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The Russian economy and banking system

boris ananich

Introduction

The beginning of the eighteenth century was a period of radical change in Russia’s economy. These transformations are connected with the name Peter I, but they proved possible thanks to the development of trade and the accumulation of capital by the Muscovite government in the sixteenth and seventeenth centuries. The main sources of this capital growth were domestic and foreign trade, salt mines, fishing, payments to the treasury, customs duties and income from taverns. Capital was concentrated in the merchant class, the state and monasteries. Monasteries sold bread, salt and fish, and to a certain extent performed the functions of banks, undertaking credit transactions. Economically, Russia lagged behind the leading countries of Western Europe, where developed banking and stock markets already existed and where concepts such as bills of exchange and promissory notes were widespread.

In many ways, Peter I’s transfer of the Russian capital to St Petersburg and his declaration of a Russian ‘empire’ predetermined the later development of the Russian government and economy. Peter’s ‘Europeanisation’ of the country occurred during wars and was accompanied by the breakdown of old customs and societal structures. The foundation of the empire was an enormous financial burden on peasants and urban dwellers, and limited their freedom of movement as well. Peter I introduced a poll tax, military conscription and internal passport system. But the decisive role in Russia’s economic development belonged to the government and state enterprises.

The 21-year war with Sweden greatly influenced Peter’s commercial and industrial policies. Providing the army and navy with everything it needed required an intense development of industry and trade, all of which needed to occur in an extremely short period of time. Peter I went down in history

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as one of the founders of active government entrepreneurship.1 As a result of the Petrine reforms there was a sharp jump in the development of manufacturing.2 The state financed not only the construction of new factories but also founded new industrial districts. It owned industrial enterprises and enjoyed a monopoly over areas of foreign and domestic trade. In 1705 a state monopoly was introduced over salt and tobacco, products which brought state coffers significant revenues. The state also monopolised the right to sell key Russian exports. In 1706 yet another monopoly was introduced, this time on trade with China.

Peter I sought to turn his empire’s capital city into a commercial and financial centre. He forcibly moved merchants from various Russian cities to St Petersburg, and when he opened a stock exchange in the city he forced merchants to appear and trade at the exchange at designated times.

Before the beginning of the eighteenth century, Russian foreign trade was conducted through the northern port of Archangel. In 1713 Peter broke with this tradition, declaring St Petersburg to be Russia’s main trading port. Furthermore, delivering hemp, Russia leather (iuft’), potash and other exports to Archangel was prohibited. Despite these measures, however, the state’s share of the export trade in Russia in the first quarter of the eighteenth century did not exceed 10–12 per cent.3 Russian financial transactions in Western Europe were conducted during this time mainly through foreign financiers and merchants, while credit transactions in the country were carried out by administrative institutions.

By the end of the Great Northern War, Peter I’s commercial-industrial policies had changed in certain respects. As a result of the reforms of 1719–24 the Mining, Manufacturing and Commercial College was created to manage trade and industry. In these same years a series of measures was approved to encourage private enterprise in trade and industry. Beginning in 1719 government monopolies were eliminated for almost all export goods. In the 1720s the transfer of state manufacturing enterprises into private hands became a relatively common occurrence.4 If in the seventeenth century salt mines and

1 T. von Laue, Sergei Witte and the Industrialisation of Russia (New York and London: Columbia University Press, 1963). E. Anisimov, Vremia petrovskikh reform (Leningrad: Lenizdat, 1989).

2E. Anisimov, Gosudarstvennye preobrazovaniia i samoderzhavie Petra Velikogo v pervoi chetverti XVIII veka (St Petersburg: Dmitrii Bulanin, 1997).

3P. N. Miliukov, Gosudarstvennoe khoziaistvo Rossii v pervoi chetverti XVIII veka i reforma Petra Velikogo, 2nd edn (St Petersburg: Tip. M. M. Stasiulevicha, 1905), pp. 364, 485; N. I. Pavlenko, ‘Torgovo-promyslennaia politika pravitel’stva Rossii v pervoi chetverti XVIII veka’, Istoriia SSSR 3 (1958): 58–9.

4Pavlenko, ‘Torgovo-promyslennaia’, 50–1.

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trade in Siberia had been an important factor in capital accumulation, then in the first quarter of the eighteenth century government contracts, wine sales and tax farming had become the main sources of capital.5 Peter the Great was an advocate of mercantilism. In 1724 a protectionist tariff was enacted to defend the interests of Russian merchants. The 1729 statute on promissory notes and bills of exchange, which was under preparation in Peter’s lifetime, helped the development of international trade and financial ties.

The reforms of Peter I provided an impetus and new direction for economic development in Russia.6 This new dynamic continued during the reign of Elizabeth Petrovna through the reforms of P. A. Shuvalov. Internal customs duties were eliminated while conditions for a freer development of trade were created.7 Only in the middle of the eighteenth century did the creation of Russian banks to finance merchants and the nobility become possible. In 1754 the Loan Bank (Zaemnii Bank) was established. This was a mortgage institution (for long-term credit) and commercial institution (for short-term credit). In fact it was made up of two constituent banks: a Bank for the Nobility and a Bank for the Merchant Estate.

The Catherine system

The second half of the eighteenth century represented a new stage in the development of trade and banking in Russia.

The commercial-industrial and financial policy of Catherine II furthered the ‘Europeanisation’ of the Russian economy. The credit system created under her reign became known as the ‘Catherine credit system’, and lasted until the middle of the nineteenth century.8

Catherine II declared herself a supporter of the economic teachings of the Physiocrats. The customs tariffs of 1767 and 1782 were a further step towards free trade. For the first time, Russian state credit gained access to the international monetary market. The state’s encouragement of trade promoted the intensification of foreign commerce, especially with England.9 Reforms in the

5Pavlenko, ‘Torgovo-promyslennaia’, 65–6.

6See Anisimov. Gosudarstvennye preobrazovaniia.

7E. V. Anisimov, ‘Rossiia v “epokhu dvortsovykh perevorotov”’, in B. V Anan’ich, et al. (eds.), Vlast’ i reformy. Ot samoderzhavnoi k sovetskoi Rossii (St Petersburg: Dmitrii Bulanin,

1996), pp. 162–3.

8More details in S. Ia. Borovoi, Kredit i banki v Rossii (seredina XVII veka – 1 861 (Moscow: Gosfinizdat, 1958); See ‘Banki i bankiry. Ekaterinskaia sistema: 1760–1850e’, in B. V. Anan’ich et al. (eds.), Petersburg. Istoriia bankov (St Petersburg: Tret’e Tysecheletie, 2001), pp. 34–108.

9H. Kaplan, Russian Overseas Commerce with Great Britain during the Reign of Catherine II

(Philadelphia: American Philosophical Society, 1995).

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area of local government helped industrial development in the provinces. The accumulation of capital, as well as the improvement of banking and monetary circulation, created conditions for private credit and the expansion of industrial production.10 The number of factories using hired labour increased to 2,000 during Catherine II’s reign, a fourfold increase. Most of these hired workers were peasants on obrok (quit-rents).11 However, these changes did not undermine the foundations of the serf system.

Wars and the growth of the empire exerted an enormous influence on the Russian economy, especially through the annexation of the economically developed areas of Poland and the Crimea. The expansion of the empire’s borders proved hugely expensive but also promoted the development of industry and foreign trade. At the end of the eighteenth century, this development became very noticeable. Western European states gladly purchased inexpensive Russian raw materials. Russia in return imported cotton, wool, silk and colonial goods including tea, coffee, sugar and wines.12

A sharp budget deficit, worsened by expenditures on the 1769–74 war with Turkey, became one of the reasons for introducing paper money into circulation at the end of December 1768. Special banks were opened in Moscow and St Petersburg in 1769 for financial transactions with the new paper money. In 1786 these banks were united into a single State Paper Money (Assignat) Bank. From 1783 to 1790 a new building for the bank was built by the Italian architect Giacomo Quarenghi in St Petersburg, at the intersection of the Catherine canal and Sadovaia Street. Printed money was exchanged mainly for bronze coins. It was also traded for silver coinage, but in 1772 the exchange rate of paper money vis-a`-vis silver began to drop, and further trading into silver became rare. The government used the resources of the Paper Money Bank to cover emergency expenditures, including war needs.

In 1786 Catherine II signed a manifesto transforming the Bank of the Nobility into a lending bank. This bank provided credit for real estate, including industrial enterprises and the construction of private stone houses. The bank offered 4 per cent interest rates to depositors and issued loans for a period of eight years, including to cities. The bank also opened an insurance company.

Besides banks, other institutions also conducted credit transactions, in particular the Moscow and Petersburg foundling homes. These organisations

10 V. Vitchevskii, Torgovaia, tamozhennaia i promyshlennaia politika Rossii (St Petersburg: Izdanie D. A. Kazitsina i Iu. D. Philipova, 1909), pp. 24–5.

11 See also R. Tugan Baranovskii, Russkaia fabrika v proshlom i nastoiashchem (Moscow: Moskovskii rabochii, 1922), pp. 41–2.

12 See Kaplan, Russian Overseas Commerce.

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were directed by committees of ‘guardians/trustees’. They paid interest on deposits, conducted money transfers between Moscow and St Petersburg and offered loans, accepting real estate and precious metals as collateral.

During Catherine II’s reign the so-called ‘court bankers’ began to appear. These court bankers continued to exist in Russia until the 1860 reforms. As a rule, court bankers were foreign. In Russia they served both the private and state sectors. Amongst the court financiers of the second half of the eighteenth century was the English merchant William Gomm, who traded through Archangel, the Dutch merchant Fredericks, and Richard Sutherland, who became widely known as a court financier of Catherine II. A central function of the court bankers was to manage the government’s foreign payments and search for international credit. During Catherine II’s reign, Russia began to take out foreign loans regularly. In 1769 the government of Catherine, with Fredericks serving as the middleman, concluded its first major loan with the Amsterdam banking house Raymond and Theodore De Smeth. The money was used to cover military expenditures, specifically the upkeep of the Russian fleet in the Mediterranean Sea and to strengthen Russia’s influence in Poland. The loan of 1769 marked the beginning of the growth of Russian foreign debt. Russia’s main creditor became the Dutch banking house of Hope and Company. This firm financed Russia’s military operations during the entire Russo-Turkish war of 1787–91. Russia took out eighteen loans from Hope and Company just between 1788 and 1793. Richard Sutherland was the intermediary between Hope and Company and the government of Catherine II until his death in 1791. In addition, three loans were taken in Genoa from the banking firm of Aime´ Renny from 1791 to 1793. To help pay for the foreign debt, the tax on wine was increased.13

After Paul I’s accession to the throne Russian debt to Dutch bankers was consolidated. The total was 8,833,000 guilders. This included the debt of the last Polish king and some private Polish debts. Paul I decreed in 1797 that a Special Committee for paying the debt be founded. The emperor reorganised the institute of court bankers. A royal decree of 4 March 1798 created the Office of Court Bankers and Commissioners (Vaught, Velho, Rally and Co.) to manage domestic and foreign financial operations. Their task was to maintain good relations with the Russian government’s foreign contacts. Paul I intended to stop borrowing from abroad. However, in 1798 an agreement was concluded with the English government for a loan of £225,000 sterling plus £75,000 sterling

13 See B. V. Anan’ich and S. K. Lebedev, ‘Kontora pridvornykh bankirov v Rossii i Evropeiskie denezhnye rynki (1798–1811)’, in Problemy sotsial’no-ekonomicheskoi istorii Rossii

(St Petersburg: Nauka, 1991), pp. 125–47.

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monthly. This money was intended to finance a joint Anglo-Russian expedition in Holland and Russo-Austrian operations in northern Italy. Russia was to receive the money through the London banking house of Harman and Company. Many European banking houses, primarily from Hamburg, transferred money to the places of Russian troop deployment. London and Hamburg were the main centres through which Russian financial operations abroad took place. Through Harman and Company Russia received £815,000 in 1799,

£545,494 in 1800, £250,000 in 1802, £63,000 in 1803 and £614,183 in 1807.14 The court bankers also played a crucial role in financing Russian ground and sea military operations during the Napoleonic Wars (1805–14).

In 1801 Alexander I came to the throne. In 1802 a decree was issued to create ministries in Russia. In 1803 the Ministry of Finance set up an Office for Foreign Monetary Matters. Some of the court bankers’ functions became the responsibility of this new unit. In 1811 the Office was formally closed, although it continued until 1816 to conduct limited money transfers abroad. In 1806 the Finance Committee was created. To a large extent, this committee determined the government’s finance policies. After 1811 international financial operations were supervised by the Third Department of the Chancellery of the Ministry of Finance, which had been created to replace the Office for Foreign Monetary Matters. In 1824 it became the Credit Chancellery of the Finance Ministry and was subsequently again renamed as the Special Credit Chancellery of the Ministry of Finance. This chancellery controlled all foreign financial operations in pre-revolutionary Russia down to 1917.

The first minister of commerce, Count N. P. Rumiantsev, like Alexander I, was an advocate of free trade, which was fashionable in European intellectual circles at that time. But already by 1806 trade policy had become totally dependent on military affairs. In 1807 Alexander signed a treaty with Napoleon I at Tilsit. At France’s insistence Russia joined the Continental System blockade against England, its main trading partner. The Continental System dealt a sharp blow to Russia’s economy. But at the same time, it boosted the development of Russia’s textile and sugar industries and furthered the development of trade relations in southern Russia. For example, Odessa’s role as a major commercial port grew. Trade relations with England returned to normal only after the break with Napoleon I and the Grand Army’s invasion of Russia. Under the influence of the 1815 Congress of Vienna, Russia introduced a customs tariff in 1816. This allowed much freedom for foreign trade. Soon after, the tariff of 1819 brought even lower duties on imported industrial

14 Anan’ich, ‘Kontora pridvornykh’, p. 136.

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goods.15 However, within two years the government had returned to the policy of protectionism. The tariff of 1822 prohibited the import of 300 types of goods and the export of 21.16 This tariff lasted until 1841, when it was slightly relaxed, and remained in its revised form until 1851.17 Despite the policy of protectionism the period of the 1820s–40s saw continued growth in Russia’s foreign trade. Within twenty years the value of Russian exports almost doubled, from 55 to 100 million roubles; the value of imports did in fact double, from 40 to 80 million roubles. Seventy-five per cent of Russian exports were agricultural goods, 11 per cent were timber and commercial goods and 14 per cent were industrial goods.18 Beginning in the 1830s, grain becomes an important Russian export as well. Sixty-two per cent of bread exports went through Odessa and other Mediterranean ports, 7 per cent through Archangel, 25 per cent through ports on the Baltic Sea and 6 per cent via land routes. The rise of bread prices on the European market further encouraged grain exports in the 1840s and the development of Russian factories specialising in agricultural equipment and tools.19

The 1840s also saw a growth in the development of Russian industry. In 1833 there were more than 5,500 factories and mills in Russia. By 1850 that number rose to 9,848, and the number of workers employed in them increased from 227,670 to 500,000.20 Gradually, factories that employed serfs began to disappear. In 1839 Finance Minister E. F. Kankrin proposed to phase out factories with permanently assigned serf labour (posessionnye) forces.21 In the first half of the nineteenth century, serf-labour factories slowly became capitalist, and the number of factories employing free labour grew greatly, their owners now sometimes being not only nobles and landowners, but also peasants.22 Free labour was used, first of all, in the cotton industry. In the 1830s–50s, this industry experienced significant success. In these years railway construction also began in Russia. In 1837 the first railway was opened from St Petersburg to Tsarskoe Selo, and from 1843–51 a second rail line was built connecting Moscow and St Petersburg.

15V. I. Pokrovskii, Sbornik svedenii po istorii i statistike vneshnei torgovli Rossii (St Petersburg: Departament Tamozhennykh Sborov, 1902), p. 30.

16Vitchevskii, Torgovaia, p. 51.

17A. S. Nifontov, 1 848 v Rossii. Ocherki po istorii 40-kh godov (Moscow and Leningrad: Sotsial’no economicheskoe izd. 1931), p. 15.

18Nifontov, 1 848, pp. 16–17.

19Nifontov, 1 848, pp. 19, 31.

20Nifontov, 1 848, p. 34.

21Vitchevskii, Torgovaia, p. 80.

22Tugan-Baranovskii, Russkaia fabrika, pp. 80–3.

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Despite these economic successes in the first half of the nineteenth century, Russia, devastated by the Continental System and the Napoleonic Wars, began to lag economically behind the West European powers, although its military prestige in Europe remained extremely high until the Crimean War. This economic backwardness was above all clear as regards the iron industry. In the first half of the eighteenth century Russia produced significantly more cast iron than England and until the end of the century it maintained a strong position in the world market. At the beginning of the nineteenth century, however, the export of iron from Russian began to decline rapidly as Russia lost its ability to compete with the economically developed European countries.

Beginning in this period, economic backwardness becomes a chronic phenomenon in Russia, and the government’s commercial-industrial policy takes on a cyclical character. Periods of economic stagnation are followed by reformist activism aimed at catching up its European competitors and retaining Russia’s influence in Europe.23 Many Russian senior officials believed that the thirty years of stagnation during the reign of Nicholas I was the reason for Russia’s economic backwardness.24

The Napoleonic Wars also disrupted the Russian monetary system and caused a budget deficit. To combat these ills, in 1839 Finance Minister E. F. Kankrin introduced monetary reform. A fixed exchange rate for paper money and silver was established, and then beginning 1 July 1841 it was announced that new banknotes would be introduced to replace the old paper money (assignats). By 1848 the old paper money had been fully exchanged into bank-notes (credit roubles) and the Paper Money Bank (Assignat Bank) was abolished. Bank-notes were also exchanged into silver, but with the beginning of the Crimean War this practice stopped.

In 1841 the emperor signed a decree creating savings banks. These were unique because they served all classes of society. The first savings bank opened in St Petersburg on 1 March 1842 on Bolshaia Kazanskaia Street. As industry and trade grew in the beginning of the nineteenth century, the question of commercial credit also became increasingly pressing. In January 1818 the Commercial Bank was established specifically to address this issue. One of the bank’s main functions was inventorying bills of exchange. But by the middle of the nineteenth century, it became clear that the system of state banks had become obsolete. Indeed defeat in the Crimean War demonstrated the degree

23 T. Taranovskii (ed.), Reform in Modern Russian History: Progress or Cycle? (New York: Woodrow Wilson Centre Press and Cambridge University Press, 1995).

24 Ananich et al. (eds.), Vlast’, p. 423.

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