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Can Russian payments systems weather the sanctions storm

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Alongside a host of other Western companies, PayPal, Mastercard, Apple and Visa have pulled out of the Russian market following Russia’s invasion of Ukraine, with major banks such as JP Morgan and Goldman Sachs joining the chorus as well.

While such announcements might be good for international solidarity, will they make much of a difference to Russian citizens who use cards to shop every day?

Based on proprietary research from our Digital and Card Payment Yearbooks 2022, we look for answers.

Western governments have rushed to demonstrate support for Ukraine by slapping the toughest sanctions regime in history on the Putin regime.

In payments, other than the companies mentioned above, crypto platforms have been asked – and not all have accepted – to cease trading and settlement with wallets based in Russia.

Meanwhile, as is widely known, a wide array of Russian banks have been blocked in Europe, the US and other jurisdictions – although Germany has refused to block Sberbank, which it uses to purchase natural gas and oil from Russia.

Corporate payments

“Longer term, banning Russia from SWIFT could favour the Yuan’s status as a reserve currency.”

From a banking perspective, some of the Russian institutions banned from trading in the West had minimal operations in those markets anyway: VTB’s rapid decision to quit its operations in Western Europe speaks, in part, to how little significance Europe had to its portfolio compared with activities in Central Asia.

In the short term, the most significant impact of blocking Russian banks from SWIFT is likely to be felt by private corporations.

In the event that war in Ukraine becomes a drawn-out conflict, most Russian corporates are likely to use China’s CIPS clearing and settlement system, launched in 2015 to internationalise yuan use.

It allows global banks to clear cross-border yuan transactions directly onshore, instead of through clearing banks in offshore yuan hubs.

On the corporate side, then, there’s a chance the long-term effect of the move to ban Russia from SWIFT could favour the Yuan’s status as an international reserve currency.

Short-term, Russian corporates will face additional cost, administration and inconvenience – as well as a drop in revenues in those markets in which they can no longer trade.

When it comes to domestic business, sanctions are unlikely to have any effect, since just 10 percent of the banking sector is owned by foreign entities, each of which has minimal (<3%) market share.

Consumer payments

When it comes to consumer payments, the effect of sanctions – and in particular, the decisions by Visa, Mastercard, Apple and other players to pull out – is likely to have more effect.

Although Russia has sought to wean itself off reliance on Western payment systems since 2015 with the launch of MIR as a national payments system, Visa and Mastercard still have significant market share in the domestic debit and cross-border credit card markets.

Again, though, perspective is helpful: in 2020, just under half of all POS payments in Russia still used cash, with MIR accounting for around a third of all electronic payments at POS.

By rough estimation, around one-third of domestic payments used international payments brands – and it’s likely that consumers will switch rapidly to MIR, Zolotaya Korona, and other domestic alternatives.

“Sanctions are likely to have more effect on the consumer side, in the short term at least.”

MIR is also mandated for use in all welfare, pension and state salary payments in the country.

Although Visa and Mastercard are widely used for cross-border credit card payments, fewer than 1.3% of all Russian offline payments in 2020 were cross-border and credit cards constituted just 11% of all cards in Russia.

Most recent reports speculate that Russian banks will look to migrate their card portfolios to UnionPay – another example of where Western sanctions might be said to benefit China’s status.

Online, cross-border e-commerce accounted for just under half (48%) of all Russian digital business in 2020, with debit cards and digital wallets used in around two-thirds of transactions.

Domestic players such as yandex.money had significant market share, so again the decision by Western players to pull out will have some effect – though it won’t be catastrophic by any means.

“Sanctions will have some effect in the short term, but may end being a benefit to China’s payment sector and the Yuan’s status as a reserve currency.”

Summing up, it looks as though sanctions on Russia will have some effect on corporate payments in the short term, and a more marked effect on consumer payments, especially for cross-border and internet payments.

As has always been the case, markets that are subject to sanctions will look for work-arounds, and Russia will be no exception.

Indeed, it may be that, in the longer term, Western sanctions end up as a benefit to China’s payment sector and the Yuan’s status as an international reserve currency.

 

Source: Payments Cards and Mobile

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