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. Last Updated: 07/27/2016

MinFin Flap Unnerving, Bankers Say

Russia's government bond markets will remain vulnerable to fraud until uncertainties about the treatment of bearer bonds are clarified, a senior Russian banker said Monday.

The legal authorities froze $24.22 million of stolen and missing MinFin bonds in June, hitting prices in the market, and banking sources said Friday the authorities are preparing an order to freeze up to another $7 million of stolen bonds.

But bankers say this treatment of bearer bonds appears to contradict Russia's civil code.

"The problem is how the prosecutor-general and other judicial bodies can think they have the right to bend the rules," said a top official at Vneshtorgbank, who declined to be named.

Vneshtorgbank is the main depository for the dollar-denominated MinFin bonds, which are bearer securities and are traded actively in Russia and abroad.

Russia's civil code states that bearer bonds cannot be seized in any way from people who bought them in good faith.

Bankers said bonds from both the first batch of MinFins frozen in June, and from those for which a freezing order is now being prepared, had been bought in good faith in the market by operators who did not know they had been stolen.

The Finance Ministry said it would not service the frozen bonds, but it was some weeks before it calmed the market by saying how many bonds were involved and listing their numbers.

It is still not clear how it will react to any further freezing, although the market already has some idea of how many bonds could be affected.

"For the financial community it is quite understandable that some bonds may be stolen, what is not understandable is why they did not give any information about them," said Eurobank dealer Olivier Coursault.