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. Last Updated: 07/27/2016

State Fumbling Sberbank Test Case

The book will close on Tuesday on Sberbank's share sale, ending a 20-day rollercoaster ride that has been marked by PR fumbles, state interference and widespread investor confusion.

State-controlled Sberbank has been publicly traded since 1997, and it decided to hold a secondary sale of 3.5 million shares, worth about $12 billion at today's market price, after demand for loans grew fivefold over the past five years, requiring the bank to replenish its capital.

The share emission, expected to be the biggest in Russia's history, is a major test of the state's ability to handle a public offering -- a test that it looks to have failed after managers scrambled to find buyers and signs of share manipulation prompted the Federal Securities Commission to open an investigation.

The latest murky episode came Thursday, when Sberbank announced that it had auctioned off 2,176 shares to an obscure investment bank called Russ-Invest. Analysts were baffled by the size of the winning bid -- $3,450 per share -- which was about 2 percent higher than Sberbank's market price this month. The same shares, therefore, could have been bought for cheaper, and without the hassle of an auction on any of the local exchanges.

Russ-Invest's head of research, Dmitry Bedenkov, said: "The price we paid is within the current market price range, and our participation in the auction allowed us to buy a single block of the bank's equity without having to buy scattered shares on the market.

"We view this as a long-term investment," he added.

None of Russ-Invest's four rival bidders has been identified, and many analysts suspect that the auction was staged -- an attempt to inflate the value of the stock as Sberbank looked for more buyers.

What has kept many investors away is the fact that Sberbank has refused to name a price range for the shares. Buyers have been asked to make offers, and when the book is closed Tuesday, the bank's board will examine them and come up with the final price. If an investor's bid is lower than this price, the investor can walk away, and the shares they bid on would revert to Sberbank.

Natalya Orlova, banking analyst at Alfa Bank, said she could not remember any other share emission being handled this way.

And MDM Bank pointed out the inherent paradox. "The price should be determined on the basis of demand; however, true demand can only be determined after the price is announced," the bank said in a note to investors.

In other ways, management of the emission has also looked irrational and poorly planned.

On the eve of the sale, Sberbank CEO Andrei Kazmin said each share would go for at least 68,000 rubles ($2,590), 26 percent below the opening price for that day. This spooked investors so badly that by the close of trading, Sberbank had tanked by 5.7 percent.

Kazmin then went on damage control, assuring investors on the first day of the emission that the shares would sell above the market price. The below-market price he had named the day before was only the lower limit, he said, "like the price of an entry ticket to the auction hall."

Kazmin had to calm the market down again after a Reuters report said the shares would sell for well below the market price, citing a source close to the offering. In the seven minutes after the report came out, Sberbank's stock lost 7 percent of its value. The sudden plunge led the Federal

Securities Commission to open an investigation into the apparent news leak.

In both cases, Kazmin insisted that the emitted shares would sell at a premium to the market price. Although this helped the stock recover, it presented a new dilemma. There now seemed to be no incentive for investors to bid. If the market price would indeed be lower than the price of the shares, then it seemed more reasonable simply to buy shares on the market, without going through the bidding process.

This was especially true for foreign portfolio investors. Despite laws passed in December to give them the same rights as Russians in buying shares of local banks, interest from abroad has been weak.

"Basically, foreigners are not used to having to pass all of the hurdles that exist in Russia," said Richard Hainsworth, head of RusRating, an independent bank rating agency. "But that doesn't mean Russians don't have to pass them, too."

To attract Russian investors, Sberbank has undertaken a major PR campaign, printing cartoon posters that look like Soviet placards and inviting bids at its 20,000 branches nationwide. The offering is being lauded as a "people's IPO."

President Vladimir Putin, in a move unheard of in the West, has also endorsed the stock, advising the country that Sberbank was a "safe investment" during a televised address. Deputy Prime Minister Alexander Zhukov has said he would act on Putin's advice.

But at more than $3,000 per share, the price is a turnoff for mid-income Russians. Partly as a result of this, bidders have been few. RBC Daily reported late last week that Sberbank was pushing employees to buy up the surfeit of shares. The daily cited unidentified branch managers who said their vacation time was on the line if they did not put in a bid.

Vedomosti, citing an unidentified Sberbank manager, published a list of investors expected to bid willingly in the auction. None of them, however, belongs to the middle class, for whom the shares were ostensibly meant.

Topping the list was Suleiman Kerimov, a billionaire who owns 6 percent of Sberbank and made headlines in December when he crashed a Ferrari in France. Three other billionaires were also named: Yelena Baturina, a real estate developer and the mayor's wife; cement tycoon Filaret Galichev; and oil and metals mogul Viktor Vekselberg.

MDM Bank said "sharing the information on big business with the media appears to be a PR move aimed at helping the book-building process."

It said the four owned 12.4 percent of Sberbank's shares, worth about $8 billion, which entitles them to buy $1.5 billion more during the secondary offering.

The Central Bank will buy 25.5 percent of the emission, which will bring its total stake down from 64 percent to 58 percent. This would take the Central Bank's stake just above the level of ownership approved by Prime Minister Mikhail Fradkov this month.

The state body in charge of policing banks will therefore continue to own the largest bank in Russia. "There is a conflict of interest here," said Julia Kochetygova, head of governance services at Standard and Poor's. "The state banks can pressure commercial banks and squeeze out competition."

Anders ?slund, a Russia expert at the Washington-based Institute for International Economics, also criticized the arrangement, saying: "An IPO should aim at taking ownership away from the Central Bank. ... Any Central Bank ownership of a commercial bank is wrong."

But Moscow analysts were not so categorical. "This is Russia," Orlova said. "That is the way it is."

The value of Sberbank's stock has nearly tripled since the start of 2005 as demand for corporate and consumer loans grows ever stronger. The bank also has deep market penetration, having been established in 1841 under Tsar Nicholas I, and it holds half of all deposits in the country.

The state will soon have a second chance at the helm of a major share emission. Vneshtorgbank, also known as VTB, is expected to hold its IPO in the second quarter of this year. The country's second-largest bank, 99 percent controlled by the state, intends to place 25 percent of its stock in Moscow and London, worth some $4.6 billion.

But analysts do not expect that offering to go without a hitch.

"Sberbank's have effectively been the only shares that were in the banking market, and a lot of people bought them, because they didn't have a choice. But after the VTB emission, I think the value for Sberbank shares will be affected, substantially," said Hainsworth of RusRating.

?slund said VTB would also have trouble placing its shares. "VTB is appallingly badly run," he said. "They are not thinking of their shareholders in terms of providing a big dividend. ... They are either looking to enrich themselves or just to build an empire."

Sberbank and VTB spokespeople declined to comment for this report.