While Russia lays siege to Ukrainian cities that include Mariupol, Odessa and Kyiv, Moscow's economy is arguably under the greatest unified economic blockade in modern history.
Alongside partners in Europe and Asia that encompass a nearly unprecedented coalition of nations, the US is leading a ban on major Russian banking institutions from the SWIFT bank messaging system while also imposing hugely restrictive measures on the Russian Central Bank and seizing Kremlin-linked offshore assets held by institutions outside of Russia. Adding to the pain for Russian citizens, popular mobile payment platforms such Apple (AAPL) Pay and Google (GOOGL) Pay are no longer functioning in the nation.
What's more, credit card giants such as Mastercard (MA) , Visa (V) and American Express (AXP) have blocked transactions in the aggressor country, sending Russia's citizenry back to reliance upon either cash or faltering domestic solutions from banks such as Sberbank (SBRCY) and Alfa-Bank that now find themselves on the brink of insolvency. The pressure is only amplified as a rush to ATMs puts the possibility of runs on banks on the table.
Bank run accelerates in #Moscow after Putin imposed crippling capital controls last night to protect a collapsing economy. This is Svetnoi Boulevard in the heart of Moscow. pic.twitter.com/LgaclQzaPB
— Jason Corcoran (@jason_corcoran) March 1, 2022
"As a result of sanction orders, we have blocked multiple financial institutions from the Mastercard payment network," Mastercard CEO Michael Miebach said in a statement. "We will continue to work with regulators in the days ahead to abide fully by our compliance obligations as they evolve."
The move is not merely symbolic as Mastercard dominates in terms of wallet share in the country with 39% of Russian card carriers relying upon it. Per recent reports, about 4% of the company's overall revenue is exposed to Russia and 2% to Ukraine. Visa is not far behind, controlling one-third of the market in Russia, amounting to 4% of its total revenue. However, Ukraine only makes up 1% of Visa's revenue, half that of its peer Mastercard.
Flight to Fintech?
The dynamics of the impact of sanctions appear murkier when moving beyond the big card companies toward digital-first payment processors such PayPal (PYPL) , Stripe and Block (SQ) .
Part of the reason that determining fintech exposure and impacts is a taller task with this group of companies is simply a dearth of data on precise vulnerabilities. According to Russian Internet giant Yandex (YNDX) , the services are scarcely utilized among Russians, with more than 90% of customers preferring the use of credit and debit cards to the online options.
Even among those who use online payment services, Sberbank's online payment platform dwarfs the competition with more than 80% of online payment users using its service, with PayPal coming in a distant third in terms of market share. Nonetheless, PayPal's share is nothing to spit at, with 46% of Russian netizens reporting usage, accounting for a significant overlap.
As Sberbank and other domestic options encounter significant issues, at least some Russian users may have moved toward PayPal as an alternative. Indeed, shares of PayPal have climbed out of a rut since the invasion began on Feb. 24, perking up more than 15% since then. However, according to Reuters, PayPal quickly curbed any notion of attempting to capitalize on the catastrophe region by banning new users from its platform.
Experts at the Financial Services Regulatory Practice within the South Carolina-based law firm Nelson Mullins Riley & Scarborough said this action has as much to do with compliance concerns as it does with moralistic judgment.
"These (sanctions) pose a significant regulatory risk to US financial institutions and FinTech companies," the firm told Real Money in an email. "While an entity's strong Bank Secrecy Act, anti-money laundering compliance program and Office of Foreign Asset Control sanctions program should be able to address these new sanctions, the controls around your third-party due diligence and FinTech partnership program oversight most likely did not anticipate such a large-scale change to the regulatory landscape with a developed country that is extremely active in the payments, digital assets, and FinTech spaces."
In short, any attempt to capitalize on Russian or Ukrainian consumers looking to leverage FinTech amid a financial crisis would be more trouble than it is worth for almost any US-based institution.
"Sanctions programs (are) applicable to (the payment processing) business that works closely with banks to fulfill payments into the impacted regions that similarly apply such sanctions. These same requirements apply to businesses like PayPal and Block," Marwan Forzley, CEO of online global payments platform Veem, told Real Money. "I would not expect to see this sector becoming a path to sidestepping sanctions, at least for mainstream players."
Meanwhile, the Jack Dorsey-led Block has no exposure to Eastern Europe with little exposure to international markets outside of the major economies of Western Europe, Oceania and North America. In addition, cross-border transactions are unsupported by the service. As a result, the Block platform looks lightly exposed.
Cashing Out in Crypto?
That is not to say that Block is not impacted by the geopolitical events that now permeate almost every inch of the market. Due to its founder's focus on Bitcoin and cryptocurrencies, it could be a major beneficiary.
"Cryptocurrencies have already seen increases in value as a safe harbor for rapidly fluctuating currencies in Ukraine and Russia," Forzley told Real Money. "Cryptocurrency is continuing to see an uptick in usage amongst Russians as it's currently the only type of foreign currencies available to them."
Indicative of this dynamic, Block's stock has soared about 50% since the start of the invasion and subsequent news that Russian assets would be frozen. This is largely tied to the company's audacious push into cryptocurrencies, outpacing its peers in adapting to digital currencies.
"During the year ended December 31, 2021, we saw a significant increase in total Cash App revenue, primarily from bitcoin revenue which contributed 57% of total consolidated net revenue in 2021 and 48% of the total increase in consolidated net revenues in 2021," a Block SEC filing released late last week reads. "The primary drivers of bitcoin revenue are customer demand and the current market price of bitcoin."
In addition to customer transactions, Block holds about $350 million in Bitcoin on its balance sheet, the fourth most of any publicly traded firm in the world. The surge in Block's stock is understandable in the context of Bitcoin's recent run amid the invasion, jumping more than 10% per coin.
According to Citi, about 11% of Russians currently own cryptocurrencies, with a possibility that buying will only increase as alternative allocations for currency transactions close off and the ruble crashes.
Still, the analysts were not so quick to draw a direct cause-and-effect relationship.
"Interest in bitcoin is rising," the firm's analysts wrote earlier this week. "But Russian volumes have been relatively small so far, suggesting that the price action is more due to investors positioning for an expected uptick in demand from Russia rather than Russian demand itself."
This observation stands somewhat to reason as Russian policymakers are not keen to allow big outflows from its core currency, thus putting Russian oligarchs and others who might try to put capital outside the country for safekeeping in quite a bind. The price for patriotism, in this case, is quite high indeed. For investors outside of Russia eyeing opportunities both in Bitcoin and in correlated companies such as Block, it is important to temper expectations given this impasse.
