Russian Collection : Introduction

 

Special circumstances require special actions. This was our Leitmotiv for creating this separate catalogue of Historical Russian Shares and Bonds. Indeed, when one of our very first clients (going back almost 30 years) informed us of his desire to sell the main part of his Russian Scripophily Collection, we immediately saw the uniqueness of this event.

 Going through the collection piece by piece for the first time – something which took us several days – made us realize the exceptional quality and thematic variety of the certificates. It also enriched us with the fascinating story on how the world’s biggest country (roughly twice the size of China or the U.S.A.) transformed itself in good half a century (1857-1917) from a “sleeping bear” into a modern, strongly industrialized nation with an important capital market, and with –despite the country’s huge size – a door wide open to the world. An overview of this historical process is presented on the next pages.

The story doesn’t stop here. The revolutionary years, starting with the ‘democratic’ February Revolution of 1917 leading to the fall of the last Tsar (Nicholas II), followed some months later by the Bolshevik October Revolution, but not ending until White Army General Anatoly Pepelyayev capitulated in the village of Ayan (on the Pacific Coast) on June 17, 1923, has given us a limited number of remarkable (provisional) shares and public loans. The latter were mostly issued by local cooperative organizations, and can be seen as the post-Tsarist substitutes of the imperial city loans. The shares from that period were issued under different regimes, varying from companies working in “White Army territory” to briefly independent states such as the Ukraine (1918/19). The collection we offer covers this transitional period exceptionally well.

Finally, even the communists didn’t have a black/white relationship with share-based companies. Indeed, during Lenin’s New Economic Policy (1921-1928), small private businesses could be established and a handful of large companies were permitted to sell up to 49% of their shares to private investors (the remaining being state-owned). Even foreign capital was permitted, as evidenced for instance by the Russian-Canadian-American Passenger Agency Co. (1924). Yet, when Stalin came to power, this “experiment” came to an end and the only type of Russian bonds to be collected from then on are ‘working obligations’ issued to motivate – not to say press – the Russian workers to further help industrializing the state-owned economy.

By then, some parts of formerly Tsarist Russia had (re)gained their independence. Shares of the Interbellum Period (between WWI and WWII) from Poland, the Baltic States,… can be found in the Second Part of this Catalogue. In this First Part, we offer shares and bonds issued under Russian/Soviet authority, as well as certificates from briefly independent countries during the Revolutionary years such as from the Ukraine.

We hope that by going through this catalogue, you will come to appreciate as much as we did this unparalleled collection of Russian financial and economic history.

 

Mario Boone

SHORT ECONOMIC HISTORY OF IMPERIAL RUSSIA

When Russia entered the 19th century, it was mainly an agriculturally-based economy. Long before, however, Peter the Great (1672-1725) had undertaken serious attempts at industrialisation of the country. Under his reign, the number of manufacturing businesses greatly increased and many state corporations were founded.

The production complex which he founded with his associate, V.N. Tasichev, in the Urals, developed into one of the major producers of cast iron. Private entrepreneurs also set up businesses and, in 1790, the region already numbered 165 companies. As the administrative and industrial centre of the region, the town of Ekaterinburg had smelting works, blast furnaces, canals, a technical college and factories of various types.

This industrial glory did not last long. The lack of means of transport remained a major drawback and the aristocratic structure and the existing hierarchy were increasingly jeopardizing the development of the Russian industry. The main entrepreneurs ran their factories in an authoritarian way and owned  villages where they required the worker-serfs to work for them. The traditional organisation of work, based on seasonal labour and compulsory labour was incompatible with an industrial business organisation.

Another worthwhile feature of tsar Peter’s reforms was however the St. Petersburg stock exchange, founded in 1703. Until 1860, this would remain the most important exchange by far, followed by Moscow and Odessa.  During the 18th century it seemed to have been more an exchange exclusively for commodities and bond trading. As legislation for joint-stock companies did not exist until 1802, Russian joint-stock companies remained few until 1850. While the foundation of a Russian joint-stock company has been cited as early as 1755 and 1757 (Russian Trading company in Constantinople), late Imperial market observers generally dated the first such company to 1799. This was the year in which the Russian-American Company was founded, with a capitalisation of 1,1 million rubles, divided in 7484 shares of 150 rubles nominal value. From table I it can be seen that only 20 companies were listed until 1850, with a market value of around 20,7 million rubles, which could be hardly called a broad market.

Table I: new listings on the St. Petersburg stock exchange 1827-59:

Joint-stock company formation and share capital, 1827-59

 

 

 

 

 

 

 

Year

Number of

Capital

Year

Number of

Capital

 

 

companies

 

 

Companies

 

1827

1

410 600

1849

1

400 000

 

1833

1

70 000

1851

1

100 000

 

1835

4

2 578 579

1852

1

123 750

 

1836

2

2 100 000

1853

4

3 191 500

 

1838

3

767 200

1854

3

3 600 000

 

1841

1

28 285

1855

1

750 000

 

1844

1

172 800

1856

6

15 500 000

 

1846

1

2 000 000

1857

14

300 170 000

 

1847

2

2 950 000

1858

38

59 525 000

 

1848

3

9 243 500

1859

27

95 300 000

 

Source: The Development of a Domestic Stock Market in St. Petersburg in Late Imperial Russia, Robert Gordon Papp, p. 65

The first issue in 1827 is that of the First Russian Fire Insurance Company. As the investors did not have to pay up the full amount of the shares, it paid an incredible high dividend of 45% during 20 years, and would remain a blue chip until the Russian revolution. Other companies of that period included steamships, the first industrial manufacturing, and municipal service (gas & water) joint-stock companies. The former were however generally conversions of already existing companies to a joint-stock format, rather than newly created companies.

The small size of the stock market could be first explained by a lack of adequate legislation. This was to last until 1802, when legislation of joint-stock companies was introduced; a basic statute was not promulgated until 1836. But there was also the conservative investment behaviour of the nobility, and appealing investment opportunities were still missing. The latter would change in 1857 when 600 000 shares totalling more than 75 million rbls. capital of the “Great Russian Railroad company” were issued.

The railway as a means of transport had already been introduced in 1829 in Great Britain, but the discussion as to whether it would be useful in traditionalist and aristocratic Russia would last several years longer.  Tsar Nicolas I was convinced of it, but his ministers were fearful of Western technology and others were persuaded that no locomotive could withstand extreme winter temperatures and snow conditions. Before 1857 the Russians had therefore adopted a careful attitude, limiting themselves to smaller projects resulting in an even smaller network than a dwarf country like Belgium (1333 miles in Belgium, compared with only 1049 miles in Russia). As the existing railways were moreover financed by (mostly foreign) loans, only 2 railroad companies had attracted capital on the stock market: the Tsarkoe Selo Railroad Company (1835, 3,5 million rubles) and the Peterhof Railroad company (1856: 3,8 million rubles). However, the Russian rulers were convinced of the usefulness of a more extensive railway system only after the Crimean war (1854-55), which proved the value of fast transport of troops. The Great Russian Railroad company would eventually enable the extension of the railway network to 2231 miles in 1862, or 1/5 of France and 1/6 of Germany.

As public finances were also exhausted due to the war, an appeal was made to the stock market. In order to convince private investors; dividends of the company were guaranteed by the government. Together with a high trading frequency (as the shares were traded abroad as well), this would play an important role in familiarizing Europeans with Russian securities.  In all, 101 companies were founded between 1857 and 1860, and 87 actually began operations. The investors’ enthusiasm cooled down in 1859, when Russia was also finally hit by a worldwide financial crisis.

The period from 1861-1870 was one in which fundamental transformations of Russia’s economy and the development of its banking system and money market would play a major role in enabling the growth of its stock market.In the short term, the abolition of serfdom did not have a profound impact on the stock market. The now peasants, now free, had to work less to earn the same income and rather preferred doing this than increasing their income; agricultural productivity decreased. Moreover, the nobility could not dispose immediately of the financial receipts of the compensation of their land, as those were paid in instalments. The stock exchange was however more affected by the establishment of the State Bank and the liquidation of the previous credit establishments, which it replaced. The State Bank attracted the released cash from the credit establishments by issuing 5% state bank notes and lottery bonds. As a consequence, Russian investors became more familiar with paper securities and eventually were more stimulated to invest in shares. The year 1862 also saw the publication of the charter on savings banks, which would prove to be important vehicles by which the public could deposit and save money. From 1864 onwards, mutual credit societies and also listed joint-stock commercial banks (St. Petersburg Private Commercial Bank) were founded. From 1868 onwards the market revived thanks to better company results and in this period there were signs of an overheated market, as we also know them today. Initial public offerings were oversubscribed (e.g. St. Petersburg International Loan and Discount Bank: 292 times) and the new savings banks also offered share loans which further heated the frenzy. In order to stop the stock market frenzy, the State bank carried out a strict monetary policy: it raised its discount rate and issued new state bank notes. Money supply dried up and the stock market crashed.

In the 1870s growth of the stock exchange was hampered many times by international events such as the Franco-Russian War (1870), the financial crisis in Vienna (1873) and Russia’s own involvement in the Russo-Turkish War (1877). Meanwhile the proliferation of banks had continued, but many of the new banks were solely set up to quickly enrich the founders and were involved in highly speculative activities like security loans. As a result government installed a more restrictive banking law (1872), but this could not prevent the bankruptcy of the Moscow Commercial Loan Bank in 1875 and resulted in serious damage to the faith in credit institutions.  One of the scarce positive elements during this period, was the creation of the regional joint-stock land bank system, in which ten such banks were founded from 1871-73, and the ultimately less successful Central Bank of Russian Land Credit in 1873. With these institutions, the nobility was able to obtain loans on the security of land, and this generated cash. The newly acquired funds could be either reinvested in the stock market or used to modernise the agricultural sector, which further fuelled the rest of the economy by a higher demand for transport and equipment. Meanwhile, in the real economy, foreign involvement had increased greatly, especially in heavy industries such as metallurgy and industrial equipment. This could be explained by the further expansion of the railway network: five times as much track as in 1861 (11 280 miles) was laid down; this linked the main grain producing areas of the great estates (Ukraine and north-west) with the major cities and ports. As from 1874 inward tariffs on finished goods such as industrial equipment were increased greatly (whilst keeping low levels on raw materials), it was much cheaper to set up factories for industrial equipment instead of importing it. Moreover, the weak ruble, caused by the continuously tormented public finances, enabled foreign investors to buy Russian assets (land and property) at real knock-down prices. By 1878, especially southern Russia was populated with a host of foreign engineering works: Briansk, the Warsaw steel company, Putilov and the Huta-Bankova company.

The 1880s were characterized by an industrial crisis that began in spring 1880, after the short industrial revival that followed the Russo-Turkish war in 1877. World investors lost their trust in the ruble following the impact of the Russo-Turkish war on state finances. Foreign investment dried up and the reduction of government spending resulted in a lower increase of investments (especially railways). Finally, by 1891 Russia succeeded in restoring the finances by the sale of crown assets, reducing imports and by enhancing taxes though better collection, and even new taxes (like the 3% tax on company profits). The healthier state finances finally allowed it to adopt the gold standard. This in turn offered better borrowing conditions on the international capital markets and the money was spent again on the expansion of Russia’s industrial complex. During the 1890s, total investments rose to an all-time high from 443,1 million rubles to 1401,5 million rubles, with the foreign share rising from 25,8% to 44,8%. More than 80% of the money flew to the heavy industries. It is striking as well that consumption-based industries like food and textile received less than 15% of the total capital expenditure.

Table II : Distribution of capital investments in 1900: total investments and foreign share:

Capital investments 1900 (millions of rubles and %):

Industries

Millions of Rubles

%

Total

Foreign

Total

Foreign

 

 

 

 

 

Mining and metallurgy

472.2

343.8

34.12%

55.27%

Metal conversion

177.3

125.6

12.81%

20.19%

Glass

59.1

26.6

4.27%

4.28%

Chemicals

93.8

29.3

6.78%

4.71%

Food

158.3

11.4

11.44%

1.83%

Paper & wood processing

49.6

13.9

3.58%

2.23%

Textiles (incl. leather)

373.7

71.4

27.00%

11.48%

 

1 384

622

100%

100%

Source: “L’industrie belge dans la Russie des Tsars”, p.32

This higher economic activity combined with lower interest rates initiated a new speculative boom, briefly interrupted in 1896, which would finally end in 1899. The stock exchange expanded greatly, as about 927 new joint-stock companies were allowed by government. After 1899, the weaknesses of the Russian economy became apparent. Russian economy relied very much on heavy industry (see again table 2) which in turn depended much on exports and was therefore seriously affected by the international crisis in 1900. In a reaction to the worsened public finances, state financing of the railway construction came to an end and so did the railway boom. Moreover, the economy had not really provided more welfare for the common people. In 1914 the average Russian, with a per capita income of 60 rubles per year, was still poorer than his counterpart in 1788/1807. Russia definitely had become a less agricultural country as the proportion of industry, transport and commerce in national income had risen from 10% in 1850 to 40% in 1913. However, the benefits of that industrialisation went completely to the Russian elite as inequality had risen as well. In 1850 the upper-level aristocracy who comprised 1% of the population, controlled 6% of the national income. In 1905 this had already risen to 12% and in 1910 to 15%. This explained mainly the events of social unrest which culminated with Black Sunday on January 9 1905 when a peaceful demonstration of workers was fired on by troops on Palace Square. On October 17 1905 Nicolas II was forced to issue a manifesto proclaiming a number of civil rights and instituting a new parliament, consisting of the Duma and the reformed State Council.

The St. Petersburg stock exchange recovered briefly between 1909-1912 and, after an unstable 1913, it would come to an end in 1914. After the Austrian ultimatum to Serbia on July 10, the stock exchange finally closed on July 16. The last day of trading on July 15 was a confused one, with only limited transactions taking place early in the session as both bulls and bears stood by to see what would happen, and with news of foreign exchange closures already coming in. In the middle of the session, hope rose again with bank, metallurgical and some oil and gold  shares rising in price. And then it was over. The effects of war worsened and misery caused by bad food supplies finally brought the Bolsheviks to power in October 1917. This meant a final blow to Russia’s experience with the capitalist economy as the Soviets nationalized joint-stock companies and credit institutions on December 14, 1917.

 

Sources:

- Financing the imperial Russian state, Peter Waldron, 2006, 15 pp.

- Imperial Russia 1700-1917, renewed growth aborted in the late nineteenth and early twentieth century, Ian Blanchard, xxxx, 40 pp.

- L’industrie belge dans la Russie des Tsars, Wim Peeters et Jérôme Wilson, 1999, 199 pp.

 - “The Development of a Domestic Stock Market in St. Petersburg in Late Imperial Russia”, Robert Gordon Papp, 2001, 647 pp.