European Blockade & Russia – A Vicious Circle

The following article is an historical reflection of the economic sanctions placed on Russia written by our colleague in Moscow, Sergey Pakhomov. Too often we fail to understand how far back in time our economic dependences stretch. Europe has a long and colourful history of trading and working with Russia. We should recall that even the queen of England was married to a near descendant of the past rulers of Russia!

We must hope that one day these relationships can be normal without political tensions. Sergey knows Finland well and has a long career in finance in Russia. His writing with a historical perspective are vivid and interesting. He writes in Russian and this is a translated version, which may explain that the language is a little stilted here and there… Nicholas Anderson, Editor in Chief.

Continental blockade and Russia: a vicious circle of economic sanctions.

By Sergey Pakhomov

“We hope that our faithful subjects, having penetrated into the true reason of the rules, will in every possible way contribute to Our care for their own welfare, cutting off unnecessary costs, moderation in their way of life and turning their capital not into food for foreign luxury, but into the encouragement of our own domestic factories and products; in this assumption we expect them to gladly sacrifice their instant whims to the lasting arrangement of inner industriousness. “ 

So unexpectedly modern sounds one of the manifestos of Alexander I, adopted in the midst of the so-called “Continental blockade” of England, in which, against its own will and contrary to its interests, Russia participated.

An eye for an eye – how the system of sanctions is formed

England was the most implacable enemy of the revolutionary, and then Napoleonic France, and the rivals fought for mutual destruction. The methods of economic war also played a significant role in this struggle. France, consistently conquering European countries and defeating one hostile coalition after another, began to create a system of economic isolation and strangulation of England, the purpose of which was to undermine its economy and make it impossible to wage a war. In their formed form, these sanctions are called the Continental System, although another term is more consistent with reality – the Continental Blockade.

The overwhelming volume of world trade at that time was carried out with the help of shipping. The main subject of British trade and export and customs revenues were colonial goods and cotton, products of the British textile industry, supplied all over the world by sea. The first salvo of the Continental Blockade followed on June 20, 1803, when, by decree of Napoleon I, all ports of France were completely closed to English ships, ships sent from England, or calling at English ports on their way to France. A wide range of export goods, primarily colonial and raw materials, was banned from import and export. On February 6, 1805, high customs import duties were imposed on all goods that could potentially be of English origin, including the colonies of England, or could be transported in transit through the ports of England, to combat the immediately emerging smuggling. The duties were imposed on tea, coffee, cocoa, raw cotton, cotton fabrics, raw sugar and granulated sugar, cotton yarn. England, naturally, did not remain in debt. On November 11, 1806, the British government announced a complete naval blockade of French ports, and British warships began to inspect all ships from neutral countries heading to France. Napoleon responded with a decree dated November 21, 1806, which declared the British Isles to be in a state of complete naval blockade, prohibited any trade with England, and cut off access to French ports for any ship from a neutral state that entered England. England responded with an order of the Privy Council in 1807, which obliged all neutral ships bound for France and Continental Europe to enter England or Malta to inspect the cargo and obtain permission to sail on after paying a huge tax. Then Napoleon issued a Milanese decree on December 17, 1807, declaring every merchant ship that entered English ports or paid English tax as a legitimate war prize for French warships, along with all cargo.

If you can’t, but you really need to, then you can. 

However, it was impossible to completely stop all trade, and rivals began to issue licenses for the import of certain groups of goods, even to enemy ships. England began to allow the import of bread, timber, hemp, and tar from France. Napoleon allowed to license the import of indigo, fish oil, wood, leather into France in exchange for the export from France of bread, fabrics, silk, wines, cognac products, and cheeses, which were banned in England. Smuggling by sea flourished. In 1810, more than 600 supposedly neutral ships regularly roamed the Baltic and North Seas, looking for ways to unload goods in German ports. Many British ships sailed and carried goods under the neutral flag of the United States, the island of Helgoland served them as a transshipment base and for replenishment of supplies. Since 1810, the import of colonial goods into France, formally prohibited, began to be allowed with the payment of very high duties. Cotton and cotton products continued to be confiscated and burned. Napoleon reasonably hoped that high duties on colonial goods would lead to a decrease in demand, to an overstocking of British warehouses, a fall in selling prices and the ruin of English merchants. Simultaneously with these measures, after the capture of the Netherlands and German ports by the Napoleonic army, a large-scale customs special operation was carried out, during which a huge amount of smuggled goods was confiscated, both in France and abroad. The seizures took place in Zurich, Bern, Frankfurt, Stuttgart, Munich, Dresden, Leipzig, Bremen, Hamburg, Lubeck, Stettin, Küstrin and Danzig. French customs received 150 million francs, not counting the value of the confiscated goods.

Calculated – wept. 

For the warring parties, the mutual economic damage was colossal. For France, an extremely difficult situation came, accompanied by a sharp rise in prices for imported raw materials with a simultaneous collapse in prices for French goods, especially agricultural exports. The receipts of customs duties to the treasury fell sharply. For England, at first, the situation was less difficult, since domination of the sea allowed her to import imported raw materials for the manufacturing industry, the active promotion of smuggling by the state made it possible to deliver British goods abroad. Subsidies to the Allies for the purchase of British goods even led to the conquest of new export markets. However, the damage was enormous and undermined the country’s international credit.

From 1810 to 1812, the Continental Blockade began to bring more and more tangible damage to England. Napoleon’s seizure of Holland and German ports made it possible to confiscate a huge amount of British goods smuggled into Continental Europe. The French, having taken the customs duty to the treasury at half the value of the confiscated property, again put it into trade. This led to a colossal overstocking of British warehouses and a drop in prices for all colonial goods and British exports. Along with this, in England there was an acute shortage of bread, and the population began to suffer from food shortages. In 1811, a break in trade relations with the United States followed, which in fact joined the Continental Blockade and ended all trade relations with England and her colonies. A catastrophic drop in British exports followed; in the winter of 1811-12, the population of England experienced an acute shortage of food and was practically in poverty. The decline in industrial exports led to massive layoffs of workers and a fall in wages. Social unrest and riots began. A Luddite uprising broke out, smashing factories and destroying industrial equipment, believing that technological progress was to blame for their dismissal. During the suppression of such a riot in York, 12 workers were hanged in just one day. The English middle classes were ravaged en masse, and crime was on the rise. City trading houses went bankrupt one by one, despite a government subsidy of £6 million. Art., allocated by the parliament to support them. The Bank of England, which issued loans secured by goods whose prices had collapsed, faced massive loan defaults.

Russia entered the war of sanctions. 

On November 16, 1806, Russia started another war with France along with a coalition of European states. The war ended unsuccessfully for the allies. Napoleon defeated the allies at Austerlitz, then at Preussisch-Eylau, and on July 25, 1807, the Tilsit Peace Treaty was concluded between Russia and France. Contacts between Napoleon and Alexander I took place in an atmosphere of secrecy and without witnesses. “I will be your secretary, and you will be mine,” Napoleon suggested to Alexander. The treaty contained articles delimiting the spheres of influence in Europe between Russia and France. Russia received a “free hand” in the East with respect to Turkey and the opportunity to start a war with Sweden. As a result, Bessarabia and Finland were annexed to Russia. However, in exchange for a “free hand”, Russia, in accordance with a secret article of the treaty, joined the Continental trade and economic blockade of England and began preparations to conclude a defensive and offensive alliance with France against England.

The Peace of Tilsit had enormous implications for Russia’s economic policy. The agreements were rigorously carried out, since Napoleon demanded from his vassals and allies, among whom Russia was for the time being, strict observance of the Continental blockade. On October 26, 1807, the Russian government recalled its ambassador from England and published the “Declaration on the break between Russia and England.” On October 28, an imperial decree followed the Minister of Commerce to impose an embargo on all British ships and goods in Russian ports and on the property of British subjects in Russia. In St. Petersburg, Riga and Arkhangelsk, commissions were established to analyze the debts and mutual claims of England and Russian subjects. In March 1808, by decree of Alexander I, “in order to weaken England by bargaining to bring peace in Europe closer”, all Russian ships in British ports were ordered to immediately return to Russia without any cargo. When several Russian merchants petitioned for permission to import already loaded goods, the ships and cargo were confiscated. On June 5, the importation of all goods produced in England or her colonies was prohibited, and on August 16, 1808, a formal decree was issued banning the import of British goods acquired before Russia joined the blockade, since this is incompatible with measures “seeking to acquire peace, only Desired Europe ”. As British goods continued to enter Russia on ships of neutral countries, in May and June 1809, special commissions were established in St. Petersburg and Arkhangelsk to consider evidence of the neutrality of the ships and the origin of their cargo.

The devastating economic impact of the sanctions. 

The borders of Russia were closed for mutual trade with England, which was the main export market for Russian goods, this immediately affected the general foreign trade turnover of the country. The turnover figures were falling rapidly. If in 1806 the foreign trade turnover amounted to 120 million rubles, then in 1808 it was already only 88 million rubles. A sharp rise in prices for broad groups of imported goods on the domestic market began, which was largely due to the fall in the exchange rate of the banknote ruble. Attempts to counteract the fall in the exchange rate by raising customs duties in banknotes only led to a further rise in inflation. The rise in prices was also caused by an increase in transport costs due to the prohibition of shipping, an increase in insurance premiums by 30%, and Russian export commodities were transported by sea. The reduction in external demand for Russian exports led to a fall in prices for these groups of goods in the domestic market and to the ruin of producers.

Attempts were made to compensate for the drop in income from foreign trade with England by developing the transit of European goods to Asia through Russian territory. The role of Odessa as a “free port” increased sharply, and the transit of goods prohibited from being imported into Russia was allowed. Thus, in 1808, the transit of cotton increased by 9 million rubles. However, an obstacle to the development of transit was the hostile position of the Emir of Bukhara, which impeded the movement of caravans through Central Asia. At the same time, English goods were freely flowing to Central Asia through India.

Russia suffered more and more seriously economically from the consequences of its participation in the Continental Blockade of England. The official history of the Russian Ministry of Finance noted: “The Continental System was adopted against England; in reality, it has taken a heavy toll on Russia’s trade interests. ” The Russian local nobility was in dire need of England, where Russian export goods were traditionally exported: bread, hemp, bacon, timber. Trade with France, which was reduced to the import of wines and luxury goods, was unprofitable. In addition, France increased its grain production and allowed its export to England in 1809, taking the Russian market share. England also increased crops of grain and hemp, and to compensate for the loss of Russian raw material supplies, it actively developed trade relations with the Spanish colonies in America. The war with Turkey closed the Black Sea to Russian exports to the East, and the Continental Blockade closed European markets. The exchange rate of the banknote ruble collapsed. If in 1807 it cost 67 kopecks in silver, then in 1810 its rate dropped to 25 kopecks. The half-ruined Russian landowners could not pay taxes, the treasury became impoverished and the military might of Russia weakened. This, obviously, was the calculation of Napoleon when Russia was involved in the Continental system: to simultaneously undermine economically the two largest European powers, closely linked by mutual trade.

In search of a way out: a departure from sanctions and a path to war. The situation for Russia was becoming unbearable, which was also realized by Alexander I. A deliberate departure from Russia’s participation in the Continental Blockade began. On the advice of M.M. Speransky Alexander I adopted a new customs tariff, which sharply limited the import of wine from France. In 1811, the Neutral Trade Regulations were enacted for a period of one year. The list of Russian goods allowed for export was expanded. Duties on bread and iron were abolished, duties on tea, coffee, cocoa, granulated sugar, and products from valuable wood species were sharply increased. The import of luxury goods and vodka was banned, and contraband goods were confiscated and destroyed. The application of the Neutral Trade Regulation had a positive effect on the growth of transit trade through the ports of the Baltic and White Seas and the western land border. The growth in the transit of colonial goods alone amounted to 30 million rubles. The provision was extended for 1812. 

Napoleon saw in these measures, in reality, a weakening of the Continental blockade regime, a violation of the Treaty of Tilsit and perceived the destruction of French goods as an extremely offensive gesture. “The emperor said that he would rather agree to receive a slap in the face than to see the works of labor and skill of his subjects burned.”

An inevitable and sad outcome. 

Forced to join the Continental Blockade, adherence to trade and economic policies that were beneficial to Napoleonic France and did not correspond to the interests of Russia, caused enormous damage to the Russian economy and its state prestige. Russian industry suffered severely. There was no development of industries capable of replacing imports. The metallurgical and linen industry lost its main sales markets in England, and the textile industry, which at that time was a technologically advanced industry, suffered from a lack of imported cotton, dyes, and paper yarn. Foreign trade generated an urgently needed flow of money for the economic development of Russia, which was sharply reduced due to the participation in the blockade. France could not compensate for the cessation of trade with England, since its economy and industry could not absorb all the Russian raw materials that were supplied by sea to the English market. 

“Russia could receive money only through sea trade and the export of its raw materials to the main market at that time, to England; and Russia was already too European a country to do without money. The trade blockade was becoming unbearable. The economy turned out to be stronger than diplomacy and the tsar combined; trade relations with England were secretly renewed; the terms of the Treaty of Tilsit were violated and the war of 1812 broke out. ”

Immediately after the start of Napoleon’s campaign in Russia in June 1812, trade and diplomatic relations with England were fully resumed on the basis of the most favored nation principle. Peace with England was promulgated by a special manifesto, and all Russian ports were immediately opened to ships flying the English flag. The embargo was immediately lifted, the arrests of British property, ships and cargo were canceled, and all kinds of commissions to supervise the blockade regime were disbanded. This was the last act of Russia in the Continental blockade, which ended ingloriously to the mutual damage of all sides. “In some eighteen months after Napoleon entered Moscow, Alexander entered Paris as the sovereign and sovereign of Europe.”

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