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US credit card giants Visa and MasterCard announced on May 23 that they will continue to do business in Russia. The pair said they have reached a compromise with the Russian government that will sidestep punitive legislation that had threatened to force them out of the market.

Last month, the two companies, which together service 90% of credit card transactions in Russia, stopped servicing payments for four Russian banks that were included on the US sanctions lists. Moscow responded by rushing through legislation to create its own payment system that is independent of the US dollar international reserve currency or western companies. 

The new regulations also made foreign credit card companies liable to deposit billions of dollars in a guarantee fund. The companies baulked at making such large payments - analysts suggested Visa might have to shell out as much as $1.8bn - saying that unless the terms were softened they would pull out of Russia by July 1, when the legislation is due to come into force.

They appear to have thrashed out a deal in talks with Finance Minister Anton Siluanov and First Deputy Prime Minister Igor Shuvalov in St Petersburg on the sidelines of the Kremlin's flagship economic forum. "MasterCard and Visa will continue business in Russia," said Andrew Torre, Visa's general director for Russia, according to Interfax. “In any situation, we will stay in Russia,” Ilya Ryaby, general director of Mastercard in Russia, told journalists.

The credit card company executives said Russia has agreed to a proposal that will see the pair build a working relationship with domestic payment systems within six months to guarantee operations. Following that, within 18 months Visa and MasterCard will create a Russian company to handle their operations, Siluanov told the newswire. “We are willing to cooperate in this direction,” he added, according to Reuters. “I think we will find a solution that suits both Visa and Mastercard and the Russian Federation.”

Working for the yankee dollar

The international sanctions applied by the West on Russia since it annexed Crimea in March have been largely symbolic so far, but the move to limit access to international payment and settlement systems is perhaps the one area in which they have done real damage. With the dollar as the international reserve currency, the US is in the position of being able to cut Russia off.

That has seen the Kremlin ordering state-owned companies to settle international trade contracts in local currency rather than dollars. One of the deals cut in Beijing this week during Russian President Vladimir Putin's visit was between state-controlled VTB Bank and the Bank of China to use rubles and yuan to settle trade deals.

China has long called for a decline in use of the dollar, and will be more than aware that the US has vividly shown how vulnerable countries are to its power over international payments. Therefore, it's a willing partner to set up an alternative payment system that operates independently from the US currency. However, analysts say that the switch to a non-dollar based international payment system will be extremely difficult, and that it will be several years before the new system is running smoothly.

"Putin's bill to make export contracts in rubles is likely to be implemented formally. Russian banks may play the role of intermediaries that receive forex payments from international companies and convert the receipts into rubles in order to show clearly that export revenues are paid in rubles," says Natalia Orlova, chief economist at Alfa Bank. "We see this news as rather negative. Should this initiative be implemented, it may reduce forex market liquidity, as companies, instead of operating through the market directly, may be restricted to converting export revenues through those banks where they hold accounts. Thus, the idea of billing contracts in rubles could likely end up causing additional economic costs by reducing forex market flexibility."

The change will inevitably squeeze liquidity in the Russian banking sector further. Russian banks are already under a lot of pressure and due to the slowing economy, the central bank has had to lend the sector as much money as it did in 2009 to keep the system working smoothly. As a result, loans to the banking sector have contributed to a fall in Russia's gross international currency reserves.