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At the beginning of the 20th century, the Russian Empire was the biggest borrower in the world. Russian government bonds were traded in all major financial centers, including London, Paris, Amsterdam, and New York. But in February 1918, after the two Russian Revolution, the repudiation of the debt by the Soviet government shocked international finance and triggered unanimous condemnation by the governments of the great powers. The British, and especially the French, had lost millions of pounds of foreign investment in Russia. The revolutionary Russia completely fell out of the world economy and sealed itself up in isolation, which would not be disturbed until the need to fight with others nations arose during the Second World War.

The Russian Empire
In the early 19th century, the Russian Empire turned to the world capital markets to regulate and stimulate the growth of its economy, financing its ambition and its development. The transformation from a feudal to a capitalist system proceeded little by little and required foreign investment. Until then, the russian economy was mainly dominated by agricultural and local production and thus did not stimulate the creation of a national marketplace. In 1913, foreign investors held 49.7% of Russian government debt and owned nearly 100% of all petroleum fields, 90% of mines, 50% of chemicals and 40% of metallurgical industries. With such a scope of foreign investment, it is only natural that Russian foreign debt was the largest of the world. France became the major lender to Russia and French investors financed the creation of iron and steel industries and mining operations. In 1914, 80% of the russian government debt was held in France and 14% in Great Britain.

World war I
Russia entered World War I in July 1914. Military spending was enormous and was financially catastrophic for the Russian government. The Russian budget deficit stood at 40 percent in 1914, 76 percent in 1915, and 78 percent in 1916. The easiest way to find new funds was to place loans on the London, New York, and Paris bond markets and to open lines of credit with the allies. Between the beginning of the war and Bolsheviks’ accession to power, the debt soared to £ 3,385 million, about 3.5 times what it had been. But the burden of the war finally caused a complete collapse of the economy and a change in the political system.

The Russian Revolution
On February 17 1917, the Tsar Nicholas II, the last Emperor of Russia, was forced to sign his abdication and the end of the Russian Imperial Government and of the Romanov dynasty. The new government decided to continue the war, which meant more military spending. The Provisional government was overthrown on October 24, 1917, and the Soviet government was created. The amounts of payments in default were enormous. Russian debt to Great Britain alone at the end of World War I was estimated at between 538 and 568 million pounds. The amount of debt to France was estimated at 3,573 million francs and Russian foreign debt to Japan equaled 147 million dollars.

The debt repudiation
The Russian Soviet Federative Socialist Republic stopped payment on foreign debt at the beginning of 1918 and declared that all debts contracted by the Russian Empire were cancelled, as well as the debts contracted by the Russian Provisional Government, so that the war could be continued from February to November 1917. In the same time, The Soviets decided to expropriate all the assets of foreign nations in Russia. They also nationalized all the banks, lands, and industries and restore them to the national estate. By repudiating the debt, the Soviet government implemented the Petrograd Soviet’s decision of 1905.

Reaction of creditors
The cancellation of the foreign debt by the Soviet Russia stunned international finance and triggered universal denunciation by the allied powers. Western governments were convinced that they should openly support the anti-Bolshevik forces to restore a capitalist order. The foreign intervention began in the summer of 1918 and finished at the end of 1920 when the Western powers were obliged to acknowledge that the Red Army had taken back control of the territory.

The golden blockade against Soviet Russia
In early 1920s, the recently proclaimed Soviet Union was worried about the restoration of its industry totally destroyed after the World War I and Civil War in Russia but the Allied powers carried out a blockade against the Soviet government. The Soviets desperately needed modern machinery and industrial equipment and were prepared to pay in gold to import goods of absolute necessity. However, none of the major banks or any government in the world could accept Soviet gold without crossing swords with the Allied governments. In fact, France, Great-Britain and USA considered that they had a right to Russian gold to compensate Russia’s expropriated capitalists and as debt repayment. The USSR could pay for machinery and equipment only by oil, timber and grains.