U.S. in Talks With EU on Next Round of Sanctions on Russia

The U.S. is negotiating with European Union officials on a third round of sanctions to use against Russian industries if the former Soviet republic continues destabilizing Ukraine as it prepares for a May 25 election, two officials told Congress today.

“As the Kremlin’s decisions concerning the situation in Ukraine leave us with little choice but to continue to ratchet up the pressure, we will use the full range of sanctions authorities at our disposal, which will expose the weakness and vulnerability of the Russian economy,” Daniel Glaser, the Treasury Department’s assistant secretary for terrorist financing, said in testimony to the Senate Foreign Relations Committee in Washington.

While the U.S. has blocked access to U.S. markets for 45 individuals and 19 entities, including OAO Rosneft Chief Executive Officer Igor Sechin, it has yet to use the most significant sanctions -- those on financial, energy or mining industries.

Senators pressed testifying Obama administration officials, including Victoria Nuland, the State Department’s assistant secretary for European and Eurasian affairs, to use those broad measures before the elections.

Cohen’s Trip

The Treasury is “working tirelessly” to ensure the EU and the Group of Seven countries also continue to expand their measures, Glaser said. Treasury Undersecretary for Terrorism and Financial Intelligence David Cohen is traveling to Germany, France and the U.K. this week to discuss further steps.

“As the United States and our international partners continue to confront Russia’s illegal actions in Ukraine, we stand ready to further employ our arsenal of financial measures as the situation escalates,” Glaser said. “If Russia chooses to continue its illegal and destabilizing actions in Ukraine, we can impose substantial costs on, and expand the isolation of, an already weak Russian economy.”

Nuland said the administration is hopeful that in working with European officials, “we will have a strong package” of additional sanctions” and intend to “have them at the ready very soon.”

Besides economic sanctions, the tools Treasury is using include halting negotiations with Russia over an agreement that would help Russian financial companies comply with the Foreign Account Tax Compliance Act, a law passed by Congress in 2010 designed to prevent U.S. citizens from avoiding taxes by using foreign bank accounts.

‘Strong Penalties’

Without a bilateral agreement between the two nations, Russian banks will have to register with the U.S. Internal Revenue Service. While some might be able to do that, others that won’t face “strong penalties,” Glaser said today. Companies that don’t register with the IRS face a 30 percent withholding tax on payments from the U.S. starting July 1.

“The Treasury Department at this point has no intention of restarting negotiations with Russia,” he told the committee.

Without the agreement between the two nations, it will be “expensive and difficult” for the Russian banks to comply with the tax law, also known as FATCA, VTB Group chairman Andrey Kostin said last month.

While pressing Russia to change its course, the international community is providing support for Ukraine. Financial aid provided to the country this month is estimated to reach $5.9 billion, including $3.2 billion from the International Monetary Fund and an estimated $2.7 billion from the U.S., European Union, World Bank, Japan, and Canada, Glaser said.

Asked about whether punitive steps against Russia might involve credit-card companies Visa Inc. (V) and MasterCard Inc. (MA), Glaser said “we have a number of tricks up our sleeve” and the “credit-card idea that you are articulating is certainly one of the levers that we have with respect to Russia.”

Visa and MasterCard play a “significant” role in the financial system in Russia, Glaser said.

To contact the reporter on this story: Kasia Klimasinska in Washington at kklimasinska@bloomberg.net

To contact the editors responsible for this story: Chris Wellisz at cwellisz@bloomberg.net Brendan Murray, Vince Golle

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