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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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The Lazar Polyakov’s banks turned out in the tightest situation. In 1901 it became clear, that Polykov and his banking house in Moscow were bankrupts. The Polyakov’s many-millioned debts burdened his banks, and the situation appeared the worst in Petersburg. Petersburg-Azov Bank collapsed in 1902 and Petersburg-Moscow Bank shut down operations in 1904. Polyakov’s banks in Russian Central Industrial Region — Moscow International Trade Bank, Orel Commercial Bank and South Russian Industrial Bank — passed under control of the State Bank, which bought out their debts. In state auditors’ opinion, these tree banks were considered as viable institutions albeit burdened with their owner’s debts. In the 1900s the persistent attempts to find any European investor for Polyakov’s group failed, and in 1908-1909 the Ministry of Finance and the State Bank conducted a merging of three banks into new Union Bank, but 17.5m rubles from 25m of total fixed capital of three banks was spent on cover of loss. Nevertheless a part of Polyakov’s debts remained on State bank’s accounts.72 In order to summarise the banks’ difficulties in 1899-1903 it is important to underline that any bank endured drops in stock prices easier if it had kept large credit customers’ network outside head office. The role of banks’ reserves remains still underestimated by economic historians in risk management at the turn of the 20th century. In other words, some banks, dealing with investment banking, tried to diversify operations and accumulate reserves.

Bankruptcies usually happened to not large banks, bunched various drawbacks in management,

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and banks which had not been saved by the State Bank.

At the same time the large banks survived crisis due to ample informal opportunities to obtain crediting of the State Bank, subordinated to the Ministry of Finance. The fact is that the Russian government always aimed to exclude crushes of large banks by all means. This policy went back to the 1870s when unfavourable juncture and problems in banking system in 1873had crystallised the government approach to banking regulation. Since then banking founding was provided with a lot of state restrictions and financial institutions were under particular control in comparison with Western Europe in the second half of the 19th century. The government considered bankruptcy as undesirable shock to domestic financial market, and they found insolvency conceivable for minor banks only, unencumbered with the large-scale liabilities to various sectors of economy.

The State Bank not only credited banks urgently at the turn of the 20th century, but it took part in syndicate, organised for interventions in Petersburg exchange. It was formed on Witte’s initiative in October 1899 and it included fifteen Petersburg banks and banking houses. By June 1900 syndicate spent 4 million rubles, although its effectiveness has not studied well yet. Among the other State Bank’s measures worthy of being noted there was a decision to buy shares of viable enterprises or to take their stock in pledge. This measure developed into mass urgent crediting of industrial customers of large banks.73 Thus, the crisis revealed the principal investment banks’ weaknesses: insufficient assets’ diversification and lack of experience in stock market risk management. In short-term perspective the main factors in crisis management were banks’ reserves and the State Bank’s policy of banking liquidity support and prevention of financial panic. In middle- and long-term perspectives the banking system’s recovery was provided by banks themselves. It took all the 1900s to integrate investment banking into a more stable structure of operations.

4. Towards the universalisation of banking Before WWI, the Russian banking system had noticeably changed. The process, caused these changes, was launched by the crisis at the turn of the 20th century, revealed risks of intensive investment activity. In the 1900s the banks had to deal with crisis management and to develop new foundations for services to industrial customers and their stock. Credit portfolios’ readjustment took eight years and cost banks a lot of efforts. The banks worked out a counterbalance to stock market operations, wherefore they partly returned to traditional discount customers’ networks. These customers were attracted in regions, where the metropolitan banks had rushed to build up branch networks in the 1900s. In the 1910s since the new economical upturn the percentage of discount began to drop again due to increase in stock transactions but it would not lead to the disparity observed in the 1890s.

In the pre-war period a universal bank became a prevailing model in the Russian banking system. This type of bank distributed the assets more or less evenly between discount, credit accounts and transactions with securities. The universal bank credited trade and industrial companies and simultaneously took part in new paper issues. Its liabilities included not large stock and reserves, deposits (the share of current accounts prevailed over the share of time deposits) and credits from the other Russian and European banks. The large-scale universal banks operated not only at domestic market but all over the world.74 Above- mentioned traits corresponded wholly to five largest Russian commercial banks in 1913: Russo-Asian Commercial Bank, Russian Bank for Foreign Trade, Petersburg International Commercial Bank, Azov-Don Commercial Bank, Russian Trade and Industrial Commercial Bank (see table 5a).

The tables 5a, 5b and 5c retrace evolution of banks presented previously in tables 4a and 4b, as investment banking leaders in 1890s. The grouping of banking operations with private shares, used in tables 4 for the 1890s data, didn’t permit to reveal any trends in the 1910s, as if the investment banking dissolved in banking reports. But universal trends could be observed by 73 Serguei Lebedev, S.-PeterburgskijMezhdunarodnyj, op. cit., pp. 392-393.

74 Sofya Salomatina, “Modeli kommercheskikh bankov”, op. cit., p. 342.


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The head offices of all banks were in Petersburg except Union Bank and Moscow Merchant Bank, having directory in Moscow.

The sections of tables: 1) the five largest Russian universal banks and Union Bank — the largest universal bank in Moscow; 2) the largest deposit banks; 3) small □investment banksn in the 1890s.

— Russo-Asian Bank was established in 1910.

1 — Azov-Don Commercial Bank was relocated in Petersburg from Taganrog by Azov Sea; it was 2

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— Azov-Don Commercial Bank possessed control stock of Banque des Pays du Nord in Paris.



Assets on 01.01.1914 — Svodnyj halans akcionernyh kommercheskih bankov na 1 janvarja 1914 g., SanktPeterburg, Korn, s’ezdov predstavitelei akts. kom. bankov, 1914, pp. 1-15.

Average annual discount — Sofya Salomatina, Kommercheskie banki v Rossii: dinamika i struktura operacij, 1864-1917 gg., pp. 129-135.

Branch networks in 1898 — A. Golubev (ed.), Russkie banki: Sprav. i stat. svedenija o vseh dejstvujuwih v Rossii gos., chast. i obwestv. kredit. uchrezhdenijah. God 3, Sankt-Peterburg. Kom. s’ezdov predstavitelei akts.

kom. bankov, 1899, pp. 24-40.

Branch networks in 1913 — Akcionerno-paevye predprijatija Rossii po oficial 'nym dannym. Moskva, 1913, pp. 464-480.

Profit from security trading in 1898 — Sofya Salomatina, Kommercheskie banki v Rossii: dinamika i struktura operacij. 1864-1917gg., pp. 147, 159.

Profit from security trading in 1913 — Russkie akcionernye kommercheskie banki po otchetam za 1913 g. v sravnenii s 1912 g., Sankt-Peterburg, Kom. s’ezdov predstavitelei akts. kom. bankov. 1914, pp. 32, 36 The tables 5a, 5b and 4c present the evolution of banking models since the 1890s up to 1913/1914; they observe the several tendencies. Firstly, former “investment banks” had increased percentage of discount by the 1910s in comparison with the 1890s (see table 5a). By the 1910s discount amounted no less then 20 per cent of any large bank’s assets, whereas it went down to 11-15 per cent in the 1890s. Secondly, the total number of branches increased approximately in five times from the 1890s up to the 1910s. They were the Russian provinces who gave a stimulus to discount customers’ networks growth. In addition to domestic branches large universal bank surely developed some branches abroad — in European and Asian financial centers. Thus bank evolved foreign economic activity (see table 5b). Thirdly, the percentage of stock transactions was down by 10 percentage point in universal bank, but in absolute value there was a considerable profit usually gained by large stock department, having substantial transactions turnover (table 5c).

The pre-war universal banks had different origins. In the first place there were “investment banks” evolving into universal banks through the expansion to the provinces. It was the course of development of Petersburg International Bank, Russian Bank for Foreign Trade, Russian Trade and Industrial Bank. In the second place some new- founded banks, transformed form problem banks or rapidly developing banking houses, took up a strong position in banking system right away. These new banks began to operate initially as universal institutions. This group was represented by Russo-Asian Bank in Petersburg and Union Bank in Moscow. The deposit VolgaKama Commercial Bank, the largest private bank in the second half of the 19th century, lost its leading position in assets rating by the 1914 and ranked sixth before WWI. The bank did not take part in issues of companies stock and preferred short-term crediting of business customers in metropolis and in the provinces.75 In the 1910s the alignment of forces changed in Moscow. Union Bank, newly founded on the basis of crashed Polyakov’s banks, drew the previous Moscow leader Merchant Bank back to the second place. Union Bank concentrated on discount and loan operations. The bank tried to pursue a very reasonable policy towards stock market transactions, because it sought to clean its reputation from Polyakov’s legacy,76 associated with bankruptcy due to risky projects. The bank had no sufficient opportunity to develop time deposits by reason of this legacy, therefore it had 75 Sofya Salomatina, ‘Modeli kommercheskikh’, op. cit., p. 342.

76 Valery Bovykin and Yuri Petrov. Kommercheskie banki, op. cit., pp. 249-250.

20 to borrowed resources from the other Russian and foreign banks.77 Generally speaking there was a trend that banks, keeping any non-uni- versal model, began gradually to lose their positions. It concerns Volga- Kama and Merchant banks uppermost. The small “investment banks” kept also many traditional traits by the 1910s and they remained at minor position at banking system. For instance, Petersburg Private Commercial bank continued to develop as “investment bank”. The Petersburg Discount and Loan Bank increased discount appreciably, but any way equity market transactions brought substantially greater percentage of return to the bank in comparison with larger universal banks.78 All in all the “universalisation” of banks in pre-revolutionary Russia corresponded to development of powerful merchant bank having broad domestic branch network as a counterbalance to investment department in head office, and further to these units the bank possessed foreign branches subordinated to central foreign department. It was obvious that universal bank became the leading model in Russia before WWI, and banks, kept to the other models, began to go under to strong competition from powerful universal banks. But for the world war and the revolution in 1917 Russian banking system would have entered in the epoch of merges and acquisitions.


Our chapter reviewed the prerequisites and evolution of investment banking in prerevolutionary Russia, placing in the focus of attention the boom of investment banking in the 1890s and transition to universal banking by the 1910s. The development of investment banking was traced from services to state and mortgage bond market in the 1880s to investment specialisation inside merchant banking in the 1890s, then up to its integration into universal banking.

The 1890s decade had passed under the sign of investment banking in Russia. It was a period of the heaviest economic growth in the pre-revolutionary period. The financial system of empire had also overcome the recession of previous two decades. In the 1890s the investment banking concerned those commercial banks that had developed specialisation in equity market services in earlier years. Russian equity market was concentrated in Petersburg to a large degree, because state bonds and securities, guaranteed by government, prevailed at the market and therefore Petersburg developed as only centre of negotiations from Russian side for Russian domestic and foreign issues.

An underwriting was typical for Russian investment banking; therefore international banking syndicates played a decisive role in Russian issues. Two banks — powerful Petersburg International Commercial Bank and middle-sized Petersburg Discount and Loan Bank — were the most active participant of international syndicates. International Bank acted usually as a leader of Russian group since the 1880s. At the same time a head office of any Petersburg bank was involved into equity market transactions, regardless of bank’s model. The important changes happened at Russian currency market by the middle of the 1890s simultaneously with the economic growth and equity market development. Russian currency was stabilised and banks, drawn out of currency speculation, switched easily to investment banking for private companies.

The investment banking evolution was specified by risk management development.

Investment banking emerged inside merchant banks and special investment institutions didn’t appear in Russia. Before the 1890s the banking risks were mainly caused by unstable currency and competition between European and domestic financial markets. In the 1890s mass investment banking for private companies was a new phenomenon in Russia, therefore risks of investment activity turned out underestimated until the crisis, happened in 1899-1903.

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