As leading commercial cities developed more active and sophisticated financial markets, some cities became centers for global finance. London and Paris became such cities in the 19th century, serving the financial needs not only of their own countries but even those of the continent and the world. Governments of other countries turned to these cities, and their bankers, to raise money. In the 1880s and 1890s, Russia was in need of a lot of borrowed money and turned to the markets in France to raise several large loans. These financial milestones did not only mirror, but to at least a small extent drove, an accompanying diplomatic alliance between the two countries.
Russian Loans
Russia needed to borrow lots of money in the second half of the 19th century, the natural result of the Crimean War, a Polish uprising in 1863, and the Russo-Turkish War of the late 1870s. Being a great power was expensive for this impoverished agrarian country so taxation and local borrowing were insufficient to fund the state. As a result, the government turned to foreign loans. From mid-century up to 1887, most Russian foreign borrowing took place in Berlin which replaced London as an important market for Russian bonds as diplomatic tension rose between Britain and Russia due to their colonial rivalries in Asia.
In 1887, Russia’s debt burden stood at 6.25 billion rubles. Two-thirds of this had been raised locally and one-third abroad. Of this latter portion, as much as two-thirds was secured from investors in Germany. Russia raised loans in Germany in 1856 and 1877 and from the mid-1870s to the mid-1880s, German banks were the principal foreign financial agents to the Russian state. However, this partnership was not to last. With German industrialization, Russian state bonds had to compete with growing German securities issuance. Investors replaced Russian bonds with those of local industrial companies. There were political problems as well.
Diplomacy
The partnership between German banks and Russia’s government did not survive worsening Russian-German relations in the 1880s. The chief problem was that Germany increasingly favored Austrian interests in the Balkans over those of Russia. Economic relations soured when Germany increased tariffs placed on Russian grain and Russia placed higher tariffs on German iron. In 1887, a critical decision forced the hand of Russia’s government to search for a new lender. Germany, in a policy known as the Lombardverbot, forbade its banks from loaning money against Russian securities.
This period saw the development of a new Franco-Russian alliance. The two countries had mutual worries about Germany and Britain. France felt especially isolated in the aftermath of its defeat in the Franco-Prussian War, the unification of Germany, an ongoing colonial rivalry with Britain, and the development of an alliance between Germany, Austria, and Italy. The Russian need for credit and the French need for an ally among Europe’s leading powers brought the two countries together. Compared to others, the development of the Franco-Russian alliance of the late 19th century had a pronounced financial dimension.
Agents
French investors bought Russian bonds issued in Germany which Germans no longer wanted to own following the Lombardverbot. French investors were encouraged by the bonds’ good price, falling French bond yields, and the relative scarcity of industrial bond issuance in France. In search of a new lender, Russia found a suitable one in France. France was a capital-exporting country, the second largest international investor, and its public was very familiar with foreign public bonds. French investors had already been active investors in the bonds of Italy, Spain, Portugal and Austria and unlike some of these countries, Russia had never defaulted on its debts.
Still, there was some groundwork to be laid before a market for Russian bonds could develop in France. Governments and banks communicated often; a bank could not take on a major syndication of a foreign loan without the approval of both the government raising the money and that of the creditor country. After all, German government policy had killed off the market for Russian bonds in Berlin by decree. By contrast, the French government would be interested in the success of Russian loans sold in Paris.
Elie de Cyon, born Ilya Fadeyevich Tsion, acted as an agent between the bankers and the government of Russia. A Russian resident in France, de Cyon acted as promoter of Russian and French cooperation by persuading the Russian government to leverage the financial markets in Paris rather than those in Germany for the raising of new loans. The Russian government had relied on the Rothschilds as their agents in Paris before but Russian antisemitism in government policy strained their partnership. De Cyon helped restore relations between the Paris Rothschilds and the Russian government.
Another such agent was a Danish-French banker Emile Hoskier. He provided much of the initiative for the first large Russian state loan placed in Paris and participated in a syndicate of rival banks to the Rothschilds. Emile Hoskier was the brother-in-law of the French ambassador in St. Petersburg who had particularly good access to the Tsar. Hoskier’s own wife was Russian and he was also close to Arthur von Mohrenheim, the Russian ambassador to France who had previously represented Russia in Denmark.
Paris Loans
The renewed partnership de Cyon had some part in bringing about began in 1887 when the Paris Rothschilds participated in a successful refinancing of Russian mortgage bonds at a reduced rate of interest. Still, other banks took a leading position in placing a new Russian state loan in Paris. A syndicate comprised of Banque Paribas, Credit Lyonnais, Comptoir d‘Escompte, and Emile Hoskier sold a 500 million franc loan in the autumn of 1888. This, like many in a coming spate of loans, was used to refinance an earlier German loan.
French banks like Credit Lyonnais and the Societe Generale placed Russian bonds in the portfolios of their clients. These large banks had the advantage of extensive branch networks. Whether because of the banks’ initiative or their search for better yielding investments, smaller investors were particularly interested in Russian bonds. For placing a bond with an investor, banks would receive commissions of 1.5% to 3.75%.
Future loans got even larger. In 1889, the Rothschilds participated in a 1.7-billion-franc railroad bond issuance in Paris. This was just one of two Russian loans that year. Then, in 1890, Russia raised three separate loans in France, one arranged by the syndicate led by Banque Paribas and Emile Hoskier and two by the Rothschilds. The size of these would require a multitude of large banks to place. By year-end, Russia had raised over three billion francs across six loans in France within three years .
“The guarantees of the first order which [Russia] presents to her creditors, the abundance of her resources, the wisdom of her policies, the good management of her finances are among the elements of protection which, joining with the sentiments of mutual sympathy existing between the two countries, assure to the Russian securities the most favorable welcome on the French market”
Henri Germain, the founder of Crédit Lyonnais, in 1894
Still, the new alliance between France and Russia was not purely, or even most notably, a financial one. This was a deep alliance marked by political and military milestones. In 1891, a French fleet visited Kronstadt near Saint Petersburg. That same year, Russia and France agreed to consult each other in the event of a threat to peace in Europe. In 1892, a military accord was negotiated. The following year, the Russians followed up with a visit of their own to Toulon. In 1894, the new Tsar, Nicholas II, expressly upheld his father’s commitments with France.
Besides the alliance, superior yields encouraged investment in Russian bonds. The typical Russian state bond yielded 4.3% at issue in this period as compared to 3.1% for the average of all other government-backed or similar bonds on the Paris Bourse. Still, the refinancing of Russia’s German loans into French ones was saving the Russian government 50 million francs, or 12.5 million gold rubles, in interest costs each year.
Now interested in keeping some of this business for itself, in 1894, Germany lifted its ban on bank loans secured by Russian securities. However, while German banks would from time to time participate in syndicates placing Russian loans, Paris had by now firmly displaced Berlin as Russia’s preferred banking center. The Rothschilds led a 400-million-franc 3.5% loan issued in 1894 and a 3% loan two years later. They were also heavily invested in the Russian oil industry during this period of Russia’s rapid industrialization. Overall, the amount of foreign capital invested in Russian industry multiplied by six in the 1890s no doubt much of it held by Frenchmen. In 1897, some 6.5 to 7.0 billion francs were invested in Russian debt. By this point though, bankers in France finally believed the market was saturated.
Lesson
Between France and Russia, finance did not merely mirror the diplomatic changes but rather helped drive them. This is not to say such an alliance would not have developed otherwise; it almost certainly would have. However, the diplomatic realignment was to some extent encouraged by what France and Russia could provide each other financially. Russia needed to borrow and there were only so many markets available for Russian borrowing; that of Paris was among the most promising. As countries began to develop more sophisticated financial systems and financial needs alike, finance became an important driver of diplomatic affairs. Not far later, in the 1920s, one could argue that finance even became the primary driver of diplomatic events in Europe.
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Read about a speculative bubble in emerging market sovereign bonds in 1820s London, gold-linked sovereign bonds issued in 1950s France, and the role of a Ivar Kreuger, an unscrupulous match-industry magnate, in meeting governments’ credit needs in the 1920s. Consider subscribing to this blog’s newsletter or checking out book recommendations, which include many of the sources often referenced in my posts.
Further Reading
1. Ferguson, Niall. “Chapter 12: Finances and Alliances (1885-1906).” The House of Rothschild: The World’s Banker, Viking, New York, 1999.
2. Kennan, George F. “Chapter 5: Private Stirrings.” The Fateful Alliance: France, Russia, and the Coming of the First World War, Pantheon Books, 1985.
3. Kindleberger, Charles P. A Financial History of Western Europe. George Allen & Unwin, 1987.
4. Siegel, Jennifer. For Peace and Money: French and British Finance in the Service of Tsars and Commissars. Oxford University Press, 2017.
