Vladimir Putin signed a law Monday geared at creating a homegrown credit card system and imposing new rules on international cards.
The legislation was spurred on by Visa (NYSE:V) and MasterCard's (NYSE:MA) decision on 21 March to stop servicing payments for clients of Rossiya Bank, as well as its daughter company Sobinbank. Rossiya Bank was included in the first round of US sanctions over the Ukraine crisis because it is owned by Putin associate Yury Kovalchuk and is the "personal bank for senior officials of the Russian Federation," the US Treasury said when announcing the sanctions.
Visa and MasterCard also blocked operations for cards issued by SMP Bank, which is owned by the brothers Arkady and Boris Rotenberg, who are old judo buddies of Putin's. According to the US Treasury:
They have provided support to Putin's pet projects by receiving and executing high price contracts for the Sochi Olympic Games and state-controlled Gazprom. They have made billions of dollars in contracts for Gazprom and the Sochi Winter Olympics awarded to them by Putin. Both brothers have amassed enormous amounts of wealth during the years of Putin's rule in Russia. The Rotenberg brothers received approximately $7 billion in contracts for the Sochi Olympic Games and their personal wealth has increased by $2.5 billion in the last two years alone.
Visa and MasterCard process 90% of cashless payments in Russia
Both Visa and MasterCard say Russia's measures are too severe and say they will negotiate with the government to find a solution.
"Several provisions in the law are unprecedented and will have a severe impact on the payments market in Russia - particularly cardholders, financial institutions and merchants," Visa said in a statement.
Visa and MasterCard have announced they were concerned about the future of their business in Russia in light of the new legislation.
The new law stipulates the creation of a homegrown system to facilitate cashless transactions by 1 July, but also imposes stiff new requirements on international payment systems operating in Russia.
The new legislation forbids international payment systems from cutting off services to Russian clients and obliges them to base their processing centre in Russia. To ensure their good behavior, international operators will have to place a security deposit in Russia's central bank equal to the average value of two days' worth of transactions.
Visa and MasterCard together processed $1.9 billion in transactions per day last year - 90% of all cashless payments in Russia - equal to a $3.8 billion security deposit, the Moscow Times reported.
The security deposit will be due in eight quarterly payments starting on 1 July. The law states that if a payment system unilaterally freezes operations for a Russian client, it is liable for a fee totaling 10% of its security deposit for each day without service.
Is this the dawn of new economic warfare between power blocs?
Russia represents less than 3% of the global economy, and Visa and MasterCard are global players. Whatever Russia does to them is insignificant and will have a negligible impact on the bottom line.
The only ones to suffer from Putin's hubris are ordinary citizens of Russia and Russian businesses. Russia is in no position to wage a war, even with Visa.
However, Visa has been faced with a fait accompli with this law. Though laws apparently mean nothing to the Russian ruling class, Visa will have to follow draconian rules mentioned above. My guess is that Visa and MasterCard will simply exit this rogue nation until a new regime change, or negotiate with the Kremlin to abide by internationally accepted rules.
New legislation placing foreign payment service providers under the thumb of Russian regulators is so damaging to Visa and MasterCard that the two U.S. companies might be better off abandoning the Russian market, according to research by investment bank Morgan Stanley. It will be interesting to see what happens from a geopolitical as well as a business point of view.
My fear is that new trading blocs are emerging. US and its allies vs the emerging market nations. This is to the detriment of international trade and global corporations and can further escalate international tensions.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.