The Russian Review/Volume 1/February 1916/Germany and the Russian Markets
Germany and the Russian Markets.
By Oscar M. Kartoschinsky.
Long before the war, it was said in Europe, and particularly in Russia, that of all the colonies Germany had, Russia was the most profitable one!
And there was truth in this statement. The whole of Russia, from the Western provinces bordering on Germany, to the most remote corners of Siberia, was flooded with articles of German production. The trade-mark "Made in Germany" had penetrated through every pore of the Russian body politic. German cloth was rapidly driving out the English. German foot-wear largely replaced not only the imported goods, but even that produced by the Russian factories. The dry goods were almost entirely of German make. Paper, chemicals, and drugs came across the border in enormous quantities. The dyes were almost exclusively German.
In metal industries the Germans were even more successful. As a result of thorough and efficient work on the part of their salesmen and other commercial representatives, the French and English tools and cutlery were almost entirely driven out of Russia, and their place was taken by those of German make. Russian carpenters, cabinet-makers, masons, paper-hangers, locksmiths, blacksmiths, and mechanics of all kinds were almost all equipped with tools imported from Germany.
In the field of agricultural implements and machinery, the Germans encountered considerable difficulty in competing with American goods. In view of the fact that there exists an import duty of 2r. lOcop. per "poud" (36.11 pounds avoirdupois) on agricultural implements brought into Russia, the Germans could not compete with the Americans in point of cheapness. Moreover, the reputation of American agricultural machinery in Russia is firmly established.
But the Germans found a way of getting around this difficulty also. The import duty regulations make an exception in the case of parts of agricultural machinery, needed for replacement or repair. The Germans made advantageous use of this, by leaving the sale of machinery in the hands of Americans, and displacing them in the field of selling parts. German factories, working exclusively on production of parts for agricultural implements, rapidly grew up in the Western provinces of Russia. Notable example of this kind are the works of Schmidt in Kovno, Otto Erbe in Riga, "Forum" in Zaverze, and many others.
Russian foundries and factories imported most of their machinery from Germany. German steam-engines, gasoline and electric motors were used almost exclusively.
As a matter of fact, most of the foundries and factories of Southern Germany, particularly in Westphalia, worked almost solely for the Russian markets. The fame of such manufactories as the machine works of Bergman and Co. was due almost entirely to their export trade to Russia. The Russian market was largely responsible for the rapid growth of German factories producing typographical supplies and materials.
All this was achieved by Germany in a comparatively short time. In 1904, the German exports to Russia amounted to only about 50,000,000 marks. But during the year following, taking advantage of Russia's weakened condition on account of the Russo-Japanese War, Germany succeeded in signing a commercial treaty with Russia, which practically compelled her to deal almost exclusively with Germany. This treaty made it possible for German exports to gain a virtual monopoly of the Russian markets. During the year preceding the declaration of war, German exports to Russia amounted to over 800,000,000 marks, which means that they increased sixteen fold during one decade.
But something else was needed besides a favorable commercial treaty in order to make such an enormous development possible. The moment the German manufacturers, merchants and exporters realized the value of the Russian markets, they began to apply all their energies towards obtaining control over them. Whole armies of German salesmen, and often the manufacturers themselves, travelled through the country, trying to induce the Russian businessmen to deal in goods of German make, in preference to all others. And they were, in most instances, very successful.
The exporters were not anxious, at first, to make large profits. On the contrary, they were satisfied with a very small return, as their main object was to place on the Russian markets as large quantities of their goods as was possible. They were not disturbed, or discouraged, by the fact that Russian businessmen are accustomed to buying on credit. Realizing that the rate of interest on investments in German government bonds is only two, or two and one half per cent, and that the rate paid by private banking institutions is only about three per cent, German businessmen were perfectly willing to extend credit to the Russians, charging them five per cent, and more. This credit operation alone was considered very profitable in Germany.
The writer has often come in contact with cases in which the German manufacturers were greatly disappointed when some Russian merchants preferred to buy on cash terms. This deprived them of their profits on the discount operation, and they often used every possible means of persuasion to induce the Russians to give them promissory notes instead of cash. And it was not only large firms, with large surplus ot capital, that engaged in these operations. Even small firms, which often had to seek loans themselves, were very anxious to sell on credit. The notes, signed by Russian merchants and bearing interest at the rate of five percent or more, were readily discounted by German banks of exchange, which charged only two or three per cent. It should be noted here, however, that going into bankruptcy is quite common among Russian businessmen. In such cases, as is customary everywhere else, either no payment at all is made on obligations, or else some sort of settlement is effected. Postponement of payments on promissory notes is very frequent.
All this was, of course, well known in Germany and was fully taken into account. Still, it did not deter the German businessmen from going into the Russian field. Their business organizations and associations proved to be an ample defence against such bankruptcy troubles. One of the provisions of the charters of their associations binds all in the associations to refuse selling to any Russian merchant who, through fraudulent bankruptcy, failed to settle satisfactorily his accounts with any German firm. In this way Russian businessmen were compelled to be extremely careful in settling their accounts with the German creditors.
Moreover, German businessmen who traded with Russia were not content with the information concerning financial reliability furnished by the best Russian inquiry offices. They had their own registers, their information being partly based on the personal study made by their representatives in Russia. The German firms were always ready to exchange such information among themselves.
It is very interesting to note that one of the best inquiry-offices concerning the rating of the Russian businessmen was that of Schimmelpfeng, in Berlin. This credit-house developed its activity to such an extent, that, within a comparatively short period of time, it was compelled to establish branches at Petrograd and Moscow. It even opened a temporary branch at Nizhni-Novgorod, during the celebrated annual fairs. The services of this inquiry-office were employed not alone by German exporters but by Russian dealers as well. Thus the Germans knew more about the financial standing of the Russian businessmen than the Russian themselves.
The Germans spared no pains and paused before no difficulties, in trying to accomplish their main purpose, viz., to make articles of their manufacture indispensible in the Russian markets. English and American goods were never able to compete with the German in point of cheapness. When it did happen that other firms, foreign or Russian, succeeded in outselling the Germans in some commodity, the latter not only strove to regain their position by sending hosts of salesmen to different parts of the country, but even went so far as to establish their works in Russia. The case of factories producing machine parts, of which we have already spoken, is a notable example of this. The economy in transportation, and the absence of import duty usually enabled them, in such cases, to regain their places by driving out the competing firms.
Such considerations were responsible for the large number of German factories that sprang up in the Western provinces of Russia bordering on Germany, and now occupied by the German troops. Chemical works, machine shops, textiles factories grew up like mushrooms, created by the energy and the initiative of the German businessmen, who were ever securing a stronger hold on the Russian markets. Thus the markets of vast Russia, like the fat cows of Pharaoh's dream, was being swallowed up by the lean cows, the business firms of Germany.
The War has put a stop to this activity of the German business organizations which were developing and extending their field of action with almost incredible celerity. Whatever the outcome of the War, it is more than probable that the Germans will never occupy in Russia the position they have held hitherto. But the Russian markets still remain, with their needs increased by the War. They have to look to other sources of supply and will, in the near future, seek other sellers.
The development of Russia's own resources cannot, naturally, proceed rapidly enough to supply the immediate wants of the Russian markets. Russia will still, for many years to come, remain essentially a buying nation. A large export trade with such a country would be a profitable and mutually beneficial business activity for an enterprising commercial and manufacturing nation, with broader business and politico-economic policies than are found in some of the European countries.
When the sudden upheaval that struck Europe in the summer of 1914 made Russia realize her dependence on Germany for imports, she began to supply the immediate needs by turning to the only available source near home, the small Scandinavian countries. Their ability, however, to supply the markets of Russia is obviously insufficient. And the Russian businessmen finally began to turn to the one great, available source of imports, the American Republic across the Atlantic.
The War affords the United States an opportunity of engaging in import and export trade with the largest buying nation in the world. Only, this opportunity must be recognized by the American sellers, as well as by the Russians buyers. The work of establishing close commercial relations between the two countries must be the task of both, working together, and each meeting the other half-way.
There are many things that Americans can learn from the experience of the Germans who dominated the Russian markets before the War. The principle of low prices and large quantities must be the watchword, at least at the beginning. This will be especially important since German competition, perhaps disguised in many ways, will still have to be reckoned with. But, if the American agricultural implements are enjoying a marked preference over the German, why should not this be equally true of other American goods?
The American sellers must know their buyers, at least as well as the Germans knew them. They have to organize methods for obtaining the necessary information concerning the reliability and standing of the different Russian business houses.
They must have some institution of exchange. The establishment of a Russian-American Bank, or a series of banks, so favorably regarded by the Russian business organizations, the Russian government, and the American exporters, would, perhaps, be the best means of establishing a basis for real commercial relations on a really large scale.
The game involves large stakes on both sides, but it promises large returns. It is worth the risk.