Russia Builds Parallel Payment System That Survived Western Sanctions

Earlier this month Visa Inc. and Mastercard Inc. The domestic payment system continued to function smoothly after its withdrawal. While the card giant’s exit from Russia was seen by many in the West as a significant step forward, the reality on the ground was anything to go by. Most Russian consumers never lose sight of the ability to use their MasterCard- and Visa-branded cards to pay for things within the country.

According to the trade publication, Nilsson Report, there were about 197 million MasterCard or Visa cards in Russia at the end of 2020. But behind the scenes, the cards do not rely on US networks’ systems to process payments in Russia. Over the years, they have used the domestic system under the supervision of Russia’s central bank.

The National Payment Card System—known by its Russian initial NSPK—runs the financial pipeline that eases card transactions in Russia, even for cards with the Visa and MasterCard logos.

The system was part of Moscow’s eight-year effort to protect the Russian economy from Western financial pressure. The Kremlin has also aggressively promoted its own Russian card company called Mir, which is built on the infrastructure of the NSPK. According to Mir’s website, more than 100 million Mir cards have been issued since its launch in 2015.

The resilience of Russia’s payment system is a rare victory for President Vladimir Putin in his financial war with the West. Russia failed to break its reliance on Western imports, leaving the country in dire need of key parts for manufacturing. Before the war, Russia had accumulated $630 billion in reserves to ensure it could protect the ruble, but that effort was undermined when the US and the European Union froze the assets of the Russian central bank. .

“We have provided our national security in the payments sector,” said Alma Obayeva, head of the National Payments Council, a Russian trade union.

The withdrawal of Visa and MasterCard had a major consequence for Russians: in many cases, their cards no longer work outside the country. The Mir network extends to only a few countries other than Russia, most of which are former Soviet republics. According to reports from the TASS state news agency, Russian officials have been in talks in recent days to expand it to Venezuela and Iran. Some Russian banks have said they are looking into a partnership with China’s UnionPay to issue cards so that their customers can use them more widely.

Still, Russians’ inability to withdraw cash or use their cards to make purchases abroad aligns with the Kremlin’s goal of keeping assets in the country. Some Russians who have fled have said the Visa and MasterCard cutoffs passed into Mr Putin’s hands.

On a February call to discuss possible Russia sanctions, executives from Visa, Mastercard and other payments companies told Treasury Department officials that it would be special to ban US networks from handling Russian bank transactions, according to people familiar with the matter. will not be significantly painful. He said the sanctions would lead to more transactions on Mir.

Representatives for Visa and Mastercard declined to comment.

More countries have developed their own payment infrastructure, limiting the influence of Visa and MasterCard and, by extension, the ability of the US to influence countries’ behavior through sanctions that target their banking systems. We do. China’s state-owned UnionPay handles most domestic transactions on cards issued by Chinese banks. Turkey and India began their networks in recent years to move the countries’ banks away from Visa and MasterCard.

Russia sought to reduce its vulnerability to Western financial pressure after sanctions over its 2014 annexation of Crimea.

At that time Visa and MasterCard were responsible for almost all card network activities in Russia. Their networks act as a link between merchants and banks that issue debit and credit cards, and they handle the routing of card transactions.

In March 2014, hundreds of thousands of Russians discovered that their cards had become worthless overnight. US sanctions on Crimea had prompted Visa and Mastercard to block the services of several banks linked to Mr Putin’s allies.

For Russian officials, the move exposed a vulnerability. Within months, Mr. Putin signed a law establishing the NSPK. Subsequent amendments to the law effectively forced Visa and MasterCard to shift the processing of transactions to the NSPK. Two US companies have previously opposed the law and suggested they could leave Russia. But by early 2015, both had agreed to use NSPK’s system.

Later that year, NSPK launched Meer. The name means both “world” and “peace” in Russian. It was chosen after an Internet naming contest, with some of the rejected choices being “Cometa” (Comet) and “Patriot”.

Initially, Russians saw no reason to swap their Visa- and MasterCard-branded cards for Mir cards. Then the Kremlin put its thumb on the scales.

In 2017, Russia passed a law requiring banks to make payments to pensioners and salaries of public sector employees such as teachers and military personnel available through Mir cards. According to the NSPK, Mir usage has increased, with the number of card issuances rising to 95 million by the end of 2020, up from about 2 million in 2016. The law also mandated that Mir be accepted at point-of-sale terminals used by many merchants.

The NSPK invested heavily in marketing the Mir, sponsoring the Russian national football team, and promoting incentives such as cashback programs.

By taking over payment processing, the NSPK became a moneymaker for Russia’s central bank, collecting fee revenue that would otherwise have flowed to Visa and MasterCard. According to its annual report, in 2020, the payment system earned 8.2 billion rubles in net profit, or about $87 million at current exchange rates.

Mir card issuance has picked up in recent weeks following the exit of the foreign card giant. Russian lender Rosbank has reported that demand for debit cards operating on Mir’s network more than doubled between January and March compared to the same period last year.

“There’s just a huge, frenzied demand for Mir cards,” Ms. Obayeva said. “There’s a long queue.”