Russians search for bootleg solutions to overcome payments sanctions

Last September, the day after Uzbekistan stopped accepting bank cards that relied on Russia’s domestic card scheme Mir, middle-class Russians were already discussing how to circumvent the ban.

“[Accounts] with cards can be opened in 3-5 days in [most] banks,” said a Telegram channel, touting how easy it is to travel to Uzbekistan, open an account and gain a credit card that can still be used internationally. The channel, with nearly 27,000 subscribers, was set up by an Uzbek less than two weeks after the start of the full-scale invasion of Ukraine to convince Russians to relocate to her country for business.

According to the Uzbek central bank, deposits in the country grew by UZS 60.5tn ($5.3bn) in 2022, twice as fast as the previous year, hinting at how Russians have retained access to international commerce despite international sanctions. Data from other former Soviet republics also shows marked increases in demand for their banking systems. Armenia documented a surge of non-resident deposits in 2022.

“Many Russians . . . crossed the border last year and opened accounts in banks across Central Asia, including Uzbekistan,” said Anton Usov, the European Bank for Reconstruction and Development’s chief spokesman for central Asia and Mongolia. “Time will tell how much of them will stay in the region, though.”

“The data [on Russian deposit inflows] is quite striking,” said Timothy Ash, associate fellow at Chatham House. “Alongside remittances, we’ve seen Russian deposit inflows including to current accounts.”

The need for creative payments solutions, at home and abroad, is obvious. Not only have Visa and Mastercard cut services in Russia but Mir, which has helped keep domestic payments flowing, is also now accepted in just a handful of countries, such as Belarus and the breakaway regions of Abkhazia and South Ossetia.

What is also obvious, say experts, is that one year since the invasion began Russia’s need to continuously innovate to keep payments flowing demonstrates just how hard it is to exist outside of the US financial system, let alone supplant it.

Russia began preparing for the withdrawal of Visa and Mastercard following sanctions imposed after its annexation of Crimea almost a decade ago.

The Kremlin launched the National Card Payment System (NSPK) in 2014 to build an alternative financial plumbing system to process card transactions in Russia. The threat of hefty fines led Mastercard and Visa to sign deals allowing NSPK to handle all domestic payments.

A year later, Russia launched Mir, which quickly built market share due to mandates for use by civil servants and pensioners.

“With 161mn cards in circulation as of September 2022, surpassing Russia’s population of just over 147mn, Mir has become a viable [domestic] alternative to western payment systems,” said Ola Oyetayo, chief executive of payments platform Verto.

When Visa and Mastercard withdrew from Russia in March 2022, Russia-issued cards simply continued running domestically on NSPK.

Private banks have also reacted to the exits of Apple Pay and Google Pay, which made up about a quarter of the digital wallet market in Russia in 2020, according to GlobalData.

Kartik Chakla, senior analyst for banking and payments at GlobalData, said that Sberbank, Russia’s largest financial institution and a target of sanctions since April 2022, has had success with a QR payment system jointly run by the NSPK and the Russian central bank, which allows consumers to pay at more than 1mn merchants.

Sberbank said that of the 75mn customers who use its app each month, more than 28mn users make use of QR payments, which launched in April 2022.

Meanwhile, digital bank Tinkoff — designated by the EU in its tenth round of sanctions at the end of February — has built a physical alternative to Apple Pay: a sticker with a near-field chip, which is connected to their accounts. Attached to the front of a phone, it turns it into a contactless device.

“The user experience is fantastic, it’s the same quality of service [as a digital wallet],” said a fintech executive with knowledge of the Russian market.

Russians travelling or working abroad have faced more difficulties as Russia-issued Visa and Mastercard cards stopped working outside of the country.

Political pressure has also affected the number of countries where Mir is accepted. In September 2022, the same month that NSPK chief executive Vladimir Valerievich Komlev was made the subject of sanctions, Turkish banks suspended Mir cards, as did Uzbekistan.

UnionPay, the Chinese rival to Visa and Mastercard once considered as a potential backbone for Russian payments, has not expanded meaningfully, with experts citing fears of a US response. Just two more banks offer co-badged cards than before the invasion began, according to GlobalData, bringing the total to 11.

Two executives said the easiest way to acquire an international card to get salaries paid in or for spending internationally was to head to a surrounding country.

“There’s a much better user experience for people who need to travel outside the country to get a bank card from a neighbouring state rather than a [UnionPay] card that only works at some card machines,” said one.

In the Uzbek Telegram channel, a post from October weighs up the pros and cons of banks. Some require foreign nationals to stay in Uzbekistan for 15 days before they can get their card — the same amount of time that Russian citizens can stay in the country without registering — or need evidence of employment there. Others, such as small branches, can get cards more rapidly but have drawbacks.

However, experts say that the relative resilience of Moscow’s payments systems does not herald a pivot towards non-US rivals, with technical challenges, cost and fears of reprisals from Washington still blocking the way.

“Investors always worry about disintermediation,” said a senior executive at a big US payments company, “but domestic networks face a challenge in scaling up and keeping up with costs like cyber security. The amount they have to invest gets bigger each year.”

Crucially, Visa and Mastercard already have global systems in place. Potential rivals would have to overcome geopolitical uncertainty to build the connections necessary to rival them.

“Trust is key to cross-country payment systems,” said an executive at a payments fintech, “and trust is almost impossible to build right now”.