U.S. economic sanctions against Russia for the part it played in the crisis in the Ukraine put payment providers Visa (NYSE:V) and MasterCard (NYSE:MA) in a dicey situation, with both credit card companies unsure of whether they would be able to keep doing business with Russian banks and consumers.
But a compromise on Friday has saved the symbiotic business relationship, and the credit card giants have announced that they will be remaining in Russia, after all.
An ongoing problem
Both Visa and MasterCard had curtailed payments processing in Russia over the past few weeks, due to U.S. sanctions of a handful of Russian banks. The Russian Prime Minister has said that this reduction in service "was a direct violation of their contracts with Russian clients", and demanded that the credit card giants place hefty sums of cash with the Bank of Russia in order to keep doing business there.
This reaction galled Visa, which responded by indicating that it is considering pulling out of Russia. The CEOs of both Visa and MasterCard recently said that, if changes to the new law are not made by its implementation date of July 1, neither company would likely continue working in that country.
A sizable chunk of business, and the promise of more to come
For both companies, however, there was a considerable amount of money involved. Visa's annual revenues from Russia are estimated to be over $470 million, while MasterCard takes in around $167 million. And, while analysts note that those numbers are only 3% to 4% of Visa's total yearly earnings, and approximately 2% of MasterCard's annual revenue, future profits are at stake, too – as the large Russian economy moves inexorably toward electronic payments, and away from cash.
Recent comments indicated that an eventual agreement was imminent. Russian authorities noted that 90% of Russians use the two payment systems, and that it wasn't feasible to stop using them. Last Wednesday, a Russian legislator who heads a committee on financial markets commented that he believes a compromise will be reached before the deadline, and that Russia should make it "interesting for (Visa and MasterCard) to work on the Russian market."
A workable solution
The compromise will save Visa and MasterCard's Russian business, and the two will use the next 18 months to set up subsidiaries in that country to handle electronic payments. This settlement came at some cost to both companies, however.
While nothing is yet set in stone, negotiations appear to include a system whereby local Russian payments companies may participate in Visa and MasterCard's processing activities. In addition, both providers will abide by Russia's "deposit" requirement, though the amounts may be adjusted in later negotiations.
This acquiescence may be a bid by Visa and MasterCard to undercut Russia's plans for its own national payments system – one that excludes MasterCard and Visa. Previous incarnations of this model have fallen flat, however, after failing to gain traction with Russian consumers.
As negotiations continue, the details of the new pact will slowly emerge, though one this seems clear: The speed at which the talks produced workable results is testament to just how important Visa and MasterCard's Russian business truly is – to all parties involved.
Amanda Alix has no position in any stocks mentioned. The Motley Fool recommends MasterCard and Visa. The Motley Fool owns shares of MasterCard and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.