The Value of Banks' Political and Business Connections in the Russian Industrialization of the 1890s and the Crisis of 1899-1902

Do personal connections matter for the performance of commercial banks in the period of economic development and financial stress? In the 1890s, the Russian Empire, when undergoing rapid stateled industrialization, grew through foreign capital inflows into the national debt and through the state's procurement of industrial output. In 1899, the inflow of foreign capital fell sharply, initiating a financial crisis and a recession in heavy industry. In response to the crisis, authorities introduced a law which removed bankers from the boards of companies. Using newly collected historical data, this paper finds that the banks which experienced greater distress during the crisis had more personal connections to heavy industrial companies, those that had been most stimulated by state policies to expand production in the 1890s. These banks also had more personal ties to top government officials, those who were closest to the epicenter of policymaking. In contrast, during the industrial development of the 1890s, banks' personal connections to heavy industrial companies and top officials were positively related to bank performance. These findings suggest that well-connected bankers might fail to provide the valuable expertise and foresight that is expected from them in a time of crisis when decisive action is required to adapt to a rapidly changing economic environment.