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VTB Bank announced on April 30 that it has secured commitments on its secondary public offer of a 10% stake. While the first privatisation since President Vladimir Putin ordered state firms to switch from international to home markets is set to go through successfully, the make up of the buyers suggests the wider privatisation programme may struggle on the Moscow Exchange.

VTB Bank is set to raise RUB102bn ($3.3bn) from the SPO, but the limited range of buyers is a concern. Three sovereign wealth funds - Norway's Norges Bank Investment Management, the State Oil Fund of the Republic of Azerbaijan (SOFAZ), and the Qatar Holding sovereign fund - subscribed for the full volume of shares, in place of private funds and portfolio investors.

In this sense the deal only highlights the shortcomings of the local market. The Kremlin has been pushing the development and reform of the domestic capital markets, but clearly the market is not big enough, nor the investors sophisticated enough, to swallow an SPO of such a size.

In the 2007 IPO of Rosneft, the Kremlin relied on oligarchs to kick in a large dollop of cash to get the floatation off the ground. This deal is more of the same, except this time Moscow is leaning on its allies rather than its businessmen.

Russia's second largest bank in terms of assets after Sberbank, VTB announced on April 26 the parameters of its SPO, under which it intends to place 2.5 trillion new shares at RUR0.041 per share - around 9% below the current market price - on the Moscow Exchange. Existing shareholders can exercise pre-emptive rights until May 6. However, the government will not participate, and will see its stake in fall to 60.93% from a current holding of 75.50%.

The sale is being forced by the bank's need for additional cash to meet capital adequacy levels. It will also "strengthen VTB Bank's shareholder base by introducing substantial new strategic investors and reinforcing links with existing major institutional shareholders," the bank claimed in a statement late on April 29.

"We are delighted to announce the capital increase and are pleased with the transaction structure. Binding commitments to subscribe from major global investors have allowed us to secure our capital raising targets," VTB Chairman Andrei Kostin said.

However, the need to rely on state investors clearly illustrates the problems Moscow is facing in its hunt to develop its capital market. The VTB offer brought in the first RUB100bn of a privatisation programme which the government says targets the sale of RUB1.2 trillion in shares this year. However, the chances of floating so much stock on Russia's shallow market seem poor, and even with the help of powerful sovereign funds, it appears likely the Kremlin will struggle to hit its target.