Bourse Battles

When Wieslaw Rozlucki first got to London, he made a beeline for the city's Stock Exchange. "It sounds a little weird, but the stock market is what I wanted to see more than anything," he says. "It was 1968, and I was a student on my first trip outside the Iron Curtain." For the next 20 years he worked as an economic researcher for the Polish government and contemplated the things his country could accomplish if capital markets ever replaced state bureaucracy. When the replacement started, Rozlucki was ready. Now he heads the Warsaw Stock Exchange, which, along with other upstart bourses in Budapest and Prague, hopes one day to challenge London's supremacy.

Erich Obersteiner may get in the way. He runs the Vienna-based New Europe Exchange, or Newex, which plans to bring Western money to eastern companies by listing Central and East European shares in the relatively safer financial haven of Vienna. The exchange, a joint venture of the struggling Vienna Bourse and Frankfurt's Deutsche Brse, started trading shares of Hungarian, Polish, Czech and Russian companies on Nov. 3 and plans eventually to list companies from Yugoslavia and beyond. "It's the ideal bridge between people who have capital and people who need it," Obersteiner asserts. "Newex will bring liquidity to the region, which will benefit the local exchanges as well."

Hogwash, says Rozlucki. Russian exchanges may welcome the overture, which could help them establish credibility, but those in Central Europe have given it the cold shoulder. In fact, both Rozlucki and Budapest Stock Exchange boss Maria Dunavolgyi say Newex has the potential to spark a pointless turf war that could derail 10 years of painstaking progress. "The implication is that our financial system is more risky than Vienna's and that a Polish company can somehow gain prestige by being listed in Vienna," Rozlucki says. "That might be true of Russia, but it's not true of Poland, Hungary or the Czech Republic."

Rozlucki proudly notes that the Warsaw exchange has followed international accounting standards from the day it opened in 1991 and already has an impressive array of Western members. In fact, foreigners accounted for roughly 35% of the trades made on Warsaw's exchange last year and that doesn't include those placed by domestic subsidiaries of foreign companies. In Prague the figure was 50%, and in Budapest 65%. "These are already international exchanges," Rozlucki says. "Newex has little chance of succeeding here, and if they do, it won't be a good thing."

Newex and the reception it has received shine a light on the role of regional exchanges versus pan-European ones, raising questions about the future development of the capital markets in Europe. "There are four functions a regional exchange can provide better than a pan-European exchange can," Rozlucki says. "These are market surveillance, admission procedures, corporate law and investor education functions that cannot be made better through economies of scale."

Dunavolgyi says a series of exchange-sponsored seminars across Central Europe has already created a critical mass of market-savvy entrepreneurs and investors. Rozlucki believes that within three years regional exchanges will be "nodes in a Pan-European trading structure, like Euronext." In fact, his exchange recently switched to Euronext's trading platform, and he's openly angling for an alliance with the French exchange. "It's too late now for an alliance among Eastern exchanges, but that doesn't rule out a cooperation with a Western exchange." He says that Newex, on the other hand, would suck liquidity out of the home states and into Vienna.

While Obersteiner's win-win pitch is still being rebuffed in Central Europe, it's finding a willing audience in Russia. Newex categorizes companies according to quality levels: they range from "official" companies that meet the most stringent Western reporting requirements, down to murky gray "semi-official" and "unregulated" operations that Obersteiner says will be given the legal and accounting support they need to climb into the better segments. Russian companies that can make it into the "official" segments will find it easier to attract Western capital than their murkier competitors, he says, and the result will be more self-imposed transparency.

Of the 90 companies traded on opening day, 44 were Russian, as were four of the seven "quality" companies listed in the high-end NX.plus segment three oil companies and one telecommunications firm, Samara Svyazinform. The remaining three were a Slovakian pharmaceuticals company (Slovakofarma), a Hungarian food processor (Globus Konzervipari) and an Austrian Internet group (S&T System Integration & Technology Distribution, which has a large presence in the East).

Russia's largest stock market, the Moscow Interbank Currency Exchange, signed a dual listing agreement with Newex back in May. As part of that deal, micex raised the rigor of its admissions criteria for example audited quarterly reports and allowing analysts to grill the bosses to the level of Newex. "Russia is where we see a lot of our potential down the road," Obersteiner says. The region's reputation for corruption means companies can gain credibility by listing in Vienna.

Unfortunately for Obersteiner, Russian firms have plenty of other options. London's seaq International, Belgium's easdaq and even the little Berlin Stock Exchange all list Central and East European shares. What's more, many Western fund managers weren't even aware Newex had made its debut. If it is to become a permanent part of the European equity landscape, the new bourse must earn itself a higher profile among Western investors. And Obersteiner will have to develop Newex into a lot more than a niche exchange for Russian firms seeking respectability and capital.