Chapter 6- Economic Developments

Who drove industrialisation and why?

In the absence of entrepreneurial middle class, industrialisation in Russia was largely driven by the State in a deliberate attempt to match the economic developments of Western Europe. Following Emancipation. Alexander II's Minister of Finance from 1862-78, Mikhail von Reutern, produced a series of reform designed to boost the economy and provide funds to drive industrial growth.

Mikhail von Reutern key profile

Mikhail von Reutern (1820-1890) was a German from the Russian Baltic landowning class. He believed that state money and control should direct economic change, and he used his position to carry out his beliefs into action. He particularly encouraged the development of the railways; selling contracts to many of his own friends and acquaintances. He became Chairman of the Council of Ministers in 1881.

What were Mikhail von Reutern's reforms?

-The Treasury was reformed and new arrangements for collecting taxes, auditing the accounts of government departments, and publishing budgets was put in place

-Tax-farming (whereby groups bought the right to collect certain taxes) was abolished and the tax system was reformed to include more indirect taxation

-Banks and the credit facilities were extended with the establishment of a state bank in 1860, municipal banks in 1862, and a savings bank in 1869

-Trade was promoted with the reduction of import duties from 1863

-Government subsidies were offered to enable private entrepreneurs to develop railways

-Foreign investment in Russia was encourage with a government-guaranteed annual dividend

-New legislation regulated joint-stock companies, to encourage "safe" investment

-Government support was offered for the development of cotton industry (seizing the opportunity created by the American Civil War in 1861-65 to capture former American markets), and mining in the Donets Coalfield

What does "joint-stock company" mean?

A business owned by shareholder who invested their own capital in the enterprise.

Positive outcomes of Mikhail von Reutern's reforms

-Von Reutern's reforms forced former tax farmers to look elsewhere to invest, while the opportunities provided by the government subsidies and trade treaties encourage enterprise. The use of foreign technical expertise and capital also supported industrial expansion and the railway network saw a marked expansion. Overall, there was an annual average growth rate of 6% during von Reutern's term of office.

-Although textiles remained the dominant industry, there were also new developments. Oil extraction began in Caspian Sea port of Baku in 1871 and an ironworks was set up in Donetsk in 1872, which started mining the rich ironfields of the Krivoi Rog region. In 1879, the Naphtha Extraction Company was established by the Nobel brothers, to exploit the coal and oil extraction further.

Negative outcomes of Mikhail von Reutern's reforms

Despite the improvements, Russia's economy remained comparatively weak. A third of all government expenditure went on the repayment of debts and the Russian currency- the rouble- was subject to wild variations in its value. The limitations of the Emancipation Edict, and a taxation system which left 66% of the government revenue coming from indirect taxation, kept the peasantry poor and the domestic market small. Furthermore, tariff reductions meant a decline in government revenues and the decision was taken to raise these again from 1878.

The industrial "take off" under Vsyhnegradsky and Witte:

Key profile on Ivan Vsyhnegradsky

Ivan Vsyhnegradsky (1832-1895) began his life as a priest but his entrepreneurial skills enabled him to accumulate wealth through investments. In 1884, he was made a member of the Council of Ministers where he drew up a new programme for technical education. In 1886, he joined the Council of the State and from 1887-1892 was head of the Ministry of Finance. Here he successfully reduced the budget deficit but only because of harsh measures.

Ivan Vyshnegradsky Actions

Tariffs were raised in the 1880s, and under Ivan Vyshnegradsky, who took over in 1887, a prohibitive import tariff of 30% of the value of raw materials was introduced. This was designed to boost home production and considerably helped the iron industry of southern Russia as well as the development of industrial machinery.

Vyshnegradsky needed to balance the budget while financing enterprise. As well as negotiating some valuable loans, for example from the French in 1888, he also increased indirect taxes and mounted a drive to swell grain exports.

Positive outcomes of Vyshnegradsky's policy

On the surface, the policy appeared very successful. Between 1881-1891, grain exports increased by 18%, as a percentage of total Russian exports, and by 1892 the Russian budget was in surplus.

Negative outcomes of Vyshnegradsky's policy

This remarkable export drive was achieved at the expense of the peasants who paid the taxes and saw their grain requisitioned by the State. Many were left with no reserve stores for the winter and it was put about that Vyshnegradsky said "We ourselves shall not eat, but we shall export". A result of this policy was witnessed in 1891-1892 when bad harvests brought widespread famine, in which many thousands died. Vyshnegradsky was dismissed in 1892, largely because of this disaster, made worse by his own policy.

Great Famine 1891-1892

The 1891-1892 famine affected 17 of Russia's 39 provinces. There had been an early winter and a long, hot, dry summer, which ruined crops. A population weakened by hunger became susceptible to disease, so when food began growing again, cholera and typhoid still continued to kill more. This was a double tragedy as the able-bodied workers who succumbed to disease left families destitute with no breadwinner to provide for them. Over 350,000 died from starvation or disease. The government failed to organise adequate relief and it was left to volunteer groups to help the stricken peasants.

Sergei Witte key profile

Sergei Witte (1849-1915) had worked in railway development. In 1892, he was promoted, firstly to Minister of Communications, and the to Minister of Finance, a post he held until 1903. He was an able minister and the author of the 1905 October Manifesto. He became Russia's first Prime Minister that year, but resigned after six months. He opposed the entry of Russia into WW1 on economic grounds, and died shortly afterwards in 1915.

Sergei Witte Actions

Vyshnegradsky's successor, Sergei Witte, was totally committed to economic modernisation as a means to curbing revolutionary activity. Witte believed that the only was forward was to continue with the protective tariffs, heavy taxation and forced exports to generate capital. Witte also sought additional loans from abroad and, foreign investment increased considerably.

Foreign investment statistics 1880-1895

1880- 98 million roubles from foreign investment

1890-215 million roubles from foreign investment

1895-280 million roubles from foreign investment

How did Sergei Witte use the foreign investments?

Much of the investments went into mining, the metal trades, oil, and banking. Witte also encouraged engineers, managers and workers, from France, Belgium, Germany, Britain and Sweden, to oversee industrial developments and advised on planning and techniques. With their help, there was a huge expansion of the railway network.

Positive outcomes of Sergei Witte

Russia's rate of growth enabled it to move up the league table of industrialised nations to become the world's fourth-largest industrial economy by 1897. This growth helped to increase Russian exports and foreign trade, although the bulk of the export trade was still in grain rather than industrial goods.

The railways

Russia's first railways had been completed before this, in 1837, and a line linking St. Petersburg and Moscow had opened in 1851. However, thanks to state support, there was a huge expansion of the railways network in the years 1855-1894, and by the mid-1890s 60% of the whole of Russian railway system was owned by the State.

Agriculture and the Land Issue:

What was the effect of Emancipation on the Russian economy?

Emancipation failed to bring any fundamental change in agricultural practice. Although there was considerable variation, the average peasant received only a little less than four hectares. High taxes, grain requisitions, redemption payments, and the traditional farming practices perpetuated by the mir elders hampered agricultural change. Yields remained low in comparison to Western Europe and although the government established Peasants' (1883) and Nobles' (1885) Land Banks to facilitate land purchase, the loans they offered often merely increased debts.

Land Banks

The Peasants' Land Bank held funds and reserves of land. They were set up to assist peasants who wished to acquire land directly or though purchase from nobles. The Nobles' Land Bank was designed to help nobles with the legal costs involved in land transfer and in land improvement schemes. Interest rates on loans from these banks were kept deliberately low. They helped to increase peasant ownership and between 1877-1905, over 26 million hectares passed into peasant hands. However, they also helped to prop up some inefficient farms, which continued in their traditional ways.

Summary of outcomes of agricultural policies

There was an overall increase in agricultural production in the 1870s and 1880s, largely thanks to the efforts of the kulak class to respond positively to Vyshnegradsky's export drive. However, the disastrous 1891-1892 famine showed that the basic economic problem, which Emancipation had been expected to solve, remained: the average Russian peasant had too little land to become prosperous.

Summary of Economic Developments 1855-1894

-the backwards Russian economy began to develop after defeat in the Crimean War and emancipation

-the State played an active role in promoting industry. Financial policies and the encouragement of overseas investment and expertise were crucial

-the peasantry were forced to support industrialisation by the drive to export grain and an increase in indirect taxation

-Railway development was a crucial first step and, in addition to traditional textiles, heavy industry and oil grew more important