Alleged Theft Freezes Millions in MinFins

Interest payments and redemptions on more than $28 million worth of Ministry of Finance bonds have been blocked by Russian authorities on suspicion of being stolen, ministry and Western banking officials said Thursday.

"It's breaking out there all over the place," said one Western banker. "Currently, within Vneshtorgbank, there are $28.5 million of stolen bonds, or bonds that have been identified as stolen, and basically blocked."

Vasily Pryanshnikov, deputy head of the ministry's foreign exchange department, said he could not give a value of the stolen bonds, but he termed the theft "massive," Reuters reported.

"I don't know the size. We've been trying to ascertain the whole size of the problem," the Western banker, who asked not to be named, told The Moscow Times.

He added that his firm, which is heavily involved in MinFin custody work, has been working with three or four other Western account holders of Vneshtorgbank, the government's primary custody and clearance organization for the bonds.

"There are rumors in the market to be tens of millions also affecting Russian banks," he said, adding that one Russian bank is rumored to be holding $7 million worth of stolen bonds.

The Ministry of Finance issued a statement saying it will not redeem or pay the coupons on the bonds until its agent banks received instructions from the authorities that the securities had been unfrozen.

Reuters said that the bonds were due to be redeemed Friday, but the Western banker disputed that report, saying that the paper's annual redemption actually came last month.

"They only pay on the 14th of May. That's when we knew exactly what was wrong," he said, adding that the Western account holders are considering lawsuits to recover the money owed their clients.

MinFin bonds are paper issued to domestic enterprises to cover Russian government debt. They later work their way onto the secondary markets, where players are about equally divided between foreign and domestic firms.

About $8 billion of 3 percent dollar-denominated bonds were issued in five tranches, two of which have been redeemed, the second on May 14. At the same time, two new tranches were issued onto the market. The stolen bonds are found in tranches 2, 3, 4 and 5, sources said.

With the issue last month of two new tranches, the total market is valued at about $9 billion.

Ultimately, orders to arrest the bonds came from the Interior Ministry, which is investigating the case, the source said. "Basically, they're acting within compliance with the criminal legislation of the Russian Federation," the banking source said.

Neither the banking source nor the Ministry of Finance could explain how the bonds were stolen or how they managed to get back into the market.

A decree issued by the Interior Ministry blocking the bonds said it mentioned only one suspect in the case, attributing $1.2 million worth of stolen bonds to a firm located in Chechnya, the banker said. The name of the firm was no immediately known.

Reuters, however, quoted Ministry of Finance sources as saying some of the bonds were stolen in Grozny as Russian troops stormed the city in early 1995 and bank vaults were looted.

MinFin bonds can be purchased anywhere in the world, although the bonds are physically held in Russia -- many with Vneshtorgbank, which serves as the government's primary clearance and custody organization.

Rumors of the theft have been circulating through the market for more than a week, and are blamed by some traders for a recent fall in prices. Other's attribute the market's reaction to a liquidity crunch at Vneshtorgbank, which they said delayed, but did not halt, payments to Russian banks.

"Investors are very scared now because of this rumor [of a theft] and the delay in payments," one trader said.