Inland Empire: Life in Russia Without Visa and Mastercard

buyerThis woman is happy she doesn’t live in Russia, where Visa and Mastercard may soon be banned. Courtesy of Fluencia

Inland Empire: How Will Russians Live Without Visa and Mastercard?
Sergei Khestanov
Republic
July 12, 2019

The new attack by Russian lawmakers on the international payment systems Visa and Mastercard may come to a head, successfully or unsuccessfully, this summer. For the law bill’s sponsors success would mean the near-total financial isolation of Russians from the rest of the world. All that would remain would be to adopt restrictions on foreign currency.

Going Our Own Way
There had long been talk of the need to talk of a completely autonomous domestic payments system, but the events of 2014 and, especially, the imposition of sanctions visibly accelerated the process.

In fact, in the spring of 2014, MPs in the Russian State Duma drafted amendments to the law “On the National Payment System” that would have forced Mastercard and Visa, which had been obliged to observe the sanctions against a number of Russian banks, to deposit amounts of money equal to their two-day turnover in special accounts at the Russian Central Bank. Visa said it would stop doing business in Russia. Negotiations with the Russian government and Central Bank followed this announcement. The draft law was considerably softened. The amount of the obligatory deposit was removed from the bill, and it was decided that international payment systems would operate in Russia through specially established local subsidiaries.

After Mir bank cards were launched, they were quite unpopular among Russians for a long time. Russians preferred time-tested foreign bank cards. Besides, initially there were purely technical problems with Mir that caused their cards to be rejected, but after the Russian Central Bank issued stern warnings, banks updated the software of their ATMs and payment terminals, more or less solving the glitches.

Another problem is that Russian cards are nearly useless abroad since they are accepted almost nowhere. However, given the small percentage of Russians who travel abroad, this is not such a huge problem.

The breakthrough in promoting the domestic cards came in 2018. On July 1, 2018, the electronic wage payments of all state-sector workers were transferred by law to Russian bank cards. By January 1, 2019, they had taken a big bite out of the share of the Russian market controlled by their famous competitors. According to the Federal Anti-Monopoly Service, during the period from January 1, 2018, to January 1, 2019, the share of actively used Visa cards among the Russian populace fell from 45% to 39.5%, while Mastercard’s share fell from 42% to 36%. The reduction in the international payment systems’ share of the Russian market happened as Mir doubled its share of active card users, which rose from 12.5% to 24.5%.

This is not surprising. The traditional Russian principle of pushing certain things, ironically dubbed the “voluntary compulsory” method, is rather effective. Outcomes are achieved quickly, making such methods of promotion quite popular. We should say, in all fairness, that this happens not only in Russia.

Such aggressiveness has a price, however. Compulsory promotion of goods and services reduces competition, since the advantages of using a particular service or buying a certain product derive from the market’s absence. Over time, products and services pushed in this way lag behind their absent competitors in terms of their quality.

Striking examples of diminishing quality in a market in which competition was restricted were the Soviet automobile and electronics industries. The latter lagged behind the world especially disastrously. Remember the old joke, “Soviet handheld calculators are the biggest handheld calculators in the worlds”?

Rejecting the Outside World
But degradation as a consequence of pushing goods and services through non-market methods is only half the trouble. It is much more dangerous to ban and expel foreign products and services from the domestic market. The new regulations described in the draft law “On the National Payment System” could force international payment systems out of Russia since they would be unable to comply with the regulations. Once they leave, Russian bank cards would not be accepted for payment abroad, and cards issued by foreign banks would not be valid in Russia.

Mir cardholders who never travel abroad would not even notice this nastiness. Everyone else would soon voluntarily be forced to join them. Give the Russian state’s high and growing share in the Russian economy, the regulations would not provoke fatal disaffection with the leadership.

Russia’s policy of self-isolation was adopted long ago, and a large segment of the populace has no real objections to it, while people who use their bank cards within Russia mostly do not care what system processes their transactions. What matters is that everything works fine and does not cost too much. Mir’s reliability is now on a par with the international payment system, and so are its rates. Besides, if push came to shove, the Russian Central Bank and the Federal Anti-Monopoly Service could force it to reduce its rates.

There are no rational reasons for establishing a homegrown system when the duopoly of Visa and Mastercard serve the Russian market just fine. China’s UnionPay and Japan’s JBC have been processed by certain Russian banks, but they have never played a significant role. You cannot make money in a highly competitive, mature market, long dominated by world leaders like Visa and Mastercard, unless you employ non-market methods of competition. The market simply does not need new players.

The reason for the persistent promotion of Mir card is not commercial. It is an insurance policy of sorts, one that will have claims made on it if real, harsh Iranian-style sanctions are imposed on Russia. If you regarded this scenario as a serious possibility you would have cause to establish a national system, especially because Chinese banks (on whom great hopes were placed in 2014) have essentially supported US sanctions. In these circumstances, it is better to have a stunted system in terms of its international access than to witness a sudden collapse of cashless payments if harsh sanctions are imposed.

However, this non-competitive idea immediately inspires people who are willing to make money by destroying their competitors.

If regulations pushing the international payment systems out of the Russian market were adopted, it would deprive Russians of the ability to pay for things abroad without cash, and the logical next step of banning or restricting the export of foreign currency from the country would be easy as pie. Simultaneously, Russians would find it much harder to purchase foreign goods in foreign online shops, something that would be incredibly difficult without access to international payment systems.

A side effect of the ban would be the promotion of Russian-registered joint ventures for selling Chinese goods to Russians.  This would have a positive effect on the receipt of VAT from these purchases. VAT matters since VAT revenues constitute up to a third of Russian federal revenues, making them comparable to Russia’s export revenues.

The natural consequence of depriving Russians of access to foreign online shops would be a rise in prices. At first, the government would profit slightly because VAT revenues would grow—until people stopped buying things.

The policy of isolating the Russian economy from the world economy in terms of Russian nationals being unable to spend money outside Russia has been reasserted, and yet another step on the long road of restrictions and bans may soon be taken. The tendency towards restrictions on foreign currency has once again been confirmed. We might recall the recent discussion about restricting unqualified investors from opening foreign currency accounts.

The hope remains, of course, that, as in 2014, the international payment systems would reach an agreement with the Russian government, Russian MPs would be reined in, and cardholders would not feel the pain. Unlike 2014, however, the Russian Central Bank has supported the bill.

Sergei Khestanov is a macroeconomics adviser to the director of Open Broker and associate professor of financial markets and financial engineering at RANEPA. Translated by the Russian Reader

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We Wouldn’t Mind If You Died of AIDS and Hepatitis C

aids flagRussia has an HIV epidemic. According to the Federal Aids Prevention Center, approximately a million Russians are infected. A third of them also have hepatitis C. At best, only hundreds of these patients receive state-of-the-art treatment. Image by Yaroslava Chingayev, special to Vedomosti

Officials Want to Replace Current Hepatitis C Treatment with Outmoded Therapy
Industry and Trade Ministry Supplied Money for Manufacture of Drugs
Irina Sinitsyna and Olga Sukhoveiko
Vedomosti
December 13, 2018

The Russian Health Ministry plans to significantly reduce procurements of the most effective treatment for viral hepatitis C, combined interferon-free treatment, thus reducing the availability of the drugs for patients infected with HIV in combination with hepatitis B and hepatitis C. Instead, the ministry has proposed putting these patients on interferon therapy. Maria Onufriyeva, director of Community of People Living with HIV, an interregional grassroots organization, has written about the matter to Health Minister Veronika Svkortsova. Ms. Onufriyeva has also sent a letter to Valery Alexeyev, director of the Honest Procurements Project at the Russian People’s Front (ONF). Vedomosti has seen copies of the letters. Ms. Onufriyeva confirmed she sent them. A spokesperson for Mr. Alexeyev said he received the letter. The Health Ministry has not responded to her query.

In November, Minister Skvortsova said that over 714,000 Russians were infected with HIV. According to the Federal Aids Prevention Center, whose figures Ms. Onufriyeva cites, there are 978,443 Russians infected with HIV. A third of them also have hepatitis C.

In late October, the Health Ministry published the final list and amounts of drugs it would be procuring in 2019 and providing to HIV patients, including HIV patients who also have hepatitis B and hepatitis C, writes Ms. Onufriyeva. (Vedomosti has seen a copy of this list.) In particular, the Health Ministry wants to reduce procument of dasabuvir by 750%, meaning one hundred patients would have access to the drug, while this year 748 people could count of getting it, according to the Community’s calculations.

In monetary terms, this would mean a drop in expenditures on the drug from 431.6 million rubles [approx. 5.7 million euros] to 57.9 million rubles [767, 754 euros].

The Health Ministry plans to switch to narlaprevir, intended for the treatment of hepatitis C in combination with other antiviral drugs. In 2018, as the Community has discovered, and as is borne out by information accessed on the federal procurements website, narlaprevir was not purchased by the Russian governmennt. In 2019, the Health Ministry could spend 139 million rubles [approx. 1.8 million euros] on procuring the drug in order to treat 430 people, the Community argues.

Dasabuvir is the most up-to-date antiviral drug. According to the Community, it can cure 98% of hepatitis C patients in twelve weeks.

This figure was confirmed by Vadim Pokrovsky, director of the Federal AIDS Prevention Center.

In Russia, HIV patients who also have hepatitis C have been treated with dasabuvir in combination with ombitasvir/paritaprevir/ritonavir, manufactured under the brand name Viekira Pak by the American company AbbVie. Dasabuvir was placed on the official Russian list of vital and essential drugs for this year. Two years ago, Alexey Repik’s R-Pharm and AbbVie agreed to partly localize manufacture of the drug at R-Pharm’s plant in Kostroma. As R-Pharm reported then, the deal covered repackaging of the drug and quality control. According to AbbVie, Viekira Pak is distributed in Russia by R-Pharm and Euroservice.

Ms. Onufriyeva writes that interferon therapy is much less effective in treating chronic hepatitis C patients with HIV. The treatment significantly reduces quality of life, since it requires weekly injections.

Mr. Pokrovsky explained the difference. Interferon treatment has almost no effect on the virus itself. It stimulates the body’s immune response, but it has numerous side effects, from impotence to mental disturbances. The treatment lasts a year.

Due to the length of the treatment, Ms. Onufriyeva said, it was between 52% and 133% more expensive than interferon-free treatment.

Tableted by R-Pharma, narlaprevir has to be taken together with ritonavir, pegylated (long-acting) interferon, and ribavirin, as indicated in the instructions.

In 2012, R-Pharma acquired a license for the production and sale of narlaprevir from Merck & Co. It tried to refine the drug with support from a federal targeted program administered by the Russian Industry and Trade Ministry. Trade publication Vademecum wrote that R-Pharm invested 700 million rubles in narlaprevir. The Industry and Trade Ministry would allocate 120 million rubles on clinical trials, Sergei Tsyb, head of the ministry’s Department for Chemical Engineering and Bioengineering, promised in 2012.

A R-Pharm spokesperson confirmed receipt of the funds.

R-Pharm registered narlaprevir in 2016. In the spring of 2017, during a meeting with the business community, President Putin promised R-Pharm’s director general Vasily Ignatiev that the government would allocate funds to procure the company’s drugs for hepatitis C patients.

“I will also keep this in mind when allocating resources for healthcare in 2018 and the following years, in 2019 and 2020. It will be necessary, of course, to use what you have developed,” Putin said.

Mr. Pokrovsky is certain the Health Ministry’s decision to reduce procurements of interferon-free drugs could have been influenced by Russian manufacturers wanting to compensate their costs at the state’s expense.

The R-Pharm spokesperson insisted that the company, like other manufactures, received a request from the Health Ministry to quote its prices for narlaprevir and dasabuvir.

“Our price offers for the drugs were the same as last year’s,” he said.

In total, according to the Community’s calculations, in 2019, the Health Ministry can spend 473.5 million rubles [approx. 6.3 million euros] on the procurement of drugs for treating chronic hepatitis C, as opposed to 1.1 billion rubles [approx. 14.6 million euros] last year.

In November, Vademecum wrote that, in 2019, the Health Ministry would also reduce its overall procurement of antiretroviral drugs under its program for providing drugs to people infected with HIV, including patients who were infected with HIV in combination with the hepatitis B and C viruses. However, although it would spend far less money, it planned to expand coverage to a mere sixty percent of those needing treatment.

Ms. Onufriyeva has asked the Health Ministry to consider increasing procurements and moving away from the chronic hepatitis C drugs scheduled for purchase in 2019 and towards drugs that have proven effective. The latter should be supplied to patients with HIV plus viral hepatitis C, including those suffering from advanced liver fibrosis and cirrhosis.

She has asked Mr. Alexeyev to assist her in protecting the interests of patients by sending inquiries to the Health Ministry, asking them to explain the reasons for the cuts in procurements and the selection of outmoded drugs. She also asked him to verify whether the Health Ministry’s actions were in compliance with antitrust laws.

She told Vedomosti she had not received replies to her letters.

vich

“How the Numbers of HIV-Infected Patients Have Changed, 2013–2018.” The red columns indicate total numbers of patients; the orange columns, first-time infections. Figures are given in thousands of people. Source: Rosstat. Courtesy of Vedomosti

Mr. Alexeyev explained the delay in replying. The letter contained a good deal of specialized and medical information, and it was under review by independent experts working for the Russian People Front’s Honest Procurements Project.

“The Russian People’s Front has drawn attention to problems with the list of essential and vital drugs, and their procurements, and this letter is the latest alarm,” he said.

According to Mr. Alexeyev, the Russian People’s Front has been reviewing the Health Ministry’s procedure for including medicines on the list and had already been in touch with the government.

hep b and c

“How the Numbers of Hepatitis Patients Have Changed, 2013–2018.” The dark blue bars indicate first-time cases of chronic hepatitis B; the light blue bars, first-time cases of chronic hepatitis C. Figures are given in thousands of people. Source: Rospotrebnadzor. Courtesy of Vedomosti

If the grassroots organization Community of People Living with HIV believes the industry regulator acted in a way that violated specific regulations on procurements or antitrust statutes, it can file a complaint with the Federal Anti-Monopoly Service (FAS) in the manner prescribed by law, said Maxim Degtyarev, deputy head of the Department for Oversight of the Social Sector and Trade at FAS. For the time being, however, FAS had no grounds to perform an inspection.

The Industry and Trade Ministry did not respond to our request for information.

Elena Filimonova contributed to this article.

Translated by the Russian Reader