Modernization of Russia

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In the late 19th Century, Russia’s domestic vulnerability and backwardness in foreign affairs reached crisis proportions. At home a famine claimed a half-million lives in 1891, and activities by Japan and China near Russia’s borders were perceived as foreign aggravation. In reaction, the regime was bound to adopt the ambitious but costly economic programs of Sergey Witte, the country’s strong-willed minister of finance. Witte methods rely heavily on foreign loans, conversion to the gold standard, heavy taxation of the peasantry, accelerated development of heavy industry, and a trans-Siberian railroad. These policies were designed to elevate the modernization of the country, secure the Russian Far East, and placing Russia at a commanding position with means to exploit the resources of China’s northern territories, Korea, and Siberia. This foreign policy expansion was Russia’s version of the imperialist logic shown in the 19th century by other large countries with vast undeveloped territories such as the United States and other Western countries. In 1894 the accession of the docile Nicholas II upon the death of Alexander III gave Witte and other powerful ministers the opportunity to dominate the government.

Witte’s policies had mixed outcomes. In spite of an arduous economic depression towards the end of the century, Russia’s coal, iron, steel, and oil production tripled between 1890 and 1900. Railroad mileage doubled, giving Russia the most track compared to any other Western nation. Yet Russian grain production and exports was unable to show any significant rise, and imports grew faster than exports. The state budget also almost tripled, absorbing some of the country’s economic growth. Western historians disaccord as to the merits of Witte’s reforms; while some believe that the domestic industry, which did not benefit from subsidies or contracts, suffered a setback. Majority of analysts agree that the Trans-Siberian Railroad (which was completed in 1904) and the ventures into Manchuria and Korea were the key economic losses for Russia and a drain on the treasury. Certainly the financial costs of his reforms resulted in Witte’s dismissal as minister of finance in 1903.

Count Sergei Iul’evich Witte oversaw Russia’s economic transition from 1892 to 1903. As finance minister, Witte pushed for greater exports, highly ambitious industrialization, and huge foreign loans. He intended to modernize Russia and make it more competitive with other Wester nations. These policies continue on even after Witte was dismissed in 1903 and were expanded by Witte when he returned to government as premier in 1905-1906, and by his successors.

Most accounts laud Witte’s creativeness and ambition. By financing industrialization and securing foreign capital, Witte played a key role in facilitating Russia’s development. The country enjoyed thrilling economic growth, a healthy pace of industrialization, and other aspects of modernization that would not have been possible in other circumstances. Witte remains a hero to those who believe that, Russia could have been different if he had been given more leadership.

Witte does have some detractors. By capitalizing on foreign borrowings, Witte based Russia’s development on the stability of foreign capital markets and with that he left the economy vulnerable to foreign security requirements. Industrial and infrastructure progression, focused on heavy industry and large-scale enterprise, created a state of unbalance in the Russian economy. Even when it expanded to greater heights, the Russian economy created divisions, difficulties, and other conundrums in Russia’s modernizing society, problems that strongly contributed to revolution in 1917.

Historians have the tendencies to praise Count Sergei Iul’evich Witte’s role in the political and economic history of tsarist Russia. His administration as minister of finance (1892-1903), negotiation of a favourable peace treaty in the Russo-Japanese War of 1904-1905, and role in promoting a constitutional political order after the Revolution of 1905 are all frequently cited as progressive developments and led to his accrual of his countrymen’s honour and respect. Yet, Witte modernization and development policies had flaws. Nowhere was this more clearly visible than in his plans for Russia’s economic development, which, though ambitious and in some ways successful, exacerbated existing problems and created new ones. Their long-term implications for the country’s economic and social stability were strenuous.

Observing the problems with Witte’s approach to modernization and development is not to deny that Russia needed drastic major reform. Russia’s defeat by Western powers in the Crimean War (1853-1856), its lack of industrial development, poor infrastructure, and enserfed rural population left it much weaker than its competitors, and everyone agreed on that fact. What one should realize, however, is that bridging this gap was not originally Witte’s idea. The eradication of serfdom and other meaningful administrative and judicial reforms carried out in the 1860s predated Witte’s ministerial appointment by thirty years. The initiative most closely associated with him, ambitious railroad expansion, had begun a dozen years before he reached high office. Between 1880 and 1890 his predecessors oversaw the expansions of Russia’s railroad network. Witte carry on this development by more than trebling its size in the last decade of the nineteenth century, but he could hardly claim the idea as his own.

Railroad development was undeniably beneficial, but several other existing policies continued and expanded by Witte were not so beneficent. In a struggle to revived Russia’s domestic economic growth, the Russian government had encouraged an increased export of wheat and other agricultural products, as well as high tariffs and other protected measures to limit competitive foreign imports. Witte’s predecessor as minister of finance, Ivan Vyshnegradskii, had pushed this policy to an extreme in the late 1880s and bore little responsibility for the famine that broke out in 1891-1892. That human catastrophe exposed the lack of wisdom behind the export policy, which failed to establish a surplus of food to compensate for even a season or two of poor harvests. Witte, however, continued to exert high pressure on agricultural exports. Like his predecessors, he also maintained high tariff rates against foreign imports to preserve a favourable trade balance. These measures had been and remained a thorn because Russia’s major trading partners both placed retaliatory tariffs on Russian grain and found their finished industrial exports is much less competitive in Russia. In this vicious circle Russia’s agricultural sector lost ground in international markets to North and South American produce, which could be shipped to European nations cheaper and easily via new transport and refrigeration technologies, while Russia lost out on cheap and efficient opportunities to modernize its productive capacities. The adaptation of the gold standard at Witte’s urging made currency exchange more rigid and denied Russia the prospect of using a flexible value currency to its advantage in international trade.

The first major consequence was agricultural exports, though greater and greater in volume, were insufficient to finance Russia’s industrial development. As a result, Witte had no choice but to take on massive foreign loans. What made Witte peculiar was that he could rely only on a single source of foreign investment. Germany, recognizing a strong Russia as a threat, had closed its capital markets to traditionally generous Russian borrowing in the late 1880s. Britain, at least until 1900 continued to see Russia as its most serious international competitor, also hesitated to help it develop and instead opted to invest in its own colonial empire, its economic condominium in Latin America, and the safer and less threatening United States. The United States directed most of its investment into domestic development and remained a nation of debtor until World War I. Its suspicion of Russian intentions in Asia and dislike of Russia’s bad treatment of Jews and other minorities contributed to its reluctance to finance Witte’s modernization program. The finance minister was thus forced to rely on the support of the worlds only other major financial power, France, which strategic circumstances had made Russia’s an ally since 1892.

Witte’s reliance on French financing posed several challenges. Poorer than the three other potential creditors, France could offer only mediocre amounts of what might otherwise have been obtained. Although French banks held about 40 percent of Russia’s public debt by 1900, their investment capital’s absolute value was very limited and will only be applied on select projects. While it would have been more sensible to spread French investment evenly, a policy that greater funds would have facilitated, most loans were spent in a patchy way that created unevenness in Russia’s economic development. As economic and military historians have pointed out, it was this unevenness in growth, rather than “backwardness” in the country’s general economic situation, that bedevilled Russia’s effort in World War I and harmed its prerevolutionary urban stability.

Worse still, if France suffered a major financial crisis or reconfigured its strategic policy in a way that left it at odds with Russia, its loans would have disappeared, and no other power would have likely step up as Russia’s banker. At the start of World War I in 1914, this was exactly what happened. The French economy faced a heightened difficulty, and its own war effort quickly consumed investment capital that would have been otherwise loaned to Russia. The case was also true for Belgium, the impressive banking sector of which had also financed some of Russia’s development, found itself in the fight of its life when the Germans invaded. Britain and the United States did issue out some wartime credits, but despite the obvious advantage of supporting a strong Russia to battle Germany, they were usually small in amount, late in payment, and unfavourable in terms. This problem had not risen while Witte was in government, but its emergence during World War I exposed the questionable foundations upon which he had based his development program and by 1917 it led to catastrophe.

Just as Britain, Germany, and the United States had strategic reasons to avoid major financing of Russian development; France accepted it largely out of strategic imperative. After its defeat by Germany in 1870-1871, France suffered two decades of diplomatic isolation accepting the fact that it could never defeat Germany on its own should there be a rematch. Germany’s ill-advised decision to forgo its strategic relationship with Russia after 1890, however, left the latter open to a new alliance partner. Studying the situation from a geographical perspective, the French identified Russia as a second front that would divert German military resources in the event of war. After the two countries accepted a mutual defensive alliance; financing Russia’s development, and by extension its effectiveness militarily, became a major French policy. Yet, this objective only proves to be a liability for Russia’s economy. As time went on and the French grew increasingly wary of German military might, they began placing more onerous strategic conditions on their loan packages. With each passing years, these conditions privileged projects of military importance such as railroad construction in the Russian Empire’s western borderlands to facilitate rapid Russian troop mobilization over more broadly useful development in other regions and economic sectors. In addition to exacerbating the Russian economy’s unevenness, the situation deprived civilian, consumer, and industrial projects of funds. As the Russians discovered in 1914, many of these needs were equal or more important than the specifically military projects demanded by the French, many of which were in any case made irrelevant by German advances in the first year of World War I. Yet, Witte’s decision to depend on French finance left Russia with no other choice.

Dependence on foreign loans as a development tool slammed the door on several much valid and less risky domestic sources of revenue. The greatest flaw in Witte’s program rested in his ambivalence toward rural modernization. Happy though he was encouraging grain exports, he did absolutely very little to modernize Russian farming. Although Russia possessed some of the world’s richest farmland, most of its rural population produced only slightly more than the subsistence level. This setting had roots in the country’s traditional communal form of land tenure and in a rapid increase in the rural population over the course of the nineteenth century, but there is nothing in Witte’s program which would allow for the improvements necessary to alleviate the situation. The only major government institution that gestured in that direction would probably be the Peasant Land Bank existed to help assist the repayment of peasant dues left over from emancipation and the purchase of gentry land for peasant use. Consumer credit, other forms of small-scale financing, and general government support for rural development all common in the West at the time passed Russia by. Foreign corporations trying to sell farm machinery consistently reported bleak sales and disobliging attitudes. In 1911 there were only 166 tractors were tilling the vast fields of European Russia, compared to 14,000 in the United States. Witte’s inability to close this gap weakened his overall program. More efficient and greater agricultural production would have created greater surpluses for export. Increased exports would then have helped balance Russia’s trade deficit and reduce its reliance on high tariffs. Bigger export revenues would have allowed for more domestic development without the need to resort to foreign borrowing. However, all of these positive achievements had to begin with measures that Witte neglected to take.

It is also worth noting that despite his great influence, Witte was unable to implement any legislation that would allow peasants to leave their neighbourhood and set up private farmsteads like those common in Western Europe. Giving modern values of private property, individual profit, and freedom from intrusive institutions of communal life, these measures were advocated by Russia’s renowned economists during his time in office, but were only implemented by a later premier, Petr Stolypin, in 1906.

Modernizing the Russian government’s domestic revenue collection was another lost cause under Witte’s administration. Even though he tried to rationalize and standardize Russia’s system of taxation and tax collection, the more innovative approaches found among Russia’s competitors were sorely lacking. Most state revenue continued to be generated from direct taxes, excise duties on imports and certain essential commodities. In 1894 Witte expanded this system to include a government monopoly on liquor. Yet, these measures were inadequate to fund the needs of a modern state. Witte’s tinkering with the efficiency of collecting the extant direct taxes did increase revenues but only marginally, it did however embittered peasants community and the growing ranks of the urban poor, who felt squeezed and realized the economic truth that direct taxes, which usually assess the same amount or percentage from everyone paying, were regressive and thus fell disproportionately on them. The state monopoly on liquor was an even stranger development. Ultimately accounting for about one-third of the government’s revenue, it cast a long moral shadow since Russia’s official cultural, social, and religious institutions formally against drinking and decried the abuses of alcoholism. Good subjects were paradoxically discouraged from engaging in an activity that furnished the state with much of its revenue. The liquor monopoly also became another case of state dependence on a wavering source of income. When World War 1 broke out in 1914, the government banned vodka sales claiming it as counterproductive to the war effort, thus at a stroke cutting off much of its own revenue. The comprehensive indirect taxation systems prudently adopted by West European nations and the United States before World War I made no inroads into Russia until the influence of war forced it to consider a national income tax in 1916.

Although Russia experienced steady economic growth before and in a way even during World War I, Witte’s eleven-year tenure as minister of finance left it with many problems. The Empire’s heavy dependence on foreign capital was inefficient and surrendered an important amount of decision-making power to the strategic needs of another nation. Its agricultural sector remained overlooked, underdeveloped, underutilized as a source of revenue, and yet nevertheless perturbed socially and politically. Its taxation system failed to access its increasing urban financial resources and left it ill prepared to pay the costs of operating a modern state. The fault for these issues lay with an incomplete process of modernization, much of which was directed by Sergei Witte.

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