«Investment Banking in Russia, 1890-1917: From Pioneering Finance to Universal Banking Sofya Salomatina Moscow Lomonosov State University The chapter ...»
But since 1887 tariff and trade war between Germany and Russia had begun and the role of French and Russian domestic markets started to grow. In the beginning of the 1890s unfavourable state of market impeded to amount of Russian issues, desirable by government, so positions of the domestic equity market became still stronger.16 The Russian market was filled with new issues. Thus there were about ten issues of longterm loans in the 1860s-1870s and six of them were distributed abroad.17 More than ten issues took place also in the 1880s-1894, and a considerable part of them were conversions, conducted in Europe in the end of the 1880s in favourable conditions of reduction in discount rate and upsurge of securities rate.18 The railway securities, guaranteed by state in a majority, were massively launched into market in addition to state funds. There were fifty one issues of Russian railway companies’ bonds in the 1860s — the 1890s,19 and these securities had parity with hard European currencies. In addition to that, twenty six railway companies’ loans were distributed in rubles in 1886-1893.20 By 1 January 1893 the total sum of general-purpose state loans amounted 3,178 million rubles where of 595 millions were placed abroad.
C. The making of Petersburg banks' investment specialisation in the 1880s Several commercial banks acquired wide experience from securities transactions by the 1890s. These banks’ development in the 1880s has to be scrutinised. Russian commercial banks amounted 58.6 per cent of shortterm credit system on 1 January 1893.22 The largest part of them included discount banks, dealing with services to local trade and industrial firms; some of them had deposit specialisation.23 However Petersburg, as a centre of Russian equity market, affected some metropolitan banks deeply. In the first place it concerned Petersburg International Commercial Bank and Petersburg Discount and Loan Bank — the future investment banking leaders in the 1890s. Since the 1880s these banks took part in all Russian issues — state, railway 16 Sergei Lebedev, S.-Peterburgskij Mezhdunarodnyj, op. cit., pp. 233, 235-236, 249, 252-255, 261, 267-272, 344-346.
17 Estimated on: A. K. Sorokin, “Zaimy”, in Ekonomicheskaia istoriia Rossii (s drev- neishikh vremen do 1917 g.): Entsiklopediia, Moskow, Rossiiskaia politicheskaia entsiklopediia (ROSSPEN), 2008, Vol. 1, pp. 798-800.
18 Estimated on: Sergei Lebedev, S.-Peterburgskij Mezhdunarodnyj, op. cit., pp. 462-466.
19 Estimated on: Boris Anan’ich and Sergei Lebedev, “Uchastie bankov v vypuske obli- gatsii zheleznodorozhnykh obshchestv (1860-1914 gg.)’, pp. 3-41.
20 Estimated on: Sergei Lebedev, “Peterburgskii Mezhdunarodnyi kommercheskii bank v konsortsiumakh po vypusku chastnykh zheleznodorozhnykh zaimov 1880-kh-nachala 1890-kh gg.”, in S. I. 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. 41-65.
21 Valery Bovykin, Formirovanie finansovogo kapitala, op. cit., p. 105.
22 Iosif Frolovich Gindin, Russkie kommercheskie banki, op. cit., p. 69.
23 Data on Russian banks’ participation in international syndicates: Sergei Lebedev, S.-Peterburgskij Mezhdunarodnyj, op. cit., pp. 213-346. 462-475.
6 and mortgage, domestic and foreign. Russian banking system adopted techniques of paper issue via these banks. Their partners were Russian Bank for Foreign Trade and Volga-Kama Commercial Bank. A number of regional commercial banks acted as sub-participators in syndicates, and a part of them would develop investment banking later in the 1890s, but another
part would not progress in this field. The most active sub-participators were following:
Petersburg Private Commercial Bank, Moscow Merchant Bank, Warsaw Commercial Bank, Riga Exchange Bank, Petersburg-Moscow Commercial bank, Moscow Trade bank, and Riga Municipal Discount Bank.
In general the Russian equity market may be said to develop as a bank- oriented institution.
International banking syndicates distributed Russian securities. Every consortium included a lot of participators and one of the powerful European banks led them. Before the 1880s Russian banks acted as just technical intermediaries. But since the 1880s they gradually became fullfledged participants having real influence on conditions of issues.
It was since the 1880s that international contacts of Russian banks are systematically revealed due to archive of Petersburg International Bank, remained relatively intact for this period in Russian State Historical Archive in Petersburg. Particularly the archive includes correspondence of bank’s leaders in the 1880s-l 890s. In the issue the international activity of Russian bankers can be investigated in details on these materials. S. Lebedev revealed the particularities of these secret negotiations on syndicates’ questions.24 In the first part of the 1880s two banking groups competed for Russian issues, and it makes senses to specify just the principal participators. The first group’s leader was DiscontoGesellschaft, the other active members being Mendelssohn & Co, Robert Warschauer & Co. and Deutsche Bank. The group included Petersburg International Bank and Russian Bank for Foreign Trade from Russian side. Their rivals may be called as “Rothschilds’ group”,25 including besides Rothschilds their allies: S. Bleichröder, Berliner Handels-Gesellschaft and Lippmann, Rothenthal & Co. In this alliance the Russian side was presented by Petersburg Discount and Loan Bank and sometimes by Volga-Kama Commercial Bank. These groups united in 1887.
Russian banks’ share amounted usually on third of issue in joint group. Petersburg International Bank and Petersburg Discount and Loan Bank had approximately equal shares, although International bank usually acted as a leader of Russian group and kept syndicates’ accounts in Russia.
In 1888-1891 owing to barriers to Russian equities at German market the French group, led by Paribas, joined to Russian issues due to active role of banking house Hoskier E. & Cie, which had been able to opened French market for Russian equity throughout intermediary of International Bank in negotiation with the Russian Ministry of Finance. The Russian share in French syndicates was about 20 per cent with International Bank as the leader again. The French side included Comptoir national d'escompte de Paris (CNEP), Société générale, Banque d’escompte de Paris, Crédit lyonnais and Crédit industriel et commercial (CIC).
As a rule, a syndicate was usually led by bank, in which country the largest part of issue was distributed. However Petersburg International Bank and Petersburg Discount and Loan Bank acted as intermediaries between the syndicate and the Russian government, railway companies, mortgage institutions. This role provided these banks with an ample opportunity to influence on syndicates’ affairs. This tendency gained strength as far as importance of domestic market was increasing. The members of the “syndicates for Russian equity” waged a fierce struggle against competitive European banking groups striven to obtain admittance to Russian issues. However serious competition occurred inside the Russian syndicates themselves: between foreign and Russian groups, inside foreign group, between International Bank and Discount and Loan Bank.
The reasons why two leading Russian banks clashed against each other consisted in the same field of activity. Both banks had the similar model of operations and single-type customers.
They were simultaneously closed to the Ministry of Finance. International Bank’s director 24 See reference 23.
25 Rothschild Frères (Paris), M.A. von Rothschild (Frankfurt am Main), N.M. Rothschild & Son (London).
7 Vladislav Ljasskij (1831-1889) and Discount and Loan Bank’s director Abram Zak (d. 1893) played the roles of financial advisers of Ivan Vyshnegradsky, the Russian minister of Finance in 1888-1892. The minister was suspected of close connections with “Rothschilds’ group”. His no less close ties with International Bank arose before his appointment to ministerial post, when Vyshnegradsky executed duty of vice-chairman of the South-West Railways Society’s board.
International Bank provided the company with banking services. Sergei Witte, the successor of Vyshnegradsky as the minister of finance, began his private career at this railway company.
International Bank enjoyed support or even auspices of government, and the bank enabled even to bring into play of the State bank’s machinery for securities placement at domestic market.
After Ljasskij’s death in 1889 Adolf Rothstein was assigned to director’s position and he enabled to retain bank’s privileged positions in the time of the Witte’s ministry in 1892-1903. Thus, by the 1890s Russian banking system adopted syndicate’s technique. There were at least two banks which were deeply involved in international and domestic issuing transactions. The other Russian banks gradually joined to these operations, led by Petersburg International Bank and Petersburg Discount and Loan Bank.
D. The end of speculation in ruble Russian commercial banks played an active role not only at capital market but at foreign exchange market. A fierce speculation in ruble flourished at some European financial centers in the end of the 1880s and in the beginning of the 1890s. Totals of pre-revolutionary and modem analytics on this phenomenon were summarised by P. Lizunov.26 This period Russian currency system was based on fiduciary standard. In the first half of the 1880s paper ruble cost 0.63 conventional gold ruble or so called “credit ruble” for international transactions. Since 1885 the exchange rate was dropping until 0.50 by 16 February 1888, then it came up to 0.82 in autumn 1890 and fell again until 0.58 by 7 November 1891. The Russian currency fluctuations were very intensive even in the course of one trading session. The leading speculative centres were Peterburg and Berlin exchange. Several German banking firms specialised in ruble speculation and kept their representatives in Petersburg. The press charged banking institutions with exportation of rubles for speculation. Russian foreign economic activity suffered from unstable currency.
The Russian Ministry of Finance played European currency traders intensively. For improvement in exchange the ministry issued bills of exchange from abroad to Russia and bought up rubles at European exchanges. These operations were provided by foreign agents of the Russian government, for instance the house S. Bleichrӧder in 1888. The ministry carried out additional issues of rubles for drop in rate. In Vyshnegradsky’s period the government didn’t step in exchange affairs straightly, but after Witte’s accession to office the pressure on speculators began in connection with preparation to transition to golden standard, occurred in
1897. This new course against speculation had been declared since 1893. It’s important to note that bargains on term were officially prohibited in Russia, but this practice flourished informally.
But in 1893 some new legislative acts reaffirmed illegality of currency transaction on term, they restricted all operations, used for currency speculation, empowered the ministry of Finance to conduct an audit of banking institution, suspected in currency speculation, the minister enabled to put pressure on exchange brokers, board members and directors of banking institutions up to liquidation of business. A custom duty on currency export was imposed on 29 March 1893.
There is no evidence on victims of acts against speculation in contemporary literature, but analysts described quiet conditions at Petersburg exchange in 1893, there were no possibilities for currency gamble any more. The struggle for stabilisation yielded results whether by economic or political measures. The fluctuations of the exchange rate from London to Petersburg amounted 28 per cent in 1891, 9.6 per cent in 1892, 6 per cent in 1893, 1.94 per cent in 1894 and
0.54 per cent in 1895. Petersburg bankers conversed about coming gold standard. Rothstein, 26 The subsection is based on: Pavel Lizunov, Sankt-Peterbureskaja birzha, op. cit.. pp. 241-251.
8 International bank’s director, wrote a letter to S. Bleichroder in Berlin in April 1895 and outlined alternatives of gold standard reform, known him from contacts in the ministry of Finance, and retold local rumours on this subject.27 The epoch of fierce currency speculations came to an end.
A new trend occurred at Petersburg exchange since October 1893: the banks’ stock price began to come up, then the stock of industrial companies joined to this process.28 The 1890s upsurge had begun, and activity at the exchange resumed. This rise was concentrated on private shares unlike previous decades. Incidentally, the 1893 acts did not only prohibited futures currency transactions, but permitted bargains on term with private shares for the first time.
Thereby the market trend and the economic policy delimited in 1893 two periods of equity market development in Russian empire. Thus, by 1893-1895 some factors, important for investment banking, concurred in Russia: economic growth peak; banking growth resumption;
sufficiently developed equity market, where banks, experienced in domestic and even international equity market, prevailed; fiduciary standard period was at its end and set of stockjobber’s tools had to be changed.
2. The boom of investment banking in the 1890s Investment banking became a symbol of the 1890s. It evinced in mass private shares issues through intermediary of commercial banks. As a result, the period 1893-1899 became the most striking years of banks’ participation in financing of Russian economic growth.