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August 3, 2022

Nearly 6 months on from Ukraine invasion… how effective have Russian sanctions been?

The Russian economy is reeling from the impact of Western sanctions with Russian card issuers resorting to desperate measures amid a chip crisis

By Douglas Blakey

The Russian economy is taking a hammering from Western sanctions and corporate exodus. Moreover, sanctions against Russia are not going to be lifted any time soon. And the impact is such that Russian card issuers are having to cannibalise unissued cards amid a chip shortage.

“Politically, they have been seen as a success by the public in Western countries, in that they are regarded as punishing the Russian elite,” says Dr Henry Balani, Head of Industry and Regulatory Affairs at Encompass Corporation.

As reported by Sebastian Shehadi, political editor and senior editor at RBI sister title Investment Monitor, research from the Yale School of Management highlights the success of the sanctions to date.

In particular, Yale’s research concludes that, on its current trajectory, Russia is heading for economic oblivion. The international opposition must not step on the brakes until Russia ends its invasion.

Balani adds: “Additional sanctions will continue to be enacted as the war in Ukraine grinds on. The pace has been unprecedented – the number of restrictive measures imposed on Russia by the UK since the war started in February of this year is on pace to equal all actions since 2014.

Banks at the forefront of implementing sanctions

“The challenge now becomes one of enforcement – and banks are at the forefront of implementing the sanctions regime.

The complex structures used by Russian oligarchs to obfuscate their ownership continues to represent a challenge. Ultimately, if banks are not able to enforce these sanctions – by identifying and freezing financial transactions – they will bear the brunt of the public backlash,” concludes Balani.

As noted by Yale, Russian domestic financial markets, as an indicator of both present conditions and future outlook, are the worst performing markets in the entire world in 2022 despite strict capital controls – in addition to the country being substantively cut off from international financial markets, limiting its ability to tap into pools of capital needed for the revitalisation of its crippled economy.

Sberbank sanctions impact card operations

Russia’s largest bank, Sberbank , is suffering a hit to its card operations as a result of European suppliers halting deliveries of key components. Specifically, Western sanctions have impacted Russian banks ability to import advanced technology such as bank card chips.

Russia’s National Card Payment System said there were not enough chips to meet demand for issuing Russia’s home-grown Mir banking cards.

As Visa and Mastercard have exited the Russian market, there is an increased demand for Mir cards.

With European chip suppliers refusing to supply Russian banks, Sberbank is reduced to removing chips from un-activated bank cards to combat the shortage.

Mir playing catch up in Russian card sector

Mir cards were introduced by Russia’s National Payment Card System in December 2015 and launched due to the US and US allies placing sanctions on the country.

Mir has developed a strong acceptance network in Russia. Mir cards are now issued by 158 banks in the country. Mir cards provided a much-needed push to the domestic Russian payment card market.

Prior to the current sanctions, Visa and Mastercard accounted for 68.1% of Russian debit cards in circulation. According to GlobalData, there were some 99.8 Mastercard branded debit cards in circulation ahead of Visa (79.4 million) and Mir (74.6 million) cards.

Russia’s credit card market was dominated by Mastercard, Visa, and American Express prior to the current sanctions. Specifically, around 81% of credit cards in circulation were branded Mastercard or Visa.

According to GlobalData, credit card penetration remains low in Russia, with just 27.6 cards per 100 individuals in 2020. Mir ranks a poor third by credit card market share with just 4.7 million cards or just 12% behind Mastercard and Visa with 18.5 million and 14.0 million cards for market shares of 46% and 35% respectively. American Express accounted for about 7%.

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