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. Last Updated: 07/27/2016

Hitches and Queries Tarnish Sberbank Share Sale

Itar-TassSberbank employees explaining the bank's share issue to two potential customers in a Moscow branch on Feb. 8.
All eyes were on the banking sector last week as Sberbank closed the book on a not-so-perfect share sale, and questions were raised about possible conflicts of interest in the Central Bank.

A tangle of three problems is straining the country's small and mid-sized banks, said Anatoly Aksakov, deputy head of the State Duma's Credit Organizations and Financial Markets Committee. "The laws on money-laundering are not precise. The way the Central Bank enforces them is not always consistent ... and business is done almost entirely in cash," said Aksakov, who is also head of the Association of Regional Banks.

He explained that so much business is transacted in cash, banks are forced to dole out stacks of rubles to keep their customers satisfied. But the law makes no clear distinction between providing this service and laundering money, a situation that technically puts many banks in breach of the law. As a result, the Central Bank can go after most banks for money laundering, as it has sometimes arbitrarily done, Aksakov said.

This was the main qualm with the Central Bank raised at a Duma session last week, when deputies proposed to strip the sector's main oversight body of its power to enforce the law.

Although he defended the Central Bank's record, Richard Hainsworth, head of the RusRating banks agency, agreed that Russia's cash-driven business environment and its vague laws put banks in a difficult position.

"But the Duma is at fault, because they have made laws that have these bad economic effects," Hainsworth said.

Aksakov said the ultimate blame lies with the economy's addiction to cash.

"There is no incentive for businesses to accept plastic cards, because if you are paid in cash, it is easier to avoid paying taxes," he said.

The conflict of interest between Sberbank, Russia's biggest lender, and the Central Bank, some of whose officials sit on Sberbank's board, also came up at the Duma session. This discussion was raised against the backdrop of Sberbank's share emission, which was tarnished by a series of hitches.

Sberbank will at most be able to sell 75 percent of the shares it had sought to place this month. Moreover, the $3,394 share price is at a 4 percent discount to the market, despite promises from CEO Andrei Kazmin that they would sell at a premium. In light of the discount, a slight correction in Sberbank's stock was to be expected, as it would bring the market in line with the price of the emitted shares. But Thursday, Sberbank had surprising gains of 4 percent, which took it to $3,690 per share.

This market reaction looked all the more paradoxical in view of weak demand for the emission, said Alexander Kantarovich, banking analyst at MDM Bank. He pointed out that the 75 percent demand could drop even further because bidders still have the right to revoke their bids.

Another analyst suspected that Sberbank was pushing up the market price to keep the bidders from pulling out. "It's very possible that Sberbank is paying to have its own share price inflated," the analyst said on condition of anonymity. "If the book gets any smaller, it would be horribly embarrassing."

Suspicions of foul play arose during the 20-day emission. After a bizarre sideline auction of shares affected the value of the stock and an apparent leak to the media did the same the Federal Securities Commission opened an investigation. These PR mishaps, and Sberbank's poor handling of the sale, may have been to blame for the weak demand, particularly from foreign investors.

For comparison, last May's IPO of state-controlled Bank of China was oversubscribed by 80 times among retail investors, creating enough demand for about $700 billion of the stock, notwithstanding a string of scandals that included the jailing of the bank's vice president, Liu Jinbao. State-owned Indian Bank was more than 30 times oversubscribed when it went public this month.

Sberbank's failure to build a single book raised concerns about the health of the financial sector, its global competitiveness, and its ability to prop up the economy this year if the energy sector continues to slacken.

"It's like musical chairs," Kantarovich said. "Investors have to think about what happens when the music stops."