Ben Aris in Moscow -

On January 25, Russian President Vladimir Putin called for state-owned companies that are on the privatisation list to float on the domestic exchange, rather than in London or New York. But experts say the plan won't work, as Russia doesn't have enough investors to absorb that amount of new equity and foreign investors are not investing in Russia at the moment.

The Russian government has been struggling to sell off major companies as part of its plan to get out of the economy. It did manage to get the secondary share offering of Sberbank away last year worth several billion dollars - but only after many delays. The companies coming to market this year are just as big, but not half as attractive. The state will struggle to complete successfully any of the big issues on the London or New York stock exchanges.

So Putin says let's sell them at home. In principle it is a good idea, as it will help develop the domestic capital market, which is clearly high on the Kremlin's list of "things to do." The trouble is that the goal of these reforms is to create vibrant domestic institutional investors and mutual funds that Russia badly needs. But therein lies the Catch-22: Russia needs to sell these shares to create domestic institutional investors, but without these domestic institutional investors there are not enough investors to buy the shares.

There are at least three big companies on the docket for sale this year: VTB Bank CEO Andrei Kostin has already said that his bank will sell its next 10-25% on the local Micex this year; diamond monopolist Alrosa is slated to sell 7-14%; and global shipping giant Sovkomflot is due to sell 25-50% of its shares.

However, 10% of VTB alone will cost around $3bn, which is a heck of a lot of money for the Russian exchange to attract. Foreign investors could take up some of the slack, but Russia has barely attracted any foreign portfolio funds this year, despite the interest in emerging markets amongst international investors.

VTB will probably be the test case, as the bank needs to sell shares to shore up its capital adequacy, which fell last year on the back of strong increases in lending.

Like baking bread, the dough will have to rest while the market absorbs this dollop of new stocks, so Alrosa and Sovkomflot will probably be offered in the second half of the year, when analysts hope the international interest in Russian stocks will have revived somewhat.

The problem - and hence the reform drive - is that despite the 1m people registered to trade on Micex, only about 70,000 of them are active, and the majority of those are day traders. The biggest domestic investors are mostly Russian banks and they have very short-term investment horizons. This makes the index volatile and sensitive to external shocks. Compare this to the Warsaw Stock Exchange where 90% of the demand for domestic IPOs comes from domestic pension funds - in Russia domestic private pension funds are all but absent from the market. And the state-controlled State Pension Fund and National Welfare Fund are not allowed to invest in domestic shares (although there is a plan to lift this restriction for the National Welfare Fund). Moreover, the government's decision last year to reduce the allocation from the funded part of pensions from 6% to 2% has only reduced the amount of funds available further.

Russia's stock market is shallow and narrow. The investors are concentrated in Russian financial institutions and foreign hedge funds that are little more than speculators with short time horizons. Together, these factors will make a privatisation programme that will run into the tens of billions of dollars extremely difficult to pull off.