Bankers and Bolsheviks: International Finance and the Russian Revolution
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Bankers and Bolsheviks: International Finance and the Russian Revolution
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Overview
Following an unprecedented economic boom fed by foreign investment, the Russian Revolution triggered the largest sovereign default in history. In Bankers and Bolsheviks, Hassan Malik tells the story of this boom and bust, chronicling the experiences of leading financiers of the day as they navigated one of the most lucrative yet challenging markets of the first modern age of globalization. He reveals how a complex web of factors—from government interventions to competitive dynamics and cultural influences—drove a large inflow of capital during this tumultuous period. This gripping book demonstrates how the realms of finance and politics—of bankers and Bolsheviks—grew increasingly intertwined, and how investing in Russia became a political act with unforeseen repercussions.
Product Details
| ISBN-13: | 9780691202228 |
|---|---|
| Publisher: | Princeton University Press |
| Publication date: | 05/26/2020 |
| Pages: | 318 |
| Product dimensions: | 6.10(w) x 9.10(h) x 0.90(d) |
About the Author
Read an Excerpt
CHAPTER 1
Fault Lines
THE WITTE SYSTEM AND MISSED OPPORTUNITIES
IN LATE AUGUST 1892, just before setting off for Poland, Tsar Alexander III accepted the resignation of Ivan Vyshnegradskii, the Imperial Russian minister of finance. Although the Tsar hesitated, the resignation came as a relief to both men, and was hardly a surprise to their contemporaries — while Vyshnegradskii had been an active and reformist minister, he was being held to account for government policies that exacerbated the disastrous 1891–92 famine and thereby the cholera epidemics it triggered, resulting in the deaths of some 400,000 people. Among these policies was the raising of consumer taxes and heavily incentivizing peasants, if not forcing them outright, to sell more grain. Thus, grain exports, which could have been redirected to feed a starving peasant population, were initially curtailed, but only in stages and after delays, ultimately being banned in November 1891, far too late to avert a human tragedy. Further sealing
Vyshnegradskii's fate was his opposition to the prohibition of grain exports as late as mid-August. The combination of famine deaths and losses to the Treasury due to the famine's impact on peasant incomes contributed to the negative publicity that only worsened Vyshnegradskii's own failing health. His term as finance minister, which ended rather abruptly, was but the last stage of an otherwise highly successful career in which he amassed a fortune in railroads and finance before transitioning to government service. Indeed, his January 1887 appointment by the Tsar as a replacement to Nikolai Bunge — the Tsarist finance minister since 1881 — was initially fêted by some in the business community as the government moving to put a "practical financier" in charge of the state's finances after a period of leadership by a "man of theory." Vyshnegradskii's successor as finance minister, Sergei Witte, was by contrast a relatively obscure figure to contemporary observers. London's Economist admitted to knowing little about Witte, saying only that he was thought to be an "able financier" and, "if he succeeds in winning the opinion of the banking and operating community to but half the extent his predecessor did, it will be a good thing for Russian financial operations." Gustave Lannes de Montebello, the French ambassador in Saint Petersburg, noted in an 8 September 1892 dispatch to the Quai d'Orsay that the Tsar made his decision only after significant hesitation. The diplomat painted a picture of Witte as a self-made technocrat with a dubious personal life and a prickly personality that had made him many enemies in the Imperial bureaucracy and court. That he chewed gum and, after the death of his first wife, married a converted Jewish divorcée did not endear him to the Tsar. De Montebello went on to acknowledge expectations that Witte would continue in Vyshnegradskii's footsteps and that his doing so would be met with general approval.
Such a lackluster, even apprehensive, response to Witte's appointment is ironic in light of subsequent scholarship making him one of the most famous personalities of late Imperial Russia. Witte, more than any other figure in Russia or the West, is associated with the boom in Russian investment in the late nineteenth and early twentieth centuries. During his tenure as finance minister, from 1892 to 1903, Russia adopted the gold standard in 1897 and repeatedly turned to the foreign capital markets for loans to finance an ambitious program of state-led industrialization. His name was similarly associated with the boom in Russian railroad construction, the Trans-Siberian Railway in particular — an association that began in his earliest days while working in the railroad industry, first in the private sector (initially as a lowly conductor to learn the business) and then in government.
Pro: Witte the Revolutionary
Witte, above all others, personifies the industrialization of nineteenth-century Russia in a range of narratives. Historian Sheila Fitzpatrick portrays him as a technocrat and champion of modernizing reforms who harnessed Russia's engineers and businessmen in his industrialization program but was held back by a civil service elite and a Tsar stuck in the past. Richard Pipes credits Witte with introducing a novel and visionary turn in Russia's financial grand strategy — of initiating the policy, whereby Russia moved to a model of financing industrial growth through aggressive borrowing on international capital markets "rather than squeeze the countryside," as Vyshnegradskii had. Lenin was predictably scathing in his references to the "great acrobat Witte," although this was, of course, because he shared the view later articulated by Fitzpatrick and Pipes that Witte was a key driver of Russia's turn to the global capital markets. This narrative in generalist works, in turn, influenced students of the Russian oil industry, such as Daniel Yergin, whose discussion of Tsarist Russia in his broader global history of the oil business casts Witte as a lone and isolated voice of technocratic reason and reform against the reactionary clique surrounding an incompetent Nicholas II.
Favorable treatments of Witte isolate several factors that supposedly set him apart from his predecessors and successors. His most authoritative recent Russian biographers highlight his "national idea," crediting him with having what some described as "a whole plan." According to them, "not one of the ministers of finance of the post-reform era used such broad means of government intervention in the economy as did Witte." The German economist Friedrich List's 1889 The National System of Political Economy particularly influenced Witte. A leading American biographer acknowledges that "the three preceding finance ministers, Reutern, Bunge, and Vyshnegradskii, recognized their country's backwardness and sought to overcome it. They recognized the need for an adequate banking system, a stable currency, and large-scale foreign investment in industry as long as native investors could not provide the necessary capital," but goes on to say, "their achievements fell far short of their goals." Others may have had the right ideas, but only Witte was able to implement them and realize their benefits, according to this view.
At the height of the Cold War, perhaps reflecting awe in certain Western circles of Soviet accomplishments and the Keynesian and statist economic policy paradigm of the times, Witte was favorably cited as the forerunner to twentieth-century industrialization policies in Russia. Thus, one of his most widely cited Western biographers argued that Witte was the first Russian finance minister to make industrialization a priority. Praising Witte's system as the "boldest" yet, Theodore Von Laue credited Witte with "a more rapid pace of industrial advance" relative to his predecessors. Von Laue found something to praise even in Witte's notoriously embroidered budget reports to the Tsar, describing them as an "indispensable morale builder" for achieving his industrialization aims, and the "prelude to the fanfare of statistics blared forth during the early five-year plans." Flirtatious comparisons with Stalin are indeed a salient feature of much of the Witte literature and are not surprising, particularly given the period during which Von Laue was writing.
In the view of other favorably disposed observers, Witte was far from a ham-fisted proponent of government intervention in the economy, and his prior business experience gave him an appreciation for the private sector's potential and importance, as well as the nous to make government interventions in the economy most effective. French historian René Girault credits Witte with a more strategic deployment of Russian government funds abroad to facilitate loan issues, and with the rationalization of the Russian railroad network in the 1880s in a way that not only improved the network but also facilitated railroad bond issues. Witte is also credited in this vein with being a skilled bureaucratic politician who knew how to broaden and leverage his sphere of influence in the bureaucracy, transforming and expanding the remit of departments such as the Institute of Commercial Agents, whose staff he would use to help him tap global capital markets. In this telling, then, Witte was not just a visionary but also a doer who both conceived and implemented a new course in Russian financial policy.
In the same vein, in one of the most reactionary societies in the world, Witte stood out as a skilled and effective, no-nonsense manager who "hired talent over ethnicity" and generally revolutionized the finance ministry with his modern management style and iconoclastic ways. This iconoclasm was not lost on Witte's contemporaries abroad. Niall Ferguson, for example, argues, "It was the appointment of Witte as finance minister which persuaded the Rothschilds to resume financial relations with Russia." He calls attention to Mrs. Witte's Jewish heritage having led the Rothschilds to think that Witte would be more progressive on Jewish affairs. In this sense, there was a silver lining to the tensions Mrs. Witte's background created between her husband and the Tsar. The paradox, in the telling of his most recent American biographer, is that Witte's ability to realize his dreams of accelerating economic growth, rooted in part in his unconventional approach, fed the "military adventurism" of some of the most nationalist and conservative elements of the government that resulted in "foreign entanglement" and ultimately war with Japan.
Witte's own memoirs — both the original Russian edition and the abridged English translation — do much to advance the narrative of a progressive, forward-thinking, and indeed revolutionary technocratic genius who delivered results despite being held back by a Byzantine court and an insecure Tsar. In her preface to his posthumously published memoirs, Witte's widow writes at length about her husband's fear of being censored by the Tsarist authorities. Suspecting his study in Saint Petersburg to be unsafe, he wrote his memoirs exclusively when abroad, keeping drafts in safety deposit boxes at foreign banks overseas that were registered in his wife's name. His widow's recollection of agents from the Okhrana raiding their home after his death in search of these damning documents only sharpens the profile of an iconoclastic reformer persecuted by the forces of reaction.
Contra: Witte the Revolutionary
The notion that Witte represented a breaking point in Russian economic history is not something that emerges only from his memoirs or relatively favorable biographical treatment by later historians. Even his detractors saw Witte's accession as representing a historical discontinuity. Perhaps the most notorious contemporary attacker of Witte's policies was the infamous Elie de Cyon — a gifted but controversial character who himself attracted the scholarly attention of the original cold warrior, George F. Kennan. Born Ilya Fadeyevich Tsion to a Jewish family in Lithuania in 1842 or 1843, by 1873 Tsion was recognized as a gifted physiologist, "Russia's youngest professor, and its first Jewish one." He was also a "strong and confirmed reactionary," which, while odd for a Russian Jewish intellectual of his time, was hardly out of the ordinary for Tsarist society in general and indeed spoke to his strong assimilationist instincts. Within the context of Russia's notoriously radical universities, however, Tsion's views were so controversial that he requested military guards to be posted outside his office and eventually left the Saint Petersburg Medical-Surgical Academy and Russian academia altogether by October 1874.
Eventually settling in Paris and transforming himself into "a well-heeled and cosmopolitan gentleman, installed in a fine apartment in the rue de la Bienfaisance," Tsion — now known as Élie de Cyon — took on a third, French, doctorate and continued his research under Paul Bert, the famous French physiologist. Bert's own left-Republican views — he became minister of education under Léon Gambetta — however proved to be "too much" for Cyon, who left science "frustrated and embittered." Among other things, he developed connections to French military circles — including some notoriously anti-Semitic anti-Dreyfusards — and wrote, at times for Mikhail Katkov's Moskovskie Vedomosti, in favor of a Franco-Russian alliance. Katkov, one of the most powerful newspapermen in Russia, in turn introduced Cyon to Vyshnegradskii, at the time Russia's finance minister, who engaged Cyon to help represent the ministry in talks with French and German bankers. According to Kennan, the two fell out over the amount each was entitled to skim off the deal, and Cyon, from that point onward, became a vocal critic of the Russian finance ministry.
Although Kennan rightly points to Cyon's criticism of both Vyshnegradskii and his successor Witte, Cyon was particularly scathing in his critiques of the latter. Some of his pamphlets, including "Où la Dictature de M. Witte Conduit la Russie" (1897), had particularly sharp titles. Others, such as "M. Witte et les Finances Russes" (1895), adopted a less partisan and more technocratic frame; but all were pointed critiques of Russian financial policy in general, and of Witte in particular. Cyon — showing intellectual camaraderie with Katkov — was a vocal critic of the manner in which Vyshnegradskii and Witte sought to introduce the gold standard in Russia.
In 1797, Russia had introduced a silver standard but suffered successive devaluations because of deficit financing during the Turkish and Swedish wars of 1806–12 and 1808–9. After a brief attempt at reducing reliance on money printing to finance deficits by issuing long-term debt, Russia's involvement in the Napoleonic Wars (1812–15) resulted in a new round of printing. By 1815, the silver value of the paper ruble had fallen to just 20 percent of its original value. During the post-Napoleonic era, Russia made strides toward establishing a durable sovereign debt market that would enable the Russian government to fund deficits from the proceeds of foreign and domestic loans without resorting to the printing press. The wars with Persia (1826–28) and Turkey (1828–29), as well as the Polish rebellion (1830–31), were thus financed by a combination of foreign loans and new short-term domestic debt in the form of newly created state Treasury bills. From 1839 to 1843, the government carried out yet another monetary reform, whereby the old paper ruble was devalued into a new partially convertible "credit ruble" at a ratio of 3.5:1. In 1855, in the midst of the Crimean War (1853–56), the Russian government resumed printing money to eventually cover more than 45 percent of total wartime expenses, promising to begin withdrawing the new rubles within three years. Given the huge overhang of paper rubles as a result of the war, the government abolished convertibility altogether in 1858. In the meantime, as a Russian finance ministry report prepared in 1895 under Witte noted, Gresham's Law had kicked in, with silver coin having vanished from domestic circulation and largely having found its way abroad. After some monetary stability was restored during M. K. Reutern's term as finance minister, the Turkish War of 1877–78 saw the printing of more than 1 billion paper rubles, with the paper ruble depreciating by roughly 38 percent from 1879 to 1888. Figures pertaining to depreciation alone, however, tell only part of the story: the currency was not only depreciating, but highly volatile, with realized volatility in some years exceeding 30 percent.
In introducing the gold standard, the Russian government had to decide how to treat the existing paper rubles in circulation. As the 4 February 1895 ministry report noted, the basic theoretical currency of the Russian Empire was the silver ruble, to which the credit ruble was, theoretically, still linked. "Legally," the report acknowledged, "both rubles, silver and credit, are equivalent." In practice, however, the government's collecting of customs duties in gold, the contracting of foreign loans in gold, and the trading of the credit ruble on foreign exchanges created a de facto domestic and foreign market for credit rubles in gold terms, thus creating a gold ruble with a value at the time equivalent to one-fifth of a Demi-Imperial. This in turn implied the de facto existence of three Russian currencies: the silver ruble, the credit ruble, and a de facto gold ruble.
The arguments in favor of adopting a monometallic gold standard while simultaneously engaging in a devaluation and definitive abandonment of silver were several. First, more than half the government's debt, much of it externally held, was denominated in gold. Second, there was the practical consideration that withdrawing the silver and credit notes in circulation would be simply too difficult in a country as vast as Russia; as an earlier earlier finance minister, A. A. Abaza, put it, "notes once in circulation are as difficult to withdraw as it is to separate wine from water." Besides, Russia was not a major silver producer, but in 1895 it did account for 15 percent of global gold production. Indeed, by February 1895 the silver ruble had fallen more against gold than had the credit ruble, the value of which itself likely reflected market expectations of an impending adoption of a monometallic gold standard, as well as of active manipulation of the currency market by the Russian State Bank. Ultimately, the monetary reform saw the credit ruble devalued by two-thirds, making 1.5 credit rubles equal to one new gold ruble.
(Continues…)
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Table of Contents
Acknowledgments, xi,
Note on Dates, Transliteration and Abbreviations, xvii,
Introduction, 1,
1 Fault Lines: The Witte System and Missed Opportunities, 19,
2 The Loan That Saved Russia? Reassessing the 5 Percent Russian Government Loan of 1906, 55,
3 The Interrevolutionary Recovery and Rally, 85,
4 Investing in the Revolution, 129,
5 Revolutionary Default, 162,
Conclusion, 208,
Appendix: Rethinking Sovereign Default Rankings, 217,
Notes, 233,
Bibliography, 275,
Index, 285,
What People are Saying About This
"A fascinating study of an overlooked topic."—Andrew Stuttaford, Wall Street Journal"A highly readable tale of one of history's biggest booms and busts, with valuable perspective for contemporary investors."—Emmanuel Roman, CEO, PIMCO"Deeply researched and vividly written. . . . An original and illuminating contribution to a literature that has devoted far more attention to the revolutionaries than to the capitalist system they overthrew."—Niall Ferguson, Milbank Senior Fellow, Hoover Institution, Stanford"Beautifully written. Malik's narrative adds a depth of understanding about how sovereign finance works that I've not seen anywhere else."—William N. Goetzmann, author of Money Changes Everything"An expansive, detailed work based on an extensive and painstaking research of a huge volume of materials. . . . A fascinating read, offering a path to understanding what forces triggered the unstoppable chain of those tragic yet colossal events."—Ruben Vardanyan, social entrepreneur, impact investor, and venture philanthropist