Russian banks cut off from accessing the card networks of Visa, Mastercard and American Express and from the Swift system used to facilitate international trade are turning to Chinese companies such as UnionPay to help them weather the sanctions levied against Moscow in the wake of the invasion of Ukraine.
According to Fortune, UnionPay is "emerging as a payments work-around for Russian citizens as sanctions bite, helping cement Russia's shift away from Western-led systems and towards Chinese providers looking to expand their global footprint."
Whether the Russian market is worth the effort for UnionPay — which reportedly is considering a tie-up with Russian banks Sberbank, Alfa-Bank JSC, and Tinkoff Bank — remains to be seen, given the challenges that lie ahead for the Russian economy. Officials from UnionPay, Sberbank and Alfa couldn’t immediately be reached. Tinkoff confirmed that it was "working to start offering cards with UnionPay to our customers," according to a company spokesperson. "Please note Visa and Mastercard cards issued by Russian banks will continue to operate within the country without restrictions."
Meanwhile, the Russian ruble has lost 30% of its value compared with the U.S. dollar since the war began, forcing Moscow to institute currency controls to help maintain the ruble's value. The Institute of International Finance, a trade group, expects Russia’s economy to contract by 15% in 2022 because of the sanctions. Moody’s Investor Service downgraded Russia's debt on March 6, saying that the risk of a default on its obligations has "significantly increased."
Two of Russia’s largest banks, Sberbank and VTB Bank, were both sanctioned by the U.S. government. VTB was also kicked out of the Swift network that facilitates cross-border transactions. The Central Bank of Russia was also sanctioned.
These moves "will effectively block these institutions from participating in the global financial system and make it exceptionally difficult for them to engage in international transactions," Moody’s said. "Given compliance risks, non-Russian institutions will be very reluctant to deal with sanctioned, and likely also non-sanctioned entities, within Russia."
China may be the exception. Earlier this month, China’s top banking and insurance regulator, Guo Shuqing, said his country won’t join the boycotts against Russia over its Ukrainian invasion, according to CNBC.
The world’s most populous country is no stranger to sanctions. The U.S. led a diplomatic boycott of the recent Olympics in Beijing to protest China’s human rights record including its treatment of Uyghurs, a Muslim minority group. Moreover, as The Wall Street Journal recently noted, "Chinese companies have repeatedly dodged restrictions on trading with countries like North Korea, Iran and Venezuela" which have found themselves in hot water with the international community.
China-based UnionPay would benefit from the additional business from Russia. Founded in 2002 by the Chinese government’s central bank, the People’s Bank of China, it embarked on global development in 2004 with an eagerness to expand outside of Asia.
Now, UnionPay cards are accepted in 171 countries and regions, including the U.S., Canada and Mexico, according to the company. "Currently, its in-store acceptance network has been extended to 180 countries and regions," the company said in a February press release. Also, it has issued about 180 million cards in 75 markets outside of mainland China.
UnionPay ranked second worldwide in terms of global transaction value in 2020, with $151 billion in volume behind Visa's $188 billion, according to The Nilson Report. However, UnionPay ranked first in terms of cards in circulation, with 8.96 billion cards that year compared to No. 2 Visa's 3.56 billion.
Russian banks can also turn to Chinese alternatives. VTB Bank, Russia’s second largest bank by assets, is a participant in CNAPS (China National Advanced Payment System) "suggesting that it can easily avoid using SWIFT when facilitating renminbi-denominated payments between Russian and Chinese firms," according to Robert Greene, a non-resident scholar at the Carnegie Endowment for International Peace.
"Additionally, Russian firms with accounts at Chinese state-owned banks can presumably send and receive renminbi-denominated payments to other entities banked by Chinese depositories that circumvent SWIFT," Greene wrote in an article posted on the endowment’s website.
More than half of China's exports to Russia were dollar-denominated in 2020, while most Russian exports to China were denominated in euros, Greene noted.
China's Cross-Border Interbank Payment System (CIPS) relies on Swift for payments not involving domestic banks, so there isn’t much it can do to help Russian banks facing sanctions from the U.S. and European Union, according to Greene.
"All of these renminbi-denominated off-ramps could, in theory, be blocked if the Biden administration’s sanctions against the Russian financial system were part of a so-called secondary sanctions regime, whereby overseas entities doing business with sanctioned individuals or countries are threatened with being disconnected from dollar-denominated payments channels if they transact with parties under U.S. sanctions," Greene wrote.