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. Last Updated: 07/27/2016

Special MinFins Placed In West, Salomon Says

James Dannis, managing director of Salomon Brothers investment bank in Moscow, said Thursday that over $1 billion of Russian Finance Ministry dollar bonds had now been placed on Western markets in a special form, arranged by Salomon, that guarantees liquidity.

"That represents the biggest ever success in attracting foreign portfolio investors to a Russian instrument, and we only started the scheme in March this year," Dannis said.

All told, more than $10 billion of the so-called MinFins have been issued since 1993. They have played a key role in tempting Western investors back to Russian debt instruments after a crisis of confidence five years ago. The popularity of MinFins is evidenced by a drop in annual yields to 10 percent from 18 percent in recent months.

Under Russian law MinFins are not allowed to leave Russia, but several Western securities houses have reached agreement with Russia's Vneshtorgbank, the custodian for two-thirds of the entire MinFin issue. Under these agreements, Vneshtorgbank holds the actual bonds, and the houses offer synthetic instruments to their customers.

Salomon is offering MinFins in the form of Global Depositary Receipts, making them accessible to major institutional investors such as U.S. pension funds. That is because GDRs are recognized as safe instruments by the U.S. Securities and Exchange Commission, which places strict limitations on what U.S. funds can buy.

The MinFin market was temporarily destabilized earlier this year when the Finance Ministry froze $30 million worth of suspected stolen bonds.

"They were bonds which were held in custody by institutions other than Vneshtorgbank," said Alexander Osiptsev, Vneshtorgbank's deputy chairman. "For example, Grozny oil company held some MinFins with a bank in Grozny, and they disappeared during the first storming of the city," he said, referring to the Russian assault on Grozny, the capital of Chechnya.

Title to some of the stolen bonds reached foreign investors through a chain of trades. Dannis said it was essential for confidence-building that the Finance Ministry unfreeze the bonds before April when dividends are due.

MinFins originally were issued to Russian enterprises and joint ventures to compensate for funds held in the collapsed Vneshekonombank, the Soviet external trade bank.

They are due for redemption in seven tranches running into the first decade of the next century.