Russians Who Invested in Kremlin-Touted 'People's IPOs' See Their Savings Vanish

By Philip P. Pan
Washington Post Foreign Service
Friday, December 12, 2008

MOSCOW -- Anatoly Sisoyev always considered himself a patriot. As a child, he lost his father to an accident in the Soviet space program. As an adult, he served 30 years in the military, retiring at the rank of major. His son followed him into the army and was killed in Chechnya at the age of 18.

Through it all, he said, his faith in the Russian government never waned.

So when he heard radio ads two years ago encouraging citizens to invest in the initial public offerings of state-owned companies, Sisoyev lined up to buy shares, first in the oil-and-gas giant Rosneft and a year later in the nation's second-largest bank, VTB.

Sisoyev had suffered in Russia's rocky transition to capitalism, but the "people's IPOs," as they were billed by the Kremlin, seemed different. Then-President Vladimir Putin endorsed the stock offerings, presenting them as a chance for ordinary Russians -- and not just the wealthy -- to own a piece of the booming economy.

Now, as Russia confronts its worst economic crisis in a decade, the value of Sisoyev's shares has plummeted, wiping out most of his life savings. At 65, he is working as a part-time security guard because food prices are climbing faster than his meager pension. In a recent interview, he buried his face in his hands and fought back tears as he explained how he is trying to treat his sick wife by reading old medical textbooks because he can't afford a good doctor.

"I believed in the state, especially under Putin, so I bought shares," said Sisoyev, a soft-spoken man with white hair and a soldier's posture. "Now I don't believe in anything."

Swayed by years of steady growth -- and by an aggressive, state-funded marketing campaign -- hundreds of thousands of Russians ventured into the country's young stock markets to buy shares in the "people's IPOs." Now these first-time investors, many of them elderly pensioners like Sisoyev, are among those suffering the most as Russia's economic problems enter into a more painful phase.

Limited largely to the financial sector and the wealthy elite at first, the crisis is beginning to be felt by the broader population. Inflation, wage arrears and unemployment are on the rise, and in a recent survey, one-fifth of Russians said they or a family member worked for a company that had announced layoffs.

Putin, now prime minister, has responded largely by channeling funds into the banking system and providing emergency loans to the billionaires, known as the oligarchs, many of whom are struggling to pay debts to foreign creditors. The bailout has allowed the Kremlin to take greater control of industries that Putin has long argued never should have been privatized after the fall of the Soviet Union.

But as the state spends tens of billions of dollars aiding and gaining leverage over these tycoons, it has all but ignored the ordinary Russians who invested in the "people's IPOs." They present a political risk for Putin because their situation undermines the narrative he has used to win support and consolidate power -- that of the strong leader who delivered broad-based prosperity to Russia after years of turmoil during which oligarchs plundered the state.

The "people's IPOs" were designed in part to reinforce Putin's populist image. The three state firms involved -- Rosneft, VTB and the nation's largest bank, Sberbank -- could have done what companies going public usually do and focused on the institutional investors and wealthy individuals who own the vast majority of trading shares in Russia. Instead, Putin publicly instructed the firms to make sure the masses could buy stock, too.

The economic goal was to expand the country's tiny base of retail investors and develop its fledgling stock markets. But the approach also allowed Putin to draw a contrast with the chaotic privatization efforts of the 1990s, during which a small number of entrepreneurs took control of assets worth hundreds of billions of dollars.

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