Russia has turned to China for microchips it needs to meet surging demand for its domestic bank cards.
Cut off from international payments systems by Western-led sanctions, Russia has turned to China to obtain the microchips it needs to meet surging demand for its domestic bank cards.
But while Chinese manufacturers may be able to provide a quick fix for Russia’s besieged financial institutions, they are unlikely to be able to substantially ease 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 slapped sanctions on Moscow in response to its invasion of Ukraine.
Chip supplies have also been affected 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 meet soaring demand for cards that run 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 the Reuters news agency.
“We are looking for new microchip suppliers and [have] found a couple in China, with certification process ongoing,” Tishakov said at the conference.
The brunt of the sanctions on Russia’s economy is being felt via restrictions on the country’s ability to transact in foreign currencies and obtain specialised technology.
Some of Russia’s biggest banks have been cut off from the SWIFT global banking messaging system, effectively freezing nearly half of the country’s $640bn in foreign exchange reserves and gold. MasterCard and Visa have also stopped servicing overseas Russian accounts, while Apple Pay has ended its connection with MIR.
While there is a global shortage of microchips — not least because some of the gases needed to make them come from Ukraine — the technology for bankcard chips is not particularly advanced or limited to countries that follow Western sanctions.
Iran, for example, has been running chip-and-pin payment systems for years.
China may be able to fill the gap in the short term, but the roadblock could push Russia to bypass the relatively antiquated system altogether and move towards cardless payments.
“Numerous emerging and frontier markets in Africa and elsewhere leapfrogged branch- and card-based banking by adopting mobile phone banking over the years,” Hassan Malik, a senior sovereign analyst at Boston-based investment management consultancy Loomis Sayles, told Al Jazeera.
“Russia benefits from very high literacy rates, as well as smartphone and internet penetration, and Russian banks have invested heavily in app-based banking.”
‘Severed from the global economy’
A lack of chips for bank cards would be unlikely to deal a significant economic blow for Russia, though a steady supply could offer some relief to the country’s increasingly sanctions-weary citizens by enabling them to conduct their domestic financial affairs more smoothly.
“The problem for everyday living inside Russia is that Putin’s Russia has been severed from the global economy,” John R Bryson, professor of enterprise and economic geography at the University of Birmingham, told Al Jazeera.
“Local adaptations – 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 enable some form of everyday living to go on inside Russia, but one largely severed from the rest of the world.”
MIR and SPFS, an alternative to SWIFT, were developed after the deterioration of Russia’s ties with the West following Putin’s annexation of Crimea in 2014. While both were an attempt by Russia to improve its economic sovereignty and resilience, they remain geographically restricted. MIR, for example, is only supported 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 on the receiving end of Western sanctions, China has voiced its opposition to what it terms “interfering in other countries’ affairs” and criticised the punitive economic measures taken against Russia.
Beijing has declined to explicitly condemn Moscow’s invasion and expressed sympathy for Putin’s claimed security concerns, although it has called for “maximum restraint” and peace talks between the sides.
Even though China’s economic and geopolitical standing gives it a wider berth to engage with Russia despite Western misgivings, filling the chip shortfall is not without risks.
Despite not explicitly violating existing sanctions, Chinese firms could potentially find themselves punished further down the line if the West deemed their actions to have provided an unacceptable level of support for Putin.
“Although China has been clear that it won’t participate in financial sanctions against Russia, it will also be very careful not to put its own companies and financial institutions at risk by helping Moscow to evade Western sanctions,” Joe Mazur, senior analyst at Trivium, a China-based policy research firm, told Al Jazeera.
“Beijing will do its best to avoid knowingly violating Western sanctions, but this still leaves the door open to partnerships with non-sanctioned Russian banks and financial entities.”
Chinese President Xi Jinping has refrained from explicitly supporting the invasion of Ukraine, but Beijing continues to see Moscow as an important strategic partner, with Foreign Minister Wang Yi last month reiterating that China and Russia would “steadily advance [their] comprehensive strategic partnership of coordination for a new era”.
Some Russian banks have also issued cards in partnership with China’s UnionPay payment system, providing an alternative to Visa and MasterCard for overseas Russians, although it is unclear how long such arrangements might last. On Thursday, Russian media outlet RBC reported that UnionPay would no longer cooperate with major Russian banks, including majority state-owned Sberbank. The report, which cited 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 fall into line with the West could prove crucial for Putin, according to some analysts.
“In some respects, Putin and Xi share a similar worldview and China remains unwilling to throw Russia completely under the bus over its actions in Ukraine,” Mazur said.
The danger for President Putin, a leader seemingly consumed by the need to present a strongman image, is that Russia might become dependent on China and its trade, ultimately entering into some form of subservient relationship with one of its closest friends, said Bryson, the University of Birmingham professor.
“This would be ironic, as Putin’s Ukrainian war is partly about Russia remaining as a superpower and partly a distorted reading of Russian nationalism,” he said.