«Investment Banking in Russia, 1890-1917: From Pioneering Finance to Universal Banking Sofya Salomatina Moscow Lomonosov State University The chapter ...»
It should be noted that there were no special investment banks in Russia in the 19th century and in the beginning of the 20th century. Investment operations became one of the fields of merchant banks’ activity. But in the 1890s several banks, having head offices in Petersburg, had developed investment banking so essentially, that it influenced negatively on their stability in crisis 1899-1903. The peculiarities of Russian investment banking are in the focus of this section’s attention. Table 2 includes all data, concerning general estimation of investment banking in comparison with total investment in stock capital from 1893 to 1900. The rapid stock market growth applied to private shares in the first place in the 1890s. This peculiarity occurred for the first time. The total increase in Russian securities at the domestic market consisted of about 30 per cent (see table 1), the increase in private companies’ shares amounted almost 140 per cent, and 168.4 per cent — in trade and industrial companies’ shares (see table 2). In the issue, the private shares’ percentage rose from 14.6 to 22.9 at the domestic market (see table 1).
The largest part of private shares consisted of trade and industrial securities — 62.7 per cent (see table 2).
* ― Estimation of V. I. Bovykin.
** ― Estimation of I. F. Gindin, Russkie kommercheskie banki: iz istorii finansovogo kapitala v Rossii, Moskva, Gosfinizdat, 1948, pp. 90-91.
The leading issuers were mining, metallurgical, metalworking and chemical companies.
These shares became the main subjects for speculative transactions at Petersburg exchange and the most popular shares for stockjobbers were following: Society of Bryansk rail-rolling, iron and engineering works,29 Society of Putilov plants in Petersburg (metalworking), Partnership of Sergino-Ufaleysk mining and metallurgical plants in Urals, Society of Russo-Baltic wagon works in Riga, Society of iron, steel and engineering works Sormovo in Nizhny Novgorod, Society of Maltsov plants in Kaluga province (metalworking), Oil company “Caspian partnership” and Baku oil refining society.30 By I. Gindin’s estimation, confirmed and developed by Bovykin, Russian banks took part in 150 million rubles of industrial issues from approximately 300 million of heavy industry stock, placed in Russia31 in 1893-1900.
This figure of 150 million rubles is a rough estimate, obtained by I. Gindin by an analysis of banks’ financial statements. The same publications can be used for estimation of investment activity in every bank. But unfortunately, the Russian financial statements didn’t include definite investment items, therefore historians are forced to use indirect indicators. The investment activity can be studied through accounts, registered transactions with securities “not guaranteed by the Russian Government”.32 In prerevolutionary Russia securities were usually divided into two groups: firstly, the securities, guaranteed by the government, i.e. securities of government loans, government mortgage bonds, as well as numerous railway shares and bonds, and secondly, the securities, not guaranteed by the government, i.e. all shares of industry, transport, trade and other companies, private mortgage and municipal bonds. These two groups of securities are called “guaranteed securities” and “non-guaranteed securities” in this text for convenience. Debit accounts, concerned to “non-guaranteed securities”, included four items: non-guaranteed portfolio; shortterm loans and credit accounts (“on call loans”) against these securities, as well as correspondent loro accounts against them. Term loans were usually commercial credits to entrepreneurs. Credit accounts were used both by enterprises and by stock gamblers. Correspondent accounts were used for various settlements between banks, particularly loro accounts registered syndicates’ transactions with shares.
However, three principal drawbacks should be taken into account if the investment activity is considered as the sum of non-guaranteed securities’ transactions. Firstly, above-mentioned accounts were substantially broader than necessary for study of investment banking, because they included a large share of short-term commercial loans. Credit accounts were particularly controversial thereupon. For instance it is well known that credit accounts have been actively used for security trading in St. Petersburg, and for lending to manufacturers against their own shares in Moscow.33 A researcher may divide credit accounts by the types of customers’ activities only on ledgers in banks’ archives, but not on published financial statements.
Secondly, there was no separation by types of securities in published financial statements except concept of “guaranteed/non-guaranteed”, therefore we aren’t able to separate trade and industrial shares, mortgage and municipal bonds inside non-guaranteed portfolio. Thirdly, and perhaps it’s the main problem, not all banks indicated separately operations with government and 29 From here and so on — the list of original Russian companies’ names in transliteration in Appendix 2.
30 Valery Bovykin, Zarozhdenie finansovogo kapitala, op. cit., p. 203.
31 Ibidem, p. 207.
32 This principle underlies the analysis of banks’ statements, developed by I. Gindin, Russkie kommercheskie banki, op. cit., p. 385-386.
33 Information on credit accounts as a tool for stock market game see: Pavel Lizunov, Sankt-Peterburgskaja birzha, op. cit., pp. 263-287. The importance of credit accounts for lending to enterprises in Central Russia see: Yuri A. Petrov, Kommercheskie ban- ki Moskvy. Konets XIX v. -1914 g., Moskow, Rossiiskaia politicheskaia entsiklopediia (ROSSPEN), 1998, pp. 57-80.
10 private securities. A separate accounting of pledges required some changes in accounting practices; therefore it would make sense only when private securities became mass assets. It happened in St. Petersburg only in the late 1890s. This difference between St. Petersburg and provincial banking is indicated in table 3. The data for calculations were derived from the consolidated balance of joint stock commercial banks34 on January 1st, 1898. This date applied to the heyday of the industrial boom of the 1890s. The balance included data on all forty commercial banks of the Russian Empire except of the Russo-Chinese Bank, because its financial statement was not sufficiently diversified by various pledges.
Table 3 surveys the accounts, registered non-guaranteed securities. However, direct comparison of these accounts in St. Petersburg and the rest of Russia appears difficult, because the provincial banks didn’t provide separate accounting of pledges, as it was already mentioned.
Consequently, it is obvious that private securities are underestimated in some banks. It concerns uppermost to huge credit accounts of the Volga-Kama Bank, undivided by pledges, as well as all Moscow banks, except for the Moscow Merchant Bank. But this regional comparison will be possible for operations concerning all types of securities (guaranteed and non-guaranteed by the government). In this case the result is more correct but more general because it reveals the bank’s involvement in capital market as a whole. But in any case table 3 reveals that the operations with non-guaranteed securities were much larger in St. Petersburg as compared to provincial banks. It concerned three accounts, decisive for investment banking: security portfolio, credit and correspondent loro accounts against non-guaranteed securities. Ten banks, invested the largest assets in private (non-guaranteed) securities and all types of securities, are represented in tables 4a and 4b, and three important conclusions follow from the tables.
Firstly, the leading of role of head offices of Petersburg International Commercial Bank (PICB) and Petersburg Discount and Loan Bank (PDLB) is clearly revealed in any grouping of statistical data, despite the fact that they ranked second and sixth Russian banks, respectively, in
terms of assets. The top ten includes banks, close to the model of operations of PICB and PDLB:
Petersburg Private Commercial Bank; Petersburg-Moscow Commercial Bank; Petersburg-Azov 34 Svodnyj balans akcionernyh kommercheskih bankov na 1 janvarja 1898 g., St. Petersburg, Kom. s’ezdov predstavitelei akts. kom. bankov, 1898, pp. 1-7.
11 Commercial Bank (table 4a). These five banks concentrated in investment activity 33- 39 per cent of their Petersburg assets. They operated in Petersburg, having minimal number of branches in the provinces. The press and contemporary analysts started a tradition to call these banks “investment banks” or even “speculative banks”. Surely this cliché made hints about Crédit mobilier, but it was reminiscence but not proper used term.
Secondly, large banks with numerous branches — Russian Bank for Foreign Trade and Russian Trade and Industrial Bank — developed investment activities in St. Petersburg in a slightly smaller share than “the investment banks” — 28/9 per cent of regional assets. Thirdly, it’s curiously enough, but the two largest Russian deposit and discount banks — Volga- Kama Commercial bank and Moscow Merchant bank — dealt with investment in Petersburg in the 1890s, while in general these banks focused on lending to trade and industrial customers. The high position of these two banks in tables 4a and 4b are due to a large amount of their credit accounts, but they related mostly to the entrepreneurial lending, as other studies argue.35 But their Petersburg divisions were statistically more similar to “investment banks” than to provincial banks. Thus, the statistics of securities transactions places on top the Petersburg banks. However, the leading Russian banks are known not only from the statistical data, but from other sources, created a broad context to the quantitative data.
s’ezdov predstavitelei akts. kom. bankov, 1898.
The leader of investment banking in the 1890s became Petersburg International Bank. By the 20th century tens of industrial companies — in metallurgical, mining, oil, machinery, electrical, glass industries — entered the Petersburg stock market through this bank. At least six famous Russian companies were kept under bank’s control: Russian society of Hartmann engineering works, Nikopol-Mariupol mining and metallurgical society, Russian gold mining society, Bibi-Eibat oil society, Moscow glass society, Partnership of Revel distillery. Moreover there were at least ten ascertained personal union between the banks and well-known companies, such as above-mentioned Society of Bryansk works and Society of Putilov plants, as we as Society of Tula copper-rolling and cartridge factories, Society of Russian electrotechnical works Siemens & Halske.36 Petersburg Discount and Loan bank — the junior partner and simultaneously rival of International bank — kept up with the leader. It was revealed active transactions with large holdings of stock of more than 20 industrial companies, including Baku oil refining society, Society of Gluhoozersk Portland cement plant, Doneck-Jur’evs metallurgical society, Stockcompany of engineering, iron foundry and cable works ‘Lessner G.A., Oil production and refining companies Mazut and Mantashev A.I. & Co., above-mentioned Nikopol-Mariupol and Sormovo societies and Russo-Belgian metallurgical society.37 The other three small Petersburg “investment banks” conducted the similar operations.
Petersburg Private Commercial Bank was usually a partner of International or Discount and Loan banks.38 The other two Petersburg banks belonged to quick-growing financial and industrial group of well-known businessman and banker Lazar Polyakov (1842- 1914). He was a chairman of council in Petersburg-Moscow Bank and a principal shareholder in Petersburg-Azov Bank. The core of the group was Polyakov’s banking house in Moscow.39 These five banks had a resembling model of operations in the 1890s. Security transactions brought at the average 25 per cent of gross profit per year to the banks, although this percentage could increase up to 30/35 per cent in some banks. In general, their non-credit profit (that is profit from exchange transactions and commissions) amounted 40/50 per cent of gross profit.40 As a rule, the resources of Russian “investment banks” included, as a rule, sizable own funds (equity and reserves): for instance in 1898 the own funds of International bank amounted 38 per sent of liabilities, Discount and Loan Bank — 23 per cent, Private Bank — 36 per cent.
The other resources, used by these banks, were interbank short-term credits as well as customers’ current accounts, but these banks did not attract time deposits.41 The term “investment bank” was also applied to Russian Bank for Foreign Trade and Russian Trade and Industrial Bank, but this cliché characterised their Petersburg head offices and it was irrelevant to their model of operations in general. These two large banks had wide branch networks in provinces (13 and 39 branches, respectively), where crediting of trade and industrial customers brought the principal profit. Bank for Foreign Trade took part in foreign economic activity through branches in London, Paris and Genoa.
In the 1890s Russian Bank for Foreign Trade was a principal founder of Sormovo company, Russo-Belgian society, Balakhany oil society and Mantashev A. I. & Co. The bank