Russia is driving out Visa and Mastercard, creating huge opportunity for domestic tech companies

By Yasha Levine , written on May 22, 2014

From The News Desk

It hasn’t been a good year for Western tech in Russia. First came Snowden whose NSA leaks confirmed Russia’s fears and spurred a clampdown on American Internet companies operating within its borders.

Then came the Ukrainian clusterfuck and the series of mini-sanctions forbidding American companies from dealing with some Russian banks and Putin’s oligarch chums.

The neocon master tacticians who run President Obama foreign policy thought the  sanctions would begin erode Putin's support among his business-oligarch base. After all, these oligarchs have countless billions of dollars hoarded overseas in banks and companies, and have the most to lose from widespread economic sanctions.

But - d'oh! -- instead of handicapping Putin, the sanctions boosted his popularity and support. And now it looks like they're helping prop up Russia’s domestic hi-tech sector.

Here’s a Bloomberg story from earlier this week:

Most Russian lenders issue banking cards supporting Visa or MasterCard. When a Russian pays with his card, even in a local shop, or withdraws money from third-party ATM, those transactions are typically processed via foreign payment systems.

When U.S. President Barack Obama sanctioned three Russian banks owned by President Vladimir Putin's allies — Rossiya, SMP and InvestKapital — it essentially banned U.S. companies from doing business with them. Visa and MasterCard had to stop servicing these banks' transactions, leaving the cards with limited use.

...While Russian industries haven't yet been significantly affected by sanctions, political tensions had already pushed Russia to start developing its own home-grown technologies to maintain independence. Today Russia depends on Visa and Mastercard to process something like 90% of domestic card payments but, thanks to the sanctions, that might all be about to change.

On the very same day that the sanctions hit, Russia’s network TV filled up with embarrassed finance experts who had to explain why the country still depended on foreign firms for something as simple as payment processing. Right away there was talk about the need to establish a national alternative to Visa/Mastercard.

And at the end of March, President Vladimir Putin announced that Russia is going to develop its own national electronic payment system — a system that could function properly regardless of external political drama. “In countries like Japan or China these systems work, and work very well. Why can’t we do this? For sure we need to do this, and we will do it,” he said.

Meanwhile, Russia quickly passed a law to punish Visa and Mastercard, ordering them to place a “security deposit” worth several hundred million dollars in Russia's Central Bank to prevent them from suddenly canceling service to its customers.

Naturally, Visa/Mastercard are complaining that it's way too much money, and are threatening to exit the country. But Russian politicians remain unfazed. “What Visa and MasterCard did was a direct violation of their contract with Russian clients, not banks, but individuals who trusted these payment systems,” Prime Minister Dmitry Medvedev told Bloomberg TV.

And of course Russian tech and finance companies are not complaining either. Visa and Mastercard siphon about half a billion dollars in worth of fees from the electronic payment market — a revenue stream that Russian firms would no doubt love to redirect into their own coffers. Then there are the tech companies who'd design, build and maintain the system — tech companies that are run by Putin-connected oligarchs like Vladimir Evtushenkov.

The Russia-America conflict is spilling over into other tech fields as well, and now involving Elon Musk to the benefit of Russia’s stagnant aerospace industry.

Here's Bloomberg again:

Russia's showdown with the U.S. could also give a boost to its challenger to GPS, called Glonass. Deputy Prime Minister Dmitry Rogozin threatened to suspend operations of 11 GPS stations on Russian territory starting on June 1. These stations, which are used to amplify signals, will be turned off permanently if the U.S. doesn’t allow Russia to install similar stations for Glonass on American soil, Rogozin said last week. As Space Exploration Technologies, led by Elon Musk, pressures the U.S. not to use Russian-made rockets, a Glonass revival could help the local aerospace industry, including satellite manufacturers such as Information Satellite Systems and Gazprom Space Systems.
Meanwhile, American Internet companies are waiting for the other shoe to drop: a law that would require them to store data of Russian users in data centers physically located in Russia — something that would give Russian Internet companies serious competitive advantage on their home turf.

Want to know more? Read Putin ramps up Internet censorship, citing Google and Snowden to ensure public support

[Image adapted from wikipedia]