Executives at Visa and MasterCard awoke yesterday morning to learn that Vladimir Putin’s Russia had passed legislation requiring foreign credit card brands to post $3.8 billion in total security collateral, the equivalent of two days’-worth of transactions processed in the country.

After Russia reunified with (or annexed, depending on your point of view) Crimea, Visa and MasterCard complied with stringent White House sanctions and blocked transaction activity at several Russian banks. Both financial companies rightly feared a backlash from their actions.

Under the new law which goes into effect on July 1st, no foreign payment system may unilaterally cut services to Russian clients and they must base their processing centre in Russia, with transaction data maintained within its borders.

Additionally, there will be fines of up to 10% of the collateral deposit per day for unilaterally stopping services to a bank. For Visa, the required collateral deposit actually exceeds their annual returns from operating in the country.

Earlier, the credit card companies stopped working with Bank Rossiya and Sobinbank due to a previous round of US government sanctions.

Now, per the more recent sanctions, that ban is extended to the Russian banks SMP and InvestCapitalbank. Both banks are controlled by the Rotenberg brothers, Boris and Arkady, who are linked to large gas pipeline contracts and various Sochi Olympics contracts.

Payments networks have now become political weapons of mass destruction. This is a disturbing trend, because if the selective halting of international credit card networks can be deployed against political enemies, then nearly no country is safe.

Business models disrupted

An admittedly nervous Visa statement on Tuesday explained: “We regret any disruptions that the institutions, their cardholders or merchants may experience. All of Visa’s systems are processing normally, and we continue to service our other unaffected Russian clients.”

MasterCard stated that they will remain “open for business as usual with all our Russian banks, with the exception of Rossiya, Sobinbank, SMP Bank and InvestCapitalBank. Service of cards issued by the latter two banks will be stopped shortly according to the revised US sanctions announced today.”

Visa and MasterCard process about 90% of all card transactions in Russia and the new law completely disrupts their business and technological models.

Visa’s Chief Financial Officer Byron Pollitt told the Financial Times that “issues with Russia and Ukraine were already affecting cross-border volume and sanctions would impact on payment volumes.” He added that the company expects several pennies of earnings per share impact for the fiscal year.

However, Visa CEO Charlie Scharf remains optimistic, telling analysts, “If you just get down to reality for a second, we have 100 million cards in Russia today. And it’s not in anyone’s best interest, inclusive of the Russians, to make those cards not available to their own citizens.”

Home-grown system

Similar to France’s Carte Bleue and Germany’s Geldkarte, the Russian central bank plans to establish a national payments system for handling domestic card transactions in Russia.

For international transactions, Russia is inspired by China’s UnionPay, the rapidly growing payments platform whose cards are accepted in 135 countries and is now bigger than MasterCard and second only to Visa in processing volume. Who needs Visa and MasterCard in a world of payments innovation?

We are witnessing more and more of these types of payment blockades in line with broader financial warfare occurring under the surface. In 2012, Belgium-based wire clearinghouse SWIFT discontinued service to 30 Iranian banks following intense pressure from Washington, DC.

And who could forget the proverbial rug being pulled out from under Wikileaks by the Visa, Mastercard, and PayPal giants.

In July, the US plans to unleash the IRS on Russian banks further destabilizing the current situation.

Risky game Centralized systems have always had the weakness of being driven by both external and political forces. It’s simply an inevitable temptation when a single choke point exists in the network. The same mischief that plays out between mega-states on the international stage just as easily plays out domestically in inflationary regimes like Argentina, where credit cards are frequently limited to domestic usage only and where hard currency and precious metals are difficult to obtain. Once the payment mechanism starts to become used for achieving policy goals, the system has lost its integrity. Alternative payment methods that rebuke censorship begin to emerge, attracting new capital and new economic activity.

Meanwhile, in other related news, Ukraine climbed to the No.9 position in global active bitcoin nodes and Russia currently sits at No.7. Global active bitcoin nodes measure number of nodes in the distributed p2p network that maintain and broadcast the full bitcoin block chain.

In the words of Jim Rickards, author of The Death of Money, “only escalate the battle if you know where it’s headed.”

Visa and Mastercard could be significantly harmed by this obvious retaliation. In addition to mandating changes to the rules of the local payments network, Russia could freeze assets of US companies doing business in Russia and also begin to unwind its positions in US treasuries. And, that’s before they even get to the gas and oil markets.

Disclaimer: The views expressed in this article are those of the author and do not necessarily represent the views of, and should not be attributed to, CoinDesk.

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