As the political crisis in Ukraine continues to unfold, the strong actions taken by President Putin in Crimea and potentially in Eastern Ukraine could have long-lasting indirect effects on Russia’s fast-growing payments industry.
With economic sanctions in place, international payment industry players would find operating in the Russian market extremely difficult or even outright illegal as was the case in Iran under the restrictions that were recently lifted. Without foreign investment, it would be a struggle for Russia’s domestic payments industry to maintain its high level of growth and the industry’s development could set back a number of years.
As the “R” in BRIC or Brazil, Russia, India, and China, Russia is globally recognized as one of the world’s premier developing countries. Whether it merits that status is subject to debate. But with a population of over 143 million, the market has large potential for long-term growth in electronic payments, especially in light of the Russian Central Bank’s estimate that 90% or more of goods and services are paid for in cash.
Visa and MasterCard have already begun to feel the effects of complying with the U.S. and European sanctions, and the effects will soon be felt by other international firms as well. In late April, Russian authorities announced their intentions to create a national payment network that would rival Visa and MasterCard and reduce the country’s dependency on the global card networks. They also announced that Visa and MasterCard will be required to pay $3.8 billion in the form of a security deposit if they wish to continue operating in Russia.
Although the Ukrainian political crisis could end in the near future with the withdrawal of Russian troops from the border and with Russia could subsequently get away with no more than a slap on the wrist from the international community, the move to enter Ukraine without permission from either Ukraine or the international community underscores one of the major concerns with the Russian market, namely the virtually unilateral ability of President Putin to affect the Russian market and consequently Russia’s domestic payments industry without warning. This latest action as well as overarching concerns regarding market stability will force international payment industry players to reconsider their focus on Russia and likely lead them to target more stable countries like Brazil, India, and China or the second tier of developing markets like Indonesia, Turkey, and South Africa.
While some firms will continue operations in Russia because of its potential, any interested payment firms should be very wary of the potentially hostile operating environment.
For more information on the Russian payments industry and why countries may seek to establish national payment networks, see Mercator Advisory Group’s research reports, Introduction to the Russian Payment Market and National Debit Networks: When Global Goes Local released in April 2013 and December 2013, respectively.