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. Last Updated: 07/27/2016

$57 Million in MinFins Frozen

Prosecutors have ordered another $57 million in Finance Ministry bonds frozen as part of a criminal investigation, a senior official with Vneshtorgbank confirmed Wednesday.

This latest pool of so-called "frozen" MinFin bonds, about two-thirds of which are held in custody by Vneshtorgbank, adds to the $24 million of suspected stolen bonds frozen in June.

Rumors of the action early this week rattled markets in the dollar-denominated bonds, widely regarded as one of Russia's few safe instruments for foreign investors.

Though MinFin prices dropped sharply Tuesday, they recovered somewhat Wednesday on news that President Boris Yeltsin's heart surgery is scheduled tentatively for next week.

MinFin bonds are not allowed to leave Russia, but several Western security houses reached agreement with Vneshtorgbank to act as custodian.

Once frozen the bonds cannot be traded, nor can they bear interest or dividends. Though the Finance Ministry has assured traders it will make good on the redemptions, the latest incident could further shake their confidence.

At the center of the problem is a conflict in Russian law. The criminal code allows investigators to seize property until the rightful owner is determined. But the civil code states that a bona fide holder of the securities should be free from any previous problems.

"If these bonds can be frozen anytime, every bond becomes a risk," said one London-based MinFin dealer, who did not wish to be identified. "It's as if the police broke into your office and took back your money because it was stolen three years ago, just to give it back. It's hard to fathom."

Traders said most of the $57-million face value in bonds are MinFin 3 and MinFin 4 tranches with maturity dates in 2003 and 2008. They were "arrested" last Friday by the Taganskaya prosecutor's office in connection with the murders of two Russian businessmen, Kommersant Daily reported Wednesday.

The Finance Ministry so far has refused to comment.

The Vneshtorgbank official said the bank may pose some "serious queries" to the government. "It's very important," he said. "We need a solution to this problem."

Market players contend there are solutions. "Vneshtorgbank could eradicate the serial numbers on these bonds ... so that they become bearer bonds. Or they could get rid of the contradictions between the legislation," said Nima Taibby, a fixed income dealer with Renaissance Capital in Moscow.

Otherwise, "this will kill the MinFin market," said another trader. "The ripples last time caused people to withdraw from the market for a long time, and this is well over double the amount."

"It plays into those who say Russia is too high-risk."