Financial sanctions: a reality check

Some friends were applauding Visa and MasterCard’s decision to throw Russia off their payments networks over the weekend.

Both companies handle 90% of all debit and credit card payments outside of China - and their announcements will deal another significant blow to the Russian economy.

It sounds grand, but the presentation by the media misses a key point: Russians or, rather, President Putin doesn’t care.

Over the last seven years, Russian banks have built a very effective internal payments network called Mir. Cards from Russian banks now cover all of the adult population – 100 million users – and allows card payments domestically. So, the action of Visa and MasterCard only affects Russians who travel overseas which, in current climate, is most likely to be wealthy Russians who have foreign bank accounts anyway. Therefore, imho, this announcement will have minimal impact.

From Wikipedia:

Mir as a system was formalized in 2014 as a way to overcome potential blocks of electronic payments, after several Russian banks were denied services by US-based Visa and MasterCard because of the sanctions regime against them …

The first cards working on the Mir system were launched in December 2015. Sberbank, Russia's leading bank, started issuing them in October 2016 … by the end of 2016, 1.76 million Mir cards had been issued by 64 banks; five years later, by October 2021, over 100 million cards were in circulation …

Mir does not itself issue cards, extend credit or set rates and fees for consumers; rather, Mir provides financial institutions with Mir-branded payment products that they then use to offer credit, debit, or other programs to their customer.

Even then, does Russia need Visa and MasterCard? Today, they announced an alliance with China UnionPay.

Several Russian banks said on Sunday they would soon start issuing cards using the Chinese UnionPay card operator's system coupled with Russia's own Mir network, after Visa and MasterCard said they were suspending operations in Russia.

China and Russia support each other. Who needs Visa and MasterCard?

A second point was that Russian banks were thrown off SWIFT. Well, they haven’t been. It’s actually just the large domestic Russian banks but not those that deal with the EU for oil and gas.

Sberbank, Russia's largest lender, and Gazprombank were not included because they are the main channels for payments for Russian oil and gas, which EU countries are still buying despite the conflict in Ukraine.

Add to this, as I blogged last week, there are ways and means around SWIFT and these sanctions are also going to hit the Russian economy but nowhere near with the magnitude accorded by our media. For example, I attended a conference in Vladivostok a few years ago and could see that Russia’s neighbours in China and India and more were present in force. In other words, the sanctions of the west are being offset by ties to the south and east. Business still goes on in Russia.

Equally, I also mentioned that Russians could use cryptocurrencies to circumvent sanctions. Sure enough, the EU has taken notice of this:

A senior EU official said the EU is aware that cryptoassets were a “possible circumvention route” to avoid sanctions imposed by the bloc and other western powers. The EU's executive European Commission has been reading reports in the press on cryptoassets and has also received information directly, the official said. “The increase in value of some of these assets maybe a response to attempts to circumvent the sanctions. We are looking into this, but no decision has been taken,” the EU official said.

And a final point is that I found magazines like The Economist are saying how Putin’s propaganda machine is failing in this war.

It is not clear how long Russians will choose to believe what their televisions are telling them. For some, rejecting the big lie is too frightening a prospect to contemplate. And the more people suspect what is really happening, the more vigorously Mr Putin’s propaganda machine will spin new lies, and the more brutally he may treat those who tell the truth about what he is doing to Ukraine, and to Russia.

A Russian friend told me that, in reality, Putin’s popularity in Russia has increased from 64% before the start of the war to over 70% last week.

“Official pollsters show about 70 per cent of Russians approve sending troops to Ukraine,” said Associate Professor Nikita Savin from HSE University in Moscow.

Professor Savin goes on to say: “we should not trust these results”, but who is we. We who are outside Russia; not they who are inside. For those inside Russia, they believe that the war is wholly justified. After all, with national television broadcasting 24*7 that Ukraine is the aggressor, combined with limited access to social media and networks, a large trench of Russian citizens believe what they are being told.

All in all, we need a reality check of what we hear. We think we know the total picture as neutral far-away observers. It’s not the same for those living through this in Russia, Ukraine and their neighbours.

Meantime, here’s a message from a friend in Kyiv that I received last night:

For those who hope the sanctions and restrictive measures introduced in response to Russia’s unprovoked and illegitimate war against Ukraine, they might find that they are fighting an uphill battle.

I keep returning to the military options – not pick a fight – but as a response to the Russian perception of the USA and NATO.

The alliance has been designated as an existential threat. NATO has been told to withdraw its forces and weapons from the nations that were not members in 1997. The Alliance has been told not to operate any fighter bombers with a strike capacity in the airspace over Eastern, Central and Northern Europe. Equally, it demands NATO to not operate warships with strike capacity in the Black Sea, the Baltic Sea, the Barents Sea, and the Arctic.

From a Russian perspective, the USA and NATO are to blame for the war in Ukraine.

The great majority of Russians blame the US, one-third blame NATO and Ukraine. Our unprecedented and comprehensive sanctions against Russia and our supply of lethal aid to Ukraine will be seen as hostile acts. On top of that, Russia, being true to its threat assessment, has been waging a hybrid war against the EU and NATO for more than 8 years already. Lastly, Russia warns of World War III and the use of nuclear weapons if NATO acts according to our strategic concept.

The fact is that, whether we like it or not, we are no longer in a state of peace. Russia has engaged us in a hybrid war, dictating us to step back and subdue to its demands. If we do, tomorrow looks even bleaker than today.

We need to bear in mind that not responding to Ukraine’s request for help, means that we:

• delegitimize past humanitarian intervention operations as none of those were anywhere close to the scale and scope of the humanitarian disaster we are facing today,
• undermine NATO credibility as we give in to Russian blackmail while failing to act according to NATO’s strategic concept, and
• turn a blind eye to the far-reaching consequences of a Russian military victory in Ukraine.

So, here is a wake-up call and a call for help.

Dear friends

Ukrainian population is supporting their army, medics are working in the hospitals, people are uniting in various local initiatives.

Moreover, resistance continues as the local population are protesting against tanks and armed Russian occupiers with just bare hands and Ukrainian flags, in Kherson, Melitopol and other towns.

Imagine the level of determination and heroism – to protest in the towns that are occupied! These people give great inspiration! Perhaps they could inspire some of those Western leaders to take more determined actions, too.

Please continue your support to Ukraine, Ukrainian Armed Forces, Ukrainians remaining in Ukraine and those who have been displaced to the West. But please also continue to pressure your governments to take more determined decisions. While they wait and do not want to get involved and provoke a bigger war – the war is already there, and Ukrainians continue to die and suffer.