Graham Stack in Moscow -

With markets volatile, investors in Russia are starting to look to stocks paying out large dividends as a defensive play. And right on cue, VTB head Andrei Kostin announced February 12 that Russia's second-largest bank was considering paying out not less than 20% of its profits as dividends this year. The statement caused VTB share price to leap 7.4%.

It's a sure sign of difficult times when Russian investors start focusing on company dividends. For most of the 21st century, Russian stock market returns have been on the level of cricket scores. Dividends paid by Russian companies, on the other hand, make Scrooge look like Bill Gates. However, with the Russian stock slumping for the second year in succession, dividends can provide some small consolation, and in this context the VTB announcement was a welcome surprise.

"That puts VTB firmly on our list of high dividend stocks," says Renaissance Capital's Tom Mundy. In a report published a week before Kostin's burst of generosity, Renaissance Capital compiled a list of nine high-dividend stocks that are both defensive and fairly liquid, focusing on undervalued oil stocks - such as TNK-BP or Surgutneftegaz - coal, fertiliser and steel producers, fixed-line telecomunication firm's preferred shares or stocks of companies exposed to consumer demand.

One-off

However, state-owned VTB's announcement of planned larger dividends is likely to be a one-off case. In fact, analysts are puzzling over the motives. VTB famously raised $9.5bn with its "people's IPO" of 22.5% in May 2007. "VTB raised a whole lot of cash and this is a little like saying 'we don't know what to with it'," says Mundy. "Although, given that they have all this cash, it's not the worst thing they can do with it."

Analysts question whether there is some political angle to the move. The VTB share price has bombed following its much-hyped IPO, recently falling to 30% under its IPO price. This puts considerable pressure on CEO Kostin, because the government actively encouraged small-scale investors to buy shares in the bank. Disgruntled investors have started to organize and demand a government buy-back at IPO prices. The looming elections magnify any such discontent, hence Kostin's attempt to boost the stock perhaps.

In addition, the Federal Agency for State Property (Rosimuschestvo) is pushing state-owned companies to boost their dividends payments for the good of the budget. State-owned companies are traditionally regular dividend payers, says Tatiana Dolgopiatova of the Higher School of Economics. For 2007, Rosimuschestvo is recommending state companies pay out 25% of their profits as dividends, the daily Vedomosti reported on February 27, up from the 10% recommended in 2004. State companies usually pay out a good deal less in reality than Rosimuschestvo recommends, Vedomosti noted.

The all-time Russian record for dividend payments is held by Roman Abramovich's Sibneft - a record it's likely to keep for a long time yet. Before being sold to Gazprom, Sibneft paid out 100% of its profits in dividends. The move, in the opinion of most analysts, was initiated not for the benefit of minority investors, but for Sibneft's majority owners to take one last big payout.

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