Support The Moscow Times!

Russia's No. 2 Bank VTB to Stop Servicing Russia-Based U.S. Clients

State-owned VTB has about 2,000 U.S. clients.

VTB, Russian's second-largest banking group, will cease service to Russia-based U.S. clients to avoid falling foul of FATCA, a U.S. tax avoidance law that comes into force on July 1.

Even at this late stage, Russian law and FATCA are incompatible — Russian banks will be able to comply with U.S. law or Russian law, but not both, the head of the Association of Russian Banks said Thursday. VTB is the first bank to decide to settle the issue by unloading its U.S. clientele, but it may not be the last.

VTB's press service said Thursday that to minimize risks "VTB's senior management has instructed the Group's entities to gradually phase out business with clients, both individuals and legal entities, that are U.S. taxpayers." State-owned VTB has about 2,000 U.S. clients based in Russia, the press service said.

The Foreign Account Tax Compliance Act was passed in 2010 to crack down on U.S. tax avoiders worldwide. When it comes into force in July, the law will require foreign banks to pass information on the accounts of U.S. taxpayers to the IRS — with the first filing no later than March 31, 2015 — and act as tax agents by withholding money on behalf of the U.S. authorities. For shirkers, FATCA threatens financial penalties on their U.S.-based income.

Since passing the law, the U.S. has been busy negotiating bilateral information sharing agreements with countries worldwide, including Russia, to ensure that the infrastructure needed to comply with FATCA is in place in time. But Russia's annexation of Crimea from Ukraine in March prompted U.S. negotiators to first freeze talks and then abandon them outright, leaving Russian legislators scrambling to find a unilateral solution.

The U.S. treasury said this week that 77,000 banks outside the U.S. have registered with the IRS,  among them 515 Russian banks, including market leaders Sberbank and VTB.

But registration does not solve the problem, as current Russian law bars banks from sharing information and withholding taxes for other countries. Since talks with the U.S. broke down, one packet of amendments addressing FATCA has been fast-forwarded through parliament. While only partially addressing the issues, the amendments also give banks the right to refuse to service U.S. clients — a solution that VTB is the first Russian bank to use. Others may well follow.

"Banks are waiting," Garegin Tosunyan, head of the Association of Russian Banks, told The Moscow Times. "Lots have registered [with the IRS]. If lawmakers pass amendments, the banks will fulfill the FATCA requirements. If they do not, they will drop their U.S. clients."

And if U.S. citizens do not like it, Tosunyan said, they can take their complaints to the U.S. government. "The situation is ridiculous, but Russia is not to blame," he said, adding that Russian banks will cope more easily with the loss of U.S. clients than U.S. clients will without Russian banking services.  

Sberbank and Gazprombank fill out Russia's banking top three, all of whom are owned by the state. Sberbank said Thursday that until FATCA's filing deadline arrives, Russian and U.S. law are still not mutually exclusive, and the bank has no plans to refuse services to U.S. clients. Gazprombank did not reply to a request for comment.

Contact the author at p.hobson@imedia.ru

Sign up for our free weekly newsletter

Our weekly newsletter contains a hand-picked selection of news, features, analysiss and more from The Moscow Times. You will receive it in your mailbox every Friday. Never miss the latest news from Russia. Preview
Subscribers agree to the Privacy Policy

A Message from The Moscow Times:

Dear readers,

We are facing unprecedented challenges. Russia's Prosecutor General's Office has designated The Moscow Times as an "undesirable" organization, criminalizing our work and putting our staff at risk of prosecution. This follows our earlier unjust labeling as a "foreign agent."

These actions are direct attempts to silence independent journalism in Russia. The authorities claim our work "discredits the decisions of the Russian leadership." We see things differently: we strive to provide accurate, unbiased reporting on Russia.

We, the journalists of The Moscow Times, refuse to be silenced. But to continue our work, we need your help.

Your support, no matter how small, makes a world of difference. If you can, please support us monthly starting from just $2. It's quick to set up, and every contribution makes a significant impact.

By supporting The Moscow Times, you're defending open, independent journalism in the face of repression. Thank you for standing with us.

Once
Monthly
Annual
Continue
paiment methods
Not ready to support today?
Remind me later.

Read more