Holy Roman Empire - Chapter 449

Chapter 449: Chapter 22, Bankruptcy

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Being without money is always the most painful thing, especially when there’s a whole group of people relying on you for their meals. Addressing the financial crisis is now an imminent issue.

The Winter Palace in St. Petersburg

The newly appointed Finance Minister Yevgeny reported with a mournful face, “Your Majesty, this is the expenditure report for the past month. If we don’t take action, we’ll be bankrupt in three months at most.”

Financial bankruptcy isn’t a first for the Tsarist Government. If it were normal times, going bankrupt wouldn’t matter much; we could simply declare a default on our debts.

The problem now is that the newly organized homesteading movement must not stop, otherwise tens of millions will go hungry. If that happens, not only would the reforms be destroyed in an instant, but the Tsarist Empire itself might collapse as a result.

After glancing at the report, Alexander II tossed it aside and started pacing in the room.

Plans can never keep up with changes. The actual number of people involved in homesteading far exceeds the government’s estimates. More people means greater strength, but also greater expenses.

After hesitating for a while, Alexander II finally asked, “If we stop international debt payments starting now, can we get through this crisis?”

Defaulting on debts isn’t a good choice, but the problem is that the Tsarist Government really has no money left. Whether continuing to take international loans or issuing bonds, the Tsarist Government has tried it all.

No one wants to lend money to a pauper, and even if the Russians can offer collateral, everyone is worried about the promise not being honored.

Due to the war, we have lost some of the fertile lands in Eastern Europe, causing a significant decrease in the government’s financial revenue.

If it weren’t for a sum discovered during raiding households, the government would have gone bankrupt long ago. War consumes much, and reforms are equally insatiable for gold, leaving Alexander II with little room to choose.

After thinking for a moment, Finance Minister Yevgeny answered, “If we suspend some projects and ensure the success of the homesteading movement, it shouldn’t be a big problem.”

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The time to make choices had arrived. Having suffered from transportation inconveniences before, Alexander II formulated an ambitious Russian rail plan.

With a total length of 150,000 kilometers, once this plan was completed, Russian-occupied Eastern Europe would be connected. Prussia and Poland could almost be pronounced finished.

Alexander II decisively made his decision, “Well then, let’s do that!”

Postpone the issues of development, what’s urgent is to solve the immediate problems. On the surface, the Great Homestead increased the amount of land, giving farmers their own plots, which seemed like a good thing.

However, there is a significant hidden danger. The biggest problem is the inevitable overproduction of food in the future, a concept that everyone understands as “plentiful grains harm the farmers.”

Perhaps for a capitalist economy, increased food production is good news, as it can lower the cost of feeding workers.

But for farmers and nobility, it is a disaster. Many of the nobility are sabotaging the efforts, mainly because they fear for their future interests.

The Russian Empire is already a major grain exporting country. If production capacity continues to increase, internal consumption won’t be enough, and exporting will become the only choice.

From the start, the Tsarist Government was prepared to drive down European grain prices. Other countries might dump industrial products on them, but they could likewise dump agricultural products.

If we could monopolize the grain supply on the European Continent, that would be best. To achieve this, the Russian Empire’s grain must be transportable.

Railroads were an indispensable link; without solving the transportation issue, the plan would forever remain on paper.

No one opposed Alexander II’s plan; compared to the grand scheme, getting past the immediate crisis was more important.

As long as we could survive the first year and the land’s yield could ensure the basic livelihood of the people, the subsequent issues would be easier to address.

In this era, Russian peasants are easy to sustain. Having just transformed from serfs to free people, as long as they had enough to eat, they hardly dared have any other demands.

Once the most critical moment passed, the rest would be easier to handle.

On July 7, 1869, the Tsarist Government sent notices to the major creditors, declaring: The Russian Empire is fiscally bankrupt and unable to continue to honor its debts.

The European world was in an uproar. For many recent years, no European country had defaulted on their debts, giving people the illusion that the integrity of governments had improved.

The Russians have now shattered everyone’s illusions; failing to default wasn’t due to solidity in finances but merely the lack of a pressing need to do so.

But when money runs out, one has no choice but to default. After all, when there’s no money to be had, and one’s life can’t be given, the rest is up to others to manage!

Besides the creditors, the European public had turned into spectators, casting their eyes towards Vienna with a schadenfreude-filled expression on their faces.

Austria had been prospering recently and naturally drew the envy of many. As the largest creditor of the Russians, many were now mocking Austria’s misfortune.

It was known that the Russians had to pay a monthly installment of 3.0684 million Divine Shield, amounting to 36.8208 million Divine Shield annually.

This astronomical figure was enough to shatter the Russian-Austrian Alliance. Even the best relationship couldn’t withstand the devastation of interests.

Franz was not as panicked as outsiders imagined. He had mentally prepared for the possibility of the Russians defaulting on their debts when he first refused to provide loans to the Tsarist Government.

No, to be more accurate, he had been prepared for this from an even earlier time. After all, the financial situation of the Tsarist Government had always been precarious, and it was already an achievement to have lasted until now.

Despite thorough preparation, follow-up work still had to be done. Most of the loans were guaranteed by the Vienna Government; otherwise, few banks would have dared to take the risk.

Apart from issues, the Vienna Government also had to take responsibility. Fortunately, most of the loans were secured, and now the Vienna Government’s job was to ensure that the Russians honor their collateral.

Prime Minister Felix, frowning, reported, “Your Majesty, based on the initial contracts, our preliminary estimates indicate that even if the Russians execute the collateral, we would still have to bear 38 million Divine Shield for compensation within the scope of our guarantee.

We cannot bear this sum directly; the Russians must be made responsible for it. Now that the finances are tight, let us extend the repayment period; the Tsarist Government cannot remain bankrupt forever.”

Franz nodded. Other people’s debts could be ignored, but one always has to collect on one’s own. Even if there’s no money, the Tsarist Government must acknowledge the debt first; otherwise, the Vienna Government would also find it hard to explain to the public.

“Communicate with the Russians through the Foreign Ministry and urge them to fulfill the contract. If they are unable to repay the debt, allow them to delay payment.”

The debtor is the boss, and right now, the Tsarist Government is this boss.

It was impossible to use military force to collect the debt; such a small amount of money was nowhere near enough to cover military expenses. Unlike Mexico, which was easy to bully, Russia still had real strength.

The Tsarist Government might have been out of money, but that did not mean the Tsarist nobility were penniless. With centuries of accumulation, they could still support a war at the very least.

The nobility and the Tsarist Government would either lose together or thrive together; in times of foreign invasion, they would quickly become as close as family.

There were many creditors of Russians, and based on the principle of bullying the weak and fearing the strong, it was expected that the debts to smaller countries would be repudiated, while debts to larger countries would generally be deferred.

Deferred debts also varied in priority; those guaranteed by foreign governments were certainly to be repaid first, while private commercial loans without government guarantees were mostly likely to be repudiated or delayed as long as possible.

After picking and choosing, the Russians had at least reduced their foreign debts by four billion Divine Shield through this round of repudiation. If the Tsarist Government had been tougher, the reduction might have been even greater.

What comforted Franz was that the debt from the recent Near Eastern war had already been mostly repaid by the Russians. Setting aside the interest earnings, at least the principal had been reclaimed.

As for the debts from the Prusso-Russian War, there was no question that they had not been recovered. Even the banks with the strongest business capabilities had managed to recover only about thirty to forty percent of their costs.

The Austrian Government did not suffer losses; most of the loans had additional conditions attached. Through years of trade between the two countries, economic development had been stimulated, and the increased tax revenue was sufficient to compensate for the losses.

Financial institutions, however, were a different story. If they were guaranteed by the Vienna Government, then it was manageable. Even if the Russians repudiated the debt, the Vienna Government was responsible for ensuring the safety of the principal.

For commercial loans that did not secure a guarantee, the trouble was significantly bigger. These loans were the financial institutions’ own responsibility.

Philipote was just such an unlucky individual. He wasn’t a banker, but merely the owner of a securities company.

Because he coveted the high commissions offered by the Russians, he agreed to sell a batch of bonds on behalf of the Tsarist Government. Now that the Russians had declared financial bankruptcy, according to Austrian law, his securities company had to assume joint responsibility.

A middle-aged, portly man hurried over and said, “Mr. Philipote, the news of the Russian bankruptcy must have spread by now, and people outside are demanding that we redeem the bonds early.”

In this era, the Austrian securities regulatory system could be described as crude; securities companies that issued bonds were obliged to be responsible for the public who bought the bonds.

Simply put, the right to audit bonds was in the hands of the securities companies. This was not merely a good thing, as with the auditing power came corresponding responsibilities.

Such as: ensuring that the bonds could be redeemed properly, explaining the risks to the bond-buying public in advance, and should default occur, the securities company would have to bear a certain amount of indemnity responsibility.

This indemnity standard was determined jointly by securities companies and the government. The standard set by the government was not less than fifty percent of the principal, but securities companies, to attract business, often set a higher standard.

There were more than a few securities companies in Austria that boasted principal protection, and Philipote’s securities company just happened to be one of them.

According to the promise, now that the Russians had repudiated their debt and were unable to redeem the bonds normally, Philipote’s securities company had to repay the principal on their behalf.

He had to honor the commitment he had made. Philipote now regretted it; the commissions offered by the Russians were as high as 15 percent, which was abnormal to begin with, but unfortunately, he had not resisted the temptation at the time.

Philipote asked anxiously, “Berg, how much money do we still have in our accounts?”

Running away was not an option; the police were already watching him. If he attempted to flee, he would likely be caught before he could even leave Austria.

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Coming up with a plan for damage control was critical, and taking a loss was inevitable. It was now clear that these bonds could not be sold at face value, but perhaps someone might be willing to take them off our hands at a discount.

After all, these were bonds issued by the Tsarist Government. Even if it is now insolvent and unable to redeem them, there is still a possibility that the Russians might want to rebuild their reputation by repurchasing them in the future.

Ordinary citizens couldn’t see that far ahead, or rather, couldn’t wait that long.

Berg thought for a moment and said, “The account totals 3.8946 million Divine Shield, but after deducting the operating expenses of the securities company, only 3.56 million Divine Shield is available for use.

“Mr. Philipote, there are many people outside demanding early redemption. I’m afraid this money is not enough to cover the compensation,” he said.

Philipote sighed and responded, “I know. Send someone out to soothe the public first, tell them that we agree to redeem the bonds ahead of schedule according to the contract.

I remember the sales contract did stipulate that in the event of force majeure that prevents the normal servicing of bonds, we are indeed responsible.

However, this responsibility is only applicable after the bonds have matured. Now, their request for early redemption is a breach of contract; they need to pay a penalty of 20 percent, and we only need to pay back 80 percent of the principal.”

“Spread the word that we’ll start redeeming the bonds three days from now, set up only one window for it, and increase the verification steps to delay the process as much as possible.

I also need to gather information to see if there’s a chance for things to turn around. After such a big event, the Vienna Government can’t possibly remain unresponsive.

Don’t worry, this matter won’t bring us down. The company has only issued a little over 8 million Divine Shield in Russian bonds; it’s not possible that all the citizens will demand early redemption!

You should also find out if anyone in the market is buying Russian bonds. Even at half the price, we might accept it.”

The profits of the securities company have always been substantial. When Philipote founded the company ten years ago, he invested less than 300,000 Divine Shield, but now just the working capital is more than ten times that figure.

Over the years, he had drawn millions of Divine Shield in profit dividends from the securities company. Although the crisis had resulted in significant losses for him, with proper handling, there was still hope of getting through it.

Philipote had to feel fortunate that the Russians had a poor reputation to begin with, causing their bonds to be unpopular in the market. Otherwise, if he had managed to sell tens of millions of Divine Shield worth of bonds in one go, he might have had to resort to jumping off a skyscraper.

Of course, if he had managed to sell tens of millions of Divine Shield in bonds, he wouldn’t have been able to carry out the deal in the first place.

The laws of Austria were not a joke; issuing bonds beyond one’s capacity would definitely invite government intervention.

Otherwise, what would stop someone from establishing a shell securities company, issuing bonds in the market to gather wealth, then decamping with the funds or declaring bankruptcy? Wouldn’t that allow one to rapidly become fabulously rich?

Clearly, the law has spelt out that this kind of get-rich-quick scheme is not allowed.

Unlike other companies, the responsibility pursued upon the bankruptcy of a securities company is most severe. Both management and shareholders are subject to rigorous investigation, and unless everything has been conducted strictly according to regulations, basically no one can escape.

Strictly speaking, the bonds Philipote issued on behalf of the Russians were skirting the edges of legality.

There wouldn’t be an issue if nothing went wrong, but now that trouble has arisen, if he didn’t address the aftermath quickly, once the police got involved, he was most likely going to end up in jail.

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