Russian Situation Creates Payments Division
The deteriorating situation in Ukraine has had a number of dramatic effects, including on the Russian economy, particularly in terms of the range of sanctions imposed by many countries across the world, including the US, UK and EU. Sanctions include measures targeted against individuals, banks, the Central Bank of Russia, and the whole Russian economic system. This is leading to a highly significant impact in the payments industry, one that we will be seeing the ramifications of for years.
This development is highly significant, not just in the Russian economy, but for the wider world. We have witnessed actions taken, such as the blocking of access to the SWIFT network and card networks, that seemed impossible only recently. As such, there are major implications for payments globally, not just for Russia.
Significant Damage Caused to Russian Economy
There has been a strong downturn in the value of the Russian currency, with further drops anticipated. Russia has also seen a number of damaging economic consequences, including a lack of access to the SWIFT interbank payments network, which will be highly destructive to international trade. The lack of clearing in popular foreign currencies, including the Euro, US Dollar and UK Pound Sterling will also significantly damage the ability of Russia to trade on international markets. There are rising fears that a default on its sovereign debt is inevitable, which will again cause shocks throughout international markets.
These are just the large-scale, systemic impacts – the lack of access in these ways is causing very damaging consumer impacts, including no access to systems such as Apple Pay and Google Pay, or the international payment card networks, such as Mastercard and Visa. There are also shortages of foreign currency, and a lack of cash at ATMs in Russia. Russians have been taking cash out of the banks; prompting fears of a liquidity crisis, with bricks and mortar retailers in some cases requesting payments in cash only.
All these damaging consequences are not going away overnight, and are likely to last for some time, as the situation in Ukraine continues. Not only are sanctions a problem – international companies are voluntarily ceasing operations in Russia, which is again having a significant impact. In the face of all of these threats, the Russian authorities will need to change their whole approach to payments in the country, and internationally.
Potential Changes to Domestic Payments in Russia
Clearly, there will have to be significant changes domestically in Russia within payment systems, in order to cope with the current conditions in the short term. For one thing, the economic disruption will likely mean the economy will shrink over the next 6 months with a lack of cash circulating. The likely changes to Russian domestic payment systems are as follows:
Potential Changes to International Payments Systems
- More Reliance on Domestically Owned and Operated Systems: Ultimately, we will see a much stronger reliance on purely domestic systems. The Central Bank of Russia launched the Mir card network in December 2015, so there is a fallback system in place, however, there has been a strong presence of Visa and Mastercard in Russia to date. The sanctions imposed means that the sanctioned banks no longer have access to the Visa & Mastercard networks; making any cards or linked terminals useless. As such, Mir will come to the fore and be heavily promoted; effectively eliminating the market share of international players, even after sanctions are lifted.
- No Joint Ventures: Joint ventures have typically been a reasonable way to access the Russian market, with recent examples including Alipay partnering with Mail.ru for eCommerce. However, this is clearly no longer acceptable, given the sanctions in place. On top of this, even where businesses are from countries more hospitable to Russia, the reputational risks of associating with somewhat controversial brands internationally are still significant. As such, we anticipate fewer joint ventures in the Russian market going forward.
- No International Payment Mechanisms: Over the past few years, we have seen significant growth of international payments, particularly apps, such as Apple Pay and Google Pay in the Russian market. However, the sanctions imposed on Russian financial institutions essentially bring this to a rapid end. These apps, certainly for the foreseeable future, will likely have no prospects within these markets. What this means is that there will be a boost for domestic options, such as YooMoney, but there will also be a capability gap for many users, therefore we will see accelerated development of domestic wallet solutions over the coming period. For Apple and Google, it means a loss of Russian market income, but their user bases in the markets were low enough to mean that it will not cause them drastic issues.
There will also be very big changes in how Russia operates internationally in the longer term – this will include the following conclusions:
Conclusions on the Future of Payments
- Alternative International Payment Rails to Be a Stopgap: In response to the sanctions, many analysts have predicted that Russia will switch to alternative methods, such as using banks in third-party countries outside of SWIFT and using digital apps & cryptocurrencies to exchange funds. While this is potentially a short-term solution, longer-term alternatives will need to be developed to properly set up Russia on a sustainable economic footing. Cryptocurrencies in particular, while emerging as a viable payment option steadily, are not yet mature to underpin an entire country’s economic activity.
- Further International Mechanisms to be Developed: Russia has already experimented with reducing its reliance on SWIFT. In 2014, the Central Bank of Russia launched SPFS (System for Transfer of Financial Messages), which allows banks to send financial messages domestically without using SWIFT. In 2019, Russia announced that it was linked SPFS to China’s CIPS (Cross-border Interbank Payment System), to allow for easier trade between the two countries, with India set to link to the system when a domestic Indian system is developed. As such, these sanctions will only intensify these efforts to become independent of traditional payment rails, linking systems further to both China and India’s systems. This disruption has exposed that further progress needs to be made to these systems to be a viable alternative to SWIFT.
Fundamentally, what we are seeing is a reshaping of the global financial order. The globalisation of payments has hit a major stumbling block, meaning that certainly in Russia, there will be a much more insular approach to payments. What it also means in future, is a challenge to the dominance of the SWIFT network. The sanctions will push Russia ever closer to the Chinese financial ecosystem, which threatens to fragment the global financial order along geopolitical lines.
At a smaller scale, we will see users in Russia unable to access what they are used to or what they expect. We will certainly see increased activity by vendors in Russia to meet this untapped demand, and incredibly diminished levels of access by Western vendors into the Russian payments market. We expect international brands to look to expand to new markets quickly, in order to recoup losses from a lack of access to the Russian market.
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