Questions and answers

Amex and Mastercard pull the plug on Russia

Mastercard and American Express have decided to block all operations in Russia: cards issued in the country will no longer be accepted anywhere in the world.

Dario Campione

07.03.2022 15:49

In the last few hours, VISA, Mastercard and American Express have made the dramatic decision to block all their operations in Russia. This is just the latest in a series of financial and economic sanctions that are shutting down Moscow’s economy.

1. Is it true that, for the first time, sanctions decided by the West have hit the Russian economy hard?

There’s no doubt that this is so, so much so that Russian President Vladimir Putin has said several times - the most recent on Saturday - that Western sanctions are similar to a declaration of war.

2. U.S. payment companies Visa and Mastercard said Saturday that they will suspend operations in Russia and work with customers and partners to cease all transactions in the country. What does this mean, specifically?

In a matter of days, all transactions initiated with VISA cards issued in Russia will no longer work outside of the country, and all VISA cards issued outside of Russia’s borders will no longer work within the country. Even Mastercard said that its services to Russian banks will no longer be supported, and any of the company’s cards issued beyond Russia will not work at any Russian merchants or ATMs. Yesterday evening, a similar announcement was made by the leadership of American Express.

3. Which sanction has been the most damaging to Russia so far?

Definitely the freezing of the Russian Central Bank’s foreign currency reserves, a manoeuvre by which the West has hit Moscow where it hurts the most. Since 2014, the year of the Crimean invasion, Russia had been increasing these financial stocks of its own by trying to make them less dependent on the dollar too. In 2014, Moscow had reserves of 509 billion, 40% of which were held in dollars; by February 2022, it had reached 630 billion, only 16% of which was in U.S. currency. The goal was to be able to count on enough funds to support the ruble in case of difficulties and liquidity with which to aid its banking system. However, with the sanctions, not only has the Russian Central Bank been blocked from selling its reserves in dollars, euros or yen (equal to 54% of the total), but other reserves deposited in countries that have applied sanctions (for example, Switzerland) have been blocked as well. Therefore, the Bank of Russia has had to resort to additional monetary instruments, including raising the key interest rate (the rate at which a central bank lends money to other banks) from 9.5% to 20%, a new all-time record. An increase which, however, will not prove painless for Russian citizens, as it will result in higher mortgage and loan rates.

4. In addition to financial institutions, were there other negative consequences for ordinary citizens?

Most certainly, yes. The Kremlin was forced to introduce new measures to avert a liquidity crisis. Specifically, Russian citizens are now forbidden to move money abroad or leave the country with more than 10 thousand dollars (or the equivalent in other foreign currency). Exporters have been ordered to change 80% of their foreign currency income into rubles and foreign investors are temporarily prevented from selling Russian assets in their possession. All of this has not, however, impeded the collapse of the ruble.

5. Have sanctions had an effect on the ruble?

Before the war in Ukraine began, it took about 80 rubles to buy one dollar, now it takes 117: a 40% decrease that indicates a consolidated weakness of the Russian currency, beginning with the war in Crimea. Over these eight years, the ruble has lost almost a quarter of its value and continues to touch new historic lows. The spread over the German Bund has also soared to over 1,260 basis points.