A Historical Take on Sovereign Default

 

  By Hassan Malik, Max Weber Fellow, HEC, 2013-2014

 

Recent events in the Eurozone have brought the issue of sovereign default back into the spotlight. Yet, in spite of recent commentary in the financial press claiming last spring’s Greek default was the largest ever, the default and repudiation by the Bolshevik government of debts incurred by the Tsarist and Provisional governments remains to this day the largest and longest-lasting in history. The default was more than just a watershed in Russian history; it also marked the end of a remarkable period of globalization stretching from the late nineteenth through the early twentieth centuries – an era some scholars refer to as the ‘first modern age of globalization.’ 

Over the last three decades, economists and historians have studied this earlier era of globalization in part to understand the present day era of financial globalization. Scholars across disciplines have, in particular, shown interest in the question of international investing, particularly in the context of what are today called ‘emerging markets.’ Social scientists in particular have sought to establish the factors that determined the cost of borrowing for countries in the international bond market. 

Drawing largely on historical financial data and automated reading of the financial press, these studies have suggested a range of factors, from adoption of the gold standard to macroeconomic fundamentals to political violence attracting or repelling investors in rich, developed economies, to or from the bonds of developing economies. Yet, as some of these scholars themselves recognize, the literature has largely ignored the role of a small but powerful group of investment banks – dubbed the ‘gatekeepers’ of international finance by economist Marc Flandreau – in shaping international capital flows. 

In my research, I use historical methods, archival sources, historical financial data to explore the decision making of these gatekeepers and the governments with which they interacted at this key period in international financial history. I focus in particular on Russia – the largest net international borrower of the age, and a country to which previous literature in the field has devoted scant attention – to determine the factors that drove banks to facilitate one of the largest investment booms in history. 

Working with documents in government and private bank archives in both Western Europe and Russia, I find that a complex combination of competitive dynamics, government interventions, and behavioral factors drove bankers to promote investment in Russia through some of the most turbulent periods of Russian and world history – a period that included the First World War and the Russian Revolution. The story of foreign investment in Russia was itself intertwined with the history of the revolution, in that the policies of the ancien régime aimed at attracting foreign capital became the focus of attacks from the opposition, which consciously fought against the regime along a financial front. In this context, investing in Russia became an act that was political as much as it was financial – something that became painfully clear to millions of foreign investors hit by the Bolshevik default of 1918. At a time when financial policy is the subject of fierce public debate and when revolutions and protest movements are sweeping several key emerging and developed markets, the case of revolutionary Russia is an important reminder both of the political and the human dimension to international investing.