 73% of respondents agree with this statement (WEF, 2023). Meanwhile, the speed between the adoption and implementation of a legislative initiative and the speed with which new technologies are being introduced remains critically high, which undoubtedly plays into the hands of cybercriminals. Under these conditions, the creation of flexible universal legal norms adapted to changing digital technologies is of particular importance. Also important is the removal of national barriers and the unification of approaches implemented in different jurisdictions, which will take into account the transnational nature of cybercrime and the realities of digital interaction.

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Methodology The study is based on a wide range of international sources, as well as on data from international organizations, national legislation and scientific literature. As part of the study, we analyzed the initiatives and policies of a number of international organizations, such as the UN, OECD, EU, and EAEU, dedicated to countering digital crime. A wide range of scientific sources, as well as analytical materials on the issues of combating cybercrime, have been studied. The research methodology includes historical, comparative, legal, and functional methods and a systematic approach.

Results Ensuring cybersecurity requires a systematic approach that involves collective decision-making and coordinated action by governments, the private sector and civil society. This is due to the exponential growth and aggravation of cyber risks, for which the use of traditional approaches seems irrelevant (WEF, 2022). At present, there are several scenarios for ensuring cybersecurity: 1. UN global initiatives to combat cybercrime as an integral part of cybersecurity. 2. Initiatives implemented at the level of international organizations and interstate associations. 3. National strategies for ensuring cybersecurity, in particular, counteracting cybercrime. 4. Initiatives implemented at the level of transnational corporations and technology companies.

Discussion The historical reality is that the pace of technological innovation has outpaced regulation and policy, and cybersecurity threat actors continue to learn and evolve rapidly. Effectively managing systemic cybersecurity risks at the required speed and scale cannot be left solely to individual governments or organizations. Instead, a whole global society approach is required (WEF, 2022).

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1. The issue of information security has been on the UN agenda since 1998, when the Russian Federation submitted a draft resolution on this issue to the First Committee of the UN General Assembly. The draft was adopted by the General Assembly without a vote as Resolution 53/70 (UN, 1998). Since then, several intergovernmental processes have been established to address security issues and the use of ICTs in the context of international security. Since 2004, six Groups of Governmental Experts (GGEs) have been studying the threats posed by the use of ICTs in the context of international security and how these threats can be addressed. The resolution “Combating the use of information and communication technologies for criminal purposes” adopted by the UN General Assembly on December 17, 2018 notes that, despite the enormous opportunities that ICTs offer for the development of states, they also create new opportunities for criminals and contribute to the growth of crime, emphasizes the potential of new technologies, including artificial intelligence, in preventing and suppressing the use of information and communication technologies for criminal purposes, a separate paragraph indicates the increase in the scale and variety of crimes committed in the digital world, and their consequences for the stability of the critical infrastructure of states, enterprises, and well-being people (UN, 2018). In December 2018, by resolution 73/27, the General Assembly established the Open-ended Working Group (OEWG), which is open to all Member States. The group began its work in 2019 and held intersessional consultation meetings with industry, civil society, and academia. The result of the joint work of WGGE and GGE (Group of Governmental Experts) was the Resolution of the UN General Assembly 75/ 240 of December 31, 2020 “Advances in the field of informatization and telecommunications in the context of international security”, which identified the main problems of using ICT, the need to develop international law for the regulation of this area, and the creation of a new open-ended working group. According to this resolution, the previous WGE ends its work, and the new one is formed “taking into account its results”, after which an organizational meeting is held. The group adopted the report by consensus at its closing meeting in March 2021 (A/75/816). The adoption on December 6, 2021, of the UNGA consensus resolution No. 76/19, proposed by Russia jointly with

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the United States, secured the status of the EWG as the only negotiating mechanism on international information security issues under the auspices of the UN and confirmed its mandate. The resolution also stipulates that the 2021–2025 Open-ended Working Group should take into account and complement the work of the previous Open-ended Working Group and groups of governmental experts, and that its work should be consensus-based and result-oriented (UN, 2021a, b). The decision of the General Assembly also established a new EWG for 2021–2025, formed at the initiative of Russia in accordance with the resolution of the UN General Assembly No. 75/240 of December 31, 2020 (UN, 2020). The mandate of the WGGE includes as priorities the continuation of the further development of norms, rules, and principles for the responsible behavior of states in the information space and ways to implement them, if necessary, amend them, or formulate additional rules to govern; consideration of the initiatives of states aimed at ensuring security in the use of ICT; organization under the auspices of the UN of a regular institutional dialogue with a wide range of participating States. In addition, the EWG is intended to continue developing a common understanding of the study of existing and potential threats in the field of information security, including data security, and possible joint measures to prevent and counter them, as well as a common understanding of how international law applies to the use of ICT by states. The EWG should continue to develop confidence-building and capacity-building measures. All 193 UN Member States participate in the OEWG, unlike previous thematic forums (UN, 2021a). An analysis of the content of the OEWG report presented at the 76th session of the UN General Assembly allows us to highlight the main problems that are focused on in the fight against cybercrime; incidents involving the malicious use of ICTs by States and non-State actors are becoming larger, more serious, and more complex; individual countries began to increase the use of digital technologies for military purposes; conducting information campaigns using digital technologies (AI, deep fake) to influence the processes, systems, and overall stability of another state; use of ICT for attacks against critical infrastructure; serious digital threats identified in previous reports still exist; new and emerging technologies expand the possibilities for development, but their constantly changing properties and characteristics also expand the range of attack, creating new vectors and vulnerabilities that can be used to cause harm; it

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is becoming increasingly difficult to protect against malicious exploitation of vulnerabilities in operating technology and interconnected computing devices, platforms, machines, or objects that make up the Internet of things (UN, 2021b). Among the risks identified in the reports are the following: the growth of risks associated with the mass use of inexpensive “smart” devices; a proportional increase in the number of encroachments in the digital sphere with the systematic promotion of the policy of “digital openness” and universal digitalization, which determines the storage of a data array in digital form (Sidorenko et al., 2021). 2. A separate important level at which a significant number of initiatives in the field of combating digital crime are being implemented is the level of international organizations and interstate associations. The advantage of such organizations, of course, is the active participation of Member States in them, thanks to which legislative initiatives can be adopted and successfully implemented that level systemic risks not in a single state, but at the level of the entire region (Curtis & Oxburgh, 2022). The OECD, which is a major trendsetter in matters of legal regulation, is doing a lot of work to equip states with tools to improve national cybersecurity strategies. Thus, the organization has developed 9 interrelated principles that form the “gold” standard of OECD digital security, and on which all other recommendations of the organization are based: digital security culture, responsibility and accountability, respect for human rights and fundamental values, cooperation and cooperation, strategy and management, risk assessment and mitigation, security measures, innovation leaders, business resilience and continuity (OECD, 2022). The first step to managing digital security risks in organizations is a strategic approach and the establishment of a proper management system. In September 2022, the OECD Recommendations on National Digital Security Strategies were adopted. National Digital Security Strategies (“National Strategies”) should articulate a clear vision of a country’s digital security goals. They should aim to create a culture of digital security and protect individuals, as well as public and private organizations, from digital security threats, taking into account the need to ensure national and international security and preserve human rights and fundamental values. National strategies should enable all stakeholders to manage digital security risks, build trust in the digital environment,

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enhance security and resilience, and promote digital transformation. They should also focus on strengthening the digital security of critical activities (OECD, 2022). The European associations are an example of the successful use of their platform to coordinate the fight against cybercrime. The Budapest Computer Crime Convention or the Council of Europe Computer Crime Convention is the first international treaty on crimes committed using IT technologies (Internet, computers, and computer networks) (European Council, 2001). The convention assumes the obligation of states to criminalize a number of criminal acts: various hacker attacks, fraud using computer technologies, illegal trafficking in child pornography, violations of copyright and related rights, etc. In December 2022, the United Kingdom, Brazil, Moldova, Slovenia, Ukraine, Croatia, and Sri Lanka signed the Second Additional Protocol to the Cybercrime Convention on increased cooperation and disclosure of electronic evidence. The signatories of the Additional Protocol agree that the powers of law enforcement agencies are limited by territorial boundaries. To counter this, the document provides a legal framework for disclosure of domain name registration information and for direct cooperation with service providers to obtain subscriber information, effective means of obtaining subscriber information and traffic data, immediate emergency cooperation, mutual assistance tools, and See also privacy safeguards (Tosoni, 2018; De Hert et al., 2018). The adoption of a new protocol aimed at protecting evidence stored in the cloud, while respecting the guarantees established by the rule of law, will be another important milestone in the history of this treaty. It should be especially noted that the ratification of the convention does not limit the state in the fight against digital crime and the criminalization of some additional compounds. The Russian Federation has not ratified the Budapest Convention of the Council of Europe “On Crimes in the Sphere of Computer Information” due to certain complaints about its content. Yes, Art. 32 of the Convention gives the participating countries extraterritorial powers: “one party may, without the consent of the other party: get access to publicly available (from open sources) computer data, regardless of their geographical location; access through a computer system in its territory, or to receive computer data stored in the territory of another party, if that party has the legal and voluntary consent of a person who has the

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legal authority to disclose those data to that party through such computer system” (European Council, 2001). It should be noted that over the past two decades, the European Union has adopted a number of important documents (directives and framework decisions) and created a fairly extensive legal framework for the functioning of various segments of the digital economy, one of the areas of which is cybersecurity an integral part. The guiding principles for building a unified European system for ensuring digital security are four basic principles: preparedness and prevention; detection and response; mitigation and restoration; international cooperation (Hermavati & Santiago, 2023). In December 2020, the EU elaborated on its EU Cyber Security Strategy for the Digital Decade. The EU Cybersecurity Strategy for the Digital Decade aims to promote and protect an open, free, global, stable, and secure cyberspace based on human rights, fundamental freedoms, democracy, and the rule of law. The strategy contains specific proposals for the use of three main tools—regulatory, investment, and political—to achieve: – sustainability, technological sovereignty, and leadership, – the establishment of operational entities capable of preventing, containing, and responding to cyber incidents, and – promotion of a global and open cyberspace (EU, 2020). The strategy contains specific proposals for developing countermeasures, preventing and responding to cyber threats, and as well as developing a global and open cyberspace. Preventing the misuse of technology, protecting critical infrastructure, and ensuring the integrity of supply chains also enable the European Union to achieve compliance with the norms, rules, and principles of responsible state behavior adopted by the United Nations. The Eurasian model of international information security is being formed on the basis of initiatives taken within the framework of the Commonwealth of Independent States, the Shanghai Cooperation Organization, and the Eurasian Economic Union. Each of the organizations has adopted strategic documents that note the need to minimize the risks of introducing digital technologies and preventing cybercrime. Within the framework of the EAEU, global work is being carried out to harmonize and create common processes within the Union. The list of

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common processes within the Union is determined by the Decision of the Board of the Commission dated April 14, 2015 No. 29. The list includes 76 items. The issues of combating digital security include, among other things: comprehensive protection of information during the creation and operation of an integrated system, ensuring information security, and protecting information processed in information systems and information resources of the Commission. Close interaction is observed in the issue of ensuring digital security in the credit and financial sector, as the most sensitive to cybercrime. The financial regulators of the countries of the Eurasian Economic Union (EAEU) are coordinating efforts in the field of interaction on information security issues. If threats to information security are identified, financial regulators send operational notifications containing the main parameters of computer attacks to the Center for Monitoring and Response to Computer Attacks in the Credit and Financial Sphere (FinCERT) of the Bank of Russia. The center’s employees provide assistance in conducting malware research, as well as advice on attacks on ATMs and the allocation of phishing resources (TASS, 2018). 3. It is impossible not to mention the national strategies for ensuring cybersecurity, in particular, the fight against cybercrime. In some countries, the strategies are comprehensive, universal, and open-ended, in others they are more focused and implemented in a separate time period. For example, in the UK (UK National Cyber Security Strategy 2022– 2030), Australia (Australian Cyber Security Strategy 2023–2030), New Zealand (Cyber Security Strategy 2023), and Kyrgyzstan (Cyber Security Strategy 2019–2023), and an action plan for its implementation. The goal of the Strategy of Kyrgyzstan is to form a national cybersecurity strategy to ensure the security of citizens, businesses, and the state. As part of the implementation of the strategy, it is planned to create organizational structures that are clearly separated from each other, such as computer incident response teams to ensure the cybersecurity of banking, telecommunications, and other service infrastructure, centers for monitoring and responding to cyber attacks, threats; formation of a legal and methodological framework for combating computer crimes; formation of a national information security system, including a cryptographic security system; formation of a system for ensuring the security of the critical information infrastructure of the republic, cybersecurity of state structures and organizations of the non-state sector; technical standardization

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and international cooperation in the field of cybersecurity; formation and strengthening of human potential in the field of cybersecurity. Similar goals are stated in the cybersecurity concepts of Kazakhstan and Belarus. Belarus additionally adopted the Decree of the President of the Republic of Belarus No. 40 “On Cyber Security”, which, along with the Concept of Information Security, is aimed at consolidating efforts to prevent, detect, and minimize the consequences of cyber attacks on information infrastructure facilities, thereby increasing the security and reliability of information systems. The document defines the legal basis for the creation and functioning of the national cybersecurity system, which provides for the formation of a comprehensive multilevel mechanism for counteracting cyber attacks on state bodies and organizations, and critical information infrastructure. In the Russian Federation, by presidential decree, the Doctrine of Information Security of the Russian Federation was approved, in which national interests in the information sphere are declared. The implementation of national interests in the information sphere is aimed at creating a safe environment for the circulation of reliable information and information infrastructure resistant to various types of influence in order to ensure the constitutional rights and freedoms of man and citizen, stable socioeconomic development of the country, as well as the national security of the Russian Federation. A detailed analysis of the provisions of the cybersecurity concepts indicates that their content is based on the key principles of the OECD for building cybersecurity strategies, determines the main directions of the state response to cyber incidents, determines the authorized bodies for countering digital crimes, and establishes the key principles of international cooperation.

Conclusions The analysis carried out shows that the world community has long recognized the importance of ensuring information security and countering encroachments in the IT sphere. Meanwhile, the initiatives implemented at the international level are predominantly private in nature and affect certain aspects of the problem under consideration. While the Single Convention or other global agreement has not yet been adopted, despite constant calls. This circumstance is dictated by the difference in the approaches of states in matters of regulation. For example, privacy laws

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vary greatly from state to state. A great achievement in this regard was the adoption of the EU GDPR, which today serves as a model law for many jurisdictions outside the EU. The difficulty of adopting a single declarative document is also due to the desire of states, especially those with great geopolitical influence, to limit the access of foreign jurisdictions to the data of their citizens and critical infrastructure. However, despite the existing contradictions, all countries agree on the need to consolidate efforts to prevent abuse in the digital sphere. The search for a balance between national interests today is the cornerstone in the fight against digital crime, since many years of unsettled legal relations in this area leads to an increase in the attractiveness of individual regions as a platform for the development of the shadow Internet, with all the ensuing consequences.

References Curtis, J., & Oxburgh, G. (2022). Understanding Cybercrime in ‘Real World’ Policing and Law Enforcement. The Police Journal: Theory, Practice and Principles, 0032258X2211075. https://doi.org/10.1177/0032258X221107584 De Hert, P., Parlar, C., & Sajfert, J. (2018). The Cybercrime Convention Committee’s 2017 Guidance Note on Production Orders: Unilateralist Transborder Access to Electronic Evidence Promoted Via Soft Law. Computer Law & Security Review, 34(2), 327–336. https://doi.org/10.1016/j.clsr. 2018.01.003 EU. (2020, December 16). The EU’s Cybersecurity Strategy for the Digital Decade. https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri= CELEX:52020JC0018 European Council. (2001, November 23). Convention on Crime in the Field of Computer Information. No. 185. https://www.coe.int/ru/web/conven tions/full-list/-/conventions/treaty/185. Accessed 15 March 2023. Hermawati, N., & Santiago, F. (2023). Law Enforcement Against Cybercrime in Online Activities. Edunity: Kajian Ilmu Sosial dan Pendidikan, 2, 28–37. https://doi.org/10.57096/edunity.v1i05.33 Morgan, S. (2020). Cybercrime To Cost The World $10.5 Trillion Annually By 2025. https://cybersecurityventures.com/cybercrime-damage-costs-10-tri llion-by-2025/. Accessed 13 March 2023. OECD. (2022). OECD Policy Framework on Digital Security: Cybersecurity for Prosperity. https://www.oecd-ilibrary.org/science-and-technology/oecdpolicy-framework-on-digitalsecurity_a69df866-en

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OECD. (2023). Recommendation of the Council on National Digital Security Strategies. https://legalinstruments.oecd.org/en/instruments/OECDLEGAL-0480 Oshanina, O. (2023, March 14). The Internet is Losing. https://www.vedomo sti.ru/importsubstitution/new_technologies/articles/2023/03/14/966290internet-neset-poteri. Accessed 16 March 2023. Sidorenko, E. L., Kubantsev, S. P., & Khisamova, Z. I. (2021). International Financial and Information Security Strategies: Key Aspects of Preventing Criminal Threats. In S. I. Ashmarina, J. Horák, J. Vrbka, & P. Šuleˇr (Eds.), Economic Systems in the New Era: Stable Systems in an Unstable World. IES 2020. Lecture Notes in Networks and Systems (Vol. 160). Springer, Cham. https://doi.org/10.1007/978-3-030-60929-0_61 Siregar, G., & Sinaga, S. (2021). The Law Globalization in Cybercrime Prevention. International Journal of Law Reconstruction, 5, 211. https://doi.org/ 10.26532/ijlr.v5i2.17514 TASS. (2018). The Financial Regulators of the EAEU Countries Have Joined Forces in the Field of Cybersecurity. https://tass.ru/ekonomika/5798271 TASS. (2020). The Expert Estimated the Losses of the Global Economy from Cyber Attacks by 2030. (in Russ). https://ria.ru/20201105/ataka-158320 1096.html Tosoni, L. (2018). Rethinking Privacy in the Council of Europe’s Convention on Cybercrime. Computer Law & Security Review. https://doi.org/10.1016/j. clsr.2018.08.004 UN. (1998, December 4). Achievements in the Field of Informatization and Telecommunications in the Context of International Security. A/RES/53/ 70. https://www.un.org/ru/ga/53/docs/53res1.shtml. Accessed 15 March 2020. UN. (2018). General Assembly Resolution Countering the Use of Information and Communications Technologies for Criminal Purposes, 73/187. https://undocs. org/ru/A/RES/73/187. Accessed 15 March 2020. UN. (2020). General Assembly Resolution. General Assembly Resolution Achievements in the Field of Information and Telecommunications in the Context of International Security, 75/240. https://documents-dds-ny.un.org/ doc/UNDOC/GEN/N21/000/28/PDF/N2100028.pdf?OpenElement. Accessed 15 March 2021. UN. (2021a, December 6). General Assembly Resolution Achievements in the Field of Information and Telecommunications in the Context of International Security and the Promotion of Responsible Behavior of States in the Use of Information and Communication Technologie, 76/19. A/RES/76/19. https:// namib.online/wp-content/uploads/2023/02/A.RES_.76.19.pdf UN. (2021b, July 14). Group of Governmental Experts on Promoting Responsible State Behavior in Cyberspace in the Context of International Security. Note

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by the Secretary-General. https://namib.online/wp-content/uploads/2021/ 08/2021-07-14_A_76_135-21040 WEF. (2022). Systemic Cybersecurity Risk and Role of the Global Community: Managing the Unmanageable Briefing Paper November 2022. https:/ /www3.weforum.org/docs/WEF_GFC_Cybersecurity_2022.pdf. Accessed 1 February 2023. WEF. (2023). Global Cybersecurity Outlook 2023 Insight Report January 2023. https://www3.weforum.org/docs/WEF_Global_Security_Outlook_R eport_2023.pdf

PART IV

Digital International Economy

CHAPTER 11

Digital Employment Platforms Vera Gnevasheva

Introduction Understanding the essence of the information revolution in the industrial economy should be reduced to the realization that information technologies do not change the types of activity. Rather, they change our ability, through technology, to use the features that distinguish us from other biological creatures—the capacity to process and understand symbols and generate new knowledge—as a direct productive force. Such changes in the structure of the modern economy are considered today as a global structural shift that marks the transition from a “material” to an “intellectual” economy, a “knowledge-based economy.” The concept of “knowledge-based economy” defines scientific knowledge and the specialized skills of those who possess such knowledge, ensuring sustainable economic development as a key factor in the development of tangible and intangible production. In this regard, the transformation of the social structure of society and the formation of a “new social order” is inevitable.

V. Gnevasheva (B) Department of Economic Theory, MGIMO University, Moscow, Russia e-mail: [email protected] © The Author(s), under exclusive license to Springer Nature Singapore Pte Ltd. 2023 A. Baykov and E. Zinovieva (eds.), Digital International Relations, https://doi.org/10.1007/978-981-99-3467-6_12

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With the process of replacing labour with knowledge, the tasks of accumulating intellectual capital, identifying, collecting and distributing information and experience and creating prerequisites for the dissemination and transfer of knowledge becomes significant. “Living knowledge” is interpreted as a “soft commodity” (software), compared to materialized knowledge, which is seen as a “hard commodity” (hardware). The “softening” of the economy means the dominance of information flows in the production process. The main share of human activity is expressed not in the process of influencing the material objects of labour, but in the process of the “game between people.” The main task of personnel policy is the disclosure of human potential. The “post-industrial society” presupposes the formation of a new organizational structure according to a type of network model. The organization of education on the network principle is a structure formed in accordance with the norms of co-organization in a post-industrial, information society. It is the network form that can provide the content (cultural eventfulness) of an individual’s educational trajectory of development and learning. In a situation of blurring borders (social, geographical and political) and the transition of education to open models within the framework of global communication flows, education as a sphere should allow for different models of reproduction, which means that it is forced to become networked not only in the sense of creating information bases and flows and providing access to them through the “global information” system, but also in the sense of the openness and accessibility of different cultural practices for different consumers and subjects of education. Thus, the idea of a “network educational communitas ” is formed as a space in which the individual who has become a subject that chooses his own version of his education (starting from the development of deeply advanced cultural practices and ending with simple forms of socialization) is himself an entrepreneur of that education, changing his professional and cultural identity. The main tasks of the educational system are the reproduction of sociocultural practice; the generation and translation of social and cultural forms and patterns; the creation of a situation of selfdetermination and development of the individual and the formation of systematic thinking. The modern educational system is largely based on the conveyor model, acting as a social institution—an intermediary in the formation of sociocultural relationships of a disparate nature.

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In modern social and labour relations, the conditions of the development of the information space mean that knowledge turns into the main factor of production. The lack of development of the innovation system remains a huge problem for Russian science. The demand for innovations in domestic production remains low overall and, as a result, science and the scientific and technical sphere are unclaimed. Thus, business does not demand domestic research and development, and science, in turn, ignores the needs of domestic business. Science mostly sells its products abroad, while business imports equipment and technologies. The only (and, apparently, not completely lost) opportunity to revive the scientific potential of Russia, bring it to a modern level of development and turn it into a driving force for the innovative development of the country’s economy, as it should be at the beginning of the twenty-first century, lies in the commercialization of science, on the one hand, and the full strengthening of the innovative component of the economy, on the other. As the years of reform in the country have shown, these processes cannot take place without a corresponding state policy, or move along extremely slowly. No such state policy has been introduced so far. And the numbers confirm this. Russian higher education is going through a difficult period. Despite the sharp drop-off in state funding for the country’s universities, more and more such educational establishments are popping up, and the total number of students compared with the Soviet period has doubled. If this trend continues, a unique situation will arise in the very near future when the number of university places will exceed the number of high school graduates. While this aggressive expansion certainly indicates an increase in the prestige of higher education, it is far from an ideal situation, as the quality of education has not increased in turn; rather, it has suffered. The quality of training of today’s workforce is determined by the level of educational potential of vocational training institutions. At the same time, the potential of a university can be determined not only and not so much by the actual availability of the necessary material and technical base, but by the strategic decisions and innovative thinking of the heads of specialized institutions regarding its expansion and development in accordance with the forecast requirements of the economy. The desire of many universities to maximize the demand for higher professional education programmes from applicants and students today largely reduces the opportunities for their innovative development, since it requires the additional diversion of

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funds in the medium and long term. At the same time, this kind of shortsightedness regarding the development strategy of the higher education system leads to the loss of the educational potential of institutions and the impossibility of meeting the challenges of our time: the rapidly changing educational space in the conditions of the formation and development of the information space. The external challenges of recent years have led to economic and social losses in Russia and around the world. The forced downtime of enterprises and organizations during the lockdown disrupted economic ties and caused many small and medium-sized enterprises to go bankrupt, leading to a drop in production. This, in turn, led to a reduction in employment and an increase in unemployment. Reproduction figures are falling, the overall health of the population is suffering, mortality is on the rise and the quality of labour potential is decreasing. The digitalization of the economy should also affect the processes of workforce formation, professional training and, consequently, the system of vocational education. It is important to note that while the total number of hours worked in the Russian economy has changed over the past ten years, the economy as a whole has remained stable. That is, on a general economic scale, the number of hours of work does not point to a significant decrease in production volume. At the same time, economic crises do affect the economy of the country as a whole. The period up to 2008 is characterized by the active inclusion of human resources in the production and distribution of goods in the economy, which is explained by the high rates of economic development during that period. The subsequent economic crises of 2009 and 2014 led to a drop-off economic growth, as well as to a reduction in actual employment in the economy. Considering a number of factors that make it possible to make approximate estimates of the degree of dependence of changes in quantitative labour on technological implementations in the country’s economy, it is important to emphasize that the change in the proportion of workers with a higher professional education in the total number of employed people, the level of employment in the service sector, as well as the fixed assets renewal coefficient for the period under review is not structural.

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Literature Review The issues of labour market transformation in the socio-economic conditions that developed during the spread of the novel coronavirus infection are considered in the works of A.G. Aganbegyan and B.N. Porfilyev (Aganbegyan et al., 2020), N.A. Bondarenko (Bondarenko, 2020), A.V. Buzgalina and A.I. Kolganov (Buzgalina & Kolganov, 2020), N.T. Vishnevskaya and A.A. Zudina (Vishnevskaya & Zudina, 2020), L.L. Kitrar (Kitrar), T.M. Lipkind (Lipkind), S.V. Ryazantsev (Ryazantsev et al., 2020), and others. The COVID-19 pandemic provided a significant impetus for the development of platform employment. For example, in China, the income of platforms specializing in food delivery, after the outbreak of the pandemic, increased by an average of 10% compared to the previous month (Eurofound, 2020). Some studies also highlight the positive short-term impact of the pandemic on the platform economy (Umar et al., 2021). At the same time, the influence of an external shock on the number of new vacancies or performers (new openings) is more pronounced than on the number of filled jobs. Thus, separate studies on the Russian labour market (Loktyukhina & Chernykh, 2020) record an increase in the number of performers on Russian platforms, in particular on YouDo (by 42%) and Yandex.Services (by 50%).

Prerequisites The problems of labour and employment are considered as inextricably linked with the problems of demographic policy in terms of population growth, poverty reduction, quality of life improvement (increased income, the inclusion of labour resources in the processes of labour and employment, creation of conditions for the possibility of work and employment) and the technological restructuring of society and the economy. It is important to emphasize the following trends: ● the decrease in and overall small share of employed people in the 15–19 age group; ● the growth of the service sector and its dominant position in terms of the volume of labour used, with one in every five Russian nationals being employed in the service sector;

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● the need for additional employment in the service sector, with the use of mainly low-skilled labour; ● the increased structural dependence on the attraction of low-skilled labour migrants caused by the development of the service sector; ● the general decline in the working-age population due to demographic reasons; ● the increase in the employment of persons over working age for economic reasons; ● the services sector, social sector and manufacturing sector experiencing the most changes; ● the shortage of labour witnessed in the social sector, which may be caused by structural inflation in the services sector; ● the dominance of workers with secondary general and secondary vocational education in the potential labour force, making up approximately 80% of this demographic for the period 2010–2019. And this trend is expected to continue, alongside a decrease in the total number of workers aged 15–72 in the status of “potential labour force.” Based on the identified trends, it is possible to determine the pros and cons of the current conditions for the Russian labour market. Advantages of the current trends in the distribution of labour and employment for the Russian labour market: ● increasing the quality of the national workforce; ● resource opportunities for the technologization of production and, as a consequence, the formation of conditions for sustainable economic development. Disadvantages of the current trends in the distribution of labour and employment for the Russian labour market: ● the growth of structural inflation in the service sector; ● the growth of structural income disparity between economic sectors and, as a consequence, the importance of a systematic policy of state regulation of migration flows in accordance with the needs of the market; the use of socio-economic instruments to protect the social sphere, stimulating the marketing of social labour;

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● with increasing labour shortage in the social sphere, it is likely to attract less qualified labour, with the subsequent growth of structural inflation in a correlative spiral with the service sector, which will eventually lead to a decrease in labour productivity and the provision of lower quality social services. The share of employees with a higher education in the total employment structure is around 30%, increased to approximately 35% by 2017. The level of employment in the service sector is significant at slightly more than two-thirds. This figure is expected to grow, albeit weakly, to a level close to 80% by 2017. The fixed asset renewal coefficient is also characterized by a weak upward trend. A multiple regression chart based on this information to identify significant factors determining the directions of technological transformation of the labour market in the modern economy gave us the following results. An economic interpretation of the model parameters is possible: a 1% increase in the unemployment rate leads to a decrease in the actual number of man-hours worked by an average of 31,067.4 thousand; a 1% increase in the share of employed people with a higher professional education leads to an increase in the actual number of man-hours worked by an average of 3523.8 thousand; a 1% increase in the share of employees with a secondary vocational education leads to a decrease in the actual number of man-hours worked by an average of 8653.2 thousand; a 1% increase in the share of people employed in agriculture leads to an increase in the actual number of man-hours worked by an average of 35,794.5 thousand; a 1% increase in the share of people employed in industry leads to an increase in the actual number of man-hours worked by an average of 7645.4 thousand; a 1% increase in the share of people employed in the service sector leads to an increase in the actual number of man-hours on average by 1.0E + 16 thousand man-hours; a 1% increase in the fixed asset renewal coefficient leads to a decrease in the actual number of man-hours worked by an average of 0.00197 thousand. According to the maximum coefficient of elasticity E1 = 0.132, we conclude that the unemployment rate has the greatest influence on the result of changes in the actual number of man-hours worked. It was found that in the situation under consideration, 60.35% of the total variability of the actual number of man-hours worked is determined by the variables listed here.

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Thus, the results of the study show that the change in the total number of hours worked is not qualitatively dependent on changes in the quality of the workforce (the level of professional education) or the structure of the economy (the strengthening of the share of the service sector in the overall structure of the economy), or on the degree of fixed asset renewal at the present stage. According to a determination analysis, only 60% of the factors considered determine trends in the total hours worked for the period under review. At the same time, each of the factors considered in the evaluation of t-statistics is insignificant. That said, the hours worked indicator mainly correlates with a quantitative indicator, namely, unemployment. Is it possible in this case to note an upwards trend in the total hours worked due to the quantitative increase of labour and the absence of obvious trends towards improved labour quality? According to the Russian national project “Labour Productivity and Employment Support,” which was put into effect in March 2019, a number of measures are envisaged to strengthen the impact of the digitalization of the economy on the development of the labour market, increase labour productivity, strengthen the qualitative component of labour and reduce the quantitative component. It is also important to emphasize the emerging trend of falling incomes. A steady trend can be identified in the current economic situation in the Russian Federation: in crisis situations, wages enter a free fall without encountering any special obstacles along the way, and the presence of a significant variable (in the form of various kinds of bonuses and perks) makes it flexible, which forms the problem of the “working poor.” As a result, while maintaining a low level of wages in comparable characteristics, reducing the quality of labour as a required characteristic, informal employment is formed and expanded. At the same time, the overall indicators of the labour market balance demonstrate positive development: employment increases while unemployment decreases. Summing up the interim results, we can note the general trends of the modern labour market: ● the decline in the value of higher professional education as an aspect of the qualitative formation of the workforce;

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● the formation of the “working poor” trend; ● the sustainable preservation of the total workforce; ● excessive and economically inefficient employment in accordance with the economic and production structure; ● the increase of hidden unemployment and the strengthening of its structural components. In this regard, there is a need for a closer study of the younger population as a primary segment in terms of the formation of the workforce. An important problem that requires the attention of state regulation is that of the formation of the youth segment of the labour market in the modern conditions of the functioning of the labour market, as well as aspects of its interaction with the youth vocational training sector. Modern socio-economic trends in the development of the world labour market are characterized by significant volatility, which undoubtedly has a knock-on effect on the transformation of regional and national labour markets, including the formation of new trends in the process of the reproduction of labour resources. According to International Labour Organization (ILO) forecasts, there will be a shortage of labour by the end of 2022. This will amount to some 52 million full-time jobs—a crisis of global disruption in the world labour market. Despite the fact that the situation is improving compared to 2021, when the volume of employment amounted to 125 million jobs (assuming a 48-hour working week), it remains extremely unstable, and the unemployment rate is still estimated to be high. In the context of increasing global instability, we should not expect a significant smoothing of processes in the global labour market in the coming years. In 2022, the share of employed people among the economically active population is projected at 55.9%, which is 1.4% lower than in 2019. Many of those who left the labour market have not returned, thus reducing the total volume of the economically active population. What this means is that the unemployment rate is still underestimated, as is the impact of modern processes on the decline in total employment. In this regard, the share of employed among economically active population, having fallen by almost 2 percentage points in the period from 2019 to 2020, is projected to recover only partially.

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The global unemployment rate is projected to remain above the 2019 level until at least 2023. The number of unemployed people is projected to decrease by 7 million in 2022 to 207 million, compared to 186 million in 2019. It is noted that the labour market recovery is fastest in high-income countries. These countries account for approximately half of the global decline in unemployment in 2020–2022, but only one-fifth of the total global labour force. Conversely, countries with below-average incomes at the beginning of the pandemic were in the worst situation, and are now demonstrating extremely slow rates of labour market recovery. Recovery is uneven within countries as well. The impact of the pandemic on gender employment, in particular women’s employment, is disproportionate. Experts have predicted a significant reduction in the share of employed women and a widening of the gender employment gap is predicted. Such inequality is most noticeable in countries with above-average incomes, where the ratio of women’s employment to the number of economically active population is projected to be 1.8 percentage points lower in 2022 than in 2019, compared with a change of 1.6 percentage points for men, despite the fact that the employment rate for women is 16% lower than that for men. The extended closures of schools, colleges and educational institutions in many countries have weakened the quality of labour force training, which will have long-term knock-on effects for employment and professional growth opportunities, which is especially significant for the development of the youth segment of the labour market, as well as for the further process of labour force formation and vocational training of young people. The pandemic and subsequent geopolitical shocks have played an important role in stimulating economic changes that may become structural, with long-term negative consequences for the labour market. The combination of different macroeconomic trends has created uncertainty about whether the fall in the number of jobs, employment and labour force participation will be temporary, or whether the consequences of the pandemic and the geopolitical phenomena of recent years will contribute to a significant structural transformation of the labour market. The pandemic, combined with geopolitical changes, has exacerbated various forms of labour inequality, from gender segregation to the

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strengthening of the digital divide in the process of labour force formation. Changes in the composition of labour relations, such as dependence on informal self-employment to maintain the necessary income, the growth of remote forms of employment, as well as various trends in temporary work, only increase the risk of the quality of working conditions deteriorating. Before the pandemic, temporary employment was on the increase, although it was growing unevenly across sectors and countries. This kind of employment was largely structural in nature and was determined by the sectoral structure and professional composition of the labour market. However, during crises, temporary employment tends to serve as a catalyst for negative socio-economic trends, with employers cutting costs and not hiring temporary workers. In the long term, temporary employment can negatively affect the production chain of organizations. At the same time, in the short term, temporary employment allows you to keep jobs and not interrupt the chain of professional training of the workforce, although the conditions of temporary employment are usually worse, often characterized by job insecurity, income instability and limited access to social protection tools. Temporary employment rates are higher in low- and middle-income countries (just over one-third of total employment) than in high-income countries (15%). However, the economic component of temporary employment varies between developed and developing countries. Temporary employment is usually popular when people first start their careers. This is because it allows young workers to choose which industry they would like to work in and try out different companies. Moreover, it is a flexible form of employment that can be used to inform one’s choice about their further career path. That said, temporary employment does not offer the employee appropriate employment guarantees or a regular income. In addition, it is often limited in terms of access to social protection measures. For workers in developing countries, temporary employment typically comes in the form of informal employment and provides little to no social and labour guarantees. Despite the fact that most temporary workers lost their jobs at the beginning of the pandemic, there is still a significant increase in temporary employment as a short-term way out of the crisis at the current stage of labour market development.

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The net economic effect of such trends is due to the relative preservation of employment in temporary jobs in comparison with other forms of employment and, as a consequence, the partial stabilization of the labour market as a whole: the preservation of employment and the reduction of unemployment, and the smoothing of structural imbalances between the formal and informal sectors. The beginning of the pandemic led to the formation of a kind of duality in the labour market, and informal employment ceased to play its traditional countercyclical role, absorbing exclusively laid-off workers from the formal sector. Technological innovations are gradually transforming all spheres of life. The ability to rapidly exchange large amounts of data and information has laid the foundations for the growth of the digital economy and digital employment platforms. Organizations in developed and developing countries alike have joined in such transformations, since this trend leads to a significant reduction in the costs of goods and services and the simplification of logistics. Digital labour platforms are now part of our daily lives. This technological transformation is increasingly spreading to the sphere of work. Digital employment platforms offer new markets and greater opportunities for earning, and attract more and more people to the labour market, including those who were previously outside it. It is widely believed that the COVID-19 pandemic accelerated the implementation of such digital innovations as cloud computing and the use of big data and algorithms, although they had been developing before them, including in the field of employment. The result has been innovative working methods and flexibility for both employees and businesses. The conditions of remote work adopted by many companies over the past year have led to the rapid growth of e-commerce, electronic services and remote forms of employment on the internet. For many who have lost their jobs, both in developing and developed countries, digital employment platforms have become an opportunity to continue working and earn an income. Many enterprises have switched completely to digital employment platforms in order to be able to continue their activities. For many, it was an opportunity to enter new markets and significantly reduce costs.

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However, such technological developments open up the possibility for companies to be set up without having to invest in fixed assets or physically hire employees. Employees of digital employment platforms face the problem of finding a well-paid job, which increases the threat of poverty and the likelihood of being classified as one of the “working poor.” As a rule, those employed within digital employment platforms do not have access to the social protection system, do not participate in the social processes of the labour collective and do not feel social inclusion in the labour community. They are thus unable to contribute to the solution of problems within the team or even act as if they are a part of that team, which, in turn, negatively effects the results of their work. The digital economy leads to a change in the world of employment, labour communities and labour results. In accordance with Decree No. 867 of the Government of the Russian Federation on the “Work in Russia” Unified Digital Platform in the Field of Employment and Labour Relations dated May 13, 2022, and Paragraph 3 of Article 162 of the Law of the Russian Federation “On Employment in the Russian Federation,” the Government of the Russian Federation established the need to set up and maintain a unified digital platform in the field of employment and labour relations. At the same time, the unified digital platform is a federal state information system, and its maintenance and modernization are carried out by the Federal Service for Labour and Employment. Empirical studies of this problem are still very limited and are usually based on sample surveys of the population, or on a secondary analysis of statistical data. However, official statistics do not always record informal employment, which significantly distorts the final estimates of the labour market and its functioning conditions, especially in the context of socioeconomic instability and the intensification of labour market failures. According to the estimates of the Institute of Social Policy, as of April 2022, 14.7% of Russians aged 18–72 had experience of platform employment; almost one in ten of them used the platform to find temporary work and around 2% (1.6%) had experience of platform employment as the main form of work. The generalization of sample data in comparison with the total number of people employed in the Russian platform economy is 15.5 million people, and those who were employed within the framework of the platform for the main place of work was 1.7 million people (Platform Employment in Russia, 2022) (Fig. 11.1).

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REGULAR DIGITAL EMPLOYMENT

7.6 11.3

EPISODIC DIGITAL EMPLOYMENT

unemployment

71.2

24.5

employment

Fig. 11.1 Share of persons included in digital employment (DE) in different formats by employment status, % (Source Based on the online survey of the urban population, ISP HSE, 2021 [Platform Employment in Russia, 2022])

For out-of-work respondents, platform employment probably plays the role of episodic (17.2% of respondents in this category) or regular parttime work (7.6% of respondents). Groups of citizens that would fall into this category include unemployed citizens, students, pensioners, mothers on maternity leave and those who provide full-time child care. The highest level of regular platform employment is observed among individual entrepreneurs and the self-employed, and those working at their own enterprises. The lowest level is observed among employees on permanent contracts. Episodic platform employment is more prevalent among younger people: 27.2% of people aged 18–24 and 25.7% of people aged 25– 34 years said that they had provided services using online platforms at least once (Fig. 11.1). At the same time, the 25–34 demographic makes the greatest contribution to both episodic and regular employment. Among them, the proportion of the population for whom such work has become regular (including as their main form of employment) reaches 12.3%. Since the level of participation of people aged 45–54 in regular platform employment is relatively high (10.7%), awareness of

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information about finding a job through special sites is significant. Lack of experience is characteristic of the oldest group—respondents aged 55–64 (74.3%). The majority of those who actively use these new employment opportunities are students and people who have temporarily found themselves out of work due to the socio-economic instability of the market in recent years. According to the Center for Strategic Research, 86% of people who use the platform see searching for employment through the digital platform as a temporary solution. However, as experience of platform employment accumulates, this format may become permanent—this much is suggested by the results of sociological research and the work of the HSE Institute for Social Policy. The target audience of the Center for Strategic Research were couriers working in Russia with at least one month of work experience, as well as taxi drivers and those who offer other services. The sample of couriers included more than 2000 respondents who were interviewed on the streets of 14 cities (Center for Strategic Research, 2021). According to ILO researchers (Aleksynska, 2021), approximately 70 online platforms were operating on the Russian-language internet in 2014, six of which boasted more than 100,000 registered users and around half of them had less than 5000 users, which was partly explained by the very narrow labour specialization of vacancies presented on the platform. However, the situation had changed significantly five years later. By 2019, at least one of the platforms had more than 3 million active users, and at least two had more than 1 million, including such platforms as: https://youdo.com/ and https://profi.ru/about/. Separate estimates of the number of people employed on the platforms can be found on their official websites. For example, as of March 2022, the number of registered users on the YouDo platform exceeded 2.3 million, followed by Profi.ru with 1.8 million users. Some 15,000 tutors actively find work through Repetitor.ru. At the same time, according to opinion polls, as noted by Rossiyskaya Gazeta (Rossiyskaya Gazeta, 2021), approximately 4% of those employed in agriculture consider platform employment a significant employment opportunity, compared to 4% in construction and real estate, 6% in transport and logistics, 3% in wholesale trade, 9% in the IT sector and 7% in finance and insurance. Platform participants note platform employment opens up opportunities for self-employment, or to find a new or additional source of income.

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Undoubtedly, platform employment plays an important role in terms of providing work experience and expanding the scope of activity of citizens. At the same time, platform employment allows people to change occupation and earn additional income. In terms of motivation, people are attracted by the freedom, the platform employment gives them to find their calling, to realize themselves professionally. At the same time, the ease of interaction with the platform and its accessibility significantly facilitates the applicant’s entry into the labour market and expands job search opportunities. The possibility of saturating the market with remote employment is important, which significantly reduces the transaction costs for both applicants and employers, ensures maximum interaction of supply and demand in the labour market and minimizes the problems of structural unemployment and inflation associated with wage mismatches, employment opportunities, market duality and the growth of the informal sector. Digital employment platforms provide easy access to the labour market for more people who want to be employed, and also attract a wide range of employers. At the same time, flexible employment and the ability to independently determine the level of employment, as well as the possibility of temporary jobs with quick earnings, will contribute to an increase in the number of those wishing to become participants on digital employment platforms. The employment platforms being formed will contribute to the stabilization of regional labour markets, a greater balance of supply and demand and a reduction in the transaction costs of employment, including those associated with the need to move to full-time employment. They will also attract more people who want to work but cannot commit to the traditional employment model due to family commitments, raising children and other social activities. The platform economy can play a damping role during periods of economic shock: in case of temporary job loss, furloughs or downtime, employees can enter the platforms in search of part-time jobs and additional employment in their field of expertise or elsewhere. Platforms are becoming a simple tool for implementing private entrepreneurial initiatives. This can smooth out fluctuations in income and partially prevent the growth of registered unemployment, have a stabilizing effect on the economy and, in the long term, contribute to its more sustainable growth.

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The coronavirus pandemic provoked the growth of the platform economy in terms of the number of employees involved in it in many countries, including Russia, but this growth did not transform into a comparable increase in its volume in monetary terms. In fact, a temporary decrease in the income of platform workers was recorded in many countries during the pandemic. The main factor of such dynamics was the reduction in consumer demand against the background of the growth in the supply of services. The risks associated with the epidemiological crisis were exacerbated in general due to the lower level of access of those employed on the platforms to unemployment benefits, health insurance and sick leave compared to those engaged in standard employment. This applies primarily to professionals for whom platforms are the main (only) employment format. Changes in the situation of platform workers during the pandemic have exacerbated the discussion regarding the shortage of social support measures addressed to them, but this has not yet led to a revision of the rules for regulating this area in the long term: the issue of developing regulatory measures for the platform segment of the economy that correspond to the economic and social interests of society remains open in most countries, including Russia.

National Labour Market Analysis The process of restoring the Russian labour market began in 2021 with a gradual decrease in the unemployment rate and more people in employment. Business activity has increased, as has the economy’s need for additional labour. In March 2021, the Industrial Production Index was up 101.1% compared to the same period of the previous year. According to the state employment service, the additional need for labour declared by employers increased in June 2021 to 2190,000 people, compared to 1700–180,000 in November–February 2021, an increase of 21.7–28.8% (Table 11.1). Indicators adopted to determine the basic characteristics of the employment in the Russian Federation for the period 2011–2020 (Table 11.1) allow us to talk about the emerging trends in reducing labour volatility, stabilizing trends and the degree to which the situation on the Russian labour market reflects global trends.

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Table 11.1 Indicators of fair work Share of employment, % (Y)

NEET, % (X1 )

Share of the informal sector in total employment, % (X2 )

Labour productivity (growth rate), (X3 )

Share of wages in GDP, % (X4 )

63.9 64.9 64.8 65.4 65.3 65.7 59.5 59.8 59.4 58.4

12.7 12.0 11.8 12.1 12.0 12.4 10.5 10.2 10.6 10.9

18.2 19.0 19.7 20.2 20.5 21.2 19.8 20.1 20.6 20.0

103.2 103.8 103.8 102.8 102.8 98.7 100.1 102.1 103.1 102.6

49.7 43.9 44.3 46.3 47.4 47.8 48.2 47.8 45.3 46.3

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source Compiled by the author based on official statistics of the Federal State Statistics Service

By determining the linear relationships of panel data, it is possible to clarify the presence of significant mutually influencing individual variables (Table 11.2). Multiple regression estimates indicate the significance of the impact of changes in the number of young people who do not work and do not study on the share of employment in general, and in a positive correlation, which demonstrates that workers under the age of 25 are being substituted with an older labour force. On the one hand, such a situation leads to a decrease in the socioeconomic burden on the labour market and an increase in employment among older demographic groups and indicates a high degree of economic activity among workers over 25 years of age. On the other hand, the presence of a category of the labour force aged 15–25 who Table 11.2 Comparative statistics of multiple regression estimates

Y1

X1

X2

X3

X4

3.23*** (0.622)

0.64 (0.875)

0.001 (0.505)

−0.269 (0.386)

R2

Radj

Favg

Df

0.84

0.72

0.029

9

The table shows the β coefficients and standard errors in parentheses. The significance of the coefficients is presented according to estimates of p value, with ***p