Why Chinese bank card chips might not ease Putin’s economic pain | Business and economy

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Cut off from international payment systems by sanctions imposed by the West, Russia has turned to China for the microchips it needs to meet growing demand for its national bank cards.

But while Chinese manufacturers may be able to provide a quick fix for Russia’s beleaguered financial institutions, they are unlikely to be able to significantly ease the country’s growing economic woes, analysts say.

Chipmakers including Intel, AMD, TSMC and Qualcomm have halted exports to Russia since the United States and its allies imposed sanctions on Moscow in response to its invasion of Ukraine.

Chip supply was also impacted by supply chain bottlenecks in Asia caused by the COVID-19 pandemic.

Speaking at a conference earlier this month, Oleg Tishakov, a board member of Russia’s National Card Payment System (NSPK), said banks had been unable to respond to the growing demand for cards running on the government-sponsored MIR system. NSPK issued more than two million MIR cards between the end of 2021 and March this year, bringing the total to 116 million, according to calculations by Reuters news agency.

“We are looking for new suppliers of microchips and [have] found a couple in China, with a certification process underway,” Tishakov said at the conference.

Russia’s invasion of Ukraine led to the expulsion of some Russian banks from the SWIFT payment system [File: Dado Ruvic/Reuters]

The brunt of the sanctions on the Russian economy is felt through restrictions on the country’s ability to conduct foreign currency transactions and obtain specialized technology.

Some of Russia’s biggest banks have been cut off from the SWIFT global banking messaging system, freezing nearly half of the country’s $640 billion in foreign exchange and gold reserves. MasterCard and Visa also stopped servicing Russian accounts abroad, while Apple Pay ended its connection with MIR.

Although there is a global shortage of microchips – not least because some of the gas needed to make them comes from Ukraine – bank card chip technology is not particularly advanced or limited to countries following Western sanctions.

Iran, for example, has been using chip and PIN payment systems for years.

China may be able to fill the void in the short term, but the roadblock could push Russia to completely bypass the relatively antiquated system and switch to cardless payments.

“Many emerging and frontier markets in Africa and elsewhere have overtaken branch banking and card banking by adopting mobile phone banking over the years,” Hassan Malik, senior sovereign analyst at the consultancy firm, told Al Jazeera. Boston-based investment management consultant Loomis Sayles.

“Russia benefits from very high literacy rates, as well as smartphone and internet penetration, and Russian banks have invested heavily in app-based banking.”

“Separated from the global economy”

A shortage of bank card chips is unlikely to deal a major economic blow to Russia, although a steady supply could offer some relief to the country’s increasingly sanctions-weary citizens by allowing them to carry out their domestic financial affairs more easily.

“The problem with daily life in Russia is that Putin’s Russia has been cut off from the global economy,” John R Bryson, professor of business and economic geography at the University of Birmingham, told Al Jazeera.

“Local adaptations – for example, the Financial Message Transfer System (SPFS) and MIR – are local solutions that are not integrated into the global financial system. They allow a certain form of daily life to continue inside Russia, but largely cut off from the rest of the world.

MIR and SPFS, an alternative to SWIFT, were developed after Russia’s ties with the West deteriorated following Putin’s annexation of Crimea in 2014. Although both were an attempt by Russia improve its economic sovereignty and resilience, they remain geographically limited. The MIR, for example, is supported only domestically and by a small handful of Russia-friendly countries, including Vietnam and Belarus, and Georgia’s breakaway regions of Abkhazia and South Ossetia.

After being the target of Western sanctions, China has expressed opposition to what it calls “interference in other countries’ affairs” and criticized punitive economic measures taken against Russia.

Beijing has declined to explicitly condemn Moscow’s invasion and has expressed sympathy for Putin’s alleged security concerns, though it has called for “maximum restraint” and peace talks between the sides.

Even if China’s economic and geopolitical position gives it a larger place to engage with Russia despite Western reluctance, filling the token gap is not without risks.

Although they did not explicitly violate existing sanctions, Chinese companies could potentially find themselves punished later if the West feels their actions provided an unacceptable level of support for Putin.

“While China has made it clear that it will not participate in financial sanctions against Russia, it will also be careful not to endanger its own businesses and financial institutions by helping Moscow evade Western sanctions,” said Joe Mazur. , a senior analyst at Trivium, a China-based political research firm, told Al Jazeera.

“Beijing will do its best to avoid knowingly violating Western sanctions, but that still leaves the door open for partnerships with unsanctioned Russian banks and financial entities.”

Xi Jingping looks on ahead of a meeting in Beijing
Chinese President Xi Jinping has refrained from explicitly supporting or condemning the invasion of Ukraine [File: Lintao Zhang/Reuters]

Chinese President Xi Jinping has refrained from explicitly supporting invading Ukraine, but Beijing continues to view Moscow as an important strategic partner, with Foreign Minister Wang Yi reiterating last month that China and Russia would “move steadily forward”. [their] global strategic partnership of coordination for a new era”.

Some Russian banks have also issued cards in partnership with Chinese payment system UnionPay, offering an alternative to Visa and MasterCard for Russians abroad, although the duration of these agreements is unclear. On Thursday, Russian news outlet RBC reported that UnionPay would no longer cooperate with major Russian banks, including the majority state-owned Sberbank. The report, which cites several unnamed sources, says China’s payment system made the move for fear of secondary penalties.

While the chips themselves are unlikely to be a game-changer, China’s willingness to trade with Russia and its refusal to align itself with the West could prove crucial for Putin, some analysts say.

“In some ways, Putin and Xi share a similar worldview and China remains reluctant to completely throw Russia under the bus for its actions in Ukraine,” Mazur said.

The danger for President Putin, a leader seemingly absorbed in the need to present a strongman image, is that Russia could become dependent on China and its trade, eventually entering into a form of subordinate relationship with the one of his closest friends, said Bryson, Professor at the University of Birmingham.

“It would be ironic, because Putin’s Ukrainian war is partly about maintaining Russia as a superpower and partly about a distorted reading of Russian nationalism,” he said.

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