Between foreign and domestic: capital, banks, and the coming of industry in the Russian Empire

So What? (short version)

Literature on the role of finance in the industrialization of Russia have focused on the impact of foreign investment, commonly defining it as one of the main pillars of the transition process. I argue that domestic and state banks were crucial in targeting industrial growth by directing capital to industries which were not the main benefactors of foreign investments.

This project is funded by the John Fell OUP Research Grant University of Oxford – Between foreign and domestic: capital, banks, and the coming of industry in the Russian Empire, July 2020 – Dec. 2021

Tell me all about it (detailed version)

The Industrial Revolution is commonly seen as the cradle of modern economic development. Consequently, historians, economists, and economic historians alike try to understand why and how countries industrialize. This project investigates the role of financial institutions and policies in the industrialization of the Russian Empire in the late nineteenth and early twentieth centuries. As the first economy to industrialise, Great Britain has been most famously subject to a vast amount of studies. However, we know comparatively little about the history of industrialisation of other nations, on country-specific triggers and drivers of economic developments in particular. Instead, Literature has used the case of Great Britain as benchmark, assuming that countries eventually tried to somewhat emulate the British way.

The study of the role of finance in the Russian industrial revolution has several interests. Firstly, Russia being comparatively late, industrialized in a so called “big spurt”.[1] The analysis of its finance-growth-nexus can provide new insights on the financial mechanisms that drive the economic catch up of developing countries. Secondly, the autocratic regime during its industrialization makes it a blueprint for comparative analysis with many of today’s developing economies that are under autocratic rule.[2] Finally, it contributes to a better understanding of government induced and controlled processes of economic transformation.

Previous studies on the role of finance in the industrialization of Russia have focused on the impact of foreign investment, commonly defining it as one of the main pillars of the transition process.[3] This approach seems, prima facie, logical and obvious, as even the Ministry of Finance of the Russian Empire itself declared the influx of foreign investment as the main requirement for the industrialization of its economy. However, at the same time the Ministry defined and limited the number and characteristics of industries that would benefit from foreign capital, controlling the capital flows by promising foreign investors certain benefits if they would invest in certain industries.[4] Other industries, therefore, were reliant on domestic capital. A fact that has been overlooked by (economic) historians to date. This exclusion of the role of domestic capital has lead to serious shortcomings in the analysis and understanding of the role of finance in the industrialization of Russia, which this project aims to correct.

The project will begin with a qualitative and quantitative assessment of the Witte’s Policy, investigating which industries benefited the most from foreign investment. In particular, I am interested in the quantitative assessment of the bias of financing only certain industries in certain regions/economically established centres. The traditional perspective will be broadened by identifying the industries that benefited the most from domestic investments, focusing on the capital provided by domestic banks. While it is known that there has been an active policy and involvement of the government in the attraction and channelling of foreign investment, we know little about the government’s position towards domestic capital. Given the importance and power of the Ministry of Finance, it seems most likely that the Russian government not only controlled foreign capital flows, but also actively influenced domestic institutions to direct capital towards sectors that benefited less from the influx of foreign investment. In particular, this seems to be the case of state banks. Finally, I will assess and compare the impact of foreign and domestic capital on the development of the industrial sector in different regions. The principal hypothesis is that industries which received comparatively more foreign investment than others grew faster. If this is the case, can we observe that domestic and/or state banks were able to absorb this bias and target industrial growth by directing capital to industries which were not the main benefactors of foreign investments?

This project will significantly contribute to the ongoing discussion on the drivers of economic development, providing new quantitative evidence and insights into the role of finance in the industrialization of one of the largest economies of today. In particular, it will improve our understanding the extent to which banks have the capacity to induce and sustain a process of economic transformation and growth in developing countries by accumulating and channelling capital to key economic sectors.

[1] Gerschenkron, A. (1962). Economic Backwardness in historical Perspective. Cambridge, MA: Harvard University Press.

[2] According to the Polity data series of Marshall & Jaggers aimed at estimating levels of democracy, in 1880s - 1890s Russia was the most authoritarian state in the world having the lowest possible score (-10) and sharing this position with Iran, Thailand and Turkey. See Marshall, M.G. and K. Jaggers. (2002). Polity IV Project: Political Regime Characteristics and Transitions, 1800-2002.

[3] Von Laue, T.H. (1969). Sergei Witte and the Industrialization of Russia. New York: Atheneum; Swetzer A. (1996). Foreign Investment and Economic Development in Tsarist Russia. In: Artisien-Maksimenko P., Adjubei Y. (eds) Foreign Investment in Russia and Other Soviet Successor States. Palgrave Macmillan, London; Dongarov, A.G. (1990). Inostrannyi capital v Rossii i SSSR. (Foreign capital in Russian and the USSR.) Moscow

[4] Tsechoeva, Z.I. (2012). Istoricheskii opyt provlecheniya inostrannogo kapitala v rossiiskuyu economiku v period 1861-1913 gg. (Historical experience of attracting foreign capital to the Russian economy during 1861-1913.) Doctoral dissertation. Moscow

[5] Owen, Thomas (2006) C. RUSCORP: A Database of Corporations in the Russian Empire, 1700-1914. Ann Arbor, MI: Inter-university Consortium for Political and Social Research [distributor], 2006-01-12