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«Investment Banking in Russia, 1890-1917: From Pioneering Finance to Universal Banking Sofya Salomatina Moscow Lomonosov State University The chapter ...»

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was a partner of International bank since the 1880s. In the 1890s it collaborated in the issue of Hartmann works’ shares and stock of Kolomna society of engineering works and Revel distillery.42 Investment activity of Russian Trade and Industrial Banks was due to projects of controlling shareholders — brothers Pavel and Sergey von Derwies (von Derviz) — entrepreneurs, philanthropists and sponsors. They were sons of Pavel von Derwies — a large railway contractor at the age of Alexander II. The brothers used bank’s resources for stock floatation and stock market games. The family had shares in some railway; steamship and industrial companies, including Society of Moscow electro-mechanical and engineering works (former K.A. Vejhelt), Society of Gluhoozersk Portland cement plant.43 The strong growth of Petersburg stock market did not skirt banks traditionally associated with deposit model in the 1890s. It concerned two banks — Volga-Kama Bank and Moscow Merchant Bank. Both banks were among the top three Russian banks together with Petersburg International Bank. Volga-Kama bank possessed numerous branches. The bank’s leading operations was discount of trade bills; amounted 35/40 per cent of assets, and discount in provinces was twice as much than in Petersburg. All peculiarities of operations indicated discount and deposit bank. Its time deposits amounted 25 per cent of liabilities, and the largest part of deposits was attracted in regions. Bank had a very small stock in comparison with “investment banks” — 12 per cent of liabilities, therefore its return on equity was the largest in Russian — 34/36 per cent in the 1890s. In addition to that the bank paid the biggest dividends and market value of its stock was the highest — more than 1,000 rubles for share with nominal price 250 rubles.44 In spite of deposit and discount model in whole, Petersburg head office was active enough at the equity market and the scale of these transactions was comparable with small “investment banks” in absolute value, but their percentage numbered just in 6.5 per cent of total assets. In the 1880s-1890s, Volga-Kama Bank took part in railway issues. Bank was not involved in promotion of industrial companies, but equity market brought 11/13 per cent of bank’s gross profit.45 The Moscow Merchant bank was an old-fashioned and respectable institution for Moscow business elite, first of all for textile manufacturers of Central Industrial Region, included several provinces around Moscow. Bank possessed one of the largest bill holdings in Russia, the percentage of discount varied from 30 per cent to 50 per cent of assets in different periods. The basis of the bank’s resources was time deposits (the same 30/50 per cent of liabilities). Since the 1890s the bank’s Petersburg branch acted at equity market. The bank could be included in top ten banks developed investment activity, but this field was not very important for the bank in percentage — just 7.8 per cent of assets.46 Thus, the analysis of banks’ annual financial reports for the 1890s permits to draw a conclusion that this decade the banking specialisation, related to equity market, were showed up, although there were no pure investment banks in Russia. This specialisation had evident traces in reports. Particularly, profit from exchange and commission transactions exceeded profit from short-term crediting of customers. Thereafter the assets associated with holding of securities, crediting security trading and syndicates’ transactions displaced discount of bills of exchange and short-term crediting of business in whole. For instance, discount amounted in the average 14 per cent in Petersburg International Bank in 1895-1899, in Petersburg Discount and Loan Bank 42 Valery Bovykin, Zarozhdenie finansovogo kapitala, op. cit., p. 270. Valery Bovykin and Yuri Petrov, Kommercheskie banki, op. cit., pp. 144-147.

43 Valery Bovykin, Zarozhdenie finansovogo kapitala, op. cit., pp. 272–273. Valery Bovykin and Yuri Petrov, Kommercheskie banki, op. cit., pp. 147–149.

44 Sofya Salomatina, Kommercheskie banki, op. cit., pp. 129-135, 143, 152, 165-167, 177. Andrei Golubev (ed.), Russkie banki: Sprav. i stat. svedenija o vseh dejstvuju-wih v Rossii gos., chast. i obwestv. kredit.

uchrezhdenijah. God 1, Sankt-Peterburg, Kom. s’ezdov predstavitelei akts. kom. Bankov, 1896, pp. 23-24.

45 Sofya Salomatina, Kommercheskie banki, op. cit., pp. 158-160. Valery Bovykin and Yuri Petrov, Kommercheskie banki, op. cit., pp. 122-123.

46 Valery Bovykin and Yuri Petrov, Kommercheskie banki, op. cit., pp. 190-201. Sofya Salomatina, Kommercheskie banki, op. cit., pp. 129-135, 165-167.

14 — 11 per cent, in Petersburg Private Commercial Bank — 15 per cent, whereas average rate for Russian merchant banks was in the range 25/35 per cent.47 The same trends could be observed in liabilities: “investment banks” increased stock and reserves, refused from time deposits’ development, the half of resources these banks attracted came via credits from correspondents.48 This tendency was showed up at most in the model of Petersburg “investment banks”, this disposition was less evident in the structure of operations of other banks, possessed Petersburg offices, and the most of regional banks were not affected by the trend at all.

It’s important to note that Russian “investment banks” developed the most profitable banking model in the 1890s, even according to their public reports. For instance, the ratio of net profit to average annual assets amounted 3/4 per cent in “investment banks” in 1898.

Particularly, Private Bank — 4.18 per cent, International Bank — 3.79 per cent, Discount and Loan Bank and Bank for Foreign Trade -3.11 per cent each. This indicator for deposit banks was below 3 per cent, for instance, 2.82 per cent in Volga-Kama Bank and 2.27 per cent in Moscow Merchant Bank, and these figures were typical for regional banks. It is obvious, that in 1890s investment banks took up an option to draw profit from equity market as much as possible.49 Private companies stock was greatly integrated in model of “investment banks” geared the banks to rate of these securities. By the 1900s the new companies stock was kept in banks’ portfolios, in pledges on customers’ credit accounts and on correspondent accounts. So far there is no evidence, that some of bankers worried about possible drop in prices in the end of the 1890s; although in some way growing stock and reserves of Petersburg banks indicated the attempt to secure themselves against critical juncture.50 It is interesting that in autumn 1898 Rothstein wrote to A. Rothschild about stress of money on Russian market, appeared these months. Particularly Rothstein mentioned that Russia “is in financial straits, as Europe”, but “industry needs vast sums of money”. He meant that numerous new enterprises, founded with assistance of banks, were still in their infancy. Rothstein was aware that all large plants had exhausted considerable sums on their accounts in International bank very soon and turned into bank’s debtors “in absolutely unnoticeable way”. Nevertheless Rothstein drew a curiously optimistic conclusion and declared that these companies had just spent their first credits and they would attract new funds through issues of bonds or shares soon.51

3. Investment banking difficulties in crisis, 1899-1903 However the stress of money was one of the first crisis warnings in autumn 1898.52 In spring 1899 a tendency to price fall appeared at Petersburg exchange. In summer public opinion was agitated by bankruptcies of some well-known entrepreneurs.53 At the end of September 1899 the general collapse was happened at Petersburg exchange. Since 1900 the total economic crisis gradually came after exchange downfall. An economic crisis had broken out in Russia in 1899it was a part of European economic recession. The hardest period fell on 1901-1902, when deep industrial fall spread to maximal number of industries. The signs of improvement had appeared since 1903, but unsuccessful Russo-Japanese War (1904-1905) and Revolution (1905did not make possible economic recovery, these events disrupted money and credit market and in the issue the recession continued until 1908-1909 in some industries.54 In fact the crisis was a breakdown of a new economy arisen in previous decade. The new enterprises bore the downturn especially hardly. These plants appeared in connection with railway construction and railroading, they were often founded with an assistance of foreign capital and, unfortunately,

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they accumulated large inventories under favourable conditions for trade and industry55 in the 1890s.

The banks, taken part in foundation of the new economy, suffered together with their customers. Devalued stock of new companies had stuck tightly in banks’ portfolios and ledgers, and suddenly banks appeared to be tied to industry in literal sense. Thereby the basis was laid for longterm relations between banks and issuers. Since the beginning of the crisis the striking wave of drops in prices, estimates of loss, banking panics and crashes washed over Russia. These events had deep public resonance. The crisis didn’t confine itself to stock market downfall, but it revealed problem banks by several characteristics, including liquidity, quality of stock and credit portfolio. By 1903 the stock market had flattened at moderate level, but unfavourable events, associated with war, revolution, difficulties of state and mortgage bond market,56 would be to follow in 1904-1908.

The Petersburg International Bank took the hardest blow of crisis. The bank’s report for 1900 showed the largest loss in banking system associated with stock market downfall — 1,487.9 thousand rubles or 22 per cent of gross value in that year.57 But general losses on various accounts amounted no less then 3.98 million rubles in 1901-1903, according public reports.58 The bank appeared an owner of large stock holdings, particularly of Nikopol-Mariupol society and Hartmann engineering works.59 In 1901 the audit of the ministry of Finance revealed large debts of industrial companies to the bank. The major debtors were five companies, having total debt in 14 million rubles. This list included the same Nikopol- Mariupol society, Russian gold mining society, Tula copper-rolling and cartridge factories, Moscow glass society and Zhillovskoe society of coal and iron ore mines. The audit recorded that “bank had violated its charter, placed considerable sums in arisen industrial enterprises through purchase of their stock and opening credits to them”.60 Public opinion charged the bank with passion for industrial securities, which were regarded by small shareholders as the root of all evil. Sergei Lebedev gathered striking illustrations of public hysteria concerning 1900 report at stockholders’ meeting in spring 1901. Russkie Vedomosti (.Russian Gazette)61 wrote that the bank had set an example of “the most groundless, thoughtless, ignorant Griindertum”.62 “Every business looks like a contrivance to obtain another sinecure, material for stockbrokers’ gambling and source of profiteering for syndicates headed by the same financial geniuses.”63 Small shareholders charged the directory with purchases of inflated shares, implied securities without state guarantee unlike state equity, customary for Russian rentier. They were made appeals to “clean the portfolios from dummy securities”, purporting the same private stock and industrial capital in the first place.64 The State Bank relieved Petersburg International Bank and open to it the preferential credit, though the favourable attitude of minister Witte toward director Rothstein were finally damaged. Nevertheless the bank obtained a permit to keep this credit account not as separate balance account, but inside total correspondent account in the liabilities. The bank owed to report for this credit account to the Credit Office of the ministry every month. The government

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promised to render assistance in recovery of railway companies’ accounts, which had been withdrawn because of reputation problems of International Bank. Before railway accounts would be returned the government intended to “transfer some money from the State Bank’s account to the International Bank’s current account for temperate interest”.65 The situation in other “investment banks” was the same as that of Petersburg International Bank in many details, but differences also deserved consideration. Thus, Russian Bank for Foreign Trade carried out reappraisal of portfolio and revealed 1,058.24 thousand rubles of loss or 20 per cent of gross profit66 in 1900. The bank’s total loss amounted no less then 3,418.98 thousand rubles67 in 1899-1901. Nevertheless the bank restored stability due to branch network since 1902. In exactly the same way the small “investment banks” — Petersburg Discount and Loan Bank and Petersburg Private Commercial Bank — evaluated amount of loss from drop in prices and from bad credits.68 The case of Private Bank appeared much more difficult. The bank failed to improve its assets without assistance in the 1900s. In 1910 the bank was reorganised by foreign banking group including Crédit mobilier français, J. Loste & Co., Mrs Thalmann & Co.

and L. Hirsch & Co. through intermediary of the Ministry of Finance.69 The case of Russian Trade and Industrial Bank drew a wide public response, although the bank was not deeply involved in investment banking in comparison with the other Petersburg banks. In summer 1899 the bank’s owner Pavel von Derwies became insolvent. As soon as the news had ran all over Petersburg, the bank became a victim of panic withdrawal of deposits. The bank’s crush was prevented by interference of the State Bank. Later Trade and Industrial Bank recovered losses and stockholders’ meeting made a decision to abandon speculation in stock and shift to trade crediting, mainly in regions70 since 1902. The Volga-Kama Bank’s total loss amounted considerable sum — 793,440 rubles in 1900, but it was just 8 per cent of gross profit.71 The Moscow Merchant Bank’s reports didn’t display any serious losses in crisis period.

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