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. Last Updated: 07/27/2016

Small Investors Feel Duped by 'People's IPOs'

Two years ago, Moscow-based IT manager Vladimir Sinyakov put some 40 percent of his savings into shares of previously state-owned VTB Bank. Today, his investment has lost more than 75 percent of its worth as the bank's shares plunged along with the Russian stock markets.

Georgy Zalyants, a retired businessman from St. Petersburg who also bought VTB stock, said losses on his investment are equal to two new Mercedes.

Sinyakov and Zalyants are among thousands of small investors who say they were duped into buying stocks of state-controlled companies by government officials promoting so-called "people's IPOs."

Their money having melted away, they say they feel cheated by the state.

When VTB, the country's second-largest bank, went public in May 2007, times were rosy, and many believed that Russian lenders would have a bright future. The minority shareholders, many of whom had little experience with financial markets, say they expected the government to support the stock.

"Like many others, I thought it was a reasonable investment," Zalyants said bitterly, adding that he had never invested in stocks before and would not do so again.

The people's IPOs began in July 2006, when state oil firm Rosneft floated 15 percent of its shares. The government appealed to citizens' patriotism and convinced more than 100,000 people to take part. The placement raised more than $10 billion for the company.

When state-owned Sberbank issued shares in February 2007, then-President Vladimir Putin publicly endorsed them as a "safe investment," and Deputy Prime Minister Alexander Zhukov said he would act on Putin's advice.

The bank's 20-day share emission was marred by weak demand and the fact that at more than $3,000 per share the price did not exactly qualify as a people's IPO. Yet almost 100,000 people signed up.

Sberbank traded at about $0.60 on Wednesday. The bank split its shares at a ratio of 1,000:1 in July 2007, but the current price reflects a loss of more than 80 percent compared to the initial offering price.

Yet in May 2007, Sberbank shares were up somewhat, making investors confident for the VTB float.

VTB's national advertising campaign also swayed Eduard Karapetov, a university professor from St. Petersburg. "Some of my colleagues had bought Sberbank shares, so when I read about the VTB shares on the Internet, I decided to invest," Karapetov, 72, said told The Moscow Times in a telephone interview.

VTB's placement was a huge success, raising $8 billion and winning more than 120,000 Russian shareholders, according to data on the bank's web site. The IPO book was covered seven times.

But Sinyakov, the Moscow IT manager, charged that the offering price was inflated. "We overpaid, and the management knew that," he said.

VTB shares were issued at 13.6 kopeks apiece (54 cents on the dollar-denominated RTS), and on Wednesday the shares traded at almost 80 percent below that price, at 2.8 kopeks.

Zalyants said he believes that the IPO was a scheme to enrich the bank at the cost of investors. "They needed extra money, and for that they had various instruments: They could have issued a bond, but then they would have to pay it back," he said. "They had top officials on their side [who] said in the media that this was a people's IPO and that it is a safe investment."

Neil Withers, a senior vice president at VTB, dismissed suggestions that there was anything underhanded about the IPO. "It is true that as stock markets around the world have fallen sharply ... investors have not been 'enriched,'" he said in e-mailed comments.

Withers was adamant, however, that the investment would pay off in the long term. "I believe that banking in Russia is essential to the long-term growth of the economy and will reward those investors over the long term," he said.

Alexei Navalny, a Moscow lawyer and shareholder rights activist, is unconvinced.

Navalny called the promotion of the IPO in early 2007 "a veritable government-driven advertising campaign," because Finance Minister Alexei Kudrin, who is chairman of VTB's supervisory board, had publicly backed it.

Navalny complained that minority shareholders find it hard to get relevant information about management activities. "Until now, there is too little information on how the IPO was conducted and how much was spent on advertising it," he said.

Sergei Guriev, the dean of Moscow's New Economic School and an independent director on Sberbank's supervisory board, acknowledged that transparency could improve. But Sberbank, he said, was simply a large bureaucratic organization. In hindsight, Guriev said, the IPO's timing was well-chosen from the company's perspective while being unfortunate for investors. "The problem for the minority shareholders is that they bought at the peak" of the market, he said.

Kudrin, who has in the past appealed to disgruntled shareholders to be patient, said last week that VTB and Sberbank should at least pay out a dividend.

Media reports earlier this year suggested that the government, the majority shareholder of both banks, was planning to ditch dividends this year. Rosneft CEO Sergei Bogdanchikov announced Tuesday that the company was planning to pay a dividend for 2008.

For small shareholders, the dividends are largely symbolic anyway, with VTB paying 0.134 kopeks, less than 1 percent of the issuing share price, last year. "The dividend is just peanuts," Sinyakov said. "I do not care much if they pay it or not."

Rosneft paid a dividend of 1.60 rubles per share last year, also less than 1 percent of its issuing price of $7.55.

Withers of VTB, meanwhile, pointed out that having small shareholders was important not just for the bank but also for the country. "We really appreciate the trust of more than 150,000 individual investors. ... We also believe that these individuals are, or may become, our most loyal and valuable retail customers as well as providing an important part of our capital," Withers said.

Another minor consolation to investors could be reports that they are in the same boat with those who publicly promoted the IPOs along with their relatives. Kudrin's sister, Marina, bought 200,000 rubles of VTB shares -- worth about $8,333 at the time -- while the parents of the Central Bank's first deputy chairman, Alexei Ulyukayev, bought 10 million rubles of VTB stock, then about $416,000, according to the official report on the IPO to the Central Bank, Vedomosti reported. VTB chief Andrei Kostin bought 26 million shares, worth more than $1 million at the time.