Obscure History: The 1906 loan that paved the way for the Entente Cordiale

Avram Liebenau recounts an unorthodox financial deal that decisively shifted European geopolitics

Sergei Yulyevich Witte in 1905

Sergei Yulyevich Witte in 1905

Entente Cordiale, Russian poster, 1914

Entente Cordiale, Russian poster, 1914

In April 1906, with the Tsarist state buckling under the fiscal strain of maintaining the gold standard, mounting political turmoil after the ‘revolution’ of 1905 and defeat in the Russo-Japanese War, Sergei Witte, Chairman of the Council of Ministers, secured funds in the form of a bond issue from a group of French and British banks which kept alive the ailing regime. Witte passed away just weeks later, but his loan came at the end of a masterclass in international diplomacy and manipulation. British interests, French desires and German grand plans were played off against each other to secure Russia as good a deal as they could get: 2.25 billion Francs, approximately 900 million roubles or £90 million given in bonds with rates of between 4 and 5% (just less than £11 billion in today’s money).

Witte had realised from the start of the war that European credit was the surest route to sustaining the military effort. He travelled to Paris in 1904, securing a bond issue which, despite the French foreign minister insisting on Russia buying French armaments, was favourable to Witte. After successive Russian defeats to the Japanese, Witte decided more funds were needed. He travelled to Berlin in early 1905, leveraging his favourable standing with the French financial elite against the competing German bankers to secure another bond issue of 231 million roubles.

Vladimir Kokovtsov, the assistant Finance Minister at the time, accompanied Witte but went on to Paris since, as the war reached its unpleasant conclusion for the Russian Empire, the Parisian markets had to prop up Russian bonds which had lost 15% of their value in the space of a few months. Suddenly, with the war lost, close to a hundred thousand soldiers dead or injured, the navy obliterated, and unrest in the capital, Witte sent Kokovtsov back to Paris to secure, by any means necessary, the funds that would sustain the regime. Kokovtsov lobbied the French bankers and harried and bribed the press while Witte went to London, trying to find a bank which would issue the bonds on the London Stock Exchange.

Of particular interest in the formation of the 1906 bond issue is the involvement of British banks. French banks’ relations with Russia had a long history, with various loans given to the Tsar’s coffers and close historical ties between the Russian Empire’s francophone aristocracy and Parisian high-society. Britain, however, was a rival. In the Middle East, British supremacy in Baluchistan (modern-day Afghanistan, Iran and Pakistan) was at odds with Russian interests in northern Afghanistan and Central Asia. Britain was an aggressor in the Crimean War and London, the world’s financial centre until the First World War, was a happy hunting ground for Japanese loans during their war with Russia.

“British strategic gain seems to be the most compelling explanation for their participation”

The impact of these political events on the course of financial history cannot be understated. Much literature revolves around the questions of where British capital went and why it went there - few scholars disagree that the influence of politics was always present. This loan presents us with an interesting puzzle. To what extent was politics driving the world of finance, or vice versa? Why did Britain help an unfriendly state, to paraphrase historian Olga Crisp, stave off the financial collapse of their government?

The possible explanations include pressure from the French and indeed Russians. Witte is known to have gone to London multiple times to try to secure loans, and the French wanted their Russian and British allies to reconcile, tempting Britain with the opportunity of suppressing the growing threat of Germany. When it comes to finance, profit is never far from the equation. The French media, taking bribes from Russian officials, consistently exaggerated the performance of Russian bonds, but, even before this, French loans to Russia had performed well in the markets.

British strategic gain, however, seems to be the most compelling explanation. Months later, Britain and Russia signed a treaty protecting the status quo in Persia, and two years later the Entente Cordiale was codified between Russia, France and Britain. In their involvement in the seemingly unprofitable loan, the British banks paved the way for the thaw between the two empires. The Foreign Secretaries of the period, Sir Edward Grey and his predecessor Charles Hardinge were well aware of the opportunity presented by the loan. Grey even personally promised that British banks would participate in the 1906 bond issue, presumably sensing the political and economic possibilities of the loan.

A 1904 cartoon of the Russo-Japanese war, by American cartoonist Bob Satterfield

A 1904 cartoon of the Russo-Japanese war, by American cartoonist Bob Satterfield

At the time, however, the loan was bandage on a severed artery. The funds allowed the Tsarist state to limp on by rebuilding their military and plugging holes in the haemorrhaging state coffers. Nevertheless the loan came too late to aid the war effort with Japan, and the next Minister of Internal Affairs, Pyotr Stolypin, fumbled the state’s assets in his attempts at reform, focussing his attention on the peasantry, strengthening the internal repression framework, and his notable ‘wager on the strong and sober’. Gone was Witte’s appeal to the European financial elite and encouragement of capital inflow to stimulate industrialisation and heavy industry. Instead, Stolypin focussed his efforts on agricultural production, already Russia’s primary export westward. Later, the bonds were annulled or ‘repudiated’ by the Bolsheviks.

Sometimes people and organisations do things that are seemingly irrational to pave the way for a change in attitude or policy. Crucially, the line between enemy and ally is slim. When conditions demand it, even your adversary, who helped your enemy in war, who rebuffed your attempts for funds, who two generations ago invaded your land, can suddenly become your saviour. International finance can be a wedge for political reconciliation. Russia and Britain were, briefly, the best of friends.


I'm Avram Altay Liebenau, I've been studying Russian since I was 15 and am in my final year studying BA Russian and History at University College London. I enjoy writing about varying topics, from financial history to football hooliganism.

Avram can be reached at avram.liebenau@gmail.com.

Pushkin House Team