The Breakdown - The Iron Firewall Descends as Visa, Mastercard and PayPal Leave Russia

Starting point is 00:00:00 The point here is not to say that these sanctions are the wrong move. But now that we are more than a week into this thing, coming up on two, we're starting to get the glimpses of the long-term fallout of not only the violent conflict on the ground, but of the economic response and the economic war happening around it as well. Like it or not, it is now setting the context for basically everything else that happens in the global economy. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexo.io, Arculus, and FTX, and produced and distributed by CoinDesk.

Starting point is 00:00:43 What's going on, guys? It is Monday, March 7th, and today we are discussing the iron firewall. Visa, MasterCard, TikTok, Netflix, all of these companies are leaving Russia. We're going to talk about the implications and the broader global economic. ripple effects. Before that, however, if you are enjoying the breakdown, please go subscribe, give it a rating, give it a review, or come join us on the Breakers Discord. It's where you can discuss not only the day's shows, but whatever else is going on in the world of crypto or beyond. A disclosure, as always, in addition to them being a sponsor, I also work with FTX. And finally, it is that time of year, tax time, and Cointelli is here to help. Cointelli is here to make crypto tax reporting stress-free for both individuals and

Starting point is 00:01:30 and accountants. Designed by CPAs, Cointelli supports hundreds of crypto platforms and provides accurate calculations so you don't pay any extra on your taxes. Cointelie also charges no added fees for up to 100,000 transactions and offers 24-7 customer support from tax advisors. These services are incredibly important, and I really appreciate Cointelli having been a sponsor for the past week. But with that, let's get to today's conversation. Over the weekend, we saw even more companies starting to pull out of Russia. The economic isolation continues. The latest and perhaps most significant that we've heard yet are Visa and MasterCard. There has been a lot of confusion around exactly what is and isn't affected, but here's what I can tell. So this was announced Saturday evening, and basically the deal

Starting point is 00:02:18 here is that MasterCards and visas issued by Russian banks will not work in other countries, and people with cards from other countries will not be able to purchase goods or services from companies in Russia. Now, cards issued by Russian banks that have the MasterCard or Visa logo may still work inside the country because the transactions are handled by a local processor. MasterCard's exact statement said, quote, with this action, cards issued by Russian banks will no longer be supported by the MasterCard network, and any master card issued outside of the country will not work at Russian merchants or ATMs. End quote. Whatever the specific details, this amounts to Russians being cut off from international commerce for all intents and purposes. In their statement about this move, MasterCard said, we don't take this decision lightly. MasterCard has operated in Russia for more than 25 years.

Starting point is 00:03:05 We have nearly 200 colleagues there who make this company so critical to many stakeholders. As we take these steps, we will continue to focus on their safety and well-being, including continuing to provide pay and benefits. When it is appropriate and if it is permissible under the law, we will use their passion and creativity to work to restore operations. Now, this is part of a much longer statement. Visas, on the other hand, was quite short. effective immediately, Visa will work with its clients and partners within Russia to cease all visa transactions over the coming days.

Starting point is 00:03:34 Once complete, all transactions initiated with visa cards issued in Russia will no longer work outside the country, and any visa cards issued by financial institutions outside of Russia will no longer work within the Russian Federation. We are compelled to act following Russia's unprovoked invasion of Ukraine in the unacceptable events that we have witnessed, said Al Kelly, Chairman and Chief Executive Officer of Visa, Inc. We regret the impact this will have on our valued college. and on the clients, partners, merchants, and cardholders we serve in Russia. This war and the ongoing threat to peace and stability demand we respond in line with our values.

Starting point is 00:04:06 Some have pointed out that because there is that local payments processor, this actually might hurt people who are against the war even more. Julia Aiafee, who's the Washington correspondent at Puck News, writes, here's the thing about Visa and MasterCard leading Russia. It only affects Visa MasterCard transactions on cards from Russian banks outside Russia. These cards continue to work in Russia. This punishes Russians who fled the country, i.e. those who opposed Putin and the war. Putin's cronies, like RT, editor-in-chief Margarita Simonien, will still be able to use their visa and mastercards and access their funds, but the journalists of TV Rain, who fled because they were threatened with 15-year jail sentences for telling the truth won't be able to.

Starting point is 00:04:44 Visa and MasterCard, what are you doing to solve this problem? Will you allow Putin's critics to access their own money so they can survive abroad in safety? Or will you continue to punish them while enabling people inside Russia? Now, the reality here, and this is sort of the lens that you have to look at almost everything coming out of this with, is this is all very messy business. The ability to precisely target is lacking, and there's no way for this sort of action to be taken without collateral damage. Having real conversations about what we are and are not willing to bear on that front is really, really important. Now, it's not just Visa and MasterCard, PayPal is also shutting down. quote, under the current circumstances, we are suspending PayPal services in Russia,

Starting point is 00:05:24 President and Chief Executive Dan Shulman said in a statement. He added that the company, quote, stands with the international community in condemning Russia's violent military aggression in Ukraine. PayPal had only supported cross-border transactions before and stopped accepting new users this week. All of this is, of course, brutal for regular Russians. And of course, that's the real issue with sanctions. Lina at Commander Ivy, who's a Russian Twitch streamer says, so PayPal has stopped working in Russia today. and Twitch will no longer pay Russian streamers. Thank you very much for cutting off my only source of income. I'm sure this will solve all of the world's problems. So yeah, this is just part of the deal

Starting point is 00:05:58 when you have sanctions. They create problems not just for the leaders and perpetrators of violence, but are a broad and largely indiscriminate tool, and they come with knock-on effects. Sunderland Global Media says breaking Russia's state-owned Spurbank is to replace Visa and MasterCard with a new MIR card system in partnership with China's Union Pay. Rahum Ahotra writes, a significant loophole. Union pay is partnered with Discover and PayPal, which would allow Russian cardholders to access most Western e-commerce. Amazon accepts Union pay by itself too. So basically, that thing that people had been worried about, about the U.S. and the Western system shut down forcing Russia into the waiting arms of Chinese alternatives, seems to be,

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Starting point is 00:08:17 Download the FTCX app today and use referral code breakdown to support the show. Those weren't the only companies to pull out of Russia in the past few days. spokesperson Emily Feingold said, given the circumstance on the ground, we have decided to suspend our service in Russia. TikTok has also limited its services. And these aren't just protests against a bad government, but are specific reactions to new laws in Russia. From the Verge, quote, last week Netflix said it wouldn't comply with a new Russian law that requires large streamers to host 20 Russian propaganda channels such as NTV and the state-backed channel one. The streaming giant later announced that it's halting all productions and acquisitions in Russia. Netflix had been

Starting point is 00:09:00 working on four Russian originals at the time. According to Bloomberg, Netflix currently has around 1 million subscribers in Russia. End quote. Now, TikTok has an estimated 36 million users in Russia, and they've suspended live streaming and new content. They said it's about ensuring the safety of their staff and users. Basically, this is the new fake news law, where since Friday of last week, anyone who writes news that is deemed false about the military could face up to 15 years in jail. In a series of tweets, TikTok said, in light of Russia's new fake news law, we have no choice but to suspend live streaming and new content to our video service while we review the safety implications of this law.

Starting point is 00:09:39 This is a huge problem. As silly as it sounds, TikTok is one of the few channels that regular Russian voices were actually getting out by. TikTok was a way to amplify the voices of people in Russia who don't agree with, Putin's aggression and who wanted to make their voice heard. TikTok's decision is understandable, given that those people are risking a huge amount of jail time for saying something that's not government approved, but it's still just a disaster any way that you look at it. The other economic fallouts of the Russia sanctions continue to mount as well. Bloomberg writes,

Starting point is 00:10:11 oil jumps near 123 as chance of Russian ban spurs crisis fears. Oil had its biggest daily swing ever, surging to near $140 before pulling back on the prospect of even tighter supplies after the U.S. said it was considering a ban on Russian crude imports. This is translating to more than $4 at the pump in most places in the U.S. Again, from that Bloomberg piece, oil's recent swings are eclipsing those seen during the global financial crisis of 2008, and the demand plunge sparked by the coronavirus pandemic. Traders, shippers, insurers, and banks have become increasingly wary wary of taking on or funding purchases of Russian barrels as they navigate international financial sanctions. Last week on March 4th, Elon Musk, yes, the founder of Tesla wrote,

Starting point is 00:10:53 hate to say it, but we need to increase oil and gas output immediately. Extraordinary times demand extraordinary measures. Obviously, this would negatively affect Tesla, but sustainable energy solutions simply cannot react instantaneously to make up for Russian oil and gas exports. Jared Dillian, the editor at Daily Dirtnap, says oil may go from negative to infinity in the span of two years. Markets, man. Finance a lot, a Canadian trader, writes, when Brent Oil peaked.

Starting point is 00:11:19 at the end of June 2008 and collapsed the first week of July 2008, volatility went insane. The velocity of energy prices is far worse than 2008. If we get a similar price correction, this will be the highest volatility spike we've ever seen. Tish Regan writes, sources tell me U.S. officials are worried about $180 oil when Russian oil is fully offline. I'd caution that 200 plus per barrel is possible if we can't access additional supply. This price shock will cause an economic meltdown. Like it or not, the world is still powered by oil. Now remember, there are carve-outs and exceptions to sanctions when it comes to energy. In fact, a number of people who were saying that these sanctions weren't powerful enough were pointing to the

Starting point is 00:11:58 fact that we didn't ban Russian oil and other energy sources as a signal that we weren't as committed as we needed to be to this fight. Turns out it doesn't really matter. People just aren't buying Russian oil already voluntarily. Bloomberg had a piece on this as well. Russia oil shunned even without sanctions, sparking supply panic. While there are currently no sanctions in place preventing companies from purchasing the nation's crude, buyers are refusing to take it, and tanker companies are unwilling to ship it. Refineries are racing to secure alternative supplies from other markets. By way of example, they point to the Trafigura Group, who's an oil trading giant, who is offering to sell a cargo of the nation's flagship Euroles grade for 1860 a barrel

Starting point is 00:12:36 less than an international benchmark. This was their deepest discount ever, but it still had no bids. The main issue here is shipping and trading. Oil tanker owners aren't willing to handle it, until it's clear what's going to happen with sanctions, and traders are concerned about negative publicity. Energy Aspects wrote about 70% of Russian crude trade is frozen. Most majors are not touching Russian oil, and only a few European refiners and trading firms are still in the market. Now, as this picture does get a little bit clearer, once sanctions are all finalized and the market feels like they have a real sense of it, it could be that Asian traders step in, and the amount of crude that's frozen may drop to something more like 20%. Still 20% of the oil of a country that exports 5 million barrels a day, which is 5% of global consumption, would still be a huge deal.

Starting point is 00:13:26 Meanwhile, in the U.S., there are a ton of headlines about where else to find a replacement. Apparently, two senior U.S. officials met with the Maduro government in Caracas, Venezuela to discuss oil, and they're also even pushing to get a deal with Iran over its nuclear program, which could pave the way for those sanctions to be lifted by later this year. Peter Zahan writes, this was originally ruled out in order to make sure the Europeans did not break ranks, but now the Europeans are turning into fire breathers and private companies are refusing to buy the oil anyway. Sanctions are just plain catch-up. Zeyan also discussed Venezuela and does not think it's the answer. Regardless of what you think about Russia or Venezuela, this is just a dumb idea.

Starting point is 00:14:04 Venezuelan oil production has been destroyed. Rebuilding it will take years and tens of billions of dollars. If you are after oil, quick, this is not the source. Now, beyond oil, the other big one that people are watching is wheat. On the 4th of March 2021, wheat was 6.50. On the 4th of March 2022, wheat was up to 1340. Belina Chakarrova tweets, Food prices soar as Black Sea ports among the most significant global food chokepoints

Starting point is 00:14:29 are at a virtual standstill amid Russia's war. Russia and Ukraine supply almost a third of the world's wheat exports. Food crisis looming as a result. Priapis IQ writes, Egypt is the world's biggest importer of wheat. It spends more than $4 billion annually defeat its population of over $100 million. Combined Russia and Ukraine cover more than 70% of Egypt's imported wheat. I bet the Egyptian ruling class are looking over their shoulders.

Starting point is 00:14:53 Nick Carter writes, Russia and Ukraine produce one-fourth of wheat and one-fifth of corn, 12% of all calories worldwide. If energy and food prices stay up and keep climbing, many governments will collapse and famine will reassert itself globally. What all of this amounts to is reality, settling in around this war. Barclays economists wrote, soaring commodity prices and increased risk aversion caused by the Russia-Ukraine war imply a stagflationary shock. While Europe looks more vulnerable than the U.S., the U.S.,

Starting point is 00:15:20 the U.K. is somewhere in between, China looks least exposed. The IMF is warning of, quote, very serious economic consequences from the fallout of this war. Goldman Sachs thinks that a sustained $20 increase in the price of oil could lower GDP by 0.6% in the euro area and by 0.3% in the U.S. and China. Cutting off gas shipments through Ukraine could be even bigger knocking 1% off of Euro area GDP, where if Russia's gas was unavailable entirely to Europe, it could mean 2.2% off of GDP. The point here is not to say that these sanctions are the wrong move. But now that we are more than a week into this thing, coming up on two, we're starting to get the glimpses of the long-term fallout of not only the violent conflict on the ground, but of the economic

Starting point is 00:16:04 response and the economic war happening around it as well. Like it or not, it is now setting the context for basically everything else that happens in the global economy. So there is going to be a ton to keep track of around all of this, and obviously it's a very dynamic situation. For now, I want to say thanks again to my sponsors, nexus.io, Arculus, FTX, and Quinteli. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - The Iron Firewall Descends as Visa, Mastercard and PayPal Leave Russia

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