By Jon Matonis
CoinDesk
Wednesday, May 7, 2014
http://www.coindesk.com/payments-become-polit...ss-destruction/
Executives at Visa and MasterCard awoke yesterday morning to learn
that Vladimir Putin’s Russia had passed legislation requiring foreign
credit card brands to post $3.8 billion in total security collateral,
the equivalent of two days’-worth of transactions processed in the
country.
After Russia reunified with (or annexed, depending on your point of
view) Crimea, Visa and MasterCard complied with stringent White House
sanctions and blocked transaction activity at several Russian banks.
Both financial companies rightly feared a target="_blank"
backlash from their actions.
Under the target="_blank";
new law
which goes into effect on July 1st, no foreign payment system may
unilaterally cut services to Russian clients and they must base their
processing centre in Russia, with transaction data maintained within its
borders.
Additionally, there will be fines of up to 10% of the collateral
deposit per day for unilaterally stopping services to a bank. For Visa,
the required collateral deposit actually exceeds their annual returns
from operating in the country.
Earlier, the credit card companies stopped working with Bank Rossiya
and Sobinbank due to a previous round of US government sanctions.
Now, per the more recent sanctions, that ban is extended to the Russian banks SMP and InvestCapitalbank. Both banks are target="_blank"
controlled
by the Rotenberg brothers, Boris and Arkady, who are linked to large
gas pipeline contracts and various Sochi Olympics contracts.
Payments networks have now become political weapons of mass
destruction. This is a disturbing trend, because if the selective
halting of international credit card networks can be deployed against
political enemies, then nearly no country is safe.
Business models disrupted
An admittedly nervous Visa statement on Tuesday explained: “We regret
any disruptions that the institutions, their cardholders or merchants
may experience. All of Visa’s systems are processing normally, and we
continue to service our other unaffected Russian clients.”
MasterCard target="_blank"
stated
that they will remain “open for business as usual with all our Russian
banks, with the exception of Rossiya, Sobinbank, SMP Bank and
InvestCapitalBank. Service of cards issued by the latter two banks will
be stopped shortly according to the revised US sanctions announced
today.”
Visa and MasterCard process about 90% of all card transactions in
Russia and the new law completely disrupts their business and
technological models.
Visa’s Chief Financial Officer Byron Pollitt told the
Financial Times
that “issues with Russia and Ukraine were already affecting
cross-border volume and sanctions would impact on payment volumes.” He
added that the company expects several pennies of earnings per share
impact for the fiscal year.
However, Visa CEO Charlie Scharf remains optimistic, target="_blank";
telling
analysts, “If you just get down to reality for a second, we have 100
million cards in Russia today. And it’s not in anyone’s best interest,
inclusive of the Russians, to make those cards not available to their
own citizens.”
Home-grown system
Similar to France’s Carte Bleue and Germany’s Geldkarte, the Russian
central bank plans to establish a national payments system for handling
domestic card transactions in Russia.
For international transactions, Russia is inspired by China’s target="_blank"
UnionPay,
the rapidly growing payments platform whose cards are accepted in 135
countries and is now bigger than MasterCard and second only to Visa in
processing volume. Who needs Visa and MasterCard in a world of payments
innovation?
We are witnessing more and more of these types of payment blockades in line with broader target="_blank"
financial warfare occurring under the surface. In 2012, Belgium-based wire clearinghouse SWIFT target="_blank"
discontinued service to 30 Iranian banks following intense pressure from Washington, DC.
And who could forget the proverbial rug being target="_blank"
pulled out from under Wikileaks by the Visa, Mastercard, and PayPal giants.
In July, the US plans to target="_blank"
unleash the IRS on Russian banks further destabilizing the current situation.
Risky game
Centralized systems have always had the weakness of being driven by
both external and political forces. It’s simply an inevitable temptation
when a single choke point exists in the network.
The same mischief that plays out between mega-states on the
international stage just as easily plays out domestically in
inflationary regimes like target="_blank"
Argentina,
where credit cards are frequently limited to domestic usage only and
where hard currency and precious metals are difficult to obtain.
Once the payment mechanism starts to become used for achieving policy
goals, the system has lost its integrity. Alternative payment methods
that rebuke censorship begin to emerge, attracting new capital and new
economic activity.
Meanwhile, in other related news, Ukraine climbed to the No.9 position in global active target="_blank"
bitcoin nodes
and Russia currently sits at No.7. Global active bitcoin nodes measure
number of nodes in the distributed p2p network that maintain and
broadcast the full bitcoin block chain.
In the words of target="_blank"
Jim Rickards, author of
The Death of Money, “only escalate the battle if you know where it’s headed.”
Visa and Mastercard could be significantly harmed by this obvious
retaliation. In addition to mandating changes to the rules of the local
payments network, Russia could freeze assets of US companies doing
business in Russia and also begin to target="_blank"
unwind its positions in US treasuries. And, that’s before they even get to the gas and oil markets.
