RIGA STOCK EXCHANGE

Basic information

Text by Bruno Lill,
Center for Markets in Transition, HSE, October 2001
Updated by Ville Rämänen in October 2002 and Antti Leivonen in May 2003

The first exchange organization in Latvia - The Riga Exchange Union - was founded in 1816. The main activities of the organization were establishing exchange procedures, drafting stock exchange laws and publishing business newspapers. The union took also an active part in the development of banking and other main business sectors. In 1937, The Securities Department of the Riga Exchange was opened, but the Soviet occupation in 1940 closed the institution before it even had time to develop and establish a stable securities market.

The Riga Stock Exchange (RSE) was founded anew in December 1993, just a couple of years after the re-establishment of independence. The RSE is organized as a non-profit joint stock company and is currently owned by Helsinki Stock Exchange with 92.98% share. Besides providing a market place for public securities, the Exchange has also been actively involved in the Latvian privatisation programme by acting as an agent of the Latvian Privatisation Agency. The Exchange is also a founding member of Latvian Central Depository, which has been granted the status of National Depository.

Operating Principles and Lists

The operating principles of Riga Stock Exchange were established in co-operation with the Paris Bourse and the Central Depository of France. The adopted model is the continental European model used by the Stock Exchanges of Warsaw, Paris, Prague and Vienna. It is implemented also in the National Stock Exchange of Lithuania. In 1997, the RSE started a continuous trading at variable prices and the Exchange was the first in the Baltic countries to offer its members a fully automated service of order execution. In 2000, Internet-based solutions were developed to give the investors a direct access to the stock exchange trading system without using a broker as an intermediary.

The securities listing in RSE is divided into equity issuers (common shares), debt issuers and investment funds. Equity issuers are sub-divided into three lists: official list, second list and free list. Companies wanting to be listed on the official list have to be paid for the shares' capital no less than LVL 5 million, and at least LVL 3 million of which has to be listed on the official list. Other requirements include the public circulation of respective securities, profitability and a broad owner base. The minimum capital requirements for the issuers attempting to the second list stand at LVL 500,000. The debt issuers are also classified into official list and second list.

Number of securities traded on the RSE

Although the Riga Stock Exchange was established in 1993, the first trading session took place a couple of years later in July 1995. By the end of that year, 18 securities were listed in the RSE. 17 of them were equity issues on the second list and one debt issue on the official debt issuer's list. During the period from 1996 till 1998 the number of shares listed increased steadily to 68. The number of debt securities on the other hand has fluctuated considerably. At the end of 1996, as much as 129 debt securities were listed, but the number dropped to just one debt security listed at the end of 1997 and 1998.

As of autumn 2002, there are listed 63 equity issues (three of them on the official list), 6 debt issues and two investment funds.

Trends and Indexes

In the Riga Stock Exchange the trends are measured by two indexes. In June 1997, the capitalisation weighted Dow Jones Riga Stock Exchange Index (DJ RSE) was launched. The RSE became the first Stock Exchange in Eastern Europe to have the Dow Jones index. The index is calculated in US dollars and Latvian lats by Dow Jones, taking into account only the most actively traded stocks on the Riga Stock Exchange. The number of companies included is reviewed at the beginning of every quarter year. As of 1 July 2002 thirteen companies were included in the index portfolio, two of them - Ventspils Nafta (oil transhipment) and Latvijas Gaze (gas supply) - clearly dominating the index.

In February 1998, another index - Riga Stock Exchange Price Index (RICI) was introduced. In comparison to DJ RSE capitalisation index, the RICI index reflects price changes of the shares in the index composition. The index calculation methodology (equal Lat) ensures that price changes of any one share in the index have an equal impact on the index. As of  1 July 2002, thirteen most widely traded RSE securities were included in the index composition.

Both RICI and DJ RSE have a base value of 100 points as of April 2, 1996. The share prices at the RSE peaked in autumn 1997 but the weakened global economic forecasts started to lower the prices in late 1997. By the end of 1997, the RICI index (calculated on a historical basis) was at 741 points. The Dow Jones RSE showed also good results standing at 346 points. The downswing accelerated in 1998 as the financial crises in Asia, Latin America and especially in Russia resulted in even more pessimistic economic forecasts. By the end of 1998, the RICI and DJ RSE indexes had dropped to 186 and 98 points respectively, evidencing over a 70% decrease over a year.

As regards RICI index, during the following years, i.e. 1999 and 2001, share prices stood at a relatively constant level. Most of the time the RICI index has remained slightly below 200 points. However, in summer 2002 it rose over 200 points.

Capitalization of RSE

In the beginning of 1996, after a half of a year of operations, the capitalisation of the Riga Stock Exchange was still below LVL 5 million. The capitalisation started to rise in 1996 as a result of share price increase and new listings. It peaked in September 1997 exceeding LVL 268 million, but diminished below LVL 200 million by the end of the year and stayed low over the whole of year 1998. However, the capitalisation of the RSE more than tripled in 1999, ending up at LVL 731 million. The leap was due to the listing of two energy sector giants Latvian Gas and Ventspils Nafta. An interesting feature was also the strong growth of bond market capitalisation, which grew from close to zero to LVL 175 million, and represented a 24% share of total capitalisation at the end of 1999. Further structural changes were seen in 2000. Bond market capitalisation increased to the level of LVL 300 million, while the equity market capitalisation decreased over the same time period by one third. RSE capitalisation is dominated by three companies - the Latvijas Gaze, Latvijas Unibanka and Ventspils Nafta. In 2001, total turnover of equity market totalled LVL 103 million. In the same year, market capitalisation amounted to 439 million. Total turnover of debt market was LVL 428 million. 

At the end of 2001, the Riga Stock Exchange's capitalisation differed vastly from that of the two other Baltic exchanges. First of all, the total capitalisation of the RSE is just one half of that of the Estonian and one fifth of Lithuanian exchanges. Another characteristic is the high share of bond capitalisation with respect to the total value.

Co-operation

Consolidation trends did not pass by the RSE as it initiated co-operation with the other Baltic stock exchanges in 1997. State regulators of the three Baltic countries started to harmonise market legislation making ground for the possible future alliance. The main objective of the co-operation was to promote the Baltic region as a single investment area and reduce entry costs of investors. According to a memorandum signed by all the three Baltic stock exchanges in April 1999, the common Baltic list was launched at the beginning of 2000 to attract foreign investors.

The Baltic list consists of up to 15 largest firms listed on the Official Lists of the three exchanges, whereas no more than seven can be from one country. The composition of the list is reviewed quarterly by the exchanges. On 19 September 2001, three out of fourteen companies on the Baltic list were from the RSE. These companies were Latvijas Gaze, Ventspils Nafta and shipping company Latvijas Kugnieciba. At the same time, 6 companies on the list were from the National Stock Exchange of Lithuania (NSEL) and 5 from the Tallinn Stock Exchange (TSE).

In September 1999, an invitation came from the NOREX alliance to the RSE to start negotiations concerning the possibility to join the co-operation of the Nordic Exchanges. Joining the alliance would have opened more opportunities for the Latvian capital market than simply the common Baltic market. In May 2000, the RSE, along with the two other Baltic stock exchanges, announced its intent to join NOREX.

However, in February 2001, the Finnish HEX group bought a majority stake in the Tallinn Stock Exchange, thus excluding the possibility of the TSE from becoming a member of the NOREX alliance, which is led by Stockholm and Copenhagen Exchanges. Later on, HEX stated, that it does not consider it impossible to make a similar offer for the other two Baltic exchanges. This led the RSE and the NSEL to announce in May 2001, that they abandon their intention to cooperate with NOREX. (Nordea country report 2000) In March 2002, the Helsinki Stock Exchange made a conditional offer to acquire 75% ownership in Riga Stock Exchange. The arrangement was finalised on 12 August 2002 and HEX bought 92,98% of the shares of Riga Stock Exchange. As a result, the structure of Latvian marketplace is similar to that in place already in Finland and Estonia. The rest of the shares are owned by the State of Latvia, which has already made it clear that it will sell its stake by the end of 2002.  

SOURCE: Riga Stock Exchange (www.rfb.lv) if other not mentioned.