Part 5: The French press in the pay of the Tsar

With the overthrow of Tsarism in February 1917 and the seizing of power by the Bolsheviks and their Socialist Revolutionary allies in October, numerous previously confidential documents were made public (see further on). This allowed Boris Souvarine, a Franco-Russian communist activist to consult Russian imperial archives. He discovered a vast organisation of complicity with the French press that pre-dated the First World War, aimed at promoting Tsarist bond issues to French investors. This affair, in which influential people were corrupted and became accomplices, was denounced by the communist daily L’Humanité in a series of daily articles entitled ’The abominable venality of the French press’ that appeared over a period of several months during 1923 and 1924.

How the Tsarist regime procured the French press in order to issue bonds

Since the end of the 19^th century the empire of the Tsar had chosen Paris as its preferred financial market for bond issues. The bonds were purchased by many French investors and small savers. At the beginning of the 20^th century this funding had become a pillar of the Tsarist regime that in 1904-5 was at war with Japan at the same time as it sought to put down internal discontent and repress the 1905 revolutionary movement. After losing the war against Japan, in 1906 Russia made a big bond issue on the Paris market. Arthur Raffalovich, diplomat and secret adviser, in Paris, to the Russian minister of Finance, was charged with promoting Russian loan certificates up to the First World War. It was his correspondence with his superiors in Russia that revealed complicity in corruption and coercion between the Tsarist regime and many big French newspapers, mostly Parisian (such as Le Figaro, Le Petit Journal, Le Temps and Le Matin), big French banks (notably Crédit lyonnais and the Banque de Paris et des Pays-Bas, which has become BNP Paribas) as well as Senators and Ministers. Among them Raymond Poincaré, who was to become President of the French Republic (i.e. head of the French State) in 1913, was implicated for his actions while he was President of the French Council (i.e. head of the French government) and Foreign Minister in 1912 (his Finance Minister, Louis-Lucien Klotz was also implicated at the time); he was again President of the French Council and Foreign Minister when the scandal exploded. However, the affair was no bother to him: he remained President of the French Council until 1924, and again from 1924 also holding the post of… Finance Minister! The role played by the Paris Stockbrokers’ Corporation was central to the coercion pressed on the Tsar’s government. Between 1900 and 1914, the Russian government distributed 6.5 million francs to the French press.

When the affair blew up, the corruption of the press by the financial sector was far from being new. A scandalous French fund raising scheme to build a canal in Panama had functioned in the same way. In the case of the Russian issues the Russian empire and the issuing banks purchased advertising in the newspapers of greater distribution that praised the Russian financial situation and the solvency of the Tsarist debt. According to Raffalovich this advertising involved censorship – news of difficulties in Russia’s war against Japan or of the revolutionary unrest in 1905 was not considered to be presentable to potential investors! The documents indicate that there may also have been false subscriptions. The Stockbroker’s Corporation, newspaper board members and politicians blackmailed the Russian government into making bigger payments and so maximised their profits.

The revelations in L’Humanité are based on authentic documents. Among the incriminated newspapers, only Le Matin initiated proceedings against the communist organ. From the first day of the trial, Vladimir Kokovtsov, the Tsar’s Finance Minister almost without interruption between 1904 and 1914, and head of the government between 1911 and 1914, was called to the box. A reactionary exiled in France, it was not in his best interest to put the press under accusation but he did bear witness to the honesty of his former collaborator Raffalovich. L’Humanité was technically condemned to pay 10,000 francs damages compared to the 1,500,000 francs demanded by Le Matin and the court recognised the authenticity of the revealed correspondence. Finally, in 1924, Maurice Bunau-Varilla, the owner of Le Matin, himself highly implicated in the affair no longer hid his sympathies for the authoritarian nationalisms coming to power in Europe to resist communism. He supported Fascist Italy and later Nazi Germany. During the occupation of France, Le Matin collaborated with the Vichy regime. After the liberation of France it was shut down.

 Part 6: Russian loans never die

Even though Russian bonds were repudiated by the Soviet government in February 1918, they were still traded right up until the 1990s.

French government policy and that of other governments was directly related to this life after death.

How Russian bonds lived on after repudiation

In 1919, the French government drew up a list of Russian bond holders in France: 1,600,000 people declared holdings. Russian bonds seem to have accounted for 33% of foreign bonds held by residents of France, which was the equivalent of 4.5% of French wealth. 40 to 45% of Russian debt was held in France. One of the main Russian bonds to be exchanged on the Paris stock-market was the famous loan of 1906 which the Soviet of Petrograd had repudiated in advance in December 1905. This massive loan of 2.25 billion francs was issued by Paris in June 1906. It was destined to enable the Tsarist regime to continue repaying earlier debts and balance their books after the deb‚cle of the Russo-Japanese war. The Credit lyonnais, [1] a French bank which had specialized in issuing Russian bonds, was making 30% of its revenu from this loan before 1914.

During the period preceding and following the Soviet governmentís debt repudiation, 72% of bonds from the 1906 loan were held in France and being traded on the Paris stock-market.

A high degree of complicity united the Tsarist regime, the French government, French banks issuing Russian bonds (mainly the CrÈdit lyonnais but also the SociÈtÈ gÈnÈrale and the Banque de líunion parisienne [2]), the major exchange agencies and the French press which had been bought off by the Tsarís emissary.

Bankers were making huge profits from commissions received when the bonds were issued and from speculative operations buying and selling Russian bonds. Their sharp practice meant that the small investors bore the brunt of the risks. Newspaper proprietors pocketed bribes paid out by the Tsarís emissary. Key government members also made sure they got kickbacks. The Tsar was a prized ally, both politically and diplomatically, to the French government and the big capitalist groups of France who invested in Russia (as did Belgian capitalists).

During the war it was the French government who paid out the interest owing to each bond-holder, at a rate of 5%. The sum of interest payments made by the French government on behalf of the Russian Empire was then added to the Russian debt to France. Thus when the Tsar was overthrown by the people in February 1917, it was a blow for the French government, who had to place all their hopes on the provisional government who claimed that debts contracted by the Tsar would be honoured. Things went from bad to worse when the Bolsheviks and their allies, the leftwing Socialists, were brought to government by the Soviets in November 1917. When the Soviet government suspended debt payments in January 1918, the French government again paid the interest on Russian bonds to bond-holders. When the Soviet government repudiated all the Tsarís debts and those of the provisional government, France decided to resort to force and prepared to send troops to Russia. From July1918, four months before the Armistice was signed with the German Empire, the government sent French troops to join forces with the British troops that had taken Murmansk in Northern Russia. Then more soldiers were sent to occupy Arkhangelsk. After the signature of the Armistice with Berlin, France sent troops to the Black Sea with warships to bomb the Red Armyís positions. This caused a mutiny among French sailors. The attack against Soviet Russia was obviously not only due to the repudiation of debt; the various powers that took part wanted to eradicate a hotspot of revolutionary contagion. But the financial interests of France and its capitalists constituted a powerful motor too. The French government gave the White Russian generals financial support in their struggle to defeat the Bolsheviks because they had announced that they would honour the Tsarís debts. Paris also supported Polish and Ukrainian politicians and soldiers, and those of the Baltic republics who had won their independence or were fighting for it, in the hopes that the governments of the new States would honour at least part of the Tsarist debt. Paris took it very badly when, from 1920, the Soviets signed treaties with the Baltic republics and Poland to the effect that they considered that those countries should take no responsibility for the Tsarist debts.

What happened to Russian bond-holders when debt repudiation was made public in February 1918?

In France, in September 1918, the government proposed to exchange Russian bonds for French debt-paper. Russian bond-holders could acquire bonds for the new loan that the French government was making. In July 1919, the French government repeated the operation. In Rome, London and Washington the authorities did the same: they exchanged Russian bonds respectively for Italian, British or US bonds. As for the Japanese government, it indemnified Japanese holders of Russian bonds at a rate of 100%. [3]

Clearly, in acting in this way the governments of these countries came to the rescue of the bankers who should have been held responsible for financing the Tsarist regime and been made to bear the consequences of the repudiation of odious debt. In the case of the French, the French government had actively shared responsibility with the bankers who supported the Tsarís regime. The French government had systematically encouraged the most affluent of the middle class, to acquire Russian bonds.

It is important to note that in France, a large portion of Russian bonds were not exchanged for French bonds. Russian bonds paid better dividends than French bonds, with an interest rate of 5% in 1906 when the average rate for French government bonds was 3%.

Between 1918 and 1922, the financial press and the government put it about that the Soviet government was about to fall and that the successors would honour the Tsarist debt. Moreover, at a conference in Genoa and on other occasions, the same press insinuated that Moscow had finally agreed to acknowledge the debt. The ensuing situation was surrealistic: bonds issued by a government that no longer existed, repudiated bonds, went on being bought and sold on the Paris stock-market. This is a perfect example of fictitious capital.

In the period 1918-1919, the price of Russian bonds oscillated between 56.5% and 66.25% of their face value. (They had originally been sold at 88% of their face value). The price of sovereign French bonds at that time oscillated between 61 and 65%. The difference between the price of repudiated Russian bonds and that of French bonds was thus slim. Speculators (and the bankers who were at the top of the list) were certainly doing very well if they could buy at 56 when small holders were offloading them, frightened by rumours circulating in the press (and originating with the bankers), and then sell them on at 66.

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 Part 7: Diplomatic maouvers around Russian debt repudiation

For five weeks in April and May 1922, a summit conference was held. Britain’s prime minister, Lloyd George, played a central role in it, as did Louis Barthou, the minister of the French president Raymond Poincaré.

The main aim of the meeting was to persuade Soviet Russia [4] both to acknowledge the debts it had repudiated in 1918 and to cease calling for a global revolution.

The Genoa negotiations (1922)

There were other points on the agenda of the conference attended by delegates from 34 countries, though not the United States, but none gave rise to much debate. Among them were the adoption of monetary regulations, especially regarding the Gold exchange standard system which was adopted that year. In the absence of the United States, decisions on this issue were made elsewhere.

The conference was hosted by five major powers: Great Britain (which had just been overtaken by the United States as the first world power), France (the third world power after the defeat of Germany), Belgium (which had been the fifth world power before the war, in terms of exportation), Japan (whose empire was expanding rapidly in East Asia) and Italy.

Of the five host powers, one, Japan, still had troops occupying Soviet Siberia. It only withdrew them permanently six months after the end of the conference, in October 1922. The other 12 countries which had sent troops in 1918 to overthrow the Soviet government and put an end to the revolutionary experiment had ceased occupation of Soviet territory in 1920. In fact the utterly demoralized foreign troops had been withdrawn when their governments had regretfully noted that the White Russian generals had been irrevocably defeated by the Red Army and that no amount of foreign intervention would remedy that. It then became necessary to use diplomacy and blackmail where arms had failed.

The major powers thought that the conference would bring the Soviet government round to recognizing the repudiated debts in view of the dramatic humanitarian and economic situation in Russia. Civil war had bled the country dry and from summer 1921, catastrophic harvests had caused terrible famine. The Western capitals believed the Soviet government to be on its knees and were convinced they would get what they wanted by making the new loans and investments Russia needed conditional upon the acknowledgment of previous debts and compensation for expropriated Western companies.

France remained the most aggressive power regarding both Soviet Russia and Germany [5], with the support of the Belgian authorities. As for Great Britain, less affected by the debt repudiation, it was more open to dialogue with Moscow and had signed an Anglo-Russian trade deal in 1921 which ended the blockade and meant de facto [6] recognition of Soviet Russia.

For its part, the Soviet government was ready to repay part of the debts contracted by the Tsar on several conditions: that the other powers give Soviet Russia official (de jure) recognition; that they grant State-to-State (i.e. bilateral) loans; that they encourage private firms affected by the expropriation of their subsidiaries to accept concessions to exploit natural resources, especially in the remotest areas of Siberia, as compensation. The Soviet government thus hoped that foreign capitalists would invest fresh capital of their own money in activities that would fortify the Soviet economy. Furthermore, the government would not hear of setting up multilateral bodies to manage loans, investments or related legal disputes. Soviet government intended that Soviet Russia should remain entirely independent of foreign powers. There was no question of giving up any part of its sovereignty.

If these conditions were met, Moscow promised to resume payment of part of the Tsarist debt within a thirty year time-frame. The Soviet delegation clearly asserted several times throughout the conference that it was ready to make this concession to reach an agreement, but that they basically considered that Soviet Russia was fully within its rights to repudiate all Tsarist debt (as well as debt contracted by the provisional government between February and October 1917). Finally the conference ended in disagreement and the Soviet delegation maintained the repudiation.

Consideration of the special relationship that came about between Berlin and Moscow after the Treaty of Versailles in June 1919 is crucial to understanding how the conference was organized. The government in Berlin was composed of a coalition between the Socialists (the Social Democratic Party or SPD), the Centrists (the ancestors of Angela Merkel’s Christian Democratic Union) and the Liberals (the ancestor of the present-day Free Democratic Party), and was fundamentally pro-Western and anti-Soviet. Nevertheless, under the onus of having to pay the huge reparations imposed by the Treaty of Versailles, which meant a staggering debt, Berlin was inclined to dialogue with Moscow and come to agreement. This tendency was reinforced by the desire of big German industrial companies (including AEG and Krupp) to sell their production on the Russian market, having been their main trading partner since the 1870s, as we saw. On the way from Moscow to Genoa, the Soviet delegation had made an extended halt in Berlin to carry out negotiations and meet with the German authorities before coming face to face with the host powers in the Italian city. In the middle of the Conference of Genoa, while the host powers adopted an uncompromising attitude towards Moscow, there was a sudden coup de théâtre. The German and Soviet delegations had met in the neighbouring town of Rapallo and signed an important bilateral agreement which has gone down in history as the Treaty of Rapallo.

It is very interesting to go over how the Conference of Genoa was conducted, the negotiations that took place and the arguments used by the different sides.

The major powers who hosted it wanted to put maximum pressure on Soviet Russia by claiming that a fundamental objective of the conference was for all countries to acknowledge their public debt and for compensation to be paid. [7]

The major powers asserted in the convocation that mutual confidence could only be restored if the nations (or the governments of the nations) wishing to obtain foreign credit would freely commit themselves to acknowledging all public debts and securities that had been or would be contracted by the State, municipal authorities or other public bodies, and also to recognize their obligation to return, restore or, failing that, compensate all foreign interests for loss or damage caused by the confiscation or sequestration of their property. [8]

Immediately Georgy Chicherin, head of the Soviet delegation, retorted that the economic reconstruction of Russia and work intended to end economic chaos in Europe would be taking a wrong and dangerous direction if the most economically powerful nations were to crush Russia under demands way beyond its capabilities, as in what that country saw as its odious past, instead of creating the requisite conditions for its economic revival and facilitating its march forward to the future. [9]

In the ensuing discussion with the Soviets, who asserted that their people and their new government could not be expected to take on debts contracted by a previous despotic regime, Lloyd George replied that when a country undertook contracutal obligations towards another country or towards nationals of that country for pledged securities, that contract could under no circumstances be repudiated each time a country changed government, unless that country restitute the assets received. [10]

 Part 8: In 1922 creditor powers again attempt to subjugate the Soviets

Western governments presented a full list of demands aimed at solving in their favour the litigation over debt repudiation and expropriations decreed by the Soviet government. Those demands were presented in Genoa on 15 April 1922, five days into the conference, in a document entitled “London Experts’ Report on the Russian issue.” [11]

Western demands on Moscow

Article 1 said:
“The Russian Soviet Government shall accept the financial obligations of its predecessors, viz. the Imperial Russian Government and the Russian Provisional Government, towards foreign Powers and their nationals.”

The form and contents of the whole text clearly indicate that it listed a number of impositions by Western powers onto the Soviet government.

In the same article, we find a provision that directly contravened the treaties Soviet Russia had signed in 1920-1921 with the Baltic Republics and with Poland (i.e. countries that had achieved independence after the fall of the Tsarist regime) whereby, as we have seen, those States no longer had to pay Tsarist debts.

“The same applies to the question whether, and if so, to what extent, new States which have been recognised as such and which were formerly part of Russia, as well as States which have acquired part of the former territory of Russia, should undertake part of the obligations dealt with in these provisions.”

Article 3 claimed that the Soviet government was responsible for damages resulting from the Tsarist regime:

“Article 3.
The Russian Soviet Government shall undertake liability for all actual and direct losses, whether arising out of breach of contract or otherwise, suffered by nationals of other Powers, due to the action or negligence of the Soviet Government or its predecessors [...]”

That was in flagrant contradiction with Moscow’s position.

Article 4 granted almost all powers to bodies outside the Soviet authorities:

“The liabilities under the preceding articles will be determined by a ‘Russian Debt Commission’ and by ‘Mixed Arbitral Tribunals’ to be set up.”

Annex 1 specified the composition and competence of the Russian Debt Commission. It was clear that the Russian government would be in minority position:
“Annex I. Russian Debt Commission.
1. A Russian Debt Commission shall be established consisting of members nominated by the Russian Government and members nominated by the other Powers, together with an independent chairman chosen from outside by agreement among the other members, or, in default, named by the League of Nations, either through the Council or through the Permanent Court of International Justice. »

The commission would be entitled to issue new Russian bonds to pay former Tsarist debts and to compensate foreign capitalists whose companies had been nationalized:

“The commission will have the following functions:
(a) To constitute and prescribe the procedure of the Mixed Arbitral Tribunals, to be set up in accordance with the provisions of Annex II, and to issue such instructions as may be necessary in order to secure uniformity in their proceedings.
(b) To issue new Russian bonds in accordance with the provisions of Annex II to persons entitled thereto, under awards of the Mixed Arbitral Tribunals, to holders of existing State bonds and other bonds and stock for which the new Russian bonds are to be given in exchange, and to persons entitled thereto in respect of funded interest and repayment of capital.”

Dominated as it was by creditors, the commission was given exorbitant powers since it could even decide what revenues had to be used to repay the debt:

“To determine, if necessary, among the revenues of Russia, those which should be specially assigned to the service of the debt, for example, an allocation of certain taxes or of royalties or dues upon undertakings in Russia. Should occasion arise to control, if the commission thinks fit, the collection of all or part of these assigned revenues, and to deal with the proceeds.”

The host nations wanted Soviet Russia to agree to a supervisory institution on the same pattern as that which had been imposed on Tunisia, Egypt, the Ottoman Empire and Greece during the second half of the 19^th century. [12] This was also very much like what has been imposed on Greece since 2010.

Annex III gave full powers to issue debt bonds to the Debt Commission in which the Russian Soviet government was in a minority position:

“1. All accepted claims for monetary compensation against the Russian Soviet Government will be met by the issue of new Russian bonds up to the amounts fixed by the Mixed Arbitral Tribunals. The terms of issue of the bonds, together with all questions arising out of the conversion of existing bonds and out of new issues will be determined by the Russian Debt Commission.
2. The bonds shall carry a rate of interest to be determined by the Russian Debt Commission.”

Whereas the Russian Soviet government had clearly stated that it would not take on any debt contracted after the 1stAugust 1914 because it would be at war, the text of the memorandum handed to the Soviet delegation said that “in view of the serious economic condition of Russia, such creditor Governments are prepared to write down the war debts owed to them by Russia.”

Eric Toussaint

Previously: Repudiation of debt at the Russian Revolution – Parts I to IV

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