Dec 10, 2004

Vimpelcom - Learn It Love It

The news of Russia's tax claims against Vimpelcom tanked the Russian market today and like the CAO news last week could have potential ripple effects. The risk that the gov't will be randomly knocking down stock prices as they feel like it could be quite sweeping. It says a lot about the markets psychology that participants are willing to tolerate a gov't policy like this.

Something similar happened in the MinFin bond market back in 1996.
In the countdown to Russia's Eurobond placement, Potanin met with various government agencies Saturday and gave them just 10 days to solve the mounting problem of so-called "frozen" domestic Finance Ministry bonds.

The frozen MinFins emerged as an untimely threat to a successful Eurobond launch and have rattled international investors eager to snap up Russia's newest issue.

Russian police released figures last week showing that authorities have seized about $74 million of dollar-denominated MinFins this year as part of criminal investigations.

Prices of Finance Ministry bonds fell last month when news broke of $57 million in face value frozen MinFins seized by police.

Prosecutors had ordered the $57 million in MinFins frozen as part of a criminal investigation, a senior official with Vneshtorgbank confirmed soon after the seizure.

The later pool of 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.

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 last month, who did not wish to be identified.

At the time the markets became extremely upset with the governments seizures and ultimately forced a full about face by the gov't. Even so repo rates on the bonds in question never returned to normal as market players were too afraid that a new bond seizure would create a liability on borrowed bonds. Apparently the markets have a different view of the current actions or are better equipped to bear the risk.

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