MOSCOW, Dec 16 (Reuters) - Moscow Region, Russia's most indebted province, said on Tuesday it had declined to make a coupon payment and execute a put option on a 5 billion rouble ($179.8 million) guaranteed regional mortgage agency bond.
"The regional budget was ready to make a payment ... but will not do so for the moment since the bond issue has been seized as part of action by law enforcement agencies," the regional government said in a statement.
"Moscow region did not transfer us the money to execute the put option," said a representative of the issuer's agent IFK Rigroup-Finans, who declined to be named. The region controls the mortgage agency and guarantees its debt issuance.
In July 2008 prosecutors launched a criminal investigation into Moscow region's former finance minister Alexei Kuznetsov, who resigned from his post and is reported to have left the country. Moscow region police declined to comment.
In October, both Standard & Poor's and Moody's downgraded the Moscow region, citing guarantees it had issued to a number of region-controlled enterprises as a reason.
The Russian government has banned the regions from issuing Eurobonds but they have 527 billion roubles ($18.95 billion) in domestic debt, according to the Russian Finance Ministry, with the Moscow region accounting for one fourth of the amount.
Moscow region, which surrounds but does not include Russia's capital, has 6.6 million inhabitants and accounts for 4.5 percent of Russia's total gross domestic product.
The region is headed by popular veteran general Boris Gromov, who oversaw the Soviet Army withdrawal from Afghanistan in 1989.
The Russian government plans to review the 2009-2011 state budget to increase subsidies to regions and Finance Minister Alexei Kudrin said he did not see "uncontrolled risks" posed to the federal budget by the regional borrowing policy.
On Monday, the government said it would allow the regions to issue guarantees on loans to up to 1,500 enterprises as part of measures to boost economic growth which will cost the state over $200 billion. (Reporting by Yelena Fabrichnaya and Gleb Bryanski; editing by Andrew Roche)