From Russia With Love

5/14/2014

The former Soviet republic of Ukraine has become the world's hottest military and diplomatic flashpoint as Ukrainian nationalists face off against pro-Russian separatists. Russian President Vladimir Putin courteously waited until after the Sochi Olympics to seize Crimea, then position troops throughout eastern Ukraine. Now he's announced he'll withdraw the troops he denied dispatching in the first place. But sabers are rattling, and the situation is so volatile that combat could explode before you finish reading this.  

The United States obviously wants to avoid that possibility. But Secretary of State John Kerry's best efforts appear to be having little effect. We're certainly not going to involve our own military anytime soon. Who will come to the rescue? Well, how about those stalwarts of democracy at the IRS?  

Back in 2010, Washington passed the Foreign Account Tax Compliance Act ("FATCA") to stop tax evaders from parking assets in secret foreign accounts. That law requires all foreign banks to divulge information on American accounts with more than $50,000. If they don't, starting July 1, they'll have to withhold 30% of the interest and dividend payments their clients earn on most U.S. stocks and bonds.  

Almost 50 countries have agreed to let their banks participate and avoid that penalty. But guess who still says no? That's right, Russia. What's worse, Russia's bank secrecy laws prevent banks from going around the country and working directly with our Treasury. And even worse, at least for Putin, our Treasury suspended negotiations entirely when Russia rolled into Crimea.  

At this point, then, it looks like law will make it way more expensive for investors to use Russian banks to invest in the U.S. And private investors who use Russian banks to facilitate trades are also subject to the law. It gets worse in 2017 — if there's still no agreement in place, banks will have to withhold 30% of the gross proceeds of stock and bond sales, on top of the interest and dividends they earn.  

FATCA may not be the only way to marshal the power of taxes against Russia. Putin's cronies — the billionaires who own Russia's biggest oil, gas, mining, and retail companies — have moved tens of billions of dollars of assets out of Russia and into western jurisdictions like Luxembourg, the Netherlands, and Switzerland. They did so to dodge Russian taxes, but now they find their assets exposed to possible U.S. sanctions and vulnerable to freezes. It's probably too soon to break out the balalaikas and celebrate — but we can hope that the risk of losing their assets motivates the oligarchs to pressure Putin to pull back.