The evolution of the central bank in Russia

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The history of the Russian banking system and the Central bank particularly, reflects the processes and tendencies that have taken place throughout the country's evolution.

However, in Russia the central feature in both banking and industrialisation is the role of the state, far more so than elsewhere. As will be seen, the Russian State and consequently the Russian Central Bank have being played a major role in Russian financial system since the very beginning. Also, this essay will show the link and continuity between the State Bank of the Russian Empire and the Central Bank of the modern Russia.

THE STATE BANK OF THE RUSSIAN EMPIRE

The history of the Russian banking began in 1754 (before Catherine the Great, 1762-96) when the Russian Government founded the first government or state bank, the first in Europe. Furthermore, Russia surprisingly was the first European country to issue an official paper currency: the paper rouble, from the reign of Catherine the Great. Although this and subsequent state banks were really Land Banks. They were designed chiefly to serve the financial needs of the Russian nobility, especially for financing their estates through mortgages.

The outcome of the Crimean War in the 1850s, where Russia was defeated, led to a financial crisis that almost saw the collapse of the State Bank. It was reorganised

in a division of the Ministry of Finance in 1862, as the State Bank of the Russian Empire or Gosbank. In its early years, Gosbank acted as a regular commercial bank: i.e., a bank of deposit, transfer, short-term lending, and discounting, filling a vacuum in the financial markets, when there were very few private banks.

To expand activity Gosbank established over 900 branches throughout Russia and several other State-Banks were founded by and governed by it. 1

All these assisted Gosbank to finance the land reform and municipals.

Private joint-stock banking began only in the 1860s: First, on a very small scale, in St. Petersburg and later, especially from the 1890s, in Moscow. By 1900, there were 43 joint-stock banks in Russia, of which six handled about half of Russia's banking business.

Quite unlike some others European Central Banks, Gosbank willingly aided the private banks and for this reason it played a major role in the formation of the early joint-stock company banks. Gosbank even supplied substantial part of their capital and because of that its officials sat on boards of directors of the most banks it financed. For this reason, the chief cost of the private banks was their dependence on Gosbank, their necessary subservience to Gosbank, which would always protect them. 1

The policy of putting Russia on the international gold standard in the late 19th century played an important role in the further development of the Russian Banking system.

It began from the building up of the gold reserves of Gosbank, and by 1897 the gold reserves of Gosbank were ten times those of the Bank of England. In addition Gosbank became the sole issuer of paper currency, and the official regulator of the Russian money supply. The new gold-backed rouble was even better than gold because the paper rouble issues of Gosbank were in fact always less than the bank's total gold reserves.

However many criticised Gosbank and pointed out that the official policy was unnecessary, too costly for the current underdeveloped Russian economy and 100% gold backing was far too restrictive. On the other hand, statistics show the real benefits of Gold Standard Policy and its real success in attracting and retaining private investment capital from abroad. Thus the level of foreign investment in the period 1897 to 1913 was four times that of the preceding 16-year era 1881 - 1897 and about 55% of total capital investments, came from foreign financing source. 1

The Industrial Depression of 1900-1906 (culminating in 1905 Revolution) along with Gosbank's policy of supporting the private banking, ensured foreign investors in Russian industries that it was more prudent to invest in Russia indirectly, via the investment banks. For this reason Russian investment banks became the chief mechanism for funnelling both domestic and foreign capital into Russian industries and they took the leadership role in the new investment boom of 1906 to 1914. It is obviously that Gosbank strengthened its positions even more.

By the outbreak of the First World War, Russia had become the greatest international debtor in the world. The state debt worsened between 1914-1916. The cornerstone of Russian financial policy, the gold standard, was abandoned, and the rouble was undermined by inflation. Unfortunately that was only the beginning of greatest tribulation the Russian economy and finance have ever known.

THE PEOPLE'S BANK OF THE RSFSR

AND

THE STATE BANK OF THE USSR

With the October 1917 revolution the Bolsheviks nationalised the banks, but made no attempt to restrict inflation. The market economy was demolished, inflation soared, and money became virtually valueless.

Lenin stressed that "the big banks represent the potential state apparatus, which we need for putting Socialism into practice.... One State Bank with branches in every rural district, in every factory - that is already of nine-tenths of the Socialist apparatus." 2

According to this premise the banks had to be nationalised and merged into one Central Bank. For this reason, on the second day of taking power the Soviet Government took the offices of the State Bank and commissars were appointed as the heads of many branches of the State Bank, which later was renamed the People's Bank of the Russian Soviet Federative Socialist Republic (still later it was renamed the State Bank of the USSR).

Banking was declared to be a State monopoly, all private joint-stock banks and banking houses were merged in the State Bank. Safes were to be opened by owners in the presence of inspectors, all money found was to be deposited on personal accounts in the State Bank, and gold coin or bullion was to be confiscated. One-month later capital of private banks was confiscated; All State and foreign loans were annulled.

Nevertheless, several credit institutions were created later but the State Bank not only preserved but also increased its role as the predominant credit institution and as a bank of banks. Soviet banks were restricted to the minimum functions of a banking system. They did not undertake any kind of investment activities in stocks, bonds, sales of securities and commodities. It was not the aim of Soviet banks to get profit from their credit operations. Instead of this they had to carrying out economic and political directives of the Soviet Government. More than 150,000 employees of Gosbank service about 600,000 clients and most part of all banking operations are with the approximately 260,000 enterprises.

What was such a huge army of soviet bankers doing?

One of the answers is in the Gosbank's official publication:

"Economists of the Gosbank are widely used by the control organs of the party and of the government to check the state of affairs in trade, in public eating places, in various establishments that service the population, and in the development of the network of movie theatres, and to conduct complex investigations of the business and financial activities of enterprises and organisations in the fields of production, trade, procurement, and other branches of the economy." 3

It is clear that the State Bank even played a role of the financial police.

More then 80 years the Communist Party through the Government, Labour Unions, committees, commissions and State Bank controlled, dominated and oppressed all areas of public and private life in the Soviet Union. However, the powerful empire called USSR had one weak point: energy exports accounted for 80 percent of the USSR's expanding hard-currency earnings (from 1973 to 1985). The hard time for the Soviet Union began in 1970th when the oil crises led to the long period of world oil prices plummeting. The dollar profits, the USSR had enjoyed for more than a decade, were wiped out. 4

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