Russian strongman Vladimir Putin struck back against Western sanctions, telling international multinational financial services companies Visa and MasterCard they must cough up a $3.8 billion USD “security deposit,” which they will forfeit if they participate in any further sanctions against Russian banks. The tactic brings into question the entire idea of economic sanctions as a political cudgel, when nations today are so economically intertwined.
Western nations, under the leadership of US president Barack Obama, have imposed a series of mild economic penalties against banks and individuals in the Russian Federation, attacking particularly the assets and businesses of wealthy individuals close to Putin. The sanctions are intended to force Putin to back off in Ukraine, where Russian troops threaten to intervene in a growing civil conflict between Ukraine’s current independent government and pro-Russian militias.
Last month, Visa and MasterCard agreed to stop servicing payments for customers of Saint Petersburg-based Rossiya Bank, which is owned by Yury Kovalchuk, the multi-billionaire who has been called “Putin’s personal banker,” and for SMP Bank, which is owned by two of Putin’s judo buddies, brothers Boris Rotenberg Sr. and Arkady Rotenberg.
With each refusal to process a transaction, the companies could lose 10% of their deposit.
New legislation pushed through by Putin bans foreign payment processing companies from refusing to process Russian orders, and requires that companies pony up a massive security deposit to ensure compliance. If a company refuses a transaction, they would lose a portion of the security deposit. Under the law, Visa and MasterCard are being ordered to pay $3.8 billion if they wish to continue doing business in Russia. With each refusal to process a transaction, the companies could lose 10% of their deposit.
Last year, the two companies processed $1.9 billion USD in Russian credit card transactions per day.
The law also provides for Russia to create its own, national credit card system. Putin has recently begun pushing for the Russian Federation’s independence from the world economy and from Western powers, citing the Soviet model, and seeks to establish his own economic union to rival Western trade regimes like the Transatlantic Trade and Investment free trade partnerships.
Neither Visa nor MasterCard have yet announced how they intend to deal with the law. “Several provisions in the law are unprecedented and will have a severe impact on the payments market in Russia — particularly cardholders, financial institutions, and merchants,” Visa said in a statement.
Russian banking analyst Vladimir Tikhonov told The Guardian that “the creation of a national payment system is not a replacement for Visa and MasterCard. If [they] leave Russia, it will of course be a serious blow for both citizens and for businesses.”