Can Russia use China UnionPay to replace banned U.S. cards?

Russian banks aren't entirely shut off from credit cards following the departure of Visa and Mastercard from Russia, but the country's remaining options — including China UnionPay — are fraught with economic and political risk.

Visa, Mastercard, American Express and about a dozen other U.S. or European payment companies have pulled out of Russia following its invasion of Ukraine. Russia's other payment card options include its own Mir network, and the country's sanctioned banks have reportedly reached out to China UnionPay to fill the gap left by the U.S.-based networks.

Russia's hoping to find new payment options to offset an gross domestic product decline of 7% or more due to the sanctions. This is a larger decline than Russia experienced during the initial stages of the coronavirus pandemic in 2020.

"With all of these countries imposing sanctions, it doesn't leave Russia with a lot of options," said Matt Cooke, vice president and general manager of Arcot Payment Security at Broadcom in New York. Cooke works with international payment companies to install the online payment security protocol 3D Secure, and has done implementations for card portfolios in Russia.

To work around Mastercard’s and Visa’s bans on cross-border payments, Russian banks including Sberbank, Alfa Bank and Tinkoff Bank are exploring cobranding with China UnionPay for international payments.

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"While China UnionPay's global acceptance network is weaker than Mastercard and Visa, it would provide Russian banks and cardholders relief," said Eric Grover, a principal at Intrepid Ventures at Minden, Nevada.

UnionPay did not return a request for comment by deadline. Before the U.S. card brands pulled out of Russia, Visa and Mastercard controlled about 75% of the Russian card market, with Mir accounting for most of the rest. Mir, which launched in 2015, is familiar to Russian consumers, and UnionPay — which is the world's largest card network with more than 7 billion cards in circulation — is also widely known.

The card sanctions are putting immense pressure on the Russian economy, which could make UnionPay popular among Russian consumers, said Ola Oyetayo, CEO and founder of Verto, a London-based B2B payments exchange, in an email. In terms of capabilities, UnionPay is almost identical to Visa and Mastercard, supporting contactless transactions and mobile wallets, Oyetayo said.

But the overall economic decline could be too much for Mir and UnionPay to overcome, according to Cooke.

"There can be an interface between Mir and UnionPay cards and it would be available to a lot of people and merchants," Cooke said. "But what is the settlement currency? Will it be the ruble, which is down 30%?"

The sanctions also create hefty barriers to using cryptocurrencies to avoid monetary restrictions. The conversion of cryptocurrency to traditional currencies could run up against anti-money-laundering and know-your-customer laws in the U.S. and elsewhere, making it hard for Russian parties to engage with cryptocurrency exchanges.

Much like the recent Swift ban affecting Russian banks, Russia's alternatives to Visa and Mastercard aren't as robust. And as U.S. merchant acquirers comply with U.S. sanctions on Russian banks, Mir and UnionPay could collectively lose merchant support.

In the U.S., UnionPay has had reciprocal acceptance with Discover, which under pre-war conditions would allow Russian UnionPay/Mir cardholders to make payments at merchants in Discover's U.S. network. "Additionally [UnionPay] has been building acceptance abroad by partnering with merchant acquirers providing Mastercard and Visa acceptance," Grover said.

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Discover said in an email that in addition to having already halted transactions by sanctioned Russian banks on its network, Discover is also suspending acceptance of cards issued by all Russian and Belarusian banks that run on the Discover Global Network, including payments through partner networks that include UnionPay.

"As of March 9, all cards issued in Belarus and Russia by Network Alliance partners such as JCB and UnionPay have been blocked from transacting on Discover Network and PULSE," Discover said in its emailed statement.

Several other merchant acquirers answered queries for this story. While the companies did not directly address UnionPay, their statements suggested that their compliance with U.S. sanctions would cover UnionPay and/or Mir transactions tied to Russian bank accounts.

U.S. Bancorp's statement said, "We are complying with the sanctions based on guidance from our regulators and other government bodies regarding assets, transactions of accounts related to the conflict, and we’re ready to quickly comply with additional sanctions as necessary."

Fiserv said it "is not processing payments for any cards issued by any identified sanctioned Russian banks, on any card network."

And JPMorgan Chase said, "We will comply with any changes in government or regulatory policy in relation to doing business in Russia, including any new sanctions that have been/may be issued."

Given the scale of the sanctions, it's unlikely U.S. firms would partner with any party that was working with Russian banks, according to Brian O'Toole, a nonresident senior fellow at the Atlantic Council, a nonpartisan research organization in Washington.

"I think the reach of sanctions is pretty unambiguous given how broadly [the Office of Foreign Assets Control] defines their prohibitions to include any services by U.S. parties," O'Toole said.

Because the sanctions target Russia's largest and most sophisticated banks, they cover the institutions that are most likely to have any relationship with U.S. companies, O'Toole said. "It's hard to imagine big U.S. companies taking the risk of bringing on small, less sophisticated issuers in Russia, especially in the current state where sanctions escalation seems to have no end in sight," O'Toole said.

Any move by Russian banks to partner with China UnionPay, or other Chinese companies as a workaround to sanctions, would cause political blowback for China, potentially hurting China's payment market. The U.S. has warned China in recent days to not provide aid to Russia.

About 18% of China's GDP comes from exports to the U.S., according to the World Bank. If China were to ally with Russia to support payments for sanctioned banks, future sanctions could affect China, according to Cooke.

"Would China jeopardize its relationship with the U.S.?" Cooke said. "If Russia were to give all of its citizens UnionPay cards, or if UnionPay supported Mir cards, how would the rest of the world act?"