Holy Roman Empire

Chapter 449: Bankruptcy

Lack of money is always the most painful issue, especially when there’s a large group of people relying on you for their livelihood. Solving the financial crisis had become an urgent matter.

Winter Palace, St. Petersburg

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

Financial bankruptcy was not a new occurrence for the Russian government. Under normal circumstances, they could simply default.

The current problem, however, was that the newly organized land reclamation campaign couldn’t be halted. Otherwise, millions of people would go hungry. This would not only ruin the reforms but could also lead to the collapse of the Russian Empire.

After briefly glancing at the report, Alexander II threw it aside and began pacing the room.

Plans could never keep up with changes; the actual number of people participating in the land reclamation campaign far exceeded the government’s estimates. More people naturally meant greater costs.

After a long period of hesitation, Alexander II finally asked, “If we stop paying our international debts now, can we get through this crisis?”

Defaulting was not an ideal choice, but the Russian government truly had no money. They had already tried obtaining international loans and issuing bonds.

No one was willing to lend money to the impoverished, even if the Russians could offer collateral. People were still worried that they would not be able to fulfill their promises.

Due to the war, the Russian government lost some fertile land in Eastern Europe, leading to a significant reduction in financial revenue.

If it hadn’t been for a substantial windfall from confiscations, the government would have already gone bankrupt. War is expensive, and so is reform; Alexander II had very few options left.

After considering the situation, Finance Minister Evgeny replied, “If we suspend some projects and focus entirely on the land reclamation campaign, we should be able to manage.”

It was time to make a decision. After suffering a setback due to poor transportation, Alexander II devised an ambitious Russian railway plan.

The plan called for a total of 150,000 kilometers of railway tracks. Once completed, it would connect Russian-held Eastern Europe, effectively spelling the end for Prussia and Poland.

Alexander II decisively ordered, “Alright, let’s do that!”

The issue of development would have to be put on hold as solving the immediate problem was more important. On the surface, the large-scale land reclamation seemed beneficial, increasing the amount of land and providing farmers with plots.

In reality, there were significant hidden dangers. The biggest problem was the inevitable future overproduction of grain, which would lead to low prices, harming the farmers.

While increased grain production might be good for a capitalist economy by lowering the cost of feeding workers, it would be a disaster for farmers and nobles. Many nobles were dragging their feet, mainly because they feared for their future profits.

The Russian Empire was already a major grain exporter. If production continued to increase, domestic consumption would not suffice, making export the only option.

From the beginning, the Russian government was prepared to drive down European grain prices. Just as other countries could dump industrial products on them, they could reverse the process by dumping agricultural products.

Ideally, they would monopolize the grain supply for the European continent. Achieving this required ensuring that Russian grain could be transported out of the country.

Railroads were an essential part of this plan. Without solving the transportation issue, the plan would remain just that—a plan on paper.

No one opposed Alexander II’s plan. Compared to a grand vision, it was more crucial to solve the immediate crisis.

As long as they survived the first year and the land produced enough to meet the basic needs of the people, subsequent issues would be easier to manage.

At this time, Russian peasants were not difficult to satisfy. Having just transitioned from serfdom to free citizens, they had few demands beyond having enough to eat.

As long as they survive the most critical period, it would make future problems more manageable.

On July 7, 1869, the Russian government issued a notice to its major creditors, declaring that the Russian Empire was financially bankrupt and unable to continue meeting its debt obligations.

The announcement caused an uproar across Europe. For several years, no European country had defaulted, leading the public to believe that governments had become more reliable.

The Russians have now shattered everyone’s illusions. The lack of defaults was only because the countries’ finances were relatively stable, and the need to default hadn’t arisen.

When the money runs out, defaults become inevitable. If a country has no money and refuses to pay, the creditors are left to deal with the consequences.

Apart from the creditors, the general European public became spectators, casting their eyes toward Vienna with expressions of schadenfreude.

Austria’s recent success had naturally aroused jealousy. As Russia’s largest creditor, many people were now watching Austria’s reaction with amusement.

It’s worth noting that Russia was supposed to pay 3,068,400 guilders in interest and principal each month, totaling 36,820,800 guilders annually.

This astronomical figure was enough to shatter the Russo-Austrian alliance. No matter how strong the relationship, it could not withstand such financial strain.

Franz was not as alarmed as the outside world might have imagined. He had already prepared for the possibility of Russia defaulting when he refused to extend more loans to the Russian government.

In fact, this mental preparation had been in place even earlier, considering the Russian government’s perpetually poor financial state. The fact that they had held on this long was remarkable.

Regardless of how well-prepared he was, aftercare was still necessary. Most of these loans were guaranteed by the Austrian government. Otherwise, few banks would have taken on the risk.

Now that issues had arisen, the Austrian government was also responsible. Fortunately, most of the loans were secured with collateral, and the Austrian government’s current task was to ensure the Russians honored these securities.

Prime Minister Felix frowned as he reported, “Your Majesty, based on the contracts we’ve signed, our preliminary estimate is that even if the Russians honor their collateral obligations, we will still need to cover 38 million guilders within the scope of the guarantee.

We cannot directly bear this cost. The Russians must be held accountable. Since our finances are currently strained, we should allow them to defer repayment. The Russian government cannot remain bankrupt indefinitely.”

Franz nodded in agreement. While he can disregard others’ debts, he must recover his own funds. Even if they are out of money, the Russian government must acknowledge the debts or the Austrian government will struggle to explain it to the public.

“Have the Foreign Ministry communicate with the Russians and urge them to honor the contract. If they are unable to repay the debt, they can defer the payment.”

In this situation, the debtor holds the power, and the Russian government is currently in that position.

Using military force to collect the debt is out of the question, as the amount owed doesn’t justify the military expense. Unlike Mexico, Russia is not easily bullied and they still have considerable strength.

While the Russian government may be out of funds, the Russian nobility is not necessarily in the same position. With centuries of accumulated wealth, they can still support a war effort.

The nobility and the Russian government share the same fate; when faced with foreign invasion, they will quickly unite.

The Russians owe debts to many creditors. Following the principle of bullying the weak and fearing the strong, they are likely to default on debts owed to smaller countries while deferring payments to major powers.

Deferred debts are also prioritized. Debts guaranteed by national governments are repaid first, while private commercial loans without such guarantees are mostly defaulted on if possible, or otherwise deferred indefinitely.

After carefully selecting and prioritizing, the Russians managed to reduce their foreign debt by at least 400 million guilders through this debt repudiation. The reduction could be even greater if the Russian government was strong enough.

What comforted Franz was that the Russians had already repaid most of the foreign debt from the Near East War. Even without considering interest gains, at least the principal had been recovered.

However, the debts from the Russo-Prussian War remained unpaid. The most skilled banks could only recover 30-40% of the costs at best.

The Austrian government did not suffer losses since most of the loans came with additional conditions. Over the years, through bilateral trade and economic growth, the increased tax revenue was sufficient to cover the losses.

For financial institutions, their circumstances differed. Loans guaranteed by the Austrian government were relatively secure. Even if the Russians defaulted, the Austrian government would ensure the principal’s safety.

However, commercial loans without such guarantees were problematic, and financial institutions had to handle them on their own.

Philippot was one such unlucky individual. He was not a banker but merely the owner of a securities company.

Lured by the high commissions offered by the Russians, he had helped the Russian government sell a batch of bonds. Now, with the Russians declaring bankruptcy, Austrian law stipulated that his securities company was responsible for joint and several liabilities.

A middle-aged, overweight man hurriedly ran in and said, “Mr. Philippot, the news of the Russian bankruptcy has spread, and people outside are demanding we redeem the bonds ahead of schedule.”

At this time, Austria’s securities regulation was notably stringent: securities companies issuing bonds were required to take responsibility for the bondholders.

Simply put, the authority to review bonds lies with the securities company. This isn’t just a privilege; holding the review authority also comes with corresponding responsibilities.

For example, the company must ensure the bonds can be redeemed normally, inform bond purchasers of the risks in advance, and if there’s a default, the securities company must bear some compensation responsibility.

The securities company and the government jointly determine the compensation standard. The government’s minimum requirement is no less than 50% of the principal, but securities companies often set a higher standard to attract business.

Austria has more than a few securities companies that promise capital protection, and Philippot’s company happens to be one of them.

According to their commitment, now that the Russians have defaulted and can’t redeem the bonds, Philippot’s securities company must repay the principal.

A promise made must be kept. Philippot now regrets his decision. The 15% commission offered by the Russians was suspiciously high, but he couldn’t resist the temptation at the time.

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

Running away wasn’t an option—the police were already watching him. If he tried to flee, he’d likely be caught before he could even leave Austria.

Finding a way to manage the aftermath was crucial. Paying compensation was inevitable. These bonds clearly couldn’t be sold at face value anymore, but perhaps someone might buy them at a discount.

After all, these were government bonds issued by the Russian government. Even if they were currently bankrupt and unable to redeem them, the Russians might still repurchase them in the future to rebuild their credit.

Ordinary people can’t see that far ahead, or they simply can’t wait that long.

Berg thought for a moment and said, “We have a total of 3,894,600 guilders in the account, but after deducting the operating expenses of the securities company, we only have 3,560,000 guilders available.

Mr. Philippot, there are many people outside demanding early redemption, and this money won’t be enough to cover the payments.”

Philippot sighed and said, “I understand. First, send someone out to appease the crowd. Tell them we agree to the early redemption according to the contract.

I remember there was a clause in the sales contract that stipulated if the bonds couldn’t be redeemed due to force majeure, we were indeed responsible.

However, this responsibility kicks in after the bonds mature. Now, their demand for early redemption is a breach of contract, which incurs a 20% penalty. We only need to pay 80% of the principal.

Spread the word that we will start early redemption in three days, with only one window open and increased verification steps to delay as much as possible.

I also need to gather more information to see if there are any changes. Such a significant event can’t go unnoticed by the Austrian government.

Don’t worry, this won’t ruin us. We issued just 8 million guilders in Russian bonds, and not all bondholders will demand early redemption, right?

Also, try to find out if anyone in the market is willing to buy Russian bonds. Even if they are sold at half price, we might consider it.”

The profits from the securities company had always been substantial. When Philippot founded the company ten years ago, he invested less than 300,000 guilders, and now, just the working capital alone is several times that amount.

Over the years, he has drawn dividends of over a million guilders from the company. This crisis has caused significant losses, but if handled properly, there is hope for overcoming it.

Philippot couldn’t help but be thankful that Russian bonds were inherently poorly regarded and unpopular in the market. If they had managed to sell tens of millions of guilders worth of bonds, he would already be contemplating jumping off a rooftop.

Of course, if he had been able to sell tens of millions of guilders worth, he wouldn’t have been able to handle the business. Austrian law is no joke. The government would intervene if bond issuance exceeded the company’s capacity.

Otherwise, one could simply set up a shell securities company, issue bonds to raise funds, sell them off, declare bankruptcy, and run away, quickly amassing wealth.

Clearly, this method of getting rich overnight is well documented in legal texts.

Unlike other companies, bankruptcy and liability issues are strictly enforced for securities companies. Management and shareholders face thorough investigations, and unless everything is strictly in compliance with regulations, it’s unlikely anyone would escape unscathed.

Strictly speaking, Philippot’s issuance of bonds for the Russians was already pushing the boundaries of legality.

If nothing had gone wrong, there wouldn’t have been a problem. But now that something has happened, if he doesn’t quickly handle the aftermath, and the police get involved, he’s likely headed for prison.