VTB, the second biggest Russian bank, announced Monday a stock offering worth $3.3 billion that should result in the state's share in the lender slipping to 60.9 percent from 75.5 percent as part of an effort by the Kremlin to boost Moscow's stature as a financial hub.
The placement would allow the sovereign wealth funds Qatar Holding and Norges Bank Investment Management to take minority stakes alongside Azerbaijan's State Oil Fund and a small group of other foreign investors.
The move is aimed at boosting the bank's capital to meet stringent Basel III rules that were accepted by global lenders to ensure greater resistance to financial shocks.
But the May 6 floatation of 2.5 trillion VTB shares at 0.041 rubles each comes at a sensitive time for the Russian market.
VTB said it will place the shares on the Moscow Exchange as part of the Kremlin's efforts to turn the Russian capital into a global financial centre linking London and Hong Kong.
But muted initial interest in VTB forced the bank to list the shares at a nine percent discount to their closing price on Friday.
"The intention to place the whole amount on the Moscow Exchange (instead of a dual track listing with a London Stock Exchange) is likely to limit investor demand and complicate the transaction," the British bank Barclays said in a research note.
But "we view the placement as necessary for VTB to improve its capital capital position and resume growth," Barclays added.
In the past year, Russia has remained one of the poorest emerging economy performers because of stalling global oil prices and inaction in the fight against corruption and graft.
A note by Gazprombank observed that Sberbank last year placed its shares in Moscow and London at a discount of just five percent.
VTB's initial public offering in May 2007 priced its shares at 0.136 rubles each. A subsequent offering in 2011 saw that price slip to 0.0915 rubles.
"But you can hardly call (VTB's) discount illogical considering the extremely weak makeup of the Russian market," Barclays said.
VTB said the government will hold its shares for at least 12 months after the offering. But the state is also to forego taking on any additional shares.
Russian President Vladimir Putin -- a supporter of strong state control of the economy in his first years in power -- has since vowed to ease holdings in major companies as part of a push to introduce efficiency and spur market growth.
The government managed to raise 217 billion rubles (about $7.0 billion) thanks to sales in holdings such as Russia's top bank Sberbank last year.
Economic Minister Andrei Belousov said this year's selloffs should raise 320 billion rubles (slightly more than $10 billion), notably via the sale of a five-percent stake in the oil major Rosneft.
Other companies to be put on the auction block include two regional power producers and the diamond manufacturer Alrosa.
Russian media said the VTB offering was already two-times oversubscribed.
The three sovereign wealth funds are expected to buy more than 50 percent of the stock on offer.
VTB posted a record 2012 fourth quarter profit of nearly $1 billion but its subsidiary in Cyprus has subsequently suffered from the eurozone crisis.
The bank's shares opened the day down four percent on the news before clawing back most of those losses in afternoon trading.