«Investment Banking in Russia, 1890-1917: From Pioneering Finance to Universal Banking Sofya Salomatina Moscow Lomonosov State University The chapter ...»
Salomatina S.A. Investment banking in Russia, 1890-1917. From Pioneering Finance to
Universal Banking // Investment Banking History: National and Comparative Issues (19th-21st
centuries) / Ed. by Hubert Bonin and Carlo Brambilla. — (Euroclio Etudes et Documents/Studies
and Documents: Vol. 78 ) — Bruxelles, Bern, Berlin, Frankfurt am Main, New York, Oxford,
Wien: Peter Lang, 2014. — P. 347-380.
Investment Banking in Russia, 1890-1917:
From Pioneering Finance to Universal Banking Sofya Salomatina Moscow Lomonosov State University The chapter analyses investment banking in pre-revolutionary Russia. In the focus of its attention there are banking services on initial public offering for private companies’ securities. This activity became a mass phenomenon in the 1890s for the first time. This research is an attempt to investigate making and evolution of Russian investment banking in the aspect of banking models’ development. It proves that investment banking for private companies appeared throughout traditional activity of several commercial banks in St. Petersburg, dealing with services to public and mortgage bond market and intensive currency speculation caused by fiduciary standard. However, private companies’ demand for investment banking appeared persistently in the peak of pre-revolutionary economic growth by 1895, and the Petersburg banks switched over to private stock as a new subject for exchange transactions. In the beginning of the 20th century the crisis revealed weak points of the 1890s investment banking, and they were overcame by universal banking development by the 1910s.
This chapter analyses investment banking in pre-revolutionary Russia. In the focus of its attention there are banking services on initial public offering for private companies’ securities.
This activity became a mass phenomenon in the 1890s for the first time. Our study reveals prerequisites of this trend stemming into the 1860s — the 1880s, peculiarities of Russian investment banking in the 1890s, this banking model’s hardships in the crisis and depression period in 1899-1908, as well as integration of Russian investment banking into universal banking in the 1910s.
This research is an attempt to investigate making and evolution of Russian investment banking in the aspect of banking models’ development. It proves that investment banking for private companies appeared throughout traditional activity of several commercial banks in St.
Petersburg, dealing with services to public and mortgage bond market and intensive currency speculation caused by fiduciary standard. However, private companies’ demand for investment banking appeared persistently in the peak of pre-revolutionary economic growth by 1895, and the Petersburg banks switched over to private stock as a new subject for exchange transactions.
Investment banking in “Petersburg style” was also observed outside St. Petersburg, but rarely. In the beginning of the 20th century the crisis revealed weak points of the 1890s investment banking, and they were overcame by universal banking development by the 1910s.
The chapter summarises findings of1 investigations in several fields of Russian economic history: the studies of economic and industrial growth by Paul Gregory, Lev Kafengauz;1 the 1 Paul R. Gregory, “Poisk istiny v istoricheskih dannyh”, in Valery I. Bovykin (ed.), Jekonomicheskaja istorija. Ezhegodnik, 1999, Moskow, Rossiiskaia politicheskaia entsiklopediia (ROSSPEN), 1999, pp. 471-500. P.R.
Gregory, “Jekonomicheskaja istorija Rossii: chto my o nej znaem i chego ne znaem. Ocenka jekonomista”, in Valery Bovykin and Yuri A. Petrov (eds.), Jekonomicheskaja istorija, op. cit., pp. 7-97 (English version of article’s title: “Russian economic history: What we know and do not know. An economical appraisal”; Lev Borisovich 2 equity market research by Iosif Gindin and Valery Bovykin;2 studies of international banks’ syndicates on issues of Russian securities in Russia and abroad by Boris Ananych and Sergey Lebedev.3 The government’s struggle for currency stabilisation in the period 1880s-1895 is analysed under Pavel Lizunov’s monograph.4 The principal tendencies of relations between banks and industrial companies are derived from Bovykin’s research5; the facts and trends of Petersburg and Moscow banking are obtained from Bovykin’s and Yuri Petrov’s studies6.
Summaries on Russian banks’ models are based on Sofya Salomatina’s research7 as well as on analysis of Russian banks’ public reports. A special attention has to be paid to a role of state in history of Russian investment banking. In what degree did banks rely on the government support or state participation in their projects? In what degree did these accounts come true? The current findings of investigations cover this issue relatively in a new way.
The four parts of the chapter analyse, firstly, the preconditions of investment banking spurt in the 1890s; secondly, Russian banking models in the period of flourishing investment banking in the 1890s; thirdly, investment banking difficulties in crisis period, and fourthly, qualitative changes in banking models in connection with transition to universal banking in the 1910s.
1. The factor of investment banking origin This section analyses the necessary factors, concurred in the 1890s for the first time and created circumstances for spurt of investment banking for private companies. These factors can be divided into four groups for convenience. Firstly, there were industrial and banking growth;
secondly, development of equity market; thirdly, making of banks, specialised on equity market services; fourthly, successful pressure on currency speculation on the Russian government’s part.
These factors have to be examined thoroughly for understanding of economic circumstances in which investment banking became apparent tendency.
A. Industrial and banking growth resumption in the 1890s The modem economic growth occurred in Russia since the 1880s. General tendencies of this stage ere industrial growth, reduction of agriculture percentage and growth in service percentage; population growth increased firstly then slowed down; an income distribution’s model gradually changed.8 Russian industrial production rate was extremely fast for the last 25 years before WWI. Rate estimations varied from 5.1 per cent per Raymond Goldsmith’s index to Kafengauz, Jevoljucijapromysh- lennogoproizvodstva Rossii, Moskow, Epifaniia, 1994, p. 22-23, 70.
2 Iosif Frolovich Gindin, Russkie kommercheskie banki: iz istorii finansovogo kapitala v Rossii, Moskow, Gosfinizdat, 1948, pp. 391-405, 444-447. Valery Bovykin, Finansovyj kapital v Rossii nakanune Pervoj mirovoj vojny, Moskow, Rossiiskaia politicheskaia entsiklopediia (ROSSPEN), 2001, pp. 93-111.
Sergei K. Lebedev, S.-Peterburgskij Mezhdunarodnyj kommercheskij bank vo vtoroj polovine xix veka:
evropejskie i russkie svjazi, Moskow, Rossiiskaia politicheskaia entsiklopediia (ROSSPEN), 2003, pp. 213-346, 462Boris V. Anan’ich and Sergei K. Lebedev, “Uchastie bankov v vypuske obligatsii zheleznodorozhnykh obshchestv (1860-1914 gg.)”, in Sergei Ivanovich Potolov (ed.), Monopolii i ekonomicheskaia politika tsarizma v kontse XIX — nachale XX v.: K probl. ist. predposylok Velikoi Okt. sots, revoliutsii, Leningrad, Nauka, Leningr.
Otd-nie, 1987, pp. 3-41.
4 Pavel V. Lizunov, Sankt-Peterburgskaja birzha i rossijskij rynok cennyh bumag (1703-1917gg.), St.
Petersburg, Izdatel’stvo ‘Russko-Baltiiskii informatsionnyi tsentr “Blits’”, 2004, pp. 241-251.
5 Valery Bovykin, Zarozhdenie finansovogo kapitala v Rossii, Moskva, Izd. Mosk. un- ta, 1967, pp. 203-291.
Valery Bovykin, Formirovanie finansovogo kapitala v Rossii. Konets XIX v. — 1908 g., Moskow, Nauka, 1984, pp.
6 Valery Bovykin and Yuri Petrov, Kommercheskie banki Rossijskoj imperii, Moskva, Perspektiva, 1994.
7 Sofya Salomatina, Kommercheskie banki v Rossii: dinamika i struktura operacij, 1864-1917 gg., Moskva, Rossiiskaia politicheskaia entsiklopediia (ROSSPEN), 2001. Sofya Salomatina, “Modeli kommercheskikh bankov v
Sankt-Peterburge i Moskve, 1864-1917 gg.”, in Boris Anan’ich (ed.), Kredit i banki v Rossii do nachala XX v.:
Sankt-Peterburg i Moskva, St. Petersburg, Izd-vo SPbGU, 2005, pp. 328-343.
8 Paul Gregory, “Jekonomicheskaja istorija Rossii: chto my o nej znaem i chego ne znaem. Ocenka jekonomista”, pp. 9, 13-23.
6.65 per cent per L. Kafengauz’ index.9 By the first estimation Russian growth of large-scale industry competed with main rapidly growing countries, by the second one Russian industry grew more rapidly. But then Russia was still substantially backward in economic and social per capita indicators, although growth rates per capita revenue remained just 85 per cent from average European measure.10 The most rapid development was in the period from 1889-1892 to 1901-1904. These years the drastic industrial alterations were based on machinery, mechanical transport, mineral fuel, coke, cement, modern chemical materials, although this process had been started even in the middle of the 19th century. The most intensive reconstruction was held in railroad facilities, industrial engineering and urban development. Before the 1890s this growth was caused by import of metals and intermediate products to a considerable degree. The demand for heavy industry production was reliably provided and the domestic heavy industry appeared at last in the 1890s.11
Figure 1. Russian commercial banks assets, 1865-1891
The banking system resumed growth only in the 1890s. Earlier Russian banking history had the following milestones. The modem banking system started to develop in Russia since the 1860s. The first joint-stock commercial bank was established in 1864, by 1873 there were about forty commercial banks, and roughly the same number of banks was kept until 1917. Before 1875 a situation at financial market had been relatively favourable, but since 1875 the period of crisis and long depression began. Total commercial banks’ assets12 in 1875 were exceeded only in 1891 (see Figures13 1 and 2). The development of earlier decades found vent in a quantitative and qualitative spurt in the 1890s. This decade became one of the most striking periods in Russian economic history before 1917.
B. The Russian equity market in the 1860s-1880s The exchange upturn occurred at the well-established equity market in the 1890s.
Thereupon Russian domestic and overseas capital issues have to be kept in mind. The market gradually developed since the beginning of the 19th century, but the critical period lasted from the end of the 1850s to the middle of the 1870s, when principal exchange institutions, all types of issuers and investors came into being as well as first exchange upturns and downfalls in up-todate sense of the word.
Russian equity market’s main features were an abundance of government and mortgage securities and a slight portion of private companies’ shares, which was gradually increasing.
Long-term state bonds amounted 60/70 per cent of Russian issues in the second part of the 19th century. A particular part of these securities were railway loans — state and private. The fact of the matter is that almost 90 per cent of private railway stock was guaranteed by the government in various forms,14 therefore these securities were essentially equal to state bonds. There were two large state issuers at Russian mortgage bond market — State Peasant Land Bank (since
1882) and State Land Bank of the Nobility (since 1885).15 Outside state equity market there was a large domestic market of private mortgage bonds, developed in the 1860s-1870s. The portion 14 Sergei Lebedev, S.-Peterburgskij Mezhdunarodnyj, op. cit., p. 214.
15 From here and so on - the list of original Russian banks’ names in transliteration in Appendix 1.
5 of securities of land banks and urban mortgage institutions amounted 22.8/24 per cent of domestic market in 1893-1900. Private companies’ securities amounted only 11.3 per cent of Russian equity market in 1893 but this sector was just ready to grow.
In the second part of the 19th century the securities were traded at Russian exchanges: in Petersburg — at the leading Russian exchange, as well as in Warsaw, Moscow, Riga, Odessa and in some other cities. However, Petersburg exchange and Petersburg equity market played absolutely prevailing role in Russian empire, and differentiation between the metropolis and regions was considerable. Russian securities circulated also at European markets. British and French markets prevailed in the 1860s-1870s. Then, since 1884, after Rothschilds’ boycott against Russian capitals these securities shifted from Britain to Europe, especially in Germany.