July 3, 2022

Russia reaps reward of domestic payment system after Visa and Mastercard withdraw

In 2014 Gennady Timchenko, a billionaire businessman and an ally of Russia president Vladimir Putin, sang the praises of a new UnionPay card he obtained after sanctions rendered his Visa and Mastercards useless.

“It works perfectly,” he told Russian news agency Tass of the card issued by China’s UnionPay. “And it is accepted in a lot of places. In some sense, it will be more reliable than Visa. At least the Americans won’t be able to grab it.”

Timchenko’s wallet refresh echoed Putin’s larger push to reshape his country’s payments system after western sanctions were imposed on Russian banks following the 2014 invasion of Crimea.

Moscow built a domestic payment system from scratch as a bulwark against the western duopoly pulling their services again; meanwhile, alternatives were explored to protect the ability to send and receive money abroad.

“For the first time in post-Soviet Russia, the events of that year demonstrated how financial sanctions can impact not only the individuals but the wider economy,” said Anastasia Nesvetailova, head of macroeconomics and political development at a division of the UN’s Conference on Trade and Development. “The risk . . . suddenly potentially became an everyday reality, not just for oligarchs.”

Now, Russia is reaping the rewards for creating an alternative payments system that has helped mitigate the effect of more severe sanctions put in place after Putin sent tanks over Ukraine’s border.

Russia’s planning has also highlighted the risk for western powers that sanctions reorder the international payments landscape, shifting the financial system away from the US and towards China.

Mastercard and Visa suspended services in Russia at the start of March, where they make up about 70 per cent of the debit card market, going further than sanctions that required networks to stop processing payments from certain Russian banks.

American Express, PayPal, Japanese card network JCB and Western Union have also suspended services in Russia, as well as digital wallets Apple Pay and Google Pay.

However, while international transactions have been limited, ordinary Russians have not felt much change as domestic transactions operate as normal — including for cards bearing the Visa and Mastercard logos.

“The majority of people hit by this either left the country in the past couple of weeks or have been living abroad earlier,” said a Moscow-based employee of a payment company.

That resilience is largely down to the development of the National Card Payment System (NSPK), which recreates the financial plumbing needed to process card transactions in Russia. NSPK launched in August 2014 and by 2015 it had signed deals with Mastercard and Visa to handle all domestic payments in the country.

Adoption was helped by Moscow threatening hefty fines if the payment networks did not ensure that processing of Russian transactions was done in the country. This drive towards the localisation of data pushed them to work with NSPK, said Nigel Cory, associate director covering trade policy at the Information Technology and Innovation Foundation.

An antiwar protest in Moscow. Among the thousands of Russians detained for protests was a man who stood alone in Moscow holding up his Mir card © Evgenia Novozhenina/Reuters

Russia’s domestic card scheme Mir also runs on NSPK’s infrastructure. Mir was launched in 2015 after three options were considered for the scheme — importing UnionPay, which had operated in parts of Russia since 2008; extending the network of the largest private bank, Sberbank; or creating a new system.

Putin chose the last option amid fears of replacing one external power with another, although the hardware backbone of Mir is supplied by Chinese technology company Huawei in collaboration with a Russian IT firm.

The name Mir itself means “peace”. Among the thousands of Russians detained in recent weeks for various forms of antiwar protest was a young man who simply stood alone in Moscow holding up his Mir card.

More than 100mn Mir cards are in circulation, about one-third of total market share, thanks to mandates for use by civil servants and pensioners. A digital wallet, Mir Pay, launched in 2019, continues to operate on Android devices.

Line chart of Debit cards issued (millions) showing Mir cards have shown a sharp rate of growth

Taken together, these systems mean that for many Russians domestic transactions have kept flowing, even if some creative thinking has been required. An executive at an international payments company said local banks had been issuing “timeless” Visa and Mastercard cards which lack expiry dates to reduce demand for new cards, undermining basic anti-fraud measures.

Other banks have said they are facing raw materials shortages. Olga Biryukova, a Moscow-based psychologist, found that the cost of quickly acquiring a new UnionPay card was 50,000 roubles ($628), which her bank blamed on high demand and a shortage of plastic.

Mir’s success, however, is limited to Russia and nine other countries, most of which are former Soviet republics, as well as Georgia’s breakaway regions of South Ossetia and Abkhazia. That has made deepening ties with Chinese payments companies, capable of offering international reach, all the more tempting.

While UnionPay was rejected as the basis of a national payment system in 2014, analysts now expect it to play a much larger role. Currently, it accounts for about a 1 per cent share of cards in circulation in 2020, or roughly 2.7mn cards, according to UK-based data firm RBR. Before the invasion, only nine Russian banks had issued UnionPay cards.

But big banks including Sberbank and Alfa-Bank are among those which said at the start of March that they would explore using the system. One senior payments executive estimated that issuance of UnionPay cards could increase 100 to 1,000 times in Russia.

That could mark a strategic win for Beijing, whose efforts to export UnionPay have been slow despite reward schemes offering discounts for shopping and hospitality.

Of the 9bn UnionPay cards in circulation — which is half of the global total of bank cards and about 2bn more than Mastercard and Visa combined — only 150mn are outside mainland China.

Line chart of Share of cards in circulation (%) showing By 2020 UnionPay issued half of all cards

The growing list of countries, including Brazil and India, embracing alternative payment networks could also reduce the power of western sanctions, a fear expressed in a report by the US Treasury last year.

“A number of countries have a critical dependence on Mastercard and Visa,” said Nicolas Véron, senior fellow at the Peterson Institute for International Economics and Brussels-based think-tank Bruegel. “After these were weaponised, maybe the consensus will emerge that UnionPay is more reliable.”

As Ola Oyetayo, chief executive of payments platform Verto, said Russian banks that have found themselves scrabbling may not give the US networks another chance: “In the long term, they may say once bitten, twice shy — they may not switch back even if they become an option again.”