MasterCard and Visa hold 85% of the Russian payments market between them – estimated at $4bn a year. But legislation was proposed earlier this year to stop offshore processing of Russian payments. Eugene Gerden looks at the government’s policy turnaround and the impact for international payments schemes in the country


Bar chart showing Russian spending on debit and credit cards by value (RUBbn), 2005-2009On 27 June 2011 a new law was signed by Russia’s President Dmitry Medvedev, allowing international payment systems to use their overseas processing centres for handling payments in Russia.

The decision is a reversal of a planned amendment to the law, which would have obliged international networks to establish processing centres in the country. That original amendment was proposed as a means of improving the reliability of the domestic financial system and reducing its dependence on the international payment systems.

The final outcome is a relief for MasterCard and Visa. If the amendment had been accepted, it might have resulted in significant problems for the market," says Ilya Riaby, head of MasterCard Russia. "It would have isolated Russia, where customers would have seen a number of currently available payments products disappear.

"In addition, it would also have cost MasterCard a lot of money, which would inevitably have lead to an increase in fees for cardholders."

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At the same time, MasterCard was clearly ready for the Russian authorities to go the other way. In April, the network announced its readiness to invest up to $20m to establish its own processing centre in Russia.

In contrast, Visa decided to wait for the final draft of the law before making any strategic decisions, according to Karina Grosheva, Visa Russia’s corporate affairs director.


Effective communication

Bar chart showing projected size of Russian payments market, 2009-2014Many Russian analysts believe that the initially active position of international payment systems – in particular that of MasterCard, who conducted lengthy negotiations with the Russian government – was one of the key reasons behind rejection of the amendments. In addition, according to some unofficial sources, the position of international payment systems was strongly supported by the US Embassy in Moscow.

According to analysts at forex brokerage Kalita-Finance, the planned restrictions around international payment systems was part of the plans to safeguard the financial sovereignty of the country, one of the essential elements of which was to be the prevention any "leakage" of information about domestic financial operations abroad.

Russian analysts also believe that the domestic security and intelligence agencies were behind the proposals, along with Russian politicians, some of whom even suggested that the existing international payment system forms part of a global anti-Russian plot, according to Evgeny Fedorov, chairman of the Duma committee on economic policy and business. According to his calculations, the US makes $4bn annually on the existing payment system in Russia.

At the same time, the prospects of a ban on the transfer of data abroad have provoked skepticism from Russian experts. Pavel Medvedev, a member of the Committee on Financial Markets of the State Duma, said that the restriction of physical access to the information transmitted by electronic means is practically impossible.

The adoption of the amendments would have led to a new, large-scale capital outflow from Russia, and an increase in the number of foreign accounts being opened by Russian citizens.

Finally, it could lead to a further increase in the amount of cash in circulation, which is currently 25-28% in Russia (compared to the EU’s 8-11%).


Shift in focus

The lack of necessity to build local processing centres in Russia can now enable the payments schemes to invest in other local projects. Visa recently announced its plans to invest up to $40m in payments innovation in Russia. This will include things like instant money transfer products and contactless payments, as well as the further expansion of its card acceptance network.

At the same time, MasterCard Russia is currently completing the establishment of infrastructure in Russia.

Neither payment scheme has ruled out the possibility of joining a project to develop a "universal e-card", which is envisioned as a universal smart card-based payment and service system that is expected to become an alternative to the passport in the long term.

According to German Gref, head of Sberbank, Russia’s largest bank and one of the initiators of the project, both Visa and MasterCard are at present still involved in the negotiations.