Really interesting paper - extremely informative - Guest post: Making a non-western payment card system, in Russia Guest writer | Apr 25 Russia’s Duma is hearing the final version of a draft law to create a national system for payment cards on Friday — a direct response to US sanctions over the Ukraine crisis. Natalia Kaurova, Associate Professor at the Financial University under the Government of the Russian Federation, and Anastasia Nesvetailova, Director of the City Political Economy Research Centre at City University London, discuss how the system could be built. ________________ In late March, MasterCard and Visa froze service to cards issued by Bank Rossiya, after it was named in US sanctions. President Putin declared that Russia should limit its exposure to political risks in the financial system and build its own national system supporting electronic card payments. Last week, the government decided to establish a Russian national clearing system as a separate corporation controlled by the Central Bank of Russia (CBR). The National Payment Card System (NPCS) would process all card payments inside the country; it is also likely that NPCS would serve as a central processing hub supporting all international card payments, which would allow Russia to bypass international payment systems. More than twenty years after the breakdown of the command economy, Russia remains a cash-based society in transition to a financialised capitalism: 81 per cent of operations with plastic cards are cash withdrawals. Only 19 per cent are for card purchases. Card payments also account for 59 per cent of total transaction volumes, with the remainder paid for in cash. During this long transition, the Russian payment system has remained fragmented. It has become dominated by western providers such as Visa and MasterCard. There are 28 payment and clearing networks operating in Russia today, including 11 based on the platforms of Russian commercial banks and 4 foreign ones. Total turnover of cards issued by Russian banks is close to $360bn. Visa and MasterCard account for up to 95 per cent of the total market for plastic cards in Russia, with about 80 per cent of their transactions serving the Russian domestic market. The current institutional and legislative effort is certainly the most serious step yet towards a country-wide payment network, but it is not the first one. Since the early 1990s, there have been attempts to build a national payment and clearing network but no concrete action ever followed the proposals. The chaos of the 1990s, and the chronic discord between the policies and the interests of largest commercial banks, stood in the way. Also, the lack of importance attached to a national payment system was symptomatic of the general trend of delayed political reaction to economic and development priorities, and of the peculiarly ‘nineties’ understanding of economic globalisation in the age of multilateralism. Dependence on Western companies was not considered a threat to national economic security. Concrete steps towards a pan-Russia card payment network were taken only in the wake of the US-imposed sanctions during the past month. Although the push for the initiative comes from those measures, the full significance of the move must be understood in the context of the general desire of the Putin regime to isolate and protect the country from political risks. The NPCS fits well with Russia’s increasing drive towards national and regional economic autonomy and geo-security. It is indicative that one of the main benefits of the new all-Russia payment system cited by Russian politicians is ‘greater protection of the privacy of Russian card holders from the eyes of US security agencies.’ There could be tangible economic benefits to the Russian state from setting up a country-wide payment and processing network. It should make the governance of the financial flows easier and more effective, and would help bring parts of the Russian shadow financial system and grey economy into light — as well as helping fight with endemic corruption, increasing the liquidity of the banking system and raising fiscal revenues. Some academics and policymakers suggest that with the NPCS working autonomously, a whole new economic strategy of import substitution in Russia — which remains heavily dependent on consumer imports — may at last be viable. But many in the Russian banking community are sceptical about the details of the plan. First, it will take at least six months to finalise the technical design of system. That is eons of years in financial services timelines, and a risky undertaking in the fragile financial context of the Russian economy. Second, the final decision about the model is likely to be informed by politics, not business rationale. Starting a vast new system from scratch is ineffective and wasteful. There are technologies and companies already servicing card payments, like Zolotaja Korona (issuing 900 million cards and controlling 513 bank terminals), or Sberbank’s Pro100, that would be relatively easy to adapt to a national scale. Some banking professionals argue for adapting a version of the Chinese Unionpay clearing system that is functioning in nearly 120 countries. This route would be cost-effective and logistically reliable, yet it would imply dependence on Chinese technology and service. Third, the Russian NPCS would service customers inside Russia. But to be able to use credit when abroad, or even to pay for international goods online, Russians would still need to use international cards such as Visa or MasterCard — or hope for a time when the NPCS becomes an international network. Fourth, most experts agree that it is the integration into the Continuous Linked Settlement Bank (CLS) that is the most critical step towards an alternative payment and clearing network not just for Russia, but for the wider market of the Eurasian Economic Community. Integrated into the CLS, the Russian NPCS would make it easier to denominate all international payments for Russian gas in roubles. Many of these questions will remain unanswered for a while. What is clear for the moment though is that the economic sanctions against individuals close to the Putin regime are having an effect, albeit not the intended one. When Bank Rossiya, one of the longest surviving private banks in the new Russia and tightly connected to the political elite, was affected by the sanctions, Putin declared that he would keep his own salary account in the bank. Since then, Bank Rossiya has been called an ‘island of stability’ in the sea of financial turbulence on social media sites. Putin’s own approval ratings are at their highest to date, around 85 per cent. The major lesson from this evolving story therefore, is not even about Russia or sanctions as such, but about globalisation in the twenty-first century. In the new reality of global competition, the sanctions intended to weaken the political regime in Russia may end up bolstering the isolationist tendencies in the country, strengthening in the process the economic arm of the Russian state, through the financial system. A country like Russia (or China, for that matter) can seriously consider limiting its dependence on global financial companies. Global companies however, do not have such a choice. And in conclusion — it is telling that in cables leaked to Wikileaks in February 2010, when the NPCS was first put into law in Russia, US diplomats observed the following: the NPCS operator would process the domestic payments for all members and collect processing fees estimated at $4 billion per year… [T]his draft law continues to disadvantage U.S. payment card market leaders Visa and MasterCard, whether they join the National Payment Card System or not. If they join, the NPCS operator will collect the fees, leaving them to collect processing fees only when card-holders travel abroad — a tiny section of the market. If they do not join but choose to compete with NPCS cards, they will have to set up payment processing centers in Russia, a very large investment in itself, and compete against a system likely backed by the largest Russian state banks… We recommend that senior USG officials also take advantage of meetings with their Russian counterparts, including through the Bilateral Presidential Commission, to press the GOR to change the draft text to ensure U.S. payment companies are not adversely affected… ___________ More about the authors Dr Natalia Kaurova is Associate Professor at the Financial University under the Government of the Russian Federation. The views expressed in this article are her own. Dr Anastasia Nesvetailova is the Director of City Political Economy Research Centre, City University London and Senior Visiting Researcher at the Danish Institute for International Studies (DIIS).
Posted on: Fri, 25 Apr 2014 15:24:17 +0000
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