Sergey Pahkomov, our “copious” writer from Moscow, has written the final part of the series on the Great Default of Russian loan. This excellent article covers the final twists and turns of debt from the Russian Empire, the USSR, and the bold new Russian Federation we know today. His writing is precise and interesting because it shows how Germany, France and the UK, the biggest and most powerful European countries, have always maintained close business and political ties with Russia in all its political forms over more than 100 years!
Nicholas Anderson, Editor-in-Chief.
Final Part 4. Revolution and world imperialism come to a compromise – The consequences of default.
By Sergey Pakhomov
The cancellation by the Bolsheviks of the external and internal debt of the Russian Empire and the Provisional Government, confirmed during the Genoa Conference, saved the USSR from debt payments and, at the same time, made it impossible to attract new foreign loans, which were urgently needed to restore Russia, ravaged by wars and revolutions. As a result, the USSR was cut off from international credit for decades.
“After all, we are standing alone. We have not received and are not receiving any loans. … In backward countries, only long-term one hundred million loans in dollars or gold rubles could be a means of raising heavy industry. We did not have these loans, and we still have not received anything,” Lenin admitted with a tinge of melancholy at the end of 1922.
In search of a way out of this impasse, Lenin put forward the idea of the primacy of the “correct class” policy of the victorious proletariat over the economy and the policy of relying on the mobilization of any internal sources of capital accumulation at the expense of state power.
“If we keep the leadership of the peasantry for the working class (read: the Communist Party), then we will be able, at the cost of the greatest and greatest economy in our state, to save the slightest savings for the development of our large machine industry, for electrification … and only in this will our hope be. ” From this ideological embryo arose soon the Stalinist policy of reliance on “socialist accumulation”, the source of which should be the expropriation of the income of the peasantry and the rest of the working population of the USSR.
At the same time, in 1924, at the initiative of the United States within the framework of the Dawes Plan, Germany, along with weakening the reparations regime, received international loans of $200 million for the restoration of heavy industry, including $110 million from American banks. This prompted the new Soviet leadership, headed by Stalin, to a radical revision of domestic and foreign policy. According to Stalin, the calculation of the Dawes Plan was based on the fact that a sharp increase in Germany’s industrial exports to the USSR in exchange for raw materials and bread would undermine the development of Soviet industry and the country’s defence capability, turning the USSR into a raw material appendage of Germany and Europe:
“What does the Dawes plan require? He demands that Germany pump out money in order to pay reparations payments at the expense of markets, mainly Soviet ones, ours. … Germany will provide us with equipment, we will import it, and we will export agricultural products. … Our industry will be tied to Europe. This is the basis of the Dawes plan. “
In response, the XIV Congress of the All-Union Communist Party (Bolsheviks) in 1925 adopted a political course towards a departure from the NEP and the forced industrialisation of the country at the expense of domestic sources of funding. “To transform our country from an agrarian into an industrial one … —that is the essence, the basis of our general development line.”
This decision led a few years later to the curtailment of the NEP, forced collectivisation through the “elimination of the kulaks as a class” and “shock” five-year plans. In the “mobilisation model” of the economy, payment for imported equipment and technologies was due to “socialist accumulation”: a reduction in domestic consumption, the creation of state reserves, compulsory domestic loans, an increase in the export of raw materials and agricultural products, primarily grain, forcibly confiscated from the “collective farm” peasantry, as a result what was the massive famine.
Ahead were the years of the “Great Turning Point”, the internal political crisis, the escalation of conflicts within the Soviet political leadership, the struggle for power and massive repression. The era of Stalin was approaching. In April 1926, Stalin clearly outlined the way to search for sources of financing for the accelerated industrial development of the USSR through the transition of the NEP to the mobilisation model of the Soviet economy: “There remains … the path of one’s own savings for the business of industry, the path of socialist accumulation, which Comrade Lenin repeatedly pointed out as the only way to industrialise our country … We have such a weapon as the state power, which manages the state budget … for the further development of the national economy. … It is necessary that the surplus accumulation in the country should not be scattered, but collected in our credit institutions, cooperative and state, as well as in the form of internal loans, for their use for the needs, first of all, industry. It is clear that depositors should receive a certain percentage for this. … The task of organizing the business of internal loans, undoubtedly, stands before us as the next task, and we must solve it at all costs. “
The case of domestic loans was soon put on stream, and the policy outlined by Stalin remained unchanged until 1966.
“… We are required to pay debts. Europe has not forgotten this yet and, perhaps, will not forget … ”. (I. Stalin).
The question of tsarist debts, depending on the foreign policy situation, was raised during negotiations with England in 1924 and 1929, with France in 1924 and 1927, the United States in 1933 and 1934. The negotiations broke down because Stalin remained on this issue on the Leninist position, as evidenced by his speeches at party congresses of the 20s-30s: “We cannot cancel the well-known law of our country … on the cancellation of debts. … to annul those decrees that … legalized the expropriation of the expropriators in our country. But we are not averse to making some exceptions … to make both for England and for France in terms of the former tsarist debts in order to pay a small fraction, and get something for it. … Cancellation of tsarist debts (removed) billions of rubles of debts from the shoulders of our national economy. … if these debts were abandoned, we would have to pay annually several hundred million in interest alone, to the detriment of industry … this circumstance has brought great relief to our accumulation. … Our policy is clear here. It is based on the formula: “give – give.” If you give loans to fertilize our industry, you receive a certain share of pre-war debts, which we regard as additional interest on loans. If you don’t give, you don’t get it. ” Briefly and clearly.
Only many years later, during the years of “perestroika”, in connection with the course of the USSR leadership towards rapprochement with the West, negotiations were resumed on solving the debt problem with a number of European countries, whose citizens were the owners of tsarist bonds. At these negotiations, decisions were reached on the “final settlement” of issues with the debts of Russia up to 1917, as well as on the payment of partial compensation. Such compensation for tsarist debts, which was rather symbolic, was paid to holders of the United States, Canada, Switzerland and some other countries. Under an agreement concluded with Great Britain on July 15, 1986, during a visit to this country by Mikhail Gorbachev, the United Kingdom and the USSR renounced all mutual financial claims that arose before January 1, 1939. Great Britain paid partial compensation to the holders of the bonds of the Russian Empire at the expense of the personal gold of Nicholas II, which was stored in the Bank of England, as well as GBP46 million held in Baring Brothers bank, which once belonged to the Russian Empire.
The problem of the French holders of the Russian debt remained. On the eve of World War I, France had up to 10 million bondholders worth 31 billion gold francs. Every fourth bond traded on the Paris stock exchange was Russian. After 1918, in order to protect their interests, a number of associations of owners of these securities were formed, which have been active for decades. The first congress of holders of Russian debt took place in the Hague conference in 1922 followed by the Committee for the Protection of French Holders of Russian State Funds was held in 1924-1925 where proposals were put forward to resolve the problem of repayment of the tsarist obligations. In particular, it was proposed to consolidate debts on all types of securities, to pay off debts in gold and goods, to grant the right to elderly bondholders to exchange these securities for life annuity, etc.
After the collapse of the USSR and the emergence of the Russian Federation in 1991, which assumed the entire external debt of the former country, active negotiations were conducted with France on the issue of settling pre-revolutionary Russian debts. This was due to Russia’s plans to enter the Eurobond market with new loans, which was impossible without a political solution to the problem with the country where most of the pre-revolutionary debt was concentrated.
In 1996 and 1997, the Chernomyrdin government concluded agreements on the repayment by Russia to the French government in eight tranches of $400 million for settlement with the heirs of the holders of the Russian debt that arose before May 9, 1945. Over 300 000 owners of Russian securities were registered upon payment of compensation. 68% were debt obligations of the tsarist government, 13.5% were bonds of Russian Railways, 7% were bonds of various private companies and 4% were obligations of individual cities and provinces. Almost all bonds were presented by individuals. Thus, formally ended the largest and longest in world history default on the state debt of pre-revolutionary Russia.
But for France, where the Russian default of 1918 remains the central issue of financial and cultural history, the issue of Russian debt is not closed. In 1997, from the point of view of the French bondholders, the payments only symbolically compensated the losses, only 1-2% of all potential debt. Therefore, these agreements were met with controversy. Almost all existing French holders of Russian bonds are now expressing their rejection of the agreements concluded between France and Russia on this matter. Currently, there are 5 such active associations in France: “National Association for the Protection of the Interests of Holders of Russian Securities”, “French Association of Russian Loan Holders (ARREK)”, “National Association for the Protection of the Descendants of Russian Loan Holders”, “Association of Holders of Old Securities” , “National Association of French Real Estate Shareholders”. These associations declare that they represent the interests of 500 000 people, whose claims exceed, according to their own estimates, $ 40 billion. Legally, these claims can now be attributed only to the French government, since from the point of view of the Russian Government, the process of settlement and settlement of pre-revolutionary debts is completed. So far, this scheme for resolving the “debt legacy of the Empire” has been successfully working, allowing the Russian State and corporate issuers to use the international capital markets.
However, storm clouds appear on the horizon.
There are claims by the “heirs” and further aggressive actions in the courts should be expected, especially in a situation when the regime of international sanctions is in effect against Russia. Now, when Russia is experiencing another aggravation of political relations with the West, the actions of these organisations may well have the support of their governments, overtly or secretly.
It turns out that the previously concluded agreements with Russia on the settlement of claims for its pre-revolutionary debt are interpreted quite arbitrarily, including by the state bodies of the respective countries. The statement of the representatives of the Ministry of Economy and Finance of France leaves no doubts on this score: “Paris refrains from making any claims to Moscow on this issue, but it cannot prohibit its citizens from making relevant claims to the Russian side. The agreement between the countries does not prohibit the French from fighting to get their money back. At the same time, debt claims can be presented even by those persons who were able to receive compensation. “
The aggravation of political contradictions with Russia even leads to such radical proposals from the British government as blocking the placement of Russian government Eurobonds in London, which is the largest international debt market. It turns out that the 1986 Agreement on the waiver of claims for the debts of the Russian Empire does not play any role in this.