Sergei Witte on the economic challenge to Russia

"Report of the Minister of Finance to His Majesty
on the Necessity of Formulating and Thereafter Steadfastly Adhering to a Definite Program of a Commercial and Industrial Policy of the Empire"

[*1954mr:JMH#26,1:60-74 | Translated with an introductory article, by T. H. Von Laue]

Excerpts (with boldface and hypertext links to SAC where appropriate to meet the needs of our course syllabus) =

The measures taken by the government for the promotion of national trade and industry have at present a far deeper and broader significance than they had at any time before. Indeed, the entire economic structure of the empire has been transformed in the course of the second half of the current century, so that now the market and its price structure represent the collective interest of all private enterprises which constitute our national economy.

[...] I realized, of course, that there were very weighty arguments against the protectionist system and against high tariffs. But I supposed that even the proponents of free trade must be aware that it would be extremely harmful from the government viewpoint to repudiate the protective system before those industries had been securely established for whose creation whole generations had paid by a high tariff....

[...] I did not waver in my fundamental aim to complete in detail what was so boldly begun in the reign of Alexander III and of Your Imperial Highness. The results of state policy in economic matters are the work of decades, and the most harmful of all commercial and industrial systems is that which is inconstant and wavering. [...]

[...] The absence of a strictly enforced plan and sudden changes from protectionism to almost unlimited free trade did not permit our industry to develop calmly. What was created yesterday was destroyed today; and only by the will of Emperor Alexander IIII was a customs tariff established which gave positive protection to our industries. His wise command was realized in the tariff of 1891 [...]

What are the tasks of the protectionist system?

Russia remains even at the present essentially an agricultural country. It pays for all its obligations to foreigners by exporting raw materials, chiefly of an agricultural nature, principally grain. It meets its demand for finished goods by imports from abroad. The economic relations of Russia with western Europe are fully comparable to the relations of colonial countries with their metropolises. The latter consider their colonies as advantageous markets in which they can freely sell the products of their labor and of their industry and from which they can draw with a powerful hand the raw materials necessary for them. This is the basis of the economic power of the governments of western Europe, and chiefly for that end do they guard their existing colonies or acquire new ones. Russia was, and to a considerable extent still is, such a hospitable colony for all industrially developed states, generously providing them with the cheap products of her soil and buying dearly the products of their labor. But there is a radical difference between Russia and a colony: Russia is an independent and strong power. She has the right and the strength not to want to be the eternal handmaiden of states which are more developed economically. She should know the price of her raw materials and of the natural riches hidden in the womb of her abundant territories, and she is conscious of the great, not yet fully displayed, capacity for work among her people. She is proud of her great might, by which she jealously guards not only the political but also the economic independence of her empire. She wants to be a metropolis herself. On the basis of the people's labor, liberated from the bonds of serfdom, there began to grow our own national economy, which bids fair to become a reliable counterweight to the domination of foreign industry.


It must be stated first of all that the system, because it is coherently carried out, is already beginning to show results. Industry numbers now more than 30,000 factories and mills, with an annual production surpassing 2,000,000,000 rubles. That by itself is a big figure. A widespread and tight net of economic interests is linked to the welfare of that industry. [...]

[...] We need capital, knowledge, and the spirit of enterprise. Only these three factors can speed up the creation of a fully independent national industry. [...]

The accumulation of capital is possible only to the extent that the productivity of an enterprise yields an unused surplus. In Russia, where the great majority of the population is still engaged in agriculture, that surplus of income over expenditure is insufficient for the accumulation of new capital. [...] The creation of large funds -- say, for the construction of railways -- always requires the help of the government in our country. Only the industrial regions of Your Empire show a real ability to create new capital for economic application. [...]

We have thus neither capital, nor knowledge, nor the spirit of enterprise. The extension of popular education through general, technical, and commercial schools can have, of course, a beneficial influence; and Your Majesty's government is working on that. But [...] that road is too slow. [...]

Industry gives birth to capital; capital gives rise to enterprise and love of learning; and knowledge, enterprise, and capital combined create new industries. Such is the eternal cycle of economic life, and by the succession of such turns our national economy moves ahead in the process of its natural growth. In Russia this growth is yet too slow, because there is yet too little industry, capital, and spirit of enterprise. But we cannot be content with the continuation of such slow growth. No matter how great the results attained by the present protectionist system, to accomplish what is still ahead and what the entire country so impatiently waits for is by all accounts the most difficult matter. We have to develop mass-production industries, widely dispersed and variegated, in which not customs duties but the more powerful and beneficial laws of competition play the dominant role. We must give the country such uindustdrial perfection as had been reached by the United States of America, which firmly bases its prosperity on two pillars -- agriculture and industry.  [...]

The influx of foreign capital is, in the considered opinion of the minister of finance, the sole means by which our industry can speedily furnish our country with abundant and cheap goods. [...]

Hence the natural riches of the Russian land and the productive energies of its population will be utilized to a considerably greater extent; our economy will begin to work with greater intensity.

The extent of the influx of foreign capital into Russia is usually much exaggerated. [...] It would seem, then, that of the total amount of capital invested every year in the further development of our industries, foreign capital scarcely constitutes more than one-fifth or one-sixth.

[...] [It has been] 376,000,000 rubles all together since 1887. Do these statistics prove that there is a danger for our vast Russian economy?

Either way we have to pay the foreigner, but obviously in the case of imported capital that payment will be considerably less than in the case of imported goods. [. . .]

[...] If in our present situation we cannot satisfy all our demands from our own resources and have to resort to purchasing abroad, it will be more advantageous for us to buy not finished goods but capital, which is one of the most necessary productive forces, particularly in industry. [...]

[...] Foreign capital comes to us from countries in which the capitalists are not spoiled by the fat profits to which our Russian capitalists are accustomed. It gravitates to us because in these countries capitalists are used to small profits. It works its way into our industry only because it is satisfied wherever it goes with smaller profits than its Russian predecessors. A new hundred million, flowing into the country from abroad during a given year, lowers by the laws of competition the rate of interest of all capital previously invested in Russian industry, which amounts to billions. If the country pays for these new hundred million rubles ten million in dividends, it gains still a considerably larger sum from the lower interest rates for the capital already invested in its economy. As the billions of national capital become cheaper, the prices of all industrial products will also fall considerably. We have at our disposal cheap labor, tremendous natural riches, and only the high price of capital now stands in the way of getting cheap goods. So why not let foreign capital help us to obtain still more cheaply that productive force of which alone we are destitute? [...]

[...] Historical experience shows that those human energies which accompany foreign capital are a useful creative ferment in the mass of the population of the most powerful nation and that they become gradually assimilated: mere economic ties change into organic ones. The imported cultural forces thus become an inseparable part of the country itself. Only a disintegrating nation has to fear foreign enslavement. Russia, however, is not China! [EG#1] [EG#2]

I have now analyzed the chief bases of the economic system which has been followed in Russia since the reign of Alexander III. Its starting point is the protective tariff of 1891, somewhat lowered by the subsequent trade treaties with France, Germany, Austria Hungary, and other governments. That protective system has for its aim the creation of a Russian national industry, which would contribute to the growth of our economic, and consequently also our political, independence and would make possible more favorable terms for both international and domestic trade. That task, demanding great sacrifices from the population, has in some respects already been fulfilled. Russia has now an industry of tremendous size. The interests of our entire economy are closely tied to its future. This industry, however, has not yet reached such an extent and such technical perfection as to furnish the country with an abundance of cheap goods. Its services cost the country too dearly, and these excessive costs have a destructive influence over the welfare of the population, particularly in agriculture. They cannot be sustained much longer. We cannot possibly count on an adequate growth of our industry out of our own national resources, because our store of capital, knowledge, and the spirit of enterprise is altogether insufficient to provide us with cheap industrial goods.

To obtain cheaper goods, of which the population stands in such urgent need, by a substantial tariff reduction would be too expensive. It would forever deprive the country of the positive results of the protective system, for which a whole generation has made sacrifices; it would upset the industries which we have created with so much effort just when they were ready to repay the nation for its sacrifices.

It would be very dangerous to rely on the competition of foreign goods for the lowering of our prices. But we can attain the same results with the help of the competition of foreign capital, which, by coming into Russia, will help Russian enterprise to promote native industry and speed up the accumulation of native capital.


[Witte submitted the following tables (here adjusted for ease of reading). SOURCE]

In my most respectful report on the state's Budget for 1900 I had the fortune to submit for your Imperial Majesty's examination the following figures on the growth of our industry (all except for the extractive industries) over the last 20 years:

(millions of rubles)











Food products





Animal products

























Metal goods





Other goods










The average annual growth in productionn was (in millions of rubles):

1878-1887 1888-1892 1893-1897
26.1 41.6 161.2

From these facts it is clear that over the last five year period the growth in manufacturing industry has been 4 times faster than in the preceding five year period and six times faster than in the decade before that. The development of the extractive industries is best described in the table below:

Product¬ 1877 1887 1892 1897
Coal 110 277 424 684
Oil 13


299 478
Cast iron 23 36 64 113
Iron 16 22 29 30
Steel 3 14 31 74

Such industrial growth in a relatively short time is highly significant in itself. By its speed and strength of growth Russia stands ahead of all foreign economically developed states, and there is no doubt that a country which in two decades has shown the capability of tripling its mining and manufacturing industry, contains great potential for further development and that development is absolutely essential in the near future, for however great the results already achieved, our industry is still very backward both by comparison with foreign states and in relation to the needs of the population.

In foreign states, industry is not developing as fast as in Russia because it has already reached there a far higher level than here. Thus, according to data for 1898, the production of cast iron per inhabitant was:

  • in Great Britain,   13.10 puds [a pub is just over 36 lbs.];
  • in the USA,           9.80 puds;
  • in Belgium,            9.00 puds;
  • in Germany           8.10 puds;
  • in France,             3.96 puds;
  • and in Russia only 1.04 puds.

For the same year, the figures for coal per inhabitant were:

  • Great Britain,     311.7 puds;
  • Belgium             204.0 puds;
  • USA                 162.4 puds;
  • Germany,          143.8 puds;
  • France                50.7 puds;
  • and Russia only     5.8 puds.

Despite the fact that Russia's underground deposits of coal and iron ore are very rich, the mining of these basic products is far lower here than in the aforementioned states. With regard to the third important branch of industry, cotton, we are very backward there too. In 1898 the production of cotton per inhabitant was:

  • in Great Britain, 53 pounds;
  • in the USA,       28 pounds;
  • in Germany,       14 pounds;
  • in France,           11 pounds;
  • and in Russia only 5 pounds.

In line with this lower production, we also see lower consumption. The consumption of coal per inhabitant is

  • 7 times less than in France,
  • 20-22 times less than in Germany,
  • 26 times less that in Belgium and
  • 34 times less than in Great Britain.

The same can be observed in relation to other products of mining and manufacturing. However, our backwardness cannot be explained as solely due to low consumption by the population. Despite the fact that prices for mined and manufactured goods in Russia are higher than abroad, and that imports of foreign goods are taxed at high tariffs, imports continue to grow steeply: over 11 years, from 1887 to 1898,

  • imports of coal almost doubled,
  • those of cast iron, iron and goods made from these tripled and imports of
  • wool products went up by 30%.

Obviously, if our industry grew more quickly, it could satisfy those demands which are now being met by foreign goods, while if at the same time domestic competition grew so as to reduce prices from their present excessively high level, then this reduction in prices would also favor a rise in consumption.

The weak development of our industry is also reflected in our trade. Our external trade in industrial goods in 1897 was 1,286 million rubles, that is

  • less than a half that of France,
  • under a third that of the USA or Germany,
  • less than a fifth that of Great Britain, and
  • equal to that of Belgium despite the fact that the latter country is incomparably smaller than Russia.

If we take the size of population into account, then external trade per inhabitant

  • in Russia is worth                 10 rubles,
  • in France or Germany about 75 rubles,
  • in the USA                           48 rubles,
  • in Great Britain                   164 rubles and
  • in Belgium                           192 rubles.

Both in trade and industry, Russia lags far behind the main foreign states...

In order for a broad and powerful industry to develop on the basis of natural wealth and cheap labor, active capital is needed which would undertake the difficult work of building things up. Unfortunately our fatherland is not wealthy in capital built up from savings...

If a country is not rich in its own capital but both the state and industry need it urgently, then there is no other solution to the situation but to attract capital from abroad. But if this foreign capital is directed to the development of national industry, then the latter also benefits from the inflow of more experienced, knowledgeable and risk-taking foreign entrepreneurialism, foreign capitalists will be interested in its destiny even in periods of political turbulence; but our need for state credit can be satisfied more safely from domestic savings, for in my opinion it is harmful and unworthy for a great empire to submit its foreign policy to the danger of pressure from foreign stock exchanges, and this would be inevitable, if all our state bonds were sold abroad. With our dearth of domestic capital, with the necessity of spending a significant part of the national savings on state needs, especially on increasing our war readiness and the extension of the rail network, the indispensable growth of our industry can happen only with direct help from foreign capital.... Only then can mass industry develop here with that essential domestic competition which will lead to the cheapening of its product, and therefore not only to the enlargement of internal consumption, but to the export abroad of surpluses.

But unfortunately in practice the founding of Russian public companies with the participation of foreign or Jewish capital, and also the starting up in Russia of foreign companies, meet with significant obstacles in the form of a great deal of existing legislation limiting both land ownership by foreigners (in 21 provinces of western Russia, the south and west of the Caucasus, the Turkestan region, the steppe districts and the Amur region) and by Jews (the 15 provinces in the Pale of Settlement, the Don district, the Caucasus district, Turkestan, the steppe districts, Siberia), and their right to undertake certain businesses (coal mining, oil, gold prospecting etc.).... The entrepreneurial activities of Russian capitalists are also surrounded by very significant obstacles.

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