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Institutional investors frozen out of a share buyback by state-owned VTB Group (VTBR) decried the plan as a ploy by Russian Prime Minister Vladimir Putin to gain votes in a March 4 election from the bank’s smaller shareholders.
Charlemagne Capital Ltd. and Van Eck Associates are among funds calling Putin’s proposal to buy shares from people who lost money in the lender’s 2007 initial public offering a political maneuver that will dilute the value of their holdings. The buyback is capped at 500,000 rubles ($17,100) per person, a ceiling that would exclude most institutional investors.
“Whenever governments impose political will and use the state-owned companies as a policy tool, in this case in the run- up to the election, that’s a negative,” said Ed Kuczma, who helps manage $35 billion at New York-based Van Eck Associates and its Market Vectors Russia ETF, which owns shares in VTB. “This arrangement is unfavorable for institutional investors.”
Fund managers say political interference, poor corporate governance and a weak judiciary are the reasons Russian stocks trade at a 40 percent discount to emerging-market peers, even though Urals crude, the country’s chief export blend and biggest export earner, tops $120 a barrel.
The VTB buyback is the latest sign that Russia’s second- largest lender, 75.5 percent owned by the government, is being used for political ends. Russians, who lost billions of dollars in bank collapses and stock-market frauds in the 1990s, rushed to buy shares five years ago in what then-President Putin dubbed a “people’s IPO” that raised $8 billion. Last year the bank received a record 395 billion-ruble bailout to cover bad debts at Bank of Moscow after buying the city’s 46.5 percent stake.
The bank will spend no more than 16 billion rubles on the buyback, which will take place this month and next, according to VTB’s website. The offer to buy shares at the IPO price of 13.6 kopeks applies only to investors who acquired them when the company went public and still held them as of Feb. 1, Chief Executive Officer Andrei Kostin said at a Feb. 9 press conference. The purchase will be funded using the company’s capital and won’t affect 2012 profit, he said.
VTB hasn’t traded above the offering price since August 2007 and tumbled as much as 86 percent to 1.9 kopeks in March 2009, according to data compiled by Bloomberg. The stock, which has increased 24 percent since the beginning of the year, closed at 7.29 kopeks in Moscow trading yesterday.
“The VTB buyback looks like straightforward populism before the elections and could be ripe for abuse,” said Robert Procope, a London-based fund manager with Charlemagne Capital, which oversees $3 billion including VTB shares.
Aivaras Abromavicius, who helps manage $5.5 billion of Eastern European assets at Stockholm-based East Capital, called the buyback a “step backward.” His fund, which held 5.4 million shares of VTB as of Sept. 30, according to filings, has since sold its stake in the bank, Abromavicius said.
“It would be negative to the remaining VTB shareholders, and negative overall because any kind of manual government intervention in Russia or elsewhere in financial markets is not something that is welcomed by market participants,” he said.
Herbert Moos, chief financial officer of the Moscow-based bank, declined to comment about institutional investor criticism, as did a spokeswoman for the bank. Moos said by e- mail that the “100,000 plus shareholders that are covered by the offer” should be contacted to get the full story.
One of those shareholders, Maria Skrebkova, an economics lecturer who lives in Moscow, said she’s “delighted and relieved” to be recouping her losses after investing 150,000 rubles in the IPO.
“I fell for all the hype about the people’s IPO, but the investment turned out to be disaster,” Skrebkova, 52, said in a phone interview. “It’s a very pleasant surprise that we are being bailed out and not the fat cats for a change.”
George Iosifyan, a banker who invested in VTB’s global depositary receipts after the IPO, said his loss amounted to more than $100,000.
“I feel cheated by the management of the bank,” Iosifyan, who works for billionaire Viktor Vekselberg’s Renova Group and isn’t eligible for the buyback, wrote in an e-mail. “I am totally appalled by the unprofessional conduct of the management of the bank, as well as the board of directors, who acted against the bank’s best interests by engaging into a loss- generating transaction using the bank’s capital.”
Putin’s call for a buyback indicates the government has lost confidence in VTB’s “road to 15 kopeks” strategy, according to Rinat Kirdan, a banking analyst at Aton Capital in Moscow. Kostin, 55, unveiled a plan in May 2010 to more than double the bank’s share price to 15 kopeks by 2013 by focusing less on corporate loans and more on retail lending and investment banking.
“Over the years we have seen considerable evidence supporting the view that VTB is more a state vehicle than a profit-oriented or shareholder-oriented business, and the government now seems to be acknowledging this,” Kirdan said in a phone interview. “Fifteen out of 20 clients I have spoken to are very upset by the buyback. Five of them said they will never buy VTB again.”
Kirdan cited VTB’s acquisition of Bank of Moscow and its $7 million bailout last month of travel agency Lanta-Tur after it left hundreds of Russian tourists stranded overseas.
VTB and the other state-run banks have a “special mission” to provide financing for projects that private lenders shun, Putin told Kostin in 2010, according to a transcript of a conversation posted on a government website.
Investors already attach a risk premium to VTB compared with OAO Sberbank (SBER), the largest bank in Russia and third-largest in Europe by market value, according to Sergey Dergachev, who helps oversee $8.5 billion in emerging-market funds including VTB bonds at Union Investment Privatfonds in Frankfurt.
“This is primarily due to its aggressive business risk, political influence and politically motivated moves,” Dergachev said in an e-mail.
Sberbank, 60 percent owned by the government and led by German Gref, a former Putin economy minister, has 26 “buy” recommendations from analysts and only one “sell,” according to data compiled by Bloomberg. VTB has three “buys,” seven “holds” and three “sell” recommendations, the data show.
The discount of VTB to Sberbank has widened to about 25 percent on the basis of 2012 estimated earnings over book value, according to Leonid Slipchenko, a banking analyst at UralSib Capital in Moscow.
“We see that as fair given the higher political and corporate governance risks that emerged after the announced buyback for minorities at the IPO price,” Slipchenko wrote in a report last month.
Still, Moscow-based investment fund Verno Capital is “bullish” on the stock and is a long-term holder, according to founder Dmitri Kryukov.
“Investors should be peeved as this is something that shouldn’t happen, and it does smell badly for institutions,” Kryukov said in a phone interview. “But investors have to take an assessment of the risk, and there are bigger corporate- governance problems in Russia.”
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