Bank of New York Mellon (BK.N) has frozen $22 billion in assets held by Kazakhstan’s National Fund, a source told Reuters on Thursday, in a rare move that escalates a legal battle between the government and a Moldovan investor.
Moldova’s Anatolie Stati and his companies earlier won damages against the Kazakh government and his pursuit of payment has lead to some 40 percent of the oil revenue-supported fund being frozen, the source said.
“It’s pretty unprecedented,” said Simon Quijano-Evans, an investment strategist at Legal & General Investment Management in London. “If 40 percent of a sovereign fund is frozen and you don’t have access to it, that should be an alarm bell for policymakers.”
Kazakhstan's dollar bonds fell after the news while its tenge KZT= currency strengthened by 0.6 percent.
“Theoretically (the fund) is a national institution so it should cause a rethink for central banks and sovereign wealth funds as it’s been assumed so far that these assets were relatively immune,” said Quijano-Evans.
At the heart of the case is a years-long legal row between businessman Stati, his son Gabriel, two family-controlled companies and the Kazakh government of President Nursultan Nazarbayev.
They invested in Kazakhstan’s oil and gas industry and have asserted that they were subjected to significant harassment from the state aimed at forcing them to sell their investments cheaply.
Kazakhstan denies the allegations, but Anatolie and Gabriel Stati and two of their companies – Ascom Group S.A. and Terra Raf Trans Traiding Ltd., won an international arbitration award of around $500 million against the government.
It has refused to pay, however, and in October Kazakhstan filed a civil racketeering lawsuit in the U.S. District Court in Washington, D.C., against the Statis and their two firms.
The central bank, the National Bank, also filed a lawsuit against BNY Mellon.
A British court was due to deliver a judgment on that case on Thursday, the source told Reuters.
A spokeswoman for the Bank of New York Mellon declined to comment. Kazakhstan’s justice ministry could not be reached for comment.
The freezing of the assets comes weeks after President Nazarbayev threatened to sack his cabinet if they failed to make large state companies bring back cash held abroad.
Nazarbayev, who wields sweeping powers in the oil-rich nation, poured scorn on private sector executives who, he suggested, were enjoying lavish lifestyles while keeping funds in foreign accounts.
Kazakhstan’s dollar bonds extended losses on Thursday, having fallen sharply the previous day after news that $22 billion in assets of a state investment fund had been frozen, while broader emerging assets were flat, tracking developed peers.
The passage of the U.S. tax cuts bill was something of an anti-climax for world stocks which have already hit successive record highs, and MSCI’s emerging equities index slipped 0.2 percent, ending three days of gains .
The tax cuts, which will add to U.S. debt levels in the longer run, have also pushed up Treasury and global bond yields, pressuring equity and emerging markets.
“(Emerging markets) have been positive on the growth outlook for the U.S. and the tax package and now it is pretty much priced in,” said Per Hammarlund, chief emerging markets strategist at SEB.
Kazakh dollar bonds slipped as much as a quarter cent across the curve after sharper falls late on Wednesday when sources said the Bank of New York Mellon had frozen assets of Kazakhstan’s National Fund over a lawsuit launched by Moldovan businessman Anatolie Stati against the Kazakh government.
A British court will hear the case today.
Bonds maturing 2025 were just off one-month lows while a 2045 issue was trading near 10-day lows , according to Tradeweb. The Kazakh tenge firmed against the dollar, though the central bank said it had not intervened to support it.
Simon Quijano-Evans, a strategist at L&G Investment Management, attributed the muted market reaction to thin pre-Christmas liquidity. But he called the development “unprecedented”.
“Theoretically it’s a national institution so it should cause a rethink for central banks and sovereign wealth funds as it’s been assumed so far that these assets were relatively immune,” Quijano-Evans said.
Reported by Reuters.
