Data from a PPRO eastern Europe payments and e-commerce report published in 2018 underlines that Russia’s e-commerce market is growing by 9% annually and is worth in excess of €23.5 billion.
A hunger for consumer goods in remote regions is being met by overseas retailers, with the PPRO report noting that the cross-border e-commerce market in Russia is growing more than four times as fast as the overall market. Credit card usage is also relatively high.
However, e-commerce growth in Russia remains well below the global average of 14% and even further behind the eastern Europe regional average of 16.8%. In addition, only 3.5% of total retail expenditure in Russia comes from e-commerce, compared to the global average of 6.9% – figures that suggest significant potential for further growth.
James Booth, PPRO
One of the challenges facing international merchants looking to do business with customers in Russia is the existence of a sovereign payments area in the form of the Russian national payment system, MIR. The purpose of this initiative was to create a system where external economic or political factors could not affect the processing of card payments in Russia.
The first MIR cards were issued in December 2015 and there are now 54 million in circulation.
The restrictions surrounding the MIR payment system are unique to card rails and in-country point of sale, explains James Booth, vice president and head of new business (payment services) at PPRO. “Unfortunately, in order to access the MIR network, merchants will need to establish a local entity, although they can still access local consumers via alternative local payment e-wallets, which are more popular than cash or bank transfer.”
He also observes that merchants accepting payments from customers in Russia are able to access local payment methods such as Qiwi or Yandex on a cross-border basis and that there is no requirement similar to other geographies that require a local entity or presence in order to operate in this market.
“However, it is recommended that merchants access Russian payment methods via payment service providers, who have direct access within the market and are able to settle cross-border in their respective country,” adds Booth.
Mike Goodenough, head of strategic initiatives at Ingenico ePayments, which recently announced that it was the first international payment service provider to support MIR cards’ acceptance on international websites via Russian local acquirers, says most merchants have been authorizing domestic Russian cards internationally, using an acquirer beyond the border to authorize and settle a transaction via the international Visa and Mastercard networks.
“That works efficiently but brings a number of challenges,” he adds. “One of these is that the authorization rate is generally lower than if you process domestically, so it can be difficult to achieve good conversion rates. International transactions also cost more.”
In addition, there are a number of cards issued in Russia which can only be authorized by a local acquirer – such as Maestro as well as MIR – and merchants face general complexities such as regulations on the storage of personal data.
Legislation requires any personal consumer data to be stored on Russian servers and merchants must ensure their data collection is legally compliant irrespective of whether a transaction is processed domestically or internationally.
Tax and duties are a further complicating factor. Maria Mikhaylova, executive director of the Russian National Payment Council, explains that if a foreign e-commerce company sells electronic content on the territory of Russia, it must register with the Federal Tax Service and pay VAT. In addition, the duty free import limit has been reduced to €500 from €1,000.
“Amendments to the law on the national payment system are also forthcoming, which will require registration with the Central Bank of Russia by payment services or systems that make only cross-border payments,” she adds.
|Maria Mikhaylova, Russian National Payment Council|
Russia has always been a complex payments market and this complexity has been exacerbated by its dispute with the US and its allies over Swift. As far back as 2015, central bank governor Elvira Nabiullina confirmed that the bank was helping to establish a national payments system to reduce its reliance on Swift.
A report on Russian TV channel RT in December quoted the head of the Russian parliamentary committee on financial markets, Anatoly Aksakov, as saying that the country’s System for Transfer of Financial Messages (SPFS) (developed by the central bank), had more domestic users than Swift. According to Aksakov, discussions have taken place with financial regulators in China, Turkey and Iran around integrating with SPFS.
These comments were made just over a month before the US special representative for Ukraine negotiations, Kurt Volker, said cutting Russian banks from the international banking network was one of the options being considered to prevent Russia from asserting unilateral control in the shared waters of the Azov Sea.
However, Volker described this as a last resort that would have negative implications outside as well as within Russia.