Baltic stock markets: reasons and possibilities for co-operation

Tatjana Shepel
In co-operation with Rigas Managers School

Local and foreign investors look at Latvia, Estonia and Lithuania as an attractive region for investments. Although it is still a long way before the stock markets of all three countries are really united, first steps in this direction have already been taken. Let us consider the facts influencing the integration of the markets.

Currently there are no official indicators describing the condition of the entire Baltic market. Experts of the Estonian company TSS have developed an integrated stock index, Baltic 30, which has been calculated since May 1997. This indicator is comprised of the ten most popular shares in every country (for example, Dow Jones Industrial, which is based on 30 regularly trading blue chips). The Estonian part of the Baltic 30 portfolio is comprised of the shares of Hansapank, Uhispank, Norma (their capitalisation exceeding US$100 million), Kalev, Saku Brewery, etc. The Lithuanian part consists of Vilnius Bankas, Hermis, Lietuvos Dujos - capitalisation of which also exceeds $100 million, the Lithuanian Shipping Company (LISCO), Rockishski Cheese, etc. Finally the Latvian part - Unibank of Latvia (the only Latvian issuer with capitalisation over $100 million), Riga Transport Fleet, Kaija, Daugavpils PR, Valmiera Glass Works, Lode etc.

Unfortunately, this index reflects changes more on the Estonian market and less on the Lithuanian and Latvian markets.

Low capitalisation brings the markets together

Small capitalisation of national stock markets (Latvia $0.34 billion, Estonia $1.1 billion, Lithuania $2.38 billion) is one of the major factors favouring integration. Latvia is far behind its neighbours with respect to both stock market capitalisation (seven times less than in Lithuania and 3.24 times less than in Estonia), and weekly stock turnover (Latvia two million dollars, Estonia $33 million, Lithuania $11.8 million). Besides the volume of market capitalisation (in terms of Gross National Product - GNP), Latvia only makes six per cent, which is 4.5 times less than Estonia. By way of comparison, the corresponding figure in Great Britain is 60 per cent, in Germany 45 per cent and in Scandinavian countries above 30 per cent.

To some extent, low stock turnover in Latvia is due to the fact that only a small portion of the stocks of major companies are being quoted and a large amount of shares are still state-owned. It is expected that once new banks, Latvijas Gaze, Latvenergo and the Latvian Shipping Company are quoted at the Riga Stock Exchange, and the privatisation of major Lithuanian companies is accelerated, the situation will change.

The stock market of Estonia can be called 'banks' market', since bank shares (Hansapank, Hoiupank, Uhispank, Forekspank and Tallinna Pank) make 91.5 per cent of the stock index TALSE. Bank stocks account for 81 per cent of the total Estonian stock market turnover.

The share of bank stocks at the Lithuanian and Latvian stock markets is slightly above 50 per cent. The weight of Vilnius Bankas and Hermis stocks in the LITIN-A index comprises 61.6 per cent, and that of the Unibank of Latvia in the Dow Jones RSE index, 52.6 per cent. This year the Latvian market will be supplemented by the shares of Riga Commercial Bank and the Latvian Savings Bank. However, an impeding privatisation of such monopolies as Latvenergo, Latvijas Gaze and Latvian Railroads can decrease the weight of bank shares in DJRSE. It is worth mentioning that in Lithuania, bank shares constitute only one-third of the total stock market turnover and in Latvia, one quarter.

In 1997 there was no significant correlation between Baltic stock markets:

However, during the crisis period (November 1997) we witnessed a strong dependence on the processes in neighbouring markets. The ratio of correlation between Riga Stock Exchange and Tallinn Stock Exchange was 0.97. Between Riga Stock Exchange and the National Stock Exchange of Lithuania (as well as between the National Stock Exchange of Lithuania and Tallinn Stock Exchange) it was 0.85. Nevertheless, the President of Riga Stock Exchange, Uldis Tserps, forecasts that the total capitalisation of the stock markets of the Baltic countries by the beginning of the next century will reach ten billion dollars. (In comparison, Finland was $45 billion).

Banks are in charge

In general the stock markets of the Baltic countries are based on an Anglo-American model, the background of which is common Anglo-American legislation, enriched on the account of precedents (this model is characterised by the ratio of about 35 listed companies to one million of the population). However, Latvia is somewhat different - a model of its stock market more resembles a French model based on civil legislation (with the ratio of about ten listed companies to one million of the population). There are about 17 listed companies to one million of the population of Latvia; 24 in Estonia and 150 in Lithuania, respectively.

The structure of brokers' activities on the Baltic stock markets is characterised as follows. In Estonia and Latvia the major intermediaries are banks, thus leaving only 17 per cent and 21 per cent, respectively, of stock market activity to other institutions. Moreover, Estonian banks deal with bank stocks. The Lithuanian market differs from the other two, and non-bank operators comprise 80 per cent of the activities of the stock market.

In fact we can speak of a certain coalescence of banking and stock markets in Estonia, which is dangerous enough. The banking crises in Latvia and Lithuania affected non-public banks. Due to this it was localised more or less quickly. However, if a public bank goes bankrupt, it can drag down all other issuers. In this way, a banking crisis may bring about a crisis in other industries, or even a recession.

The legislation regulating stock markets of the Baltic countries are similar to each other. The basic requirement determines a non-material form of the stocks. However, in Estonia, the means of the stock market regulation was the most progressive one. For example, besides the Law on Securities, the Law on Mutual Funds was adopted long ago. Thus ten mutual funds were established by the stock market participants, who are not only placing their funds in Estonia, but also in Latvia, Lithuania and other countries as well. In Lithuania only privatisation funds operate. In Latvia, mutual funds will start operating only from 1 July 1998.

The first step towards consolidation is taken

Previously, Latvian banks were not allowed to open accounts for securities registered at the Estonian Central Depository and vice versa. Thus the creation of a united system for accounting securities at Central Depositories of Latvia and Estonia is the most significant event in the process of consolidation of the three Baltic stock markets.

This agreement came into effect in July 1997. It enabled Latvian banks and brokerage firms - members of the Latvian Central Depository - to keep 211 securities issues registered at the Estonian Central Depository on their accounts. All in all, 1.335 billion securities at a total nominal value of $15.3 billion are registered at the Estonian Central Depository.

In its turn, the correspondent relations between the two Depositories enable Estonian banks to keep 60 issues of Latvian companies and 72 issues of Latvian Treasury bills.

Now investors can easily arrange repo-transactions and get extra working funds, which is a big advantage of the united securities accounting system.

Analysing statistical data of the securities accounting in the Depositories of Latvia and Estonia can determine which securities are more attractive for investors in both countries. Furthermore, it can provide information concerning the amount of funds being invested in the stock market of Estonia and Latvia, respectively. For example, according to the Latvian Central Depository, as of 5 March 1998, Latvian securities for more than six million dollars were registered at the Estonian Central Depository. Preferences of the Estonian investors were as follows:

  • Gutta (54.98 per cent);
  • Unibank of Latvia (37.66 per cent);
  • Olainfarm (2.89 per cent);
  • Balta (1.45 per cent);
  • Grindex (1.16 per cent);
  • Daugavpils PR (0.91 per cent);
  • Riga Transport Fleet (0.48 per cent);
  • Staburadze (0.37 per cent);
  • Kaija (0.08 per cent);
  • Jekabpils Sugar Works (0.03 per cent).

According to the Depository of the same date, Latvian investors have purchased Estonian securities for the amount of $4.9 million. The most popular securities are:

  • bonds of the Finnish bank Merita, kept in the Estonian Depository (63.01 per cent);
  • commercial papers of Tallinna Vesi (22.40 per cent);
  • stocks of Asa Insurance Share (7.65 per cent);
  • Bank of Tallinn (five per cent);
  • Eesti Toostusliising (1.54 per cent);
  • Savings Bank Investments Funds Unit (0.26 per cent);
  • Savings Bank Russian Investments Fund Unit (0.14 per cent).

The President of the Latvian Central Depository, Martinsh Rikshis, thinks that a united system of securities accounting for the three Baltic countries can only be a subject for discussion at the end of this year. This is when the Lithuanian Central Depository decides on whether to join the accounting system of the Latvian and Estonian Depositories.

The Commissions have found a common language

The second important event of the integration of the Baltic stock market was the signing of a Protocol of Co-operation by the Securities Market Commissions of Latvia, Estonia and Lithuania in September last year.

This Protocol comprises 12 articles and embraces a range of issues concerning the stock market. The Protocol stipulates the holding of co-ordinating sessions of the representatives of these supervising institutions, where priorities of the stock market regulation are to be discussed. In particular, an option for an issuer to choose a stock exchange will be discussed, as well as uniformed requirements of the activities of intermediaries on the stock markets and unification of the issue prospect requirements.

There is a plan to establish a common data base including all participants of the Baltic stock market. Representatives of the market supervisory institutions are also assessing the compatibility of stock exchange trade systems, which will determine the criteria of reliability for depositories' computer systems and software.

Generally speaking, co-operation of the Securities Market Commissions can be divided into two tiers. The first implies certain activities - elaboration of common principles of relevant legislation, integration of national securities markets into the European market, elaboration of common principles of the development of national securities markets, adoption of uniformed accounting standards for transactions on the capital market, attraction of investment funds into the Baltic region, uniting a system of accounting in depositories, recognition of public issues in all Baltic states, and recognition of decisions of one of the Securities Market Commissions in all Baltic States.

The second tier will determine methods of implementation of the above. In particular, co-operation between the Commissions will be achieved by means of seminars and meetings for the staff of the Securities Market Commissions, professional training of the Commission staff, exchange of experience, legislation documents, and study materials, including the relevant software and organisation of a common accounting data base.

The precedent of a simultaneous listing

The Baltic stock market is going to witness an important event at the end of March this year. For the first time, shares of an Estonian issuer will be listed at the Riga Stock Exchange. The Securities Market Commission of Latvia has registered the issue of 38,243,560 shares of the Estonian Hansapank, at a nominal value ten EEK. If the shares are listed at Riga Stock Exchange, the Estonian bank will be the first issuer at the Latvian Stock Exchange, its capitalisation increasing by $288 million, making $605 million.

At present shares of Hansapank are quoted at Tallinn, Helsinki, Munich and Frankfurt stock exchanges. Hansapank shares are most actively traded at Tallinn Stock Exchange, accounting for about two-thirds of the total turnover of the Exchange. It is expected that Hansapank-Latvija will become one of the market makers for Hansapank in Latvia.

Thus Latvian investors will get easier access to the securities of Estonian issuers. The biggest advantage of quoting Estonian Hansapank at the Riga Stock Exchange is in feasibility of arbitration transactions. It will be possible to purchase/sell stocks in lats and purchase/sell in Estonian kronas, thus not only making a margin on the share price difference, but also on the currency exchange rate as well.

The shares of Estonian Hansapank will become Latvian blue chips. It is possible that their trade will exceed the volume of Unibank of Latvia, both in the stock market and off-stock market trades.

Prospects for integration

In conclusion, these are some of the prospects of the integration of the Baltic stock markets:

  • formation of a common economic region;
  • financial growth of the market;
  • simultaneous securities listings in all three Baltic stock exchanges;
  • diversification of national contribution;
  • diverse activities of stock intermediaries (banks and brokerage firms);
  • common possibilities to attract foreign investments;
  • stabilisation of securities markets;
  • liquidity of minor capital markets;
  • fair trading requirements;
  • guarding interests of depositors;
  • integration into markets of European Union (EU) countries.

Should you be interested to hear more about the Baltic stock market and its prospects, you are welcome to attend the international Baltic Stock Market 1998 Conference, which will be held in Riga between 14-15 May 1998. The first conference, with 125 delegates from nine European countries, was held in December 1997. Participants of the Conference will have the opportunity to discuss the current stock market situation, prospects and forecasts for investments, as well as receive updated information on financial policy of the participating countries from those who actually make this policy.

For more information: Riga Managers School web site: E-mail:

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