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(Corrects to make clear VTB is phasing out business with Russia-based U.S. taxpayer clients only)
MOSCOW, June 5 (Reuters) - Russia's second-largest bank, VTB , said on Thursday it is phasing out business with around 2,000 Russia-based individual and corporate clients that are U.S. taxpayers ahead of a new law to fight tax dodging by Americans.
Scheduled to take effect on July 1, the U.S. Foreign Account Tax Compliance Act (FATCA) will require foreign banks to share information with the Internal Revenue Service (IRS) about Americans' accounts worth more than $50,000.
The law was written after a scandal involving Americans dodging U.S. taxes through secret bank accounts in Switzerland.
Foreign firms that don't comply with FATCA face a tax on their U.S. investment income and could be frozen out of U.S. capital markets.
State-controlled VTB said it registered with the IRS in order to maintain compliance with FATCA and would voluntarily abide by the legislation.
"However, as part of its prudent approach to managing risk, VTB's senior management has instructed the group's entities to gradually phase out business with clients, both individuals and legal entities, that are US taxpayers," VTB said.
VTB said it would phase out business with Russia-based U.S. taxpayer clients only; those based in the United States are not affected.
Nearly 70 countries have negotiated FATCA pacts with Treasury officials that allow their firms to comply with the U.S. law whilst preserving national privacy laws.
Negotiations with Russia, however, broke off earlier this year as the crisis in Ukraine intensified, yet hundreds of institutions in Russia signed up voluntarily to comply.
The United States and European Union have imposed sanctions on officials, lawmakers and a few companies close to President Vladimir Putin to punish Russia for annexing Ukraine's Crimea region.
They are threatening further sanctions, which could affect entire sectors such as banking, if it thwarts efforts to bring stability to Ukraine, where pro-Russian separatists are fighting against the government.
U.S. citizens are already required to disclose foreign assets to the IRS if the value of their foreign accounts exceeds $10,000 during a year.
Reporting by Megan Davies and Oksana Kobzeva; Editing by Elaine Hardcastle