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. Last Updated: 07/27/2016

Tsarist Debt Is a Slippery Slope

When all those years ago Mikhail Gorbachev, in the name of the Soviet government, started working out the terms of the first tens of billions of dollars of credits which he borrowed "to finance perestroika," no one could have guessed what it would all lead to.


Only the most radical of democrats were then talking about what was then the inconceivable possibility of a capitalist future: The Warsaw Pact and the Soviet Union broken up, Lenin removed from the mausoleum, and the country re-assuming tsarist debt. What is surprising is that one of the most complicated issues has been what to do with Lenin. Prime Minister Viktor Chernomyrdin last week announced in Paris that Russia will honor $400 million of tsarist Russia's debt, paying it off over the next four years.


From 1882 to 1916, the Russian empire issued securities, backed by the state, that were sold abroad in Great Britain, the United States and France. After coming to power in 1917, the Bolsheviks presented the world with, among other things, a fresh new financial idea -- if your debts are really big, you can start calling them "illegal plots of a capitalist cabal." In other words, you refuse to pay them off altogether. We will point out that in recent history this idea has been very popular -- in some of the countries of Africa and Latin America, in particular. In Russia so far this idea is still popular with most Russian companies.


The current Russian government's desire to use every means possible to strengthen its fresh-baked credit rating is understandable. This has included making the country's international debt obligations a priority, regardless of which government accrued them. Such an approach recalls similar events in history.


The funds raised with tsarist debt were used in building roads and in other investment programs. Private railroad construction societies and local governments were popular borrowers, with the state acting as guarantor -- funds did not go through the state budget, but directly into construction. There may be many ways to view the effectiveness of such a scheme, but the result was that Russia saw the creation of a wide-reaching railroad network that served as a catalyst to trade in grain and other goods. A very significant aspect was the laying of a foundation for increased production and the brief beginnings of capitalism in pre-Revolutionary Russia.


Clearly, Russia's rulers have been fixated on the concept of railroad building ever since. How else can one explain the full state guarantee on funds for building the high-speed railway between Moscow and St. Petersburg? It is true that the issue concerns internal loans.


But the purpose of Russia's foreign borrowing is to attract money into the budget. As Finance Minister Alexander Livshits has said, the $1 billion raised from the Eurobond issue will be used to cover the costs of salaries, benefits and rations for the military. In other words, in a matter of weeks it will disappear without a trace in the new Russia. This is how the new Russia's debts differ from the old.


The fate of tsarist debt is extremely instructional. At the end of World War II, Stalin achieved agreement with Great Britain and the United States on regulating demand on tsarist debt. Only the French were uncooperative. To this day, private individuals in France are carefully holding onto debt and securities totaling about 160 billion francs (nearly $30 billion), according to French calculations.


Until a week ago, trade in these securities was still being conducted on the Paris Stock Market. In other words, they have been trading securities from a long non-existent government, with no set maturity debt and interest rates that are not being paid. There are no such things as bad securities for good speculators. Who knows, maybe tomorrow we will see Genghis Khan or Ivan the Terrible bonds on those same exchanges.


It is interesting that long before recent events, the holders of these securities formed associations that, at the proper moment, would allow them make their demands. The Russian side has not forgotten its claims either. As it turns out, the French did not stand on ceremony when it came to the sacred rights of private property. Following the Russian Revolution, the assets of Russian banks in France were confiscated and the funds used to support the White movement. Meanwhile, the workers and peasants who had taken over the Russian government, unlike the pedantic French, did not bother about securities and the like, and so nearly no documentation of the Russian side's claims was preserved.


From a strictly formal point of view, the role of borrower was played by the Russian Empire -- the state formation that significantly extended beyond contemporary Russia's boundaries, including, in particular, Finland and Poland. It might even have been reasonable to ask the Finns and the Poles to chip in their share for the French.


Still, there is great significance and symbolism in the agreement on tsarist debt. The current government's assumption of the pre-Revolutionary government's obligations is the last nail in communism's coffin.


But there are also practical matters to consider. For example, why are foreign citizens being paid off faster than Russian citizens, who lost their savings at Sberbank as a result of 1992's hyperinflation?


Gennady Seleznyov, speaker of the State Duma and a Communist, is also concerned. He wonders what will happen if other countries begin to lodge claims. And what if they begin to remember not only their money but also their property -- factories and buildings that were nationalized by the Communists without permission. And what about the descendants of Russian emigrants, who abandoned their estates and lands when they left? Seleznyov is thinking: "You are taking the wrong road, comrades."


In fact, I have just remembered that I live on one of the side streets near the Arbat in an old home built in 1913, at the peak of Russian capitalism. What if the former owner, having heard that the Soviets are honoring tsarist debt, decides to return to Moscow and take what belongs to him according to his rights under real-estate law? Rentiers of All Countries, Unite!