Trade and the Economy of Imperial Russia
By 1913, Russia was the fifth-largest economy in the world, exporting more grain, butter, and flax than any other country, and producing more than nine million tons of oil a year from the Baku field alone. Its railway network, 71,000 kilometres long, was the second-longest after that of the United States, and it carried a national product that, despite the autocracy, was being integrated with the global economy at an accelerating rate. The banknote in a peasant’s hand was backed by gold, and the gold was in the vaults of the State Bank. The total foreign trade of 1913 was 1,512 million rubles of exports and 1,374 million rubles of imports (Crisp, Studies in the Russian Economy, 1976; Owen, The Corporation under Russian Law, 1991; Gatrell, The Great War and the Russian Civil War, 2005; Kotz, Stolypin and the Second Duma, 1972).
The integration was uneven. The Russian economy remained overwhelmingly agrarian: 81.6 percent of the population was in the countryside in 1897, and the agricultural share of the valovyi national product was about 60 percent. The industrial sector was concentrated in a small number of regions — the Central Industrial Region, the Donbas, Baku, St Petersburg — and the bulk of the national income came from grain and timber, not from manufactured goods. The autocratic state, which had built much of the economy, was also the principal obstacle to its further development (Crisp, 1976; Owen, 1991; Gatrell, 2005).
The Muscovite economy
In the seventeenth century, the economy of Muscovy was largely agrarian and relatively isolated from the international economy. The principal exports were furs, wax, honey, and timber, sold to Western European traders through the port of Arkhangelsk on the White Sea. The principal imports were manufactured goods, including textiles, metal goods, and luxury items, which the Russian market was too small to supply itself.
The state played a central role in the Muscovite economy. The tsar and his officials directed the development of new industries — the salt works of Solikamsk, the ironworks of the Tula region, the armoury workshops of Moscow — and they controlled the principal sources of revenue, including the customs, the vodka monopoly, and the tribute of the non-Russian peoples. The boyar class accumulated estates with peasants and serfs, and the great monasteries accumulated vast landholdings that were, in practice, exempt from secular taxation.
The system of serfdom, which bound most of the peasantry to the land, was a constraint on economic development. It supplied the labour for the great estates, but it prevented the development of a free labour market, and it tied the bulk of the population to subsistence agriculture. The state addressed this constraint, in part, by using the posesssionnye krestyane — serfs assigned to the industrial enterprises — to staff the new factories, but this was a form of industrial serfdom, and it was abolished only in the 1860s.
The Petrine reforms and the opening of the Baltic
The reign of Peter the Great marked a decisive opening of the Russian economy to Western Europe. The acquisition of the Baltic provinces in the Great Northern War gave Russia its first major ice-free ports — Riga, Reval (Tallinn), and the new St. Petersburg — and the Customs Tariff of 1724 established a system of protective tariffs that was to remain in place, in various forms, for the next two centuries. Peter encouraged the development of the Ural metallurgical industry, the textile industry of the Moscow region, and the shipbuilding industry of the new capital.
The state played a central role in the new economy. It owned many of the new enterprises, including the principal metallurgical works, the arms factories, and the dockyards. It placed high tariffs on imported goods, subsidised domestic production, and provided the technical and managerial staff, often imported from Western Europe. The Ural works of the Demidov family, the Tula arms factories, and the Linetsk shipyards were the principal centres of the new industrial economy.
The expansion of trade in the 18th and 19th centuries
Russian exports shifted during the eighteenth and nineteenth centuries. Furs, wax, and honey gave way to grain, flax, hemp, and timber as the principal exports. By the 1860s, grain accounted for more than half of Russian exports, and the ports of the Black Sea — Odessa, Nikolayev, Novorossiysk — were the principal outlets. The development of the southern railway network, the introduction of the steamship, and the opening of the Suez Canal in 1869 transformed the geography of the Russian grain trade, and the Russian Empire became the largest grain exporter in the world by the 1880s.
The principal markets for Russian grain were Britain, Germany, and the other industrial countries of Western Europe. The principal suppliers of Russian imports were the same countries: Britain supplied textiles, machinery, and coal; Germany supplied machinery, chemicals, and dyes; France supplied wines, perfumes, and luxury goods. The trade was conducted through a network of foreign and Russian firms, and the principal Russian banks developed close relationships with their European counterparts — the Russo-Asiatic Bank with Deutsche Bank, the International Bank of St. Petersburg with Crédit Lyonnais, the Russian Bank for Foreign Trade with Paribas.
The Crimean War of 1853-1856 exposed the structural weaknesses of the Russian economy. The army ran short of rifles and ammunition, the railway system was inadequate to move supplies to the front, and the government was forced to borrow heavily abroad to finance the war. The defeat, together with the abolition of serfdom in 1861, the judicial reforms of 1864, and the railway construction of the 1860s and 1870s, set the stage for the more rapid industrial development of the late imperial period.
The financial system
The Russian financial system developed slowly before the 1860s. The first Russian state bank, the Assignation Bank, was established in 1769 to issue paper money, and the resulting inflation was a chronic problem of the late eighteenth century. The first serious attempt to reform the currency came in 1839, when the minister of finance, Count Egor Kankrin, established a silver standard and stabilised the ruble. The system held until the Crimean War, when the government was forced to print paper money to finance the war effort, and the ruble depreciated sharply.
The 1860 establishment of the State Bank of the Russian Empire (Gosbank) marked the beginning of a modern financial system. The bank, modelled on the Bank of France and the Bank of England, was given the monopoly of note issue and the responsibility for the regulation of the commercial banks. The commercial banking system developed rapidly in the last third of the nineteenth century, with the establishment of the largest Russian banks — the Volga-Kama Bank, the Russo-Asiatic Bank, the St. Petersburg International Bank, the Russian Bank for Foreign Trade, and the United Bank of the Nobility. The 1910 merger of the Russo-Asiatic and the United Bank created the largest bank in the empire.
The Witte reform of 1897 put the ruble on the gold standard, at a par of 1 ruble = 1/15 of one imperial of gold, equivalent to about 51.5 kopecks to a Dutch guilder or about 51.5 cents at the prevailing rates. The reform had three effects. It stabilised the ruble after twenty years of depreciation. It made the ruble a respectable international currency, encouraging foreign investment. And it tied the Russian money supply to the gold reserves of the State Bank, which accumulated rapidly in the years that followed.
The introduction of the gold standard, together with the protective tariff of 1891, the construction of the Trans-Siberian Railway, and the influx of foreign capital, was the cornerstone of the industrial growth of the 1890s. The growth, however, came with costs: Russia became heavily dependent on foreign capital, and the gold standard forced the Russian economy to follow the business cycle of the international economy. The Russian economy entered a severe depression in 1900-1903, when the European capital markets contracted, and again in 1907-1908, when the American panic spread to Europe.
The vodka monopoly
The Russian state had long been involved in the production and sale of alcohol, and the otkup system — the system of private tax-farming of alcohol production — had been a primary source of revenue and corruption since the sixteenth century. The otkup was abolished in 1863, and the production and sale of alcohol was put under the control of the excise, but the state continued to derive a large share of its revenue from alcohol.
The state vodka monopoly, introduced on 1 January 1895 by Finance Minister Sergei Witte, took the wholesale distribution of vodka into state hands. The state fixed the price, controlled the production, and sold the vodka through state-owned shops. The monopoly was a powerful revenue-raiser: by 1900, vodka accounted for about 30% of all state revenue, and the figure was about a quarter by 1913, when the monopoly was relaxed in the wake of the 1905 Revolution.
The monopoly was, however, deeply unpopular. The government’s decision to increase the price of vodka in 1914, in part to compensate for the loss of revenue from the still-undeveloped income tax, is often cited as a factor in the social unrest that preceded the 1917 revolutions. The Pobedonostsev circular of 1899, which had called for a reduction in the sale of vodka in the interest of public order, was a sign of the moral ambivalence within the government itself. The production of samogon (moonshine) rose sharply, and the loss of revenue from the monopoly was significant.
Foreign capital and the integration of the Russian economy
The Russian economy of 1900-1914 was one of the most open in the world to foreign capital. By 1913, foreign capital accounted for about 60% of the joint-stock capital in Russian industry, and it was particularly important in the heavy industry of the south, the oil industry of Baku, and the chemical and electrical industries of the central region. French investors were the most important source of capital, accounting for about 33% of the foreign investment in Russia; British investors, about 23%; German, about 20%.
The investment took the form of portfolio investment in Russian government bonds, direct investment in Russian industry, and loans to Russian banks. The Russian railways, the Baku oil industry, the Donbas metallurgical industry, and the new chemical and electrical firms were all heavily dependent on foreign capital. The relationship was, however, asymmetric: the Russian economy was integrated into the international financial system, but it had little influence on the international system.
The integration made the Russian economy vulnerable to international shocks. The Russian economy was hit hard by the European financial crisis of 1900-1903, when the French and German capital markets contracted. The recovery was rapid, but the dependence on foreign capital remained, and the outbreak of war in 1914 cut off the supply of credit just as the war economy was ramping up. The 1914-1917 period was marked by a severe shortage of foreign exchange, a sharp depreciation of the ruble on the unofficial market, and a corresponding shortage of imported goods.
The Russian state as economic actor
The Russian state was the largest economic actor in the empire. It owned the railways, the principal arms factories, the State Bank, and a substantial share of the metallurgical, mining, and chemical industries. The state was the principal supplier of capital, the principal employer of skilled labour, and the principal regulator of trade and industry. The system of state economic management, which had been inherited from the Petrine era, was reinforced by the great spurt of 1890-1913, when the state placed large orders with Russian industry and regulated the tariff and the currency.
The system was effective in promoting rapid industrial growth, but it had a number of costs. The state was the principal beneficiary of the tariff system, and it used the tariff to protect inefficient domestic producers. The state was the principal source of capital, and it allocated capital on political as well as economic grounds. The state was the principal regulator of labour, and it was reluctant to allow independent trade unions or collective bargaining. The result was an industrial economy that was capable of rapid growth, but that was also rigid, politicised, and prone to crisis.
The most important economic policy failure of the late imperial period was the inability of the state to address the agrarian question. The Stolypin reforms of 1906-1911, which aimed to break up the village commune and create a class of independent peasant landowners, were an attempt to do so, but the reforms were cut short by the assassination of Stolypin in 1911 and by the outbreak of war in 1914. The land question remained unresolved, and the peasantry was an important source of social instability on the eve of the 1917 revolutions.
The international context
The Russian economy in the late imperial period was deeply integrated with the international economy, and the trade and capital relationships with Western Europe shaped the development of the Russian economy in important ways. The Russian Empire was the largest importer of Western European manufactures in 1913 and the largest exporter of grain and raw materials in 1913, and the terms of trade favoured the Western European economies.
The Russian government used the international economic relationships as a tool of foreign policy. The Franco-Russian Alliance of 1891-1894 was underpinned by a series of French loans to Russia, and the relationship was reinforced by the close ties between the Russian and French financial systems. The British relationship was more complex, but the Anglo-Russian Convention of 1907 was followed by a significant increase in British investment in Russia. The German relationship was the most important commercially, and the two economies were closely integrated in 1914, which made the outbreak of war particularly disruptive.
The First World War cut Russia off from its principal trading partners and capital markets, and the Russian economy was forced to adjust to a state of siege. The result was a rapid growth of state control over the economy, a sharp increase in inflation (the ruble on the Petrograd curb market in February 1917 was 6.4 paper to the gold ruble, in October 1917 was 17.5 paper to the gold ruble), and a corresponding deterioration in the standard of living of the urban working class. The economic crisis of 1915-1917 was a principal factor in the political crisis that brought down the empire (Gatrell, 2005; Figes, A People’s Tragedy, 1996; Pipes, The Russian Revolution, 1990).