Inland Empire: Life in Russia Without Visa and Mastercard

buyer This 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

House of Cards

A disembodied hand proudly holding a Sberbank-issued Mir card. Photo courtesy of PressTV

Central Bank Preparing for Cutoff of Some Banks from International Payment Systems
Regulator Asks Small Banks to Have Backup Intermediary Able to Service Their Cards
Anna Yeryomina
Vedomosti
December 6, 2018

The Russian Central Bank has asked small banks to find a backup partner that would be able to service their bank cards. This would be an asset if their current intermediary banks were cut off from international payment systems.

The Central Bank is concerned with the continuity of card transactions in banks that work with payment systems indirectly, that is, via an intermediary bank. The regulating authority has advised these indirect clients of payment systems to contract with another bank, besides their primary intermediary bank, that could supply them with access to card payment systems. Five bankers confirmed to us they had received the memorandum.

The memorandum also says the contract should provide for a test exchange of information when integrating with the new intermediary banks. It also states payment systems should draft an action plan and recommend it to their participating banks.

The major intermediary banks are Payment Center Credit Union, Uralsib, VTB Bank, Rosbank, and Promsvyazbank.

A Central Bank spokesperson stressed the memorandum was only advisory, but it was based on international recommendations for risk management in payment systems. The need for banks to contract with backup intermediary banks is not so obvious. According to several of its recipients, in early autumn the Central Bank had sent banks a letter urging them to draft plans to ensure the continuity of payments, but it had not recommended any specific measures.

Switching intermediary banks is a time-consuming, expensive process that takes between three to six months, notes Maya Glotova, director of Kartstandart, a processing center that partners with Payment Center Credit Union. The most high-profile case occurred in 2013 after Master Bank’s license was revoked. As Glotova recalls, Master Bank had functioned as an intermediary bank in payment systems and provided payment processing services. Small banks had to halt their operations for several weeks, and several of them had to leave the payments business. Glotova estimates it would cost a single bank more than $100,000 to switch intermediary banks in the three payment systems.

Intermediary banks had little to say about the memorandum. A spokesperson at Promsvyazbank promised to follow the Central Bank’s recommendations, while a spokesperson at VTB Bank said their own intermediary program had worked well.

Several bankers believe the Central Bank is hedging not only against the collapse of intermediary banks but also potential sanctions, which are fraught with the possibility that intermediary banks would be cut off from Visa and Mastercard, as occurred in 2014 and 2015. The United States has been drafting a new set of sanctions that could affect major banks. Payments within Russia would not be affected: these transactions are processed by the National Payment Card System (NSPK). Russian bank cards, however, would not function abroad. (A spokesperson for NSPK, which operates the Mir payment system, said they had not received the Central Bank’s memorandum.)

VTB Bank had drafted a plan to counter sanctions, its president, Andrei Kostin, told the TV channel Rossiya 24 in October.

“We have been mapping out with both the government and the Central Bank how to avoid the consequences, especially for individuals and companies. I think we can overcome them. I don’t think the sanctions will be wholesale and directed against the entire financial sector,” Kostin said.

Translated by the Russian Reader

Evgeny Shtorn: How the FSB Tried to Recruit Me

“I Had a Night to Say Goodbye to My Whole Life”
Sociologist Evgeny Shtorn Left Russia Because the FSB Tried to Recruit Him
Elena Racheva
Novaya Gazeta
January 20, 2018

On January 5, sociologist Evgeny Shtorn, an employee at the Centre for Independent Sociological Research (CISR) in St. Petersburg, left Russia for Ireland. In December, his application for Russian citizenship was rejected, and immediately afterwards he was summoned to the Russian Federal Security Service (FSB), according to Shtorn, where he was interrogated about CISR’s financing and the foreign organizations it collaborates with. (Since 2015, the CISR has been classified as a “foreign agent.”) According to CISR director Viktor Voronkov, Shtorn is at least the fourth CISR employee whom the FSB has attempted to recruit.

Shtorn was born in the Kazakh Soviet Socialist Republic, but in 2000 he left the country to study in Petersburg. In 2004, he was granted Russian citizenship at a Russian consulate in Kazakhstan. He lived for eight years on his Russian passport, but in 2011 he was told by authorities the passport had been issued groundlessly, and he was not a Russian citizen.

Shtorn’s Kazakhstani citizenship had been annulled long before, but he found himself a stateless person after living in Russia for eleven years. The only paper the authorities would issue him was a residence permit for a stateless person, which allowed him to live and work in Russia. After five years, one can apply for Russian citizenship on this basis. This was what Shtorn did in July 2017, after passing the obligatory Russian language exam, assembling a whole dossier of paperwork, and standing in endless queues.

During this time, Shtorn, who is thirty-five, enrolled in the Higher School of Economics MA program and continued working as manager for development at CISR, one of the oldest and most respected independent sociological research institutes in Russia.

“I went to the local Federal Migration Service (FMS) office in late November to pick up my passport,” Shtorn recounts. “I was told my citizenship application had been rejected because I had provided false information about myself. The FMS had decided I did not lived at my registered address, because they had come checking in the afternoon, when I was not home, and I had not listed all the addresses where I had lived in Russia, although in the application I filled out there was a footnote saying I was not obliged to list all of them.”

The rejection meant Shtorn could resubmit his application for citizenship only in a year. Two weeks after his application was rejected, Shtorn was telephoned by a person who identified himself as an FMS employee. He said he was handling Shtorn’s application and asked him to stop by their office.

On December 7, Shtorn went to the FMS office that handles the registration of statelesss persons.

“I was met by a person my age. We went up to the second floor and walked into an office with no plaque on the door,” Shtorn recounts. “I caught sight of a picture of Andropov on the wall, an old-fashioned, insipid, Soviet-era portrait. I immediately understood everything.”

The man showed Shtorn a FSB officer’s ID. Shtorn did not remember his rank, but he did memorize his name and surname, but he is afraid of identifying him publicly.

“He quickly got down to business,” recalls Shtorn. “He said when the FSB reviewed my application, they were quite surprised I worked for a ‘foreign agent’ and at the Higher School of Economics, although I am actually a student there. He asked me what I did at CISR. He was polite, but his vocabulary was bizarre. ‘Who is your patron?’ he asked. I explained we did not have patrons, that researchers operate differently. There are things a person wants to research, and he or she tries to research them. To have something to say, I told him about Max Weber, and the difference between quantitative and qualitative sociology.”

Evgeny Shtorn. Photo from his personal archives

Then, according to Shtorn, the FSB officer asked him where the “foreign agent” got its money and what western foundations CISR worked with.

“I said, ‘What, do foreign agents have money? The American foundations you declared undesirables are gone, and we have big problems with financing.’

“‘So people transport cash from abroad, right?’ he asked.

“I explained I didn’t have a passport, I hadn’t been abroad for many years, and I didn’t have access to those realms, but I didn’t think anyone was transporting cash in their underwear. Then he asked whether I had met with foreign intelligence officers as part of my job.”

According to Shtorn, the FSB officer was well informed about the work of Shtorn, CISR, and related organizations. He knew about academic conferences and listed the surnames of foreign foundation directors, asking whether Shtorn was acquainted with them. He asked what Shtorn was researching at the Higher School of Economics, although he clearly knew Shtorn was researching hate crimes against LGBT. He asked what foreign languages Shtorn spoke.

“Is English your working language?” he asked.

According to Shtorn, the FSB officer was not aggressive, but twice during their ninety-minute conversation he quoted the articles in the Russian Criminal Code covering espionage and treason, commenting they applied to everyone who flirted with foreign special services and foreign organizations.

In the middle of the conversation, the FSB officer asked him whether he had read Zbigniew Brzezinski’s book The Grand Chessboard.

“He said that, way back in the nineties, Brzezinki had written Ukraine would go over to the US in 2012, and this was what had happened. He advised me to read the book.

“At the end of the conversation, he said, ‘How unlucky you were with your citizenship application.’ He explained he was unable to help me in any way. ‘Many believe we are an all-seeing eye, but it’s not like that at all. We also have a tough time obtaining information.’

“He insisted I tell no one about our conversation. When I was getting ready to leave, he said, ‘If I call you again, you won’t be scared? Because some people get scared and change their telephone numbers.’ I said, ‘Of course not. You’re a polite person. What do I have be afraid of?’

“‘And you are such an interesting person, and educated. It’s interesting to chat with you. Thank you for your time,’ he said.

“We left the office, and that was when I caught sight of a bust of Felix Dzerzhinsky behind the coat rack, a life-sized bust.

“‘And here is Felix,’ the FSB officer said.

“I left.”

The FSB officer telephoned Shtorn the very next day. According to him, the FSB officer suggested meeting for coffee.

“I realized that was that. They were going to try and recruit me,” says Shtorn.

He believes if he had refused to work for the FSB, as a stateless person he would have been sent to the Temporary Detention Center for Migrants.

“I felt paranoid,” says Shtorn. “I imagined the FSB had access to all my channels of communication, that they could see all my emails. They realized I had nowhere to go, that without papers I was caged. I realized I had to make a run for it, so I turned to Team 29, LGBT Network, and Civic Control. I got a lot of help from human rights activist Jennifer Gaspar. In 2014, she was also invited to have a chat with the FSB, who stripped her of her residence permit and expelled her from Russia. Jennifer put me in touch with Front Line Defenders, who asked the German, Lithuanian, French, and US governments to issue me a visa. They all turned us down, saying they could not put a visa in a residence permit.”

On the evening of December 21, Front Line Defenders informed Shtorn Ireland was willing to issue him a visa. The next morning he had to fly to Moscow, apply for the visa at the Irish Embassy, and fly to Ireland without any hope of ever returning to Russia.

“I had a night to say goodbye to my whole life,” recalls Shtorn. “It felt like I was standing on the edge of an abyss and jumped off.”

In Moscow, it transpired that, due to the short working day, the Irish consular officials would not have time to draw up his visa, and he flew back to Petersburg. He obtained the visa only on January 4. The next day, he tried to board a Lufthansa flight to Dublin, but the airline refused to let him board the plane. The German Federal Police had informed the airline it would refuse to let a person with a residence permit enter the transit zone. It was clear Shtorn would not be allowed to fly via any of the EU countries. The next flight from Domodedovo Airport to Dublin had a stopover in Moldova.

“I went to the check-in counter,” recounts Shtorn. “The folks there were reasonable. They realized a person with an Irish visa would not want to stay in Chișinău. I bought a ticket. There was 45 minutes until boarding, and the whole time I sat waiting for them to come for me. When the plane took off, I started shaking.”

Shtorn is now in Dublin on a three-month short-term visa.

“Thanks to Front Line Defenders I have a place to live and money for food,” he says. “I don’t know what will happen next. I cannot go back to Russia. If my situation was bad, now I have made it worse. Initially, I wanted to keep mum, but I decided I had to warn the employees of other NGOs. When the law on ‘foreign agents’ was enacted, it stated the penalties did not apply to people who worked for such organizations. My story shows this is not the case.”

•••••

Viktor Voronkov, director, Centre for Independent Social Research (CISR), Petersburg

Of course, the FSB is interested in CISR. Four of our employees have approached me and said, “They’re trying to recruit me. What should I do?” I think they have tried to recruit nearly everyone at CISR. Some have told me, others have turned them down and not told me, and still others, perhaps, did not turn them down. In conversation with the people they were trying to recruit, FSB officers have mentioned numerous facts they could have learned only from our employees.

It is normal. I know the practice well from the Soviet Union. When they tried to recruit me in 1981, they also asked questions that came out of left field. “Maybe you could describe your critical view of things at the institute? Maybe we could work together? You want to help the Motherland, don’t you?” They always associate themselves with the Motherland. They offered me help traveling abroad via the Soviet-East German Friendship Society. They blackmailed me.

I met with them three or four times. One time, a KGB officer tried to take me into a cubbyhole under the stairs at the institute to work me over. He looked in there, said, “Excuse me,” and closed the door. Another officer was already working someone over in the cubbyhole.

You can get rid of them. They have the right to recruit, and we have the right to turn them down. When they tried to recruit a pal of mine, he simply opened the door of his officer and shouted, “Get the hell outta here!” The KGB guy left. But I do not advise anyone to start talking with them. You cannot win against them. Nowadays, I advise my employees to give FSB guys the bum’s rush.

They tried to blackmail our other employees over trifles, but they were not as vulnerable as Evgeny was. I told him him to pay no mind to the blackmail, but it was not worth taking risks in his position. When a person is guided by fear, it is better to give into that fear.

I think we have to talk about such stories publicly. We could do a flash mob hashtagged #HowTheyTriedToRecruitMe. If there is no public oversight of the KGB, it means the KGB oversees society.

I realize this story could affect CISR, but we have been taking different measures to soften the blow. CISR is currently split. The majority of our employees argues we should disband the center and establish a new one. The minority argues we should not surrender. I have taken the most radical position. Everyone wants to find the means to survive. I want to show there is way to fight we can fight to the end. I hope to their end, not ours.

Translated by the Russian Reader