Shortly after Russia’s stealth invasion of Crimea, in which soldiers in unmarked uniforms seized the peninsula’s territory, the US announced sanctions against a number of Russian banks with ties to the administration of President Vladimir Putin. Visa and MasterCard announced in turn that they had stopped servicing these banks.
This move, like the Russian invasion itself, was not a complex operation. Since banks have their own identification (or BIN) numbers, the credit card companies simply stopped processing transactions linked to these institutions. The effect on Russians traveling abroad was equally straightforward: their credit and debit cards stopped working at once.
The response of one of the affected banks was sanguine. “The management of (Bank) Rossiya understands the difficulties of clients in the current situation and will do all it can to solve them,” it said.
In truth, though, the number of those individuals impacted is rather small. Russians are avid users of debit cards, but with only 30 million credit cards circulating in a country of 143 million people, credit card usage is minimal. Most domestic transactions are consummated in cash. And the number of Russians who travel and use their cards abroad represents a small slice of the population.
That said, the response of the Russian government was both heated and defiant. Putin proposed that Russia build its own ATM and payments network. While this would be a huge undertaking in a country spanning 12 times zones, it would not be logistically unfeasible, given Putin’s willingness to spend billions on projects like the Sochi Olympics. Indeed, Sberbank, Russia’s largest savings banks, already has something close to a domestic payments network in place.
A domestic payments effort would not solve the problem of using cards abroad, of course. While Russian banks could team up with non-US payments providers such as JCP or China’s Union Pay, these networks don’t have nearly the penetration of Visa and MasterCard. What’s more, payments on these international networks would still be cleared in US dollars, exposing the banks to potential service denials should the US further escalate sanctions.
This may soon be the case, given Putin’s intransigence on the Crimea question. Crimea was Russian territory until Soviet Premier Nikita Khruschev gifted it to Ukraine in 1954. Now Putin has taken it back. But unlike in Soviet days, Russia has a stock market and a floating currency, both of which have plummeted in the past few weeks. This cannot please the resource magnates and other tycoons who help bankroll the Putin regime.
Individual Russian oligarchs have been hard hit, most notably the head of Lukoil, Vagit Alekperov, who saw his personal net worth decline by $3 billion in just one week. Even Roman Prokhorov, owner of the Brooklyn Nets and 45 percent of the Barclays Center, briefly floated the idea of transferring ownership of the team to one of his Russian companies, in fear of further sanctions.
But perhaps the most exposed player of all in this imbroglio is Visa itself, which just laid down $40 million to set up ATMs and other infrastructure around the Sochi Olympics. While Russian banks represent a tiny share of the company’s business, it has surely made itself no friends in the Kremlin.
Well, no one ever said Russia was a short-term play. Visa and other investors who want to stay in the country will need to hold on for a long and bumpy ride.