Universal Electronic Card of the Russian Federation
A prototype Russian bank card

A new Russian bank card? Priceless... for the Kremlin

It won't be cheap, but the Kremlin's plan to supplant foreign bank card companies with a national card could dull Western sanctions – and set a trend of new Russian self-reliance.

With the West's threat of deep sanctions looming over Russia in response to its annexation of Crimea, the Kremlin is beginning to consider ways to move the country back into Soviet-style economic self-reliance.

The first industry where it may happen? Bank and credit cards.

Russia's State Duma is fast-tracking a sweeping measure that could drive the global electronic payments giants Visa and MasterCard out of the lucrative Russian market, which they have dominated for well over a decade. Not only would the move insulate Russia's economy in the future against what they view as punitive, politically motivated attacks from outside, but it might also be meant to dish out a bit of payback to the global corporations that obey orders to implement anti-Russian sanctions.

The scheme, which has been on the back burner for years, is now being packaged as an urgent matter of national security, after about half a million Russians suddenly found themselves cut off from their credit cards last week after the Obama administration announced sanctions against two small Russian banks owned by cronies of President Vladimir Putin. The plan is to introduce a "RussiaCard," a national system of payment for domestic transactions run by the country's Central Bank, which would completely bypass the global processing terminals used by the big corporations and ensure that everything to do with Russians' personal finances stays in Russia.

The proposed setup is similar to monopolies in China, by the 12-year-old state-backed UnionPay bank card, and Japan, where the private corporation JCB (Japan Credit Bureau) has dominated since the 1960s.

"It's a complicated project, and there will be a material cost," says Natalia Orlova, chief economist with Alpha Bank, a leading Russian bank. "But from the political viewpoint, controlling and processing our own transactions on our own soil, has become necessary. It will yield political benefits, because we will be able to control the payment risk within our own country, without outsourcing anything to foreigners."

On Thursday, President Putin visited the Duma personally to instruct deputies to press forward with the needed legislation. "We have to do this and we will do this," he said.

Opportunity for a 'RussiaCard'

Russians have enthusiastically dumped cash and embraced plastic over the past 15 years or so, as the Putin-era economic boom fueled a rapid growth in consumption. Tens of millions of Russians have gotten used to seeing their salaries and pensions downloaded onto plastic cards, while online transactions are one of the fastest-growing businesses in the country.

According to the Central Bank, there are about 220 million payment cards circulating in Russia today, and around 90 percent of them bear the Visa or MasterCard logo. The Moscow daily Izvestia estimates that from the approximately $200 billion in transactions recorded in Russia in 2013, the two companies would have reaped around $2.5 billion in commissions.

Analysts say that since the two companies entered the market in the 1990s, Russians have found their Visa and MasterCards convenient, efficient, and globally portable. The superiority of their services – along with conflicting interests between leading Russian banks and a lack of political will in Kremlin – have prevented several attempts in the past to introduce an all-Russian payment scheme. Indeed, the idea of replacing them with some "national card" would have been politically impossible just a few weeks ago.

But with Putin's popularity spiking over 80 percent amid the standoff with the West, much of the population may now be willing to endure the switch, even if it comes with a few inconveniences.

The project will almost certainly be handed to Russia's Central Bank to implement, says Alexei Vedev, an economist with the liberal Gaidar Institute in Moscow. Visa and MasterCard will lose their dominant positions in the Russian market, and at the very least be required in future to act as clients of the Central Bank in domestic transactions.

"The Central Bank has indicated that it's ready to spend up to $200 million to put this system in place. We have enough tech-savvy people and software developers to do it, and it's perfectly feasible. But if they can't get Russians to do it, they will simply buy it," probably from China, he says.

China's UnionPay system is effectively a domestic monopoly that has invited vigorous complaints from the US for allegedly violating the rules of the World Trade Organization, of which Russia is also a member.

Analysts say the switch is likely to play well among among Putin's political base, mainly workers and pensioners who rarely need the capability provided by Visa and MasterCard to make foreign currency payments. The relatively small Russian middle class, who do tend to be avid travelers, are also viewed with some suspicion by the Kremlin due to their support of the protest movement that broke out following allegedly rigged Duma elections in 2011.

A bit of payback

The move could also deeply hurt the bottom lines of both Visa and MasterCard.

"It seems a strong possibility that Visa and MasterCard can lose their market positions in Russia completely, just because they canceled payments for these two small Russian banks," says Pavel Azov, a 20-year veteran of Russia's payments industry who now works as an independent consultant. "After all this hype, their reputations [as reliable partners] have suffered badly" among Russia's bankers.

Vladislav Reznik, deputy chair of the Duma's Financial Market Committee, says that Russia is not planning to ban Visa and MasterCard, because the 15 million Russians who annually travel abroad will still need access to global means of payment.

But, he says, it's become urgent to establish a "local transactions router" that will ensure the security of domestic commerce, so that both information and the commissions earned from card payments remain inside Russia. Mr. Reznik insists the new law, which will probably be ready in September, will still provide Russians with flexibility and will "not constitute a measure of self-isolation" for Russia.

Mr. Azov suggests that Visa and MasterCard should have averted this situation years ago by creating a Russia-based processing system that would have passed "national security" muster with the Kremlin.

"Visa and MasterCard could still prevent this by creating a Russian association of banks that would control the national switch, and ensure that all domestic transactions are under their control," he says. "These companies stand to suffer huge losses, and they would be wise to take a diplomatic approach."

If the crisis rolls on and deepens, it could play directly into the hands of economic nationalists such as the Kremlin's top economic adviser, Sergei Glazyev, who advocate much more vigorous measures of protectionism and greater state subsidies to revive Soviet-era industries.

"I think you will definitely see much more effort to insulate Russia from what they see as external risk," says Chris Weafer, senior partner at Moscow-based Macro Advisory, a leading investment consulting firm.

"Putin has talked a lot about the dangers of Russia's dependency on food and pharmaceutical imports, and so on. But in Russia, nothing tends to happen until they get a shock," he says. "Then they focus."

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