Included in the lists of U.S. sanctions targeting Russia were Bank Rossiya, SMP Bank and InvestCapitalBank, but these small banks have relatively little exposure outside of Russia, making the sanctions seem futile. However, the sanctions bar MasterCard and Visa from processing credit and debit transactions for the banks, which is indeed a painful blow. This shows that even though Russia has been shifting the international exposure of its banking system, should the larger Russian banks be sanctioned, their ability to process credit would be severely limited.
Globally, most credit and debit card transactions are authenticated and processed by Visa, Mastercard and Europay, which have set the international standards for such payment systems, followed by American Express, China's UnionPay and Japan Credit Bureau. In Russia, around 59 percent of all transactions are done through card payments, while most of the rest are done with cash. Approximately 30 million credit cards and 192 million debit cards are in circulation in Russia — a country with a population of 143 million. Currently, the country has 11 indigenous credit processing platforms via its commercial banks, but these make up less than 5 percent of credit transactions. Visa and MasterCard combine to account for the other 95 percent (Visa with 60 percent and MasterCard with 35 percent).
Some debit cards can be run through their respective Russian banks without the Visa and MasterCard systems, but nearly all the credit cards rely on the Western processing firms. Though only the top 10 to 20 percent of Russians have credit cards, those who do represent the majority of the wealth in the country. Thus, any shut down of Visa and MasterCard in Russia would disrupt the business and Kremlin elite more than the middle and lower classes. It would also impact foreign businesses.
Russia's Strategy
Russia has launched a multi-faceted effort to address this vulnerability. The first aspect involves blunting the damage that Western firms can wreak on the Russian economy. In April, the Russian State Duma passed a law tightening requirements on Visa and MasterCard. Starting July 1, the companies will have to provide a security deposit to the Central Bank equivalent to the value of two days of transactions processed in Russia. The two firms processed approximately $1.9 billion per day in 2013. Thus, they would be required to deposit some $3.8 billion as a sort of insurance policy for Russia to cover funds needed for processing in the event of a sudden shutdown by the two firms. This amount is five times the two firms' annual revenues in Russia.
Already, the heads of both Visa and MasterCard have come out against the new law. Visa CEO Charles Scharf said that Russia's demands "just go beyond what we'd be willing to do." In other words, Visa is willing to leave Russia if forced to comply. Meanwhile, MasterCard chief Ajay Banga said the legislation would "create serious complications for the way that we (MasterCard) operate in Russia."
On May 22-23, the heads of the Russian divisions for Visa and MasterCard met with Finance Minister Anton Siluanov and First Deputy Prime Minister Igor Shuvalov to discuss the issue. Following the meeting, MasterCard said it would remain in Russia despite the upcoming changes. Visa, however, said it is still looking for a compromise before the July 1 deadline, indicating that it may curb or shut down its Russia operations, although it remains dedicated to continuing talks.
The second aspect of Russia's strategy is to develop a more diversified credit processing system inside the country, allowing it to shift away from Western firms if needed. During Russia's talks in China last week, Beijing reportedly offered to allow its credit processing system, UnionPay, to expand into Russia to offset Visa and MasterCard. For China, this would serve its broader efforts to increase investment in Russia across multiple sectors and further intertwine the two countries' interests. It would also be financially beneficial for UnionPay to expand into the growing Russian credit market. For Russia, UnionPay would keep the country from being completely beholden to the West in the short term. Of course, Russia does not want to be beholden to China any more than it does to U.S. firms.
Over the long term, Russia is also looking to boost its domestic credit processing capabilities. In April, the Russian Duma adopted a law establishing the National Payment Card System through the Central Bank of Russia. Deputy Finance Minister Alexei Moiseev, who said it would start implementation by the end of the year, is currently overseeing development. Russian President Vladimir Putin said he would prefer the system to be designed along the lines of the Japanese model.
Japan Credit Bureau is the oldest domestic credit card issuer in Japan, and has been wary of allowing the Western systems to dominate the country's credit market. Founded in 1961, Japan Credit Bureau has dominated the country's credit system and kept Western systems at bay for decades. The system has risen to the international standards set by Visa, MasterCard and Europay and because of this success has expanded abroad to 190 countries. Japan Credit Bureau and China's UnionPay are the only non-Western payment systems with international reach.
Russia is debating whether to build the national system entirely from scratch or to expand one of the small systems (such as Zolotaya Korona) already established to a national level. Either way, this project will carry steep costs, though Russia has shown it is willing to shell out the funds needed to protect its economy. There is also discussion about whether the system would, in a few years, process all card and debit transactions in Russia and serve as a centralized processing hub for even international card payments.
Consolidating control over all credit processing would lessen Russia's vulnerability to the Western institutions, but there are other benefits as well. A centralized system would also allow the government to track transactions in the country, giving it insight into where and how money is moving. Such a system would boost revenues to the Central Bank and government coffers as well. Moreover, the National Payment Card System could expand into a regional processing center, particularly for states that are economically integrated or in a Russia-led alliance such as the Customs Union, which will soon become the Eurasian Union.
Problems and Pushback
Still, Russia will need to work through myriad problems in establishing its own credit processing system. For example, it is unclear whether it would be able to meet international standards and be used abroad. Most Russian financial and banking practices are considered corrupt and subject to sudden, politically motivated changes. There is also concern about how the new system would be applied to processing Internet transactions. Moreover, the cost of setting up a new system, and implementing it across all of Russia, would be massive.
Many within the Russian financial elite oppose the creation of a centralized system that would replace international firms in Russia. Finance Minister Anton Siluanov and Central Bank chief Elvira Nabiullina — both powerful figures in Russia's financial decision-making — have spoken out against a new system that would lessen Visa and MasterCard's presence. Neither object to an indigenous Russian system that would complement the current system, but they are concerned about isolating Russia from the international credit networks and are looking for a more balanced approach.
Compared to some in the Kremlin, Siluanov and Nabiullina tend to be more open to foreign investment and involvement in Russia, believing the country cannot modernize or survive in isolation. But the current push to address Russia's credit vulnerability comes from the top. In March, Putin stated that Russia is always willing to welcome Visa and Mastercard, so long as they do not become politicized. Now, with a series of sanctions showing that Visa and MasterCard could be used by Washington for political ends, Putin has little choice but to prepare his country for a possible further deterioration in relations.
