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. Last Updated: 07/27/2016

Riga Bourse Eyes Small Start, Big Future

RIGA, Latvia -- Sunlight floods through the high windows of Riga's 1850s-era stock exchange building, baking Karlis Cerbulis' office like a greenhouse.


But as president of the country's first bourse, the 35-year-old Latvian-American knows it will take something other than mother nature's blessings to nurse his project to fruition.


Cerbulis said he thinks he's got what it takes: close ties with the Privatization Agency, backing from the government and a strong law establishing a centralized depository for securities.


Helping matters along, Latvian interest rates have fallen below the level of monthly inflation -- around 3 percent since the start of the year -- which should draw money away from savings and into investment.


"In many ways it is the combination of factors that give rise to my optimism right now," said Cerbulis. "It's embryonic, but when you have all the pieces pulling in the same direction, it's hard to imagine that we're not going to be successful."


Situated in the city's cobble-stoned old town, across from the landmark Dome Cathedral, the Riga Stock Exchange occupies the same building its predecessor used more than a century ago, when the Latvian capital was a thriving port and trading hub.


But in the 1990s version -- due to start trading July 25 -- the old ground-floor trading hall will be reserved for conferences and other functions, with actual transactions occurring in computerized sterility.


The bourse was founded in December 1993 by Latvia's four largest commercial banks. Sixteen months later it claims 21 shareholders: 18 commercial banks which together account for 80 percent of the country's commercial banking, plus two investment funds and one brokerage company.


"Latvia certainly has the potential to become a regional financial center," Cerbulis said. "In banking, it already is. The question remains, will it happen in the securities market?"


The first day of listing is expected to see three to five companies registered on the exchange. It is a small start -- three firms privatized in May and scheduled for listing at the exchange amount to only $5 million in capital combined.


But Cerbulis maintained that professionalism, not quantity, will set the pace for Latvian trade.


"Even if we only start with three very small companies, we need the time to get the technology in place, the trading in place," hesaid, adding that by year's end the exchange could have 30 to 50 companies listed with capitalization of up to $100 million.


Financial experts in Riga give the project an approving nod, noting that a secondary securities market is essential to enable an increasingly stagnant banking sector to diversify.


Likewise, the exchange will encourage capital investment by opening a route for investors to generate quick cash should the need arise.


"This will give a certain push for raising capital," said a banker with one of Riga's largest institutions.


However, some observers note that 19 months has been a long time to wait for the doors to open. The original May starting date has had to be postponed.


Most the delays can be attributed to the lethargy of Latvia's Privatization Agency, which has close links with the project, said another banking expert.


"We're just waiting for it to happen," he said.


In the beginning, the exchange will run along similar lines to that of Prague's, with traders using personal computers to log their transactions weekly into a central computer.


The frequency of trading will gradually increase as the market grows, but in the beginning only several thousand lats a week are expected to pass through the exchange, said Cerbulis. That number is expected to rise to 50,000 lats ($25,000) a week by year's end, with a goal of a million lats a week by late next year.


In an effort to bring order to the Latvian bourse, the government recently passed a law defining "infrastructural elements" -- including a centralized depository, which is being developed with the help of experts from the Paris exchange. The outsiders have prior experience with exchanges in Warsaw, Lithuania and Prague, after which Riga's operations are modeled.


Unlike Russia, where only large institutional investments justify the efforts of registering a trade, the Latvian government has taken pains to ensure a level playing field that allows ordinary citizens access to the market.


"It's not going to be an insider's game," Cerbulis said. "A shareholder class will be established in Latvia, with all the rights and responsibilities to participate, no matter where you are."