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. Last Updated: 07/27/2016

Bond 'Freeze' Bigger Than First Reported


A potential shadow over Russia's plans to return to international capital markets for emerged Monday when police confirmed that a scandal involving domestic bonds was much bigger than had been thought.

Figures released by Russian police showed that authorities had seized $74 million of dollar-denominated Finance Ministry bonds this year, not $24 million as previously reported.

Markets were rattled slightly last week as rumors spread that more of the so-called MinFin bonds had been "frozen."Neither the Finance Ministry nor Vneshtorgbank, the main depository for the bonds, has commented officially.

But a senior Vneshtorgbank official, who requested anonymity, said last week that prosecutors had ordered more bonds frozen as part of a criminal investigation.

A Russian police detective said Monday his local prosecutor's office had ordered $56.81 million of the so-called MinFin bonds to be frozen in June.

The detective, Mikhail Ignatyev of the fifth central Moscow police precinct, said the bonds had been frozen as part of an investigation into a small bank that has since been closed.

The Finance Ministry had already issued a list in July of $24.22 million bonds that had been frozen, some of which had been stolen in the breakaway republic of Chechnya.

Because about $6.93 million worth of bonds are on both lists, the total now known to have been seized by the authorities comes to $74 million.

News of the latest freezing had little effect on prices of the bonds, usually traded actively in Russia and abroad, because trading had mostly dried up on last week's rumors.

But the news cast a shadow over Russia's plans to issue its first Eurobond this month.

Russian officials plan a two-week road show, or series of presentations, in major financial centers, starting Nov. 11 in Tokyo to raise investor interest.

Bankers say they expect the issue will total $300 million to $500 million. It will bring much-needed dollars to Russia's cash-strapped government and is intended to mark Russia's return to financial respectability.

But potential investors could now be put off by the MinFin scandal, financial analysts in Moscow said.

Holders of the bearer securities contend that they bought the bonds in good faith, they should not be penalized if their bonds turned out to have been stolen earlier.

Russia's Civil Code expressly protects holders of bearer securities from seizures of this kind. But a conflict arising from the old Criminal Code, which allows investigators to seize any property until the rightful owner is determined.

Some local traders expressed exasperation over the Finance Ministry's silence on the matter.

"We have had bonds frozen on our account for the first time," said one Moscow-based dealer, who asked not to be identified. "What I can't tell you is what will happen to them."

When the scandal initially broke last summer, he said, MinFin trading continued because "everybody has been willing to let the ministry work it out as they promised. Now, not only have they not resolved the old problem, but we have new bonds frozen."

Moscow investment bank Renaissance Capital said syndication managers are likely to emphasize that Eurobonds, unlike MinFins, are issued under international rather than Russian law and are placed in the international Euroclear custody, rather than in Russian banks, .

"However, this recent freezing episode serves to highlight the still evolving nature of Russian financial legislation for potential Eurobond investors," it said in a research paper.

The first wave of freezing, confirmed in July, hit prices in June when the speculation surfaced. But prices have generally risen most of the year on optimism about the Eurobond.

The Finance Ministry has stopped servicing the frozen bonds but has not been able to resolve the issue with the judicial authorities.

Although the order to freeze the $56.81 million was issued in June, an official at Deutsche Morgan Grenfell in Moscow said the bank had been advised by the depositary only last week that bonds on the June list had been frozen.