Russia » Economics
Author`s name Michael Simpson

History of Russian Monopolies: Mystery of the First Trust

Russian government in the 20th century disapproved of monopolies
Rumors about establishment of Russia's first trust produced an effect of a stick poked into a hive. The country experienced economic recession in 1908, the recession of which monopolies were considered to be guilty. The Russian society was disturbed to the highest degree, and at that very moment people were offered an idea of a super-monopoly that was said to be a rescue for the country.

In fact, the idea wasn't quite new. At the end of the 19th century, the metallurgical industry of Russia's southern regions developed dynamically. However, in several years it was also affected with crisis.

In 1903, the 27th Congress of miners from Russia's south was held in the Ukrainian city of Kharkov. It was suggested at the congress that trust management of the metallurgical production "must be recognized the most perfect for the period." The congress addressed to the government for assistance in organization of a trust.

However, the appeal was ignored: the authorities disliked the gap between the rich and the poor, the leaders and the outsiders of the metallurgical industry of Russia's South. Economic reviving that followed soon in the industry, price growth and more profitable military orders allowed to put the initiative off. It showed up once again in 1907-1908. Crisis of that period seriously affected the metal-working and machine-building industries. Simultaneously, the metallurgical industry experienced overproduction; enterprises suffered serious losses and had to compete for clients. Fixing of high monopoly prices for all kinds of merchantable metal was the only way-out of the competitive struggle. Southerners also wanted to overpower Ural, their old rival remarkable for its cheap manpower and vast woods.

The idea of trust creation was once again suggested by the Russian South Dnieper metallurgical society headed by former first chairman of the Prodamet enterprise, Yasyukevich. The man was connected with Belgian and French business elite. Preparation for organization of a trust was done by Yasyukevich and Prodamet. As a result of this work, a conference of representatives from southern metallurgical plants was held in St.Petersburg in May 1907.

Merger of two largest joint-stock enterprises, the Dnieper society with two plants and the Russia-Belgian one, was announced at the conference. Later, the Novorossiisk society joined them. Soon, negotiations on trust creation were moved to Brussels. That was done to be away from the government which official opinion was not in favor of monopolies, and second, Belgians had concerns of their own in the Russian metallurgical industry.  At the end of winter 1908 (other sources say, early in spring), a provisional agreement on terms of the trust creation was concluded in Brussels. In addition to the above mentioned societies, more joint-stock enterprises declared the intention to join the trust. 

The top-priority measure to be done after opening the trust was to exchange all shares and bonds of the companies for those of the new trust. The trust's total capital in shares and bonds made up about 172 million rubles approximately. Influential European banks: Paris's General Society, the Paris Union, the Paris-Netherlands bank, the Lyons Credit bank and Brussels's General Society, agreed to sell the securities on terms rather profitable for the banks.

The founders assured that creation of the trust was unprofitable; they said they would suffer losses because they purchased the business for a price that was higher than its actual cost. Their foes insisted that at least the banks would make a profit on the business. In fact, five of the 9 prospective members of the trust were so poor that couldn't even pay dividends. The banks immediately decided to profit by that fact: they set prices for securities of the outsiders too high. Shares of some members were valued at a price 2.5 and even 8 times higher than their shareholder value.

However, the initiative group of the trust creation didn't aim at speculative enrichment; the trust founders were dreaming of establishment of a giant corporation that would be the largest in Russia and in Europe on the whole. The strong Dnieper, Russian-Belgian, Novorossiisk and partially Bryansk societies were to take dominating positions in the trust. On the one hand, they agreed to purchase securities of unprofitable enterprises. On the other hand, they got the trust's controlling interest (66.2%). What is more, those societies got 65% in the bond capital, including cash converted in bonds. The leaders at that got a right for preference shares management, while outsiders got only common shares. From a prospective profit of 8.5 million rubles the outsiders would get only 2.4 million rubles. What is more, the Dnieper, Russian-Belgian, Novorossiisk and Bryansk societies got all management instruments in the trust, including norm-fixing in production and closure of uneconomic enterprises.
 
According to provisional estimates, the trust was expected to cover 89% of the southern metallurgical production and 45% of the all-Russian one. It was expected to control 83% of cast iron melting in the south of the country and 52.5% in Russia on the whole. 

After all, the trust had no rival in the country. It was expected to accumulate 73.4% of railing production, 33.9% of sheet and universal iron and 36.5% of special iron production. However, the figures do not provide exact notion of the scale of the designed super-monopoly. As the anti-trust monopoly calculated, the trust power considerably increased because the new establishment held vast natural resources, 2.5 billion poods of ore (one Russian pood equaled 16.38 kilogram) and 100 billion poods of coal.

It was quite natural that the new trust would get profitable military orders which, in its turn, would give it instruments of influence upon the government. Foreign diplomacy was one of this instruments. This perspective made everything went dark before the eyes of patriots and apologists of Russia's independent development.

At present, it is difficult to say to what extent the fears were grounded. However, examples of different large syndicates (such as Produgol, Prodamet, Prodsakhar and others) with participation of foreign partners demonstrate that Russian businessmen often used the partners' assistance in lobbying interests on the domestic political scene.

In fact, the Russian authorities also took the opportunity to attract foreign business in the country. Then-Minister of Finance Sergey Vitte said that foreign investments attraction "posed no danger to independence of the country." He cited examples of England, Germany, France and the USA at that.

Mikhail Azarov
Russky Fokus

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