The Washington Times reports that credit cards connected to Mastercard or Visa brands may be disabled as a result of penalties under the Countering America’s Adversaries Through Sanctions Act (CAATSA). CAATSA is a Trump-era version of The Trading with the Enemy Act (TWEA) of 1917, a WWI relic. The newstory reports:
- Russia’s Central Bank has reportedly warned leading financial institutions across the country that they could soon be disconnected from the global Visa and MasterCard credit card payment systems because of U.S. sanctions.
- Russia’s central bankers appear concerned over provisions in the Countering America’s Adversaries Through Sanctions Act (CAATSA), which target banks involved in “substantial transactions” with Russian enterprises connected to Moscow’s army and intelligence agency.
Mastercard and Visa are not alone as Intellinews reports that SWIFT may also be at risk.
- The US Special Representative for Ukraine Negotiations, Ambassador Kurt Volker threatened that the United States and its Western allies would take the “nuclear option” of cutting Russia off from the SWIFT international payments system in retaliation for Russian aggression in the shared waters of the Sea of Azov on December 6.
- This is not the first time that the west has threatened to try and isolate Russia by cutting its payment system off from the international SWIFT payments system and Russia has already built its own Mir payment system in anticipation of the potential move. The first Mir payment cards were issued in December 2015.
- Cutting Russia off from SWIFT would represent a significant escalation in the war of words between Moscow and the West and is a nuclear option. The CBR is clearly taking the threat seriously and last week warned Russian bank to have a plan B for dealing with payments just in case.
This is likely to affect the stability of the ruble and perhaps accelerate Russian inflation.
- The CBR is clearly anticipating more sanctions in the New Year and cancelled its currency purchases at the end of the summer to build up cash reserves. It also prophylactically hiked interest rates in September in anticipation of new “crushing” sanctions that could undermine the stability of the ruble. The CBR surprised analysts by front-loading the monetary policy rate with preventive 25bp hike to 7.5% in November.
- However, Volker comments are not official policy and probably represent only another salvo by the west in the war of words between Russia and the west. Volker said the West is considering a number of options to prevent Russia from asserting any more “unilateral control” in the shared waters of the Azov Sea, Ukrainian news agency Unian reported on December 6.
This may end up as a growth opportunity for Mir, the domestic Russian payment system.
- The Russian payment card Mir was launched under the umbrella of National System of Payment Cards (NSPK) and negotiating an issue of co-badged cards Mir-Mastercard, in 2017 to work in parallel with the existing international system.
- Although initially resisted by the banks, the Mir payment card is now functioning and 176 local lenders adopted the systemas of January 2017, with a total of 97% ATMs in Russia and over 75% of payment terminals accepting the card. Russia is already ready to cope with being cut off from SWIFT, but the move would be a major inconvenience for Russian card holders travelling abroad.
- However, so far the EU and the US have failed to pass any new sanctions against Russia after the Azov Sea incident. Europe and the US seem split on the issue. German Chancellor Angela Merkel said last week that there would be no new sanctions on Russia over the Sea of Azov incident and Berlin has been working hard to deescalate tensions. Volker’s statements are likely also aimed at reassuring Ukrainian interlocutors, than an actual threat at this stage.
This is potentially an ugly international issue as the world enters the winter holiday season, and the result might actually benefit the Russian indigenous payment system.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group