Cut off from international payment systems by Western-led sanctions, Russia has turned to China to obtain the microchips it needs to meet rising demand for its domestic bank cards.
But while Chinese manufacturers can provide a quick fix for Russia’s beleaguered financial institutions, they are unlikely to be able to substantially alleviate the country’s mounting 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 the invasion of Ukraine.
Chip deliveries are also affected by supply chain bottlenecks in Asia due to the COVID-19 pandemic.
Oleg Tishakov, a board member of the Russian National Card Payment System (NSPK), said at a conference earlier this month that banks were unable to meet the rising 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 microchip suppliers and [have] found a few in China while the certification process is underway,” Tishakov said at the conference.
The center of gravity of the sanctions on the Russian economy is felt through restrictions on the country’s ability to transact in foreign currencies and obtain specialized technology.
Some of Russia’s largest banks have been cut off from the global SWIFT banking messaging system, effectively freezing nearly half of the country’s $640 billion in foreign exchange reserves and gold. MasterCard and Visa have also stopped serving foreign Russian accounts, while Apple Pay has terminated its connection to MIR.
While there is a global shortage of microchips — not least because some of the gases needed to make them come from Ukraine — debit card chip technology isn’t particularly advanced or limited to countries following Western sanctions.
Iran, for example, has had chip-and-pin payment systems for years.
China may be able to fill the gap in the short term, but the roadblock could prompt Russia to bypass the relatively outdated system altogether and switch to cardless payments.
“Numerous emerging and frontier markets in Africa and elsewhere have skipped bank- and card-based banking over the years,” Hassan Malik, senior sovereign analyst at Boston-based investment management consultancy Loomis Sayles, told Al Jazeera.
“Russia benefits from a very high literacy rate, as well as smartphone and internet penetration, and Russian banks have invested heavily in app-based banking.”
‘Cut off from the global economy’
A lack of bank card chips probably wouldn’t give Russia a major economic hit, though a steady supply could provide some relief to the country’s increasingly sanctions-weary citizens by allowing them to run their domestic financial affairs more smoothly.
“The problem for everyday life in Russia is that Putin’s Russia is separated from the global economy,” John R Bryson, a professor of business and economic geography at the University of Birmingham, told Al Jazeera.
“Local customizations – for example the System for Transfer of Financial Messages (SPFS) and MIR – are local solutions that are not integrated into the global financial system. They allow a form of everyday life to continue in Russia, but a form largely separated from the rest of the world.”
MIR and SPFS, an alternative to SWIFT, were developed following the deterioration of Russia’s ties to the West after Putin’s annexation of Crimea in 2014. While both were an attempt by Russia to enhance its economic sovereignty and resilience, they remain they are geographically limited. For example, MIR is supported only domestically and by a small handful of Russia-friendly countries, including Vietnam and Belarus, and the breakaway regions of Georgia, Abkhazia, and South Ossetia.
After being on the receiving end of Western sanctions, China has expressed opposition to what it calls “interference in the affairs of other countries” and criticized the punitive economic measures taken against Russia.
Beijing has refused to explicitly condemn the invasion of Moscow and has expressed its condolences to Putin’s alleged security concerns, though it has called for “maximum restraint” and peace talks between the parties.
While China’s economic and geopolitical position gives it more opportunities to interact with Russia despite Western doubts, filling the chip shortage is not without risks.
Despite not explicitly violating existing sanctions, Chinese companies could face sanctions later if the West felt their actions had provided an unacceptable level of support for Putin.
“While China has been clear that it will not participate in financial sanctions against Russia, it will also be very careful not to endanger its own companies and financial institutions by helping Moscow evade Western sanctions,” said Joe Mazur. , senior analyst at Trivium, a China-based policy research firm, told Al Jazeera.
“Beijing will do its best not to knowingly violate Western sanctions, but this still leaves the door open for partnerships with unsanctioned Russian banks and financial entities.”
Chinese President Xi Jinping has declined to explicitly support the invasion of Ukraine, but Beijing continues to see Moscow as a key strategic partner, with Foreign Minister Wang Yi reiterating last month that China and Russia will “make steady progress” [their] Comprehensive Strategic Partnership for Coordination for a New Era”.
Some Russian banks have also issued cards in conjunction with China’s UnionPay payment system, offering an alternative to Visa and MasterCard for Russians overseas, although it’s unclear how long such arrangements will last. On Thursday, Russian media outlet RBC reported that UnionPay would no longer work with major Russian banks, including majority state-owned company Sberbank. The report, citing multiple unnamed sources, said the Chinese payment system made the decision out of fear of secondary sanctions.
While chips themselves are unlikely to be a game-changer, China’s willingness to trade with Russia and refusal to align with the West could be crucial for Putin, some analysts say.
“In some ways, Putin and Xi share a similar worldview and China remains unwilling to completely fool Russia for its actions in Ukraine,” Mazur said.
The danger for President Putin, a leader seemingly consumed by the need to present a strong image, is that Russia could become dependent on China and its trade, eventually entering into some form of submissive relationship with one of his closest friends. said Bryson, the professor at the University of Birmingham.
“This would be ironic, given that Putin’s Ukrainian war is partly about Russia’s continued superpower status and partly a distorted reading of Russian nationalism,” he said.