What some call unofficial sanctions are about to be lobbed on Russian banks. The new Russia sanctions

The U.S. may have discovered a new secret weapon against Russia.

A quiet round of what some call unofficial sanctions are about to be lobbed on Russian banks, sending them reeling as President Barack Obama and top lawmakers this week discuss another sanctions round.


Obscure tax negotiations the U.S. suspended with Russia amid the Ukraine-Crimea standoff earlier this month will hit the banking sector hard in the coming weeks, experts say — so hard that they’d actually do more damage than the widely publicized official sanctions levied on a few dozen select Russian officials and one bank.

More than 800 Russian banks could take a hit, with customers running for the exits and international banks giving their Russian partners a cold shoulder.

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“The impact could be even greater than the Western sanctions imposed so far, in effect applying to the whole of the Russian banking sector,” said David Clark, chairman of the London-based Russia Foundation. “With the Russian economy already running into difficulties, this is an area of real vulnerability.”

The news has attracted scant attention in the United States, but Russian media have written extensively about the uproar from the banks, and Russian officials’ attempts to restart negotiations and help their banks work around the problem.

“It punishes all Russian financial institutions, while they didn’t occupy Crimea and they are not linked to the sanctioned individuals — did [the U.S.] really mean to reveal ‘the ugly face of the world imperialism?’” asked Dmitry Chistov, KPMG risk adviser for Russia.

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While President Vladimir Putin and his lieutenants have thumbed their noses at Western leaders’ calls for withdrawal, they’ve taken the opposite tone on this matter, scrambling to change the law to allow their banks to work directly with the IRS and avoid the unofficial sanction.

If they’re unable to worm around the problem, a 30 percent tax penalty will hit most U.S. payments that go to Russian banks starting this summer — something that will not only turn off customers invested in American companies but also large international banks who will see Russian banks as a pariah because of the tax penalty.

“We are concerned about the general picture, about the future of our banks and banking systems,” an economic diplomat at the Russian Embassy in Washington, D.C., told POLITICO. “We’re trying to find a way to improve the situation.”

The maneuvering comes as Obama says a new round of sanctions is “teed up” and Sens. Bob Corker (R-Tenn.) and Chris Murphy (D-Conn.) took to the Sunday TV shows to call for ratcheting up sanctions on Russian banks.

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Current U.S. sanctions on visas and some asset-sale restrictions only hit a handful of individuals and Bank Rossiya, which is run by a crony of Putin.

A tax on American money going to all Russian banks could have a vaster effect.

“People will pull their money out of the banks if they want to do business with the U.S.,” said Robert Kahn, an international economics scholar at the Council on Foreign Relations. “That would be problematic for Russian banks to lose their deposit base. It’s capital flight. … It absolutely is would be a very powerful if unofficial sanction.”

The bank conundrum stems from a 2010 U.S. anti-tax evasion law that kicks in this July, the Foreign Account Tax Compliance Act. It requires all foreign banks to report to the IRS information on all American accounts with more than $50,000.

Any foreign banks that don’t participate will see a 30 percent withholding tax penalty on dividends, capital gains and other investments that yield U.S.-source income.

Almost 50 nations have signed deals with the U.S. to allow their banks to participate in FATCA and hand over American account information to avoid the penalty.

Russia wanted to be one of those and had been negotiating with Treasury since last year, according to officials.

But Treasury suspended the talks when the Crimea standoff erupted.

Since then, Russian finance minister Anton Siluanov has tried to jump-start negotiations to no avail while Russian banks have implored their leaders to fix the problem.

The Treasury Department did not answer repeated questions about whether the stalled negotiations were intentionally meant to hurt Russian banks. Instead, a spokesman said, “Generally, Russian financial institutions that are willing to enter into [an agreement] with the IRS are able to register with the IRS.”

Russian banks theoretically can avoid the tax and work around the current situation by entering into agreements directly with the IRS, promising to turn over client information.

But it’s not that simple since Russian laws currently prohibit their banks from carrying out certain FATCA requirements.

The Russian Embassy diplomat said they’re hoping to fix the law and will start work on the proposal this week.

There’s skepticism from the banks, said Elena Tchoubykina, a Moscow-based banking lawyer, noting that the banking community “views this measure as insufficient.”

In the meantime, Russia is on a time crunch. FATCA takes effect in July, and if banks want a fail-proof guarantee that they won’t get hit with the tax penalty this year, they must register for FATCA with the IRS by May 5.

About 30 to 40 are already trying to do so, said KPMG’s Chistov, who is advising the banks to “continue registering and start finalizing their procedures with the assumption that the law will get adopted.”

Experts note that the penalty is not an “official sanction” since nations and financial institutions have known about FATCA for years, and many banks won’t be complying with the law by the July deadline.

But unlike the others, Russia wants to comply — which is why some say it’s like a sanction.

It certainly could act like one.

J. Richard Harvey Jr., a professor at Villanova School of Law, said Russian banks not participating in FATCA will lose international credibility. Most of the biggest international banks will be compliant to avoid the tax, and banks that aren’t will likely be singled out, he said.

“If you’re a Russian bank and previously had relationships with banks around the world and now all of a sudden, those relationships will be cut off, that Russian bank could become a pariah in the banking world,” said the former top IRS official. “No financial intuition wants to be viewed as a pariah — and that’s probably the biggest issue: Will other banks continue to do business with those that are not part of FATCA?”

Ondrej Schneider, a senior economist for the Institute of International Finance, said the FATCA penalty will fall hardest on Russia’s five largest banks that have extensive international connections and comprise more than half of Russia’s entire banking sector.

The flight of individual and corporate customers is another problem the banks will face.

“I truly believe that their clients [with U.S. source income] would not take kindly to a 30 percent haircut to their dividends and interest, and so they probably would look for a bank that doesn’t have that — and there are certainly plenty of banking institutions elsewhere in Europe they could turn to that are FATCA-compliant,” said Susan Grbic, a FATCA expert and partner at WeiserMazars.

She said the banks could divest from American companies, but “I would think most customers who are worldly and wealthy will not take kindly to being restricted.”

Even if Russia does change its laws, a few experts said the Treasury could “find reasons to declare them noncompliant if it wanted to be difficult.”

“Ultimately, Russia is dependent on American goodwill to get this sorted,” Clark said.

Kahn, for instance, is already encouraging the IRS not to allow Russian banks to register for FATCA and avoid the tax penalty but use FATCA as a tool to crank up the sanctions heat.

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