Arab banks shun Russian Mir payments system after pressure

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• Suspension by Turkish banks comes amid warnings from the US 
• Increased global concern about falling foul of Western sanctions
• Most Gulf countries have strong ties with the US

Along with losing ground on the battlefield in recent weeks, Moscow’s foothold in the Arab world’s financial system has also hit setbacks.

Turkey’s finance minister Nureddin Nebati last Thursday announced that three state banks – Vakifbank, Ziraat Bank and Halkbank – had suspended the use of the Russian Mir payment system which is the country’s equivalent of Visa or Mastercard. 

Two private Turkish banks, Denizbank and Isbank, had also suspended use of Mir after Washington announced an expanded set of sanctions on Russia on September 15 over its ongoing invasion of Ukraine.

The sanctions included targeting Vladimir Komlev, the CEO of the Bank of Russia’s National Card Payment System (NSPK), which runs Mir. 

• Uzbekistan halts use of Russia’s Mir payment cards
• US expects more banks will cut off Russian payment system Mir
• Turkish banks suspend Russian Mir payments after US sanctions

The suspension by Turkish banks comes amid repeated warnings from the US and other countries that those who fail to adhere to international sanctions against Moscow may themselves face penalties.

“There were direct warnings from US deputy treasury secretary Wally Adeyemo during his visit to Ankara,” Hakan Akbas, managing director of Strategic Advisory Services, an Istanbul-based political risk and sanctions compliance advisory, told AGBI. 

“His press releases as well as his letters to Turkey’s leading business associations such as Tusiad, Musiad, is rare conduct by US Treasury officials.

“Should they not have stopped, banks and their officials would surely have been subject to secondary sanctions resulting in reputation loss, being listed in grey or red lists, and cut off the Swift system and US capital markets.” 

Indeed, the US and western nations have been growing increasingly concerned over increased economic ties between NATO-member Turkey and Russia.

And Turkey has clearly started to feel the heat. 

Turkish President Tayyip Erdogan was quoted as saying last week that Turkey would have to take steps on finding an alternative to the Mir system, “whether we like it or not”, due to sanctions.

Ankara continues to tread a fine line over the war in Ukraine, maintaining close ties with both Moscow and Kyiv. 

While it opposes Western sanctions on Russia, it has condemned Russia’s invasion – calling it an “illegal and unjust war” – and sent armed drones to Ukraine as part of its diplomatic balancing act.

“Turkey has been following a so-called ‘balanced policy’ between the West and Russia in order to protect her economic and political interests,” said Arda Tunca, Istanbul-based economist.

“However, recent developments have been dividing the West and Russia so deeply that such a policy can no longer work for Turkey.  

“Turkey’s economic ties with the West are strong and private institutions such as Isbank and Denizbank are not in a position to risk their income originating from Turkey’s economic relations with the West.” 

There is now increased global concern about falling foul of Western sanctions with some industry experts warning that there is a growing threat of secondary sanctions being applied by the EU. 

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“Although the stern warning came first from the US, EU Commissioner Mairead McGuinness will be travelling to Turkey soon to discuss not just Mir but also Turkey being used as a haven for Russian companies and individuals skirting sanctions against Russia,” said Akbas.

“The Turkish economy is not doing well so Ankara sees a huge potential to sell Moscow everything possible.

“However, the secondary sanction threat is high and imminent against any bank or entity or individual continuing to do business with Russia or related parties. I cannot envisage any sizeable financial party not suspending MIR after the Turkish example.” 

Turkey is now looking at possible alternatives to Mir, according to a statement made by Erdogan to a group of journalists in New York last week.

Other countries have also been cutting ties with Mir. 

On September 27, one of Tajikistan’s largest banks, Dushanbe City Bank, suspended operations of Mir payment cards in the country, citing technical issues.

Just a few days earlier Uzbekistan said Mir payment cards issued outside the country would no longer work, though those issued locally were still functioning.

Last week several banks in Kazakhstan, Turkey, and Vietnam also halted their usage. 

Dubai’s Mashreqbank in March stopped lending to Russian banks and started reviewing its existing exposure to the country as a result of heightened risks following Moscow’s invasion of Ukraine. 

Russian financial institutions were reportedly part of the emerging market loan portfolio that Mashreqbank had grown in recent years to expand beyond the Middle East. 

The move was one of the first reported instances of a Middle Eastern bank halting ties to Russia. 

“As far as I know, there isn’t any Gulf country using the Mir system, but the UAE was holding discussions with Russia to find ways to implement it,” said Tunca.

“It is quite a difficult choice, especially for the UAE, since it is an attraction point for Russian tourists in the region. 

“Most of the Gulf countries have strong ties with the US. Any country which has the intention of breaking sanctions is going to risk its financial capabilities on the international platform. Therefore, I do not think that the Gulf countries are going to begin to use the system.” 

Akbas said: “I am not aware of any UAE bank currently using Mir. The issue is that once Mir is in place, it is hard to track what it is truly being used for.

“The UAE has started supplying Germany and EU with liquefied natural gas which offers a bigger upside than Russian tourists.” 

The US on Wednesday urged financial institutions in the UAE to remain vigilant in combating Russian sanctions evasion and warned that insufficient due diligence “is not a defence”, noting that the US could target non-US citizens for providing “material support” to a sanctioned entity. 

“We know that Russian banks have employed deceptive payment practices and used shell companies and other means to hide the true nature of their transactions,” Wally Adeyemo, US deputy treasury secretary, said in an address to a UAE banking roundtable. 

Adeyemo’s trip to the Middle East also included a stopover in Turkey where he met with government officials as well as members of the banking and finance community in Ankara and Istanbul. 

“The UAE as a finance centre and Turkey as a geopolitical transit point for energy in the region have been the two major players refusing to implement Western sanctions against Russia,” said Akbas. 

“The UAE has reportedly received significant funds from Russian oligarchs even before the war.

“Turkey is a major importer of gas and the second largest importer of discounted oil from Russia – trade with Russia has almost doubled reaching a historic level.

“Accordingly, both countries will be closely monitored by the US and the EU in the weeks ahead.” 

AGBI contacted the US Treasury for comment but was unable to reach them.