Sanctions can hurt an economy, but they can be revoked. Reputation, on the other hand, is not so easily repaired. Vladimir Putin has spent years working to distinguish modern Russia from its Tsarist and Soviet predecessors, and he is well aware of the costs associated with proposing nationalization as a policy of war. His willingness to shed what might have been one of his most important legacies to pursue a war in Ukraine suggests that the past few months represent a marked turning point in Putin’s goals and his vision for Russia’s place in the the world.
In the late 19th and early 20th centuries, the Tsarist regime gained a favorable reputation with foreign lenders. The Tsar’s firm control over the economy, which included the power to revoke corporate charters at any time, made direct investment in the Russian economy risky. But the Romanov dynasty’s 300-year rule and control over roughly one-sixth of Earth’s land has made the regime seem like a reliable debtor. Lured by high interest rates and often encouraged by glowing articles written by journalists secretly bribed by the Russian government, foreign investors lent a staggering amount of money to the Tsarist government during its last decades in power.
Foreign investor confidence in Russia’s economic stability remained high even as the Tsar’s regime grew fragile. At the start of World War I, 1.6 million French citizens held Czarist-guaranteed securities worth 4.5% of France’s national wealth. During the war, American and British companies invested more in the Tsarist government to ensure that their ally could maintain an eastern front in the war. In 1916, even as major American companies, such as International Harvester and Singer Manufacturing, found themselves under strict state controls over the repatriation of their Russian profits, the New York City Bank issued $75 million in Russian Treasury bonds. backed by the dollar in the American markets.
The fall of the Tsar from power in March 1917 and the subsequent rise of Vladimir Lenin and the Bolshevik Party the following November therefore came as a shock to those with a financial interest in the country.
In January 1918 – in a move that shook world markets and would haunt foreign investment in Russia for decades to come – the Bolsheviks put their communist ideology into practice by nationalizing all foreign-owned property and repudiating all foreign debts. accumulated by their predecessors. When the Bolsheviks emerged victorious from the Russian Civil War in 1921, they solidified themselves not only as the government of the former Russian Empire, but as a pariah in the global economy.
Yet even as they forgave foreign debts and continued their commitment to ending global capitalism, Bolshevik policymakers put a lot of effort into trying to attract foreign capital. They developed a foreign concession committee to woo Western companies such as BP and Shell to develop the Baku oil fields, signed an agreement with Armand Hammer to build a pencil factory in Moscow, and granted the future American ambassador to the USSR Averill Harriman a claim to the mine. manganese in Georgia.
Despite a good faith effort to honor the contracts they offered, the Soviet government in the 1920s remained too weak to enforce them, and the relatively few projects that came to fruition were either canceled or taken over by the Soviet Union. state at the end of the 1920s. decade. In light of the Soviet Repudiation of 1918, many foreign observers ignored the fact that the Soviet government actually reimbursed many concessionaires for the capital they had invested plus interest, and instead presented these concessions as a trick. communist more to steal foreign property.
In the 1930s, the Soviet regime turned its search for capital inwards, but it never completely withdrew from world markets. Soviet leaders, for example, negotiated contracts to buy technology from foreign companies, including Ford, in the 1930s. But the emergence of the USSR as one of the two Cold War “superpowers” after World War II meant that it no longer depended on Western investment for its economic development.
Yet the USSR continued to trade with foreign companies during the Cold War. In 1972, the Soviets made a deal to bring Pepsi to the USSR, which they bought first with Stolichnaya vodka and later Soviet ships.
Yet even after decades of economic growth and a near-flawless track record of meeting financial obligations to foreign trading partners, the specter of the 1918 Nationalization Decree continued to haunt the USSR, making foreign companies wary of such commitments.
In the mid-1980s, when Mikhail Gorbachev turned to British and French financiers for loans to stabilize a Soviet economy that was falling alongside the price of oil, both countries imposed repayment of Tsarist debt as a condition. prior to the granting of loans. Soviet negotiators eventually relented, though they eventually settled on the cheap, increasing the costs of Russia’s post-Soviet transition to a market economy.
When the Soviet Union dissolved in 1991, the Russian Federation assumed most of the external debt accumulated by the USSR. This debt, along with Boris Yeltsin’s rule by decree, helped make the 1990s a decade of economic and political instability for Russia.
On August 17, 1998, the government declared a moratorium on payments to foreign lenders as part of its response to the ruble crisis, confirming investors’ doubts about Russia’s economic stability. Within a month, Russia’s already low credit rating of BB, assigned by S&P, plunged to an abysmal rating of CCC-. On January 27, 1999, the country was in selective default, where it remained on December 31, when Yeltsin announced he was stepping down as president to be replaced by his prime minister, a relatively unknown former KGB agent named Vladimir Putin. .
Putin inherited a plummeting Russian economy. Although it continued to slump during Putin’s first year in office, rising oil prices allowed Russia to resume debt payments and bolstered Putin’s leadership as he restructured the country’s legal system and recentralized state power at the federal level.
Then, as now, Putin’s lack of interest in human rights was evident. Yet, in his first eight years in office, what seemed most remarkable to many at home and abroad was the success of his economic program. Like the weather magazine said in naming him Person of the Year 2007, Putin had “achieved an extraordinary feat in imposing stability on a nation that has rarely known it”. And just like his tsarist predecessors, Putin found the image of stability a valuable asset in attracting foreign investment.
In 2008, when Putin completed his second term as president, foreign direct investment inflows into Russia amounted to $74.8 billion, almost 30 times more than in his first full year in office, and the country’s S&P credit rating was upgraded to BBB+. Had he ended his tenure in Russian politics at the time, Putin would likely be remembered for saving the Russian economy and setting it on the path to firm integration into the international economy. – which is no small feat.
Instead, Putin’s brutal war on Ukraine is once again bringing Russia to the brink of financial ruin. Having spent his early years in office leading Russia away from its legacy of economic disrepute, he reawakened that reputation with surprising force. And unlike his early years in power, Putin can no longer argue convincingly that the country’s leadership represents a break with that troubled past. Putin’s destabilization of Russia’s place in the world suggests that he is now pursuing a very different set of goals. As long as Putin and his party remain in power, they will serve as a reminder of Russia’s long history of economic instability, stifling the prosperity of the Russian people and threatening that of its neighbors.