“State Securitization,” or the Financial Mechanism for the Abolition of Serfdom

April 27, 2026

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Author: Author: Karina Utesheva, Senior Associate

The article was published in the Encyclopedia of Russian Securitization – 2026 Cbonds.

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Modern securitization — the issuance of securities whose payments are tied to a predetermined asset — found a vivid prototype in the 1861 reform. It cannot be said that the reform abolishing serfdom was the starting point for the development of securitization in Russia, but when examining the preconditions for the reform, as well as the mechanism of its implementation, one cannot help but notice a certain similarity. Unlike modern securitization, which transforms cash flows from loans and assets into securities, the 1861 “securitization” essentially meant using the labor capacity of peasants as collateral to obtain state loans: the peasants’ monetary obligations were transformed into financial assets secured by loans and state guarantees.

In this article, we will discuss in more detail this breakthrough financial and social mechanism, which became a kind of precursor to Russian securitization and for decades shaped the country’s economic development and social contradictions. In 1754, by decree of Elizabeth Petrovna, the Noble Bank was established to support the foundations of autocracy; it issued loans at a substantial discount to the nobility secured initially by serf souls and later by entire estates with serfs. The system reached its peak under Catherine II, when it was fully institutionalized and standardized: uniform valuation rates per soul were introduced, and an Insurance Office was opened at the bank for mandatory insurance of mortgaged city houses against fire, which improved the quality of the entire collateral pool. This was a revolutionary innovation that transformed the collateral pool into a liquid financial instrument similar to modern covered securities. Insurance premiums from the mandatory insurance of mortgaged houses went to the Noble Bank, reducing its financial risks and allowing it to lend more actively to the nobility: the premiums formed an insurance fund that covered potential fire losses, reducing the overall risk of the loan portfolio and enabling the bank to expand lending without raising rates. The problem of risk concentration on the lender did not arise because the Insurance Office was a separate, isolated operating unit. Risky collateral became “collateral with a quality guarantee”: in the event of a fire, the bank received an insurance payment covering the loan and could sell the remaining property without financial loss, minimizing downtime. This made loans secured by estates with serfs more attractive (by analogy with modern domestic mortgage-backed securities with mandatory insurance of the collateral).

The financing system described above through the Noble Bank became obsolete by the mid-19th century. The enormous indebtedness of landowners meant that by 1858, 2/3 of peasants belonged to them only nominally; in fact, the co-owner was the Noble Loan Bank (later the State Loan Bank), which issued loans secured by serf souls and collapsed by 1860 as a result of landowners’ non-repayment and widespread fraud “on the Chichikov scheme” involving loans secured by nonexistent “dead souls.”

After the abolition of serfdom in 1861 and the introduction of redemption payments, the system of pledging serf souls evolved into a practically full-fledged analogue of securitization.

The reform proclaimed the personal freedom of peasants, transferring land to them in exchange for redemption payments. The redemption amount that the peasants were to pay the state over 49 years was calculated not on the basis of the market value of the land, but on the amount of quit-rent that the landowner had received before the reform. The quit-rent was capitalized at 6%. The state paid landowners 80% of the redemption amount in a lump sum, while the remaining 20% was received directly from the peasants. At the same time, debts of the estate to the treasury were automatically deducted from the amount paid by the state to the landowners, saving it from bankruptcy, which ultimately stabilized the position of the nobility as the foundation of autocracy. The reform wrote off the enormous debts of the nobility to the state (or provided them with a large lump-sum capital) and shifted the burden of payments to the peasants for decades to come.

The economic specificity of the reform was the issuance of special “securities”. The above-mentioned 80% of the redemption amount was not paid in cash: so-called redemption certificates and bank notes were provided — in essence, bearer government securities (bonds) yielding 5% annual income and differing in liquidity, form of transfer, and exchange terms. Redemption certificates were not freely traded on the exchange and were intended for long-term holding by landowners; they provided for interest payments and were redeemed gradually over 15 years through exchange for bank notes. Bank notes circulated freely in the market like ordinary money and could be exchanged for cash at par or sold on the exchange. The notes existed longer than the certificates, but could be redeemed faster through the possibility of redemption by lottery. The notes provided landowners with a liquid asset, while the certificates fixed long-term income. Full redemption of the certificates was completed by 1890 (issuance stopped in 1874, exchange began in 1875), after which landowners held only notes subject to redemption by lottery. This allowed the state to control the money supply and support landowners with income from interest secured by peasants’ redemption payments. Since the state assumed the credit risk, such “securities” can be compared to modern mortgage-backed securities with credit enhancement (for example, mortgage-backed securities of the U.S. federal mortgage association Ginnie Mae, which provides guarantees of the U.S. government).

Thus, the reform introducing “redemption payments” reflected the following features of securitization:

A designated asset. For the state and the financial system, such an “asset” was the peasants’ obligation to pay quit-rent to the landowner, which as a result of the reform was replaced by a redemption payment. This was a future cash flow tied to a specific person and land, but not tradable on the market.
Issuance of “securities.” The state in effect issued debt obligations backed by future payments from the peasants. Landowners could sell them, receive cash, or live off the interest.
Pool formation and structuring. Through the redemption transaction, millions of future payments (quit-rents) were combined into one huge national pool. The state purchased this income stream from the landowners, transforming it into state debt of the peasants at an interest rate of 6% per annum, of which 5.5% covered payments on the securities issued to the landowners (5% on the securities + 0.5% amortization), and 0.5% went to the administrative expenses of the reform. This ensured balance: the peasants paid slightly more than the market rate (the quit-rent was lower), and the state financed the operation without a budget deficit.

However, the concept of securitizing redemption payments not only reveals the financial essence of the 1861 reform as a precursor to modern instruments, but also highlights its dual nature: an innovative mechanism for stabilizing the elite through the transformation of serf labor into liquid assets secured by state guarantees. From mortgaged souls in the Noble Bank and the Insurance Office of 1786 to redemption certificates, this system evolved by minimizing risks through institutional guarantees. It can be said that the 1861 reform became a kind of securitization transaction at the state level.

However, the outcome of the securitization of redemption payments proved ambiguous, ending with the abolition of redemption payments in 1905–1907 under the pressure of the Revolution and peasant impoverishment, turning the operation from profitable to loss-making (write-off of RUB 1.674 billion in debt, budget loss — RUB 386 million, or 5.5% of the annual budget). On the one hand, millions of people gained personal freedom and civil rights, which opened the way to entrepreneurship, cooperation, and self-government in the villages; the reform created a free labor market, which doubled industrial production and laid the foundations for market relations and economic modernization.

Although modern mortgage securitization differs greatly from its 200-year-old prototype, it does demonstrate a certain similarity in model. In Russia, single-tranche issuances of mortgage-backed securities guaranteed by DOM.RF are the foundation of the domestic securitization market and account for more than 99% of the Russian mortgage securitization market. The volume of mortgage-backed securities guaranteed by DOM.RF outstanding as of the end of 9M 2025 amounted to RUB 1.9 trillion. In the United States, government-sponsored enterprises such as Fannie Mae, Freddie Mac, and Ginnie Mae play a dominant role in the mortgage securitization market within the $13–14 trillion mortgage-backed securities (MBS) market (2024). These programs, like the 1861 reform, turn assets into tradable instruments, balancing the interests of the state, banks, and borrowers.

By way of conclusion, it should be noted that considering the 1861 reform through the lens of securitization makes it possible to conclude that it is similar to the structures of modern financial instruments. The Revolution of 1905 reminded us of systemic vulnerabilities: the abolition of redemption payments collapsed the model and accelerated the crisis and social explosion. The high interest rate, tied not to the market value of the land but to quit-rent, contributed to the escalation of intractable social contradictions, which were partly reflected in the revolutionary movements. Fortunately, today’s analogues are more resilient thanks to stress testing and tranche subordination; securitization remains a powerful lever for capitalization, but it requires a balance between profit and social stability — otherwise the “assets” (souls or loans) will be devalued under the pressure of reality.

Author: Karina Utesheva, Senior Associate