It is hard to beat the breadth of the Mastercard and Visa networks. Both payment networks remain at the forefront of the payments industry, engineered decades ago for security and universal acceptance. Today, you can transact globally, though things get tricky in Cuba, Iran, North Korea, and Venezuela.Recently, credit cards became more accessible in Sudan, but that took the “overthrow of its long-time dictator” to get the country off the U.S. sanctions list. When a country appears on the U.S. Department of Treasury Office of Foreign Assets Control (OFAC) sanctions list, citizens need to find payment card alternatives.
The current sanctions, described in a White House fact sheet, add Russia to the list of globally disabled credit card countries. The current sanctions are not Russia’s first appearance on OFAC’s block list. In 2014, sanctions came in response to aggressive actions in Crimea. However, the existing penalties, invoked in February 2022, are forcefully positioned by the Department of Treasury as “unprecedented and expansive” and intended to impose “severe economic costs.”
The sanctions work effectively but do not end a country’s ability to transact at the point of sale or e-commerce. Citizens can select from three workable options to circumvent global credit card and debit card payments in Russia:
- Use the Mir card, a domestic payment scheme
- Use a Russian bank-issued Mastercard or Visa until the expiration date
- Take a trip to a sympathetic country
Domestic Payment Scheme
Domestic payments schemes are a trend in some countries. (See Brazil, Russia, India, and China: Payment Developments in the BRIC Countries.) The Central Bank of Russia pressed for a domestic payment scheme after U.S. payment sanctions came into force during the 2014 Crimean War, leading to the creation of the Mir card. Mir distributes salaries, social welfare payments, and pensions and provides merchant acceptance. Take-up of Mir outside Russia is limited, despite recent efforts to gain traction in the United Kingdom through a Dutch partner. There is some Mir card acceptance in Abkhazia, Armenia, Belarus, Kazakhstan, Kyrgyzstan, Tajikistan, Turkey, the United Arab Emirates, Uzbekistan, and Vietnam.
Russia’s banks issue Mir cards in a design similar to the bank-sponsored Mastercard and Visa global business model. As a result, Russia has a domestic card function with the Mir card. Sometimes, bank partners co-brand the Mir and Mastercard or Visa to extend acceptance, but that unraveled with the brands’ Russian exit.
A recent payment trend is to codify data localization. Data localization requires that personal data reside within a country’s borders. This sovereign mandate is not unusual and exists in China, the European Union, India, and Russia. Instead of processing cardholder data at a central location, data must reside within a country’s borders.
Data localization inserts a requirement to transact through a domestic payment switch. Instead of the standard payment transaction flow, from merchant to acquirer to network for clearance and settlement, the transaction flows to the domestic payment switch from the acquirer. In the case of Russia, the data localization function can reroute transactions and exclude the network. As a result, clearance and settlement can occur through the local payment entity or clear outside the global payment brands.
With localized data under the watchful eye of the Russian Central Bank, before transactions process to Mastercard and Visa’s global network, they flow through Russia’s National Payment Card System (NSPK). Instead of routing to the worldwide payment brands, transactions will clear and settle through NSPK, eliminating Mastercard and Visa from the process. The issue will change when Russia’s global cards expire, but until then, Russia circumvents Mastercard and Visa operating requirements. Cards will no longer function after the plastic’s expiration date.
Data localization laws have teeth, as the payments industry recently saw in India. The New York Times noted: “When the clock struck midnight in Delhi at the end of Monday, Visa, Mastercard, and American Express were suddenly in violation of the law every time an Indian swiped a credit or debit card.”
Take a Trip, Get a Card
Radio Free Europe (RFE) reported a unique way for Russians to create card accounts in neighboring, sympathetic countries. RFE cited VEDI, a tour company with eleven travel agencies in Russia, which offers a tour package to Uzbekistan for a “fixed price of 23,000 rubles (about $280).” The traveler will enjoy a visit to a local bank to submit a pre-arranged card application on this trip. According to the article, two other companies, BSI Group and Russky Express, offer similar trips to Uzbekistan. Other credit card tourism sites connect Armenia, Georgia, Kazakhstan, Kyrgyzstan, and Turkey.
While this does not apply to the 12.4% of Russians falling below the poverty line, it certainly fills the needs of the top 10%, who control up to 87% of the country’s wealth. The distribution of wealth is so tilted in Russia that the Moscow Times cites a Boston Consulting Group’s estimate that 500 Russian individuals control 40% of the country’s net worth.
What to Expect Next
Current Russian sanctions will do little to curtail the use of payment cards in Russia, but there will be lasting effects on the county’s payment ecosystem. As a result, we anticipate five long-range trends.
Isolating Russia’s payment infrastructure from the global framework
There is a need for bi-lateral acceptance agreements to transact outside of Russia. Russia must find a partner that can provide suitable breath for payment acceptance. This may affect payment pricing, and it might require a method to open borders for the partner’s expansion. The broader implications for corporate and sovereign payments, which will no longer settle through SWIFT, might affect the outcome of consumer payments.
Russia’s payment partner might disrupt other facets of payments
Russia will seek partners outside the venue of Western allies. It would be unlikely to expect Japan’s JCB card as a partner since the country supports current sanctions, but China’s UnionPay is an option for broader payment acceptance. Additionally, RuPay, India’s domestic payment scheme, might also help Russia fill the void.
Further network disruption could occur if either RuPay or UnionPay aligns with the Mir card. Additional sanctions could extend to payment partners, or existing alignments might unravel for the two brands. RuPay claims international alignments with Discover, Diners Club, JCB, Pulse, and Union Pay. Union Pay indicates acceptance in ninety-five countries, with 180 million cards issued outside China.
Sanctions may disrupt the growth of consumer payments in Russia
Although debit cards are widespread in Russia, credit cards are less common. Credit bureau files are less developed than in Western countries and credit scoring is less than ten years old. We expect tighter credit availability, as the country’s broader credit needs, such as sovereign debt, face downgrading. The risk of hyperinflation and surging interest rates governed by the central bank will constrict credit in the short term.
The state will get more involved in consumer credit
With pressure on interest rates, rising inflation, and economic disruption, the Central Bank of Russia will pressure lenders to tighten credit to curtail prices. Moreover, with Mir at the forefront of payments, the system will need to develop fail-safes and contingencies to replace the backbone provided by Mastercard and Visa. As a result, current conditions will hamper consumer credit growth.
Bifurcation of a Global Payments Market
Before the sanctions, payments flowed through a global framework, leveraging the functions of Mastercard and Visa for consumers and the broader functions of Swift for corporate and sovereign payments. Depending upon the scope and duration of the Russian war against Ukraine, global payments are at risk of dividing into two worlds, where transacting becomes an “us and them” issue, with polarized entities disconnected by political interests.
This issue is less pronounced for middle-market card issuers, who focus more on their domestic customers, but it will change the playing field for those firms with international interests.
Russian sanctions will not end Muscovite’s transaction capabilities, but they will force the growth of Russia’s domestic payment system. As the Russian economy deteriorates with inflation and high-interest rates, payment cards will become increasingly important to handle higher prices. The long-term impact of the conflict will create consumer stress and separation, a change for the smooth working payments function.