Ludwell DennyCHAPTER TEN
OVERSHADOWING all other oil conflicts at the moment is the British-American struggle for control of Russian resources. Those reserves are estimated the largest in the Eastern Hemisphere. For years Russian production surpassed all other countries except the United States, sometimes even exceeding American output.156 Much international diplomacy since the war has turned on Russian oil.
Oil is the Soviet Governments bait for foreign recognition and credits. Oil explains much of Washingtons anti-Russian policy, of Britains recognition and later break with Moscow. In oil is written the British and German-Turk military campaigns in the Caucasus, the Allied interventions against the Soviets and support of puppet counter-revolutionary governments, and the international conferences at Genoa and The Hague. Russian oil is the cause of the latest and bitterest war between Napoleon Deterding and King John D.
From the beginning this Russian conflict has been more confused and disordered than in other countries. It has involved Soviet nationalization of the industry and consequent attempts at a capitalist united front against the Bolshevist menace. Lines of combat have shifted rapidly. The Deterding and Rockefeller forces have joined in drives against the common enemy one day, and the next day turned to fight each otherwhile negotiating separately and secretly with Moscow. Adding to the confusion, have been forays of the American Sinclair interests against both Dutch-Shell and Standard.
Dutch-Shell had the advantage, or disadvantage, of owning Russian fields before the Communist Revolution. Standard sold large quantities in the north Russian market in Tsarist days, but had no producing units there. Sir Henri bought wells in the Caucasus, using Russian oil to challenge Standards partial sales monopoly in Europe and Asia. Originally the fields had been Tsarist State-owned. Later, as they were sold or leased to private companies, the State retained large restrictive powers and exacted production royalties sometimes running to 40 per cent. Russian Nobel interests were permitted to obtain larger holdings than foreigners, though the latter were allowed to come in to prevent Nobel monopoly control. By 1898 Russian production forged ahead of the United States into first place. Three years later Russia supplied 55 per cent of world output. Then she maintained second place until displaced by Mexico in the last decade. Now Russia is expected by many authorities to assume again the premier position in world production.
At the outbreak of the 1917 Revolution the British with $85,000,000 invested were the largest foreign producers there.157 Dutch-Shell had $20,000,000 in the Baku field, besides large holdings in Grosni and Maikop. French capital, chiefly of the Rothschild interests, amounted to $25,000,000, and Belgian capital to $21,000,000. Standard (Vacuum and Standard of New York) has refining and marketing investments in that country.158
With collapse of the Tsarist regime and enforced peace between Germany and Soviet Russia, the Allies and Central Powers raced for the rich fields of the Caucasus. First, German-Turk forces occupied Baku, then a small British force came in, to be displaced by the Turks on the eve of the Armistice. When the Turks withdrew after the Armistice, the British re-occupied Bakuacting nominally for the Allies. British troops remained to guard the oil of the Caucasus for Dutch-Shell until July 1920. Earlier in that year, the Allied Supreme Council had recognized the anti-Soviet Republics of Georgia and Azerbaijhan, with the understanding that these Governments would favour British and French interests.
Washington refused to recognize the counter-revolutionary regimes. Not, of course, because of any American sympathy with the Soviets. For diplomatic and military reasons the United States was and is opposed to dismemberment of Russian territory. Also Standard, which by this time was seeking Russian oil, opposed recognition of counter-revolutionary Caucasian governments allegedly under the thumb of Downing Street and Deterding. Since then the Caucasian émigré group, headed by M. Jordania, representing the defunct White Governments, has made repeated unsuccessful attempts to draw diplomatic recognition from Washington and money from Standard and other American interests.
While British troops were marching out of Baku in the spring of 1920 and the Red army marching in, Dutch-Shell and Standard were preparing for the bigger petroleum war to come. Two years had passed since Moscow nationalized the fields. The former Tsarist Russian owners of oil stock were peddling their shares of doubtful value. Sir Henri bought up the stock of the old Independent Russian companies. Before that, in 1912, he had purchased a large interest in the French Rothschild holdings in Baku. With his 1920 purchases of stock of nationalized companies, he became the largest owner of petroleum resources in the Caucasian-south Russian area. Hence the London Governments urge to negotiate with France the San Remo Agreement of April 1920, which aroused Washington to such vigorous protests. At San Remo the London and Paris Governments agreed:
In the territories which belonged to the late Russian Empire, the two Governments will give their joint support to their respective nationals in their joint effort to obtain petroleum concessions and facilities to export, and to arrange the delivery of petroleum supplies.159
Standard was equally busy buying old shares in nationalized companies. In the early summer of 1920 Mr. Rockefellers agents bought equal or controlling interest in the Nobel Baku properties.160 Anglo-Persian later bought other Nobel shares. These Nobel properties before the war had 40 per cent of Baku production.
It will be observed that Mr. Deterding was placing his money on a better horse than was Mr. Rockefeller. Both bought questionable stock in nationalized companies. But Dutch-Shell bought from foreign property-owners who had defined rights under international law and usage. Standard bought from the Russian Nobel interests, knowing presumably that any sovereign government has a right under international custom to dispose of property of its own nationals as it sees fit, and that no foreign government has a recognized right to interfere.
Downing Street and Mr. Deterding after San Remo began negotiating directly with the Soviet Government. The Anglo-Russian trade agreement resulted. During the months preceding the Genoa Conference, Dutch-Shell was trying to get a monopoly concession from Moscow. Sir Austen Chamberlain later admitted these Deterding negotiations were conducted with the knowledge of the British Government. This was the situation when Premier Lloyd George brought about the Genoa Conference in April 1922.161
At Genoa Russia refused demands of the capitalist Governments that she de-nationalize petroleum lands and equipment. She offered instead to share part of her fields with British, Americans, French, Italians, Belgians, and Germans on the basis of conditional foreign concessions. Sir Henri and Mr. Lloyd George were willing to waive the nationalization issue in favour of 99-year leases or concessions. This compromise was blocked by Standard, working indirectly through the State Department observer at the Conference and through the French and Belgians. The latter also held Nobel and other Tsarist oil shares. Sir Henri then formulated a proposal, provisionally accepted by M. Chicherin, under which Russian concessions would be apportioned on the basis of foreign holdings prior to the nationalization decree. This plan in effect would have given Dutch-Shell the major share and virtually excluded Standard.
That brought Washington into the negotiations directly. The American observer, Ambassador Childs, issued a statement on rights of American property-holders, reasserting that the United States Government would recognize no settlement conflicting with the Open Door principle.162 The French and Belgian delegations, under pressure from the Franco-Belgian Syndicate of purchasers of Tsarist oil shares after Soviet nationalization, supported American opposition to the Deterding-Lloyd-George-Chicherin deal. By this time the Germans had signed a separate treaty with Moscow. But the Lloyd George plan for general diplomatic recognition of the Soviet Government was effectively blocked by Washingtons action. This accomplished, the United States acting through the French delegation forced postponement of the property-rights discussion until a conference at The Hague the following month.
Handicapped by the Genoa failure and increasing diplomatic activity of the United States, the British Government and Dutch-Shell put forward at The Hague another settlement proposal. Under the new plan, as tentatively accepted by the Russians, Dutch-Shell was to receive a block concession of certain Russian fields with the obligation of settling claims of other foreign owners by sharing production or by purchase of such claims. The plan was sufficiently indefinite on moot points to permit the charge of Dutch-Shell monopoly control. Again, as at Genoa, the United States by unofficial representations wrecked the capitalist-Communist compromise.
Soon after the unsuccessful conference at The Hague, Standard drew Dutch-Shell and 16 other companies and organizations of owners of old Russian shares into an International Defence Committee at Paris in September 1922. Participants agreed to boycott Soviet oil until Moscow rehabilitated on equal conditions to all interested parties their [oil] rights and properties. They also pledged themselves not to deal with the Russian Government except as a united group. They were to extend this boycott to include financial credits sought by Moscow. But the capitalist united front was soon broken.
Despite his boycott pledge, Sir Henri began dickering with the Bolshevists secretly. By March 1923 he had contracted for 70,000 tons of Russian oil and taken an option on another 100,000 tons.163 At the same time he was negotiating for a monopoly concession in Baku. Standard was also dealing secretly with Soviet representatives in Berlin and Moscow. Thereafter Russia was able easily to dispose of the surplus of her rapidly growing production. Moscow sold this surplus not only to Dutch-Shell, Standard, and private companies but even to the Governments and navies of Greece, Italy, France and Britain. So ended that capitalist united front against Russia.
While Dutch-Shell and Standard were jockeying for position in the Russian race, a dark horse appeared. This was Standards chief American competitor, Mr. Harry F. Sinclair. Mr. Sinclair went in person to Moscow and the Caucasus. With him on part of the trip were ex-Secretary Fall, Mr. Archibald Roosevelt and other influential persons. The Sinclair official, Mr. Mason Day, remained in Moscow until he was rewarded with a contract. A provisional concession agreement was signed by him and Soviet representatives in November 1923, providing for a joint company to exploit the Grosni and Baku fields. Mr. Sinclair and the Government were to share equally in stock, management, and profits. The former promised to invest $115,000,000 in the joint company and to float in New York a $250,000,000 loan for Russia.
There was also an unwritten understanding that Mr. Sinclair, through his friends President Harding, Mr. Fall, and Cabinet officers, would obtain United States diplomatic recognition for Moscow. To be sure the Sinclair concession covered the fields claimed by Standard. But the Bolshevist statesmen decided that Mr. Fall for the moment had more power in Washington than Mr. Rockefeller. Even the clever M. Chicherin could not be expected to foresee that the Fall-Sinclair combine would soon hang itself.
Indeed Russia was staking more than the Caucasian fields on the power of the Fall-Sinclair partnership. Moscow had granted Mr. Sinclair also the Saghalin oil concession off Siberia, and was aiding him in north Persia.
The north Persia field covers five provinces. Mr. D Arcy neglected to appropriate them back in 1901 when he got the later Anglo-Persian monopoly concession for the remaining five-sixths of Persia.164 Geographically the northern provinces are almost a separate country, their natural outlet being through the Caucasus. Russia in this sense has the power to veto any concession to the north Persian resources, for Moscow will assuredly not permit a concessionaire who is persona non grata to it to use Russian territory for transit purposes, Mr. Louis Fischer says in his Oil Imperialism.165
Since the St. Petersburg Agreement of 1907, in which the Tsarist and British Governments divided Persia into spheres of influence, Russia had held a favoured position in the northern provinces. The Russian citizen Akaky Khostaria in 1916 obtained through Tsarist influence a drilling concession in that area, which Persia cancelled after the Bolshevik Revolution. The United States Bureau of Mines rates the 500,000 square miles covered by this concession as richer in oil than south Persia. According to former Premier Dowleh of Persia, cancellation of the Khostaria concession as having been obtained under duress was suggested by the Moscow Government, carried out by the Persian Government and approved in writing by the British Government.166
Two years after this cancellation, Anglo-Persian bought from M. Khostaria his alleged rights to three and one-half of the five provinces.
British diplomacy changed thereafter in line with this transaction. The Soviet Government countered in February 1921 by signing a treaty with Persia not only renouncing all Russian exterritorial rights and concessions, but also prohibiting Persian sale of such returned concessions to other foreign owners without Russian consent.
While Moscow and London were manoeuvring around this oil concession as part of their larger game of political prestige in the Middle East, Standard slipped in and grasped the prizefor a moment. In the midst of Anglo-Persian and British Foreign Office protests against Persias refusal to recognize the Tsarist-Khostaria claim, the Teheran Government was persuaded to give the Rockefeller interests a new 50-year concession for the northern fields. To prevent extension of British power from southern to northern Persia, the Teheran Ministry wrote into the final contract that Standard could not share or transfer its right to other foreign interests. Meanwhile Mr. Sinclair was setting out on the north Persian trail. Both Russia and Great Britain protested the Standard concession. Moscow pointed to the provision of the Russo-Persian treaty obligating Persia to get Russias consent before granting such a concession. Anglo-Persian accused Standard of accepting stolen property.
Sometime later, when Sir John Cadman went to America to make the short-lived truce between the British and Rockefeller interests, it was agreed that Anglo-Persian and Standard should share the north Persian concession equally. With Moscow encouragement Persia objected to Standard sharing its acquired rights with Anglo-Persian and, instead, gave the concession to Mr. Sinclair.
Among the most remarkable of the many vivid exchanges between governments in the oil controversy in the last decade are those of Persia to the United States in the period 1921-24 in opposition to the concession claims of the temporary British-Standard alliance. In a diplomatic memorandum filled with hatred for Britain, the Persian Minister, Hussein Alai, wrote to the State Department on February 21, 1924:
The Standard Oil Company of New Jersey did not show any inclination to meet the requirements of the law and made no proposals, but the Sinclair Consolidated Oil Corporation submitted terms following closely the conditions laid down in the oil law. The Standard manifesting no further interest in the concession, an agreement was consequently signed last December by the Government and the Sinclair representative in Teheran subject to the ratification of the Madjless, as the Sinclair Company was the only applicant in the field.
Now that there is at last a prospect of the northern oil fields of Persia being developed under purely American auspices, the Standard Oil Company of New Jersey advances certain claims on the basis of association with the Anglo-Persian Oil Company, Ltd., in the so-called Khostaria concessions.
I need not repeat the arguments laid in detail before Your Excellency in my note of January 3, 1922, which to your judicial mind will, I am sure, carry conviction that these so-called concessions are null and void. If the Standard Oil Company believed it had acquired any valid rights under these alleged concessions by virtue of association with the Anglo-Persian Company, why did it continue for two years to negotiate for a new concession with the Persian Government? The negotiation indicates the doubtful sincerity of the claims now advanced by the Standard Oil Company.
I cannot, therefore, but express surprise that a large American corporation should in these circumstances ally itself with a policy known by it to be repugnant to the Persian Nation and openly declare that it maintains its so-called rights under the Khoataria concessions and that it proposes to enforce them in defiance of the Persian Government.
The Standard Oil made the mistake of yielding to the unwarranted contentions of the Anglo-Persian Oil Company. They were repeatedly warned by Mr. Shuster and myself of the strong feeling of suspicion inevitably entertained in Teheran, in view of past experiences, as to British motives and aims and of the decision of the Persian Government to stand on the firm ground of the invalidity of the alleged Khostaria concessions. In spite of this warning, the Standard Oil Company made their proposal of February, 1922, to exploit the five northern provinces in association with the Anglo-Persian Oil Company on a 50-50 basis.
In view of the facts of the case and the known policies of my Government, Your Excellency will appreciate that the announced determination of the Standard Oil Company in association with the Anglo-Persian Company to enforce its rights under concessions which my Government regard as invalid cannot be carried out within Persian territory with my Governments approval. Should, however, the Standard Oil Company of New Jersey, as an American concern, seek the assistance of the United States Government with a view to asserting its alleged rights in the north Persia oil fields, I, acting under instructions from my Government, beg you to take into consideration the history of this whole transaction as I have outlined it above; the association of the Standard Oil Company with a British concern, in which the British Government has a predominant influence, an association peculiarly distasteful to my Government, my Governments well-founded view that the concessions on which these companies base their rights are null and void, and also the earnest desire of Persia for American aid, free from foreign influences, in the development of her natural resources.167
Persias grant to the Sinclair interests, dated December 1923, was a preliminary non-transferable concession, carrying a rider that the American company must obtain for the Teheran Government a $10,000,000 credit.
A Teheran mob six months later murdered Major Robert Imbrie, American Vice-Consul. The official explanation was that he enraged the natives by taking photographs of a holy place. Major Imbrie was assassinated by a mob organized by financiers in the United States and England, who thought his influence might swing control of the Persian oil fields from the Shell group to an American syndicate in which the Sinclair group has the major interest, according to a New York Herald-Tribune Paris dispatch of September 27, 1924, quoting Harold Spencer, for years British secret service agent in the Near East and graduate from Annapolis in 1911.
Mr. Sinclair, in addition to his concessions in the Caucasus and north Persia, also gathered to himself the much-disputed Soviet concession on the Island of Saghalin off Siberia. The latter grant had been held by a $5,250,000 British organization, the Saghalin Oilfields Company, which was drilling when the Great War began.
Tokio tried repeatedly during the war to get a foothold on the Siberian mainland and incidently to extend her control of South Saghalin northward over the entire island. With the western world at war and Russia outlawed, Japan attempted in 1918 to occupy the Siberian coast as a third link in her Asiatic chain of Korea and South Manchuria.
When American diplomacy failed to prevent this Nipponese military expansion, President Wilson sent an American army to wage war in Siberia without the consent of the American Congress. The President was faced with the alternative of joining an Allied invasion of a friendly country to prevent territorial division of Russia, or of continuing Americas non-intervention policy and losing control of a vital Far Eastern issue. Mr. Wilson chose the former. In sending troops the President denounced military intervention as more likely to turn out to be a method of making use of Russia rather than to be a method of serving her.168 Despite State Department protest, Japan sent 74,000 troops compared with 8,500 Americans. But later Washington was able to force Japanese evacuation of Siberia.
When Japan occupied North (Russian) Saghalin, a rich coal and oil area almost joining the Siberian mainland, the State Department announced the United States would not recognize claims growing out of that occupation. Nippon kept her army there, but at the Washington Arms Conference promised to evacuate North Saghalin whenever an orderly Russian Government settled with Japan for the Nikolaiev massacre. Secretary of State Hughes expressed regret that Tokio chose such methods, and insisted on restoration to Russia of North Saghalin and its natural riches.
Moscow meantime had given Mr. Sinclair the North Saghalin oil concession. The preliminary Sinclair agreement was signed in May 1921, while Japan was holding and attempting to work those fields. Final approval of the contract was given in October 1923. The concession was monopolistic in character. Moscow hoped to obtain United States diplomatic recognition before 1927. The Sinclair contract was made conditional upon such recognition. Russia, moreover, expected as a result of this concession to an American company to obtain profits and financial credits, besides inducing the Washington Government to farce Japanese evacuation of the territory.
Moscow disregarded Sir Henris claim based on the Tsarist concession to the Saghalin Oilfields Company. The State Department remained discreetly silent about the Open Door, which had been shut by Russia in favour of Mr. Sinclair.
Then the crash in Washington. The Senate investigation exposed activities of the Fall-Sinclair-Doheny gang in grabbing the Teapot Dome and Elk Hills naval oil reserves in the United States. Ex-Secretary Fall was swept into the courts. Mr. Sinclair was trying to keep out of prison. He could no longer deliver credits and recognition for Moscow.
Cancellation of the Sinclair concessions in the Caucasus, in Saghalin, and in north Persia followed almost automatically. Teheran trailed the American Senate, charging Mr. Sinclair with attempting to bribe Persian officials, Moscow warned him it would revoke the Saghalin contract. Mr. Sinclair was ready to accept compromise proposals for joint Russian-Sinclair-Japanese exploitation of Saghalin, but Japan declined.
Russia promptly executed one of her many changes in foreign policy, switching back suddenly from a pro-American to a pro-Far Eastern policy. Following the Russo-Chinese treaty of May 1924, Moscow signed a treaty with Tokio in January 1925. This pact granted Japan extensive Saghalin coal and oil concessions for 40 to 50 years, in addition to equal rights with other foreigners for acquiring the remaining half of oil lands in the Russian part of the Island.
Russia formally cancelled the Sinclair Saghalin concession in May 1925, charging the company violated contract provisions by failure to exploit the fields. Former Secretary of State Lansing, as Sinclair attorney, argued that the Japanese occupation (force majeure), prevented development of wells. But the Moscow court upheld the Soviet Government. Thus Mr. Sinclair was finally kicked out of Saghalin, as he had been ousted from Teapot Dome in the United States, by the courts. In one case the American navy was regaining oil reserves for its Pacific fleet. In the other, the Japanese navy was obtaining oil resources which would make its Pacific fleet for the first time a modern fighting unit for possible use against the American fleet. The Japanese army has evacuated North Saghalin, but the Japanese navy is represented in the Japanese company operating there.
Japanese production in that field was estimated at 48,000 tons during the first nine months of 1927, or about twice as much as in the corresponding period of 1926.169 According to Japanese consular reports a production of about 80,000 tons was anticipated in 1928.170 A pipe-line to the coast was built in 1927.
At the same time the Moscow Government is organizing a Saghalin oil trust to develop some of the Okha deposits not included in the Japanese grant. According to United States Department of Commerce reports: Conditions for oil exploitation are favourable in Saghalin, and sales will be profitable because the fields are near the ocean and far from existing oil fields. The oil may be sold to Japan, China, and to Asiatic Russia, but the bulk will probably be sold abroad in order to get a supply of foreign money.171 Nutovo, a second Saghalin field, with a lighter petroleum than the Okha district, is to be opened by the State Soviet organization. Russian production on Saghalin in 1927-28 was expected to be about 6,000 tons, with the Soviet program calling for 237,000 tons annually by 1931-32.
South Saghalin is Japanese territory. Tokio is exploiting the fields of this half of the Island, in addition to the wells of the Islands of Honshu and Hakkaido. There are also commercial deposits in Akita prefecture and Formosa, which ran up total Japanese production in 1927 to 1,700,000 barrels. But Japan is now depending chiefly upon its Russian concessions in North Saghalin, and upon Manchurian shale deposits, to achieve future domestic independence from Standard and foreign wholesalers.
The Tokio Government has prevented American companies from obtaining mineral and oil rights in Japanese territory. Standard has spent several million dollars prospecting in China and the Philippines without attaining commercial production. Hence the importance of North Saghalin as the only potentially large producing field on the mainland and islands of north-eastern Asia.
While the naval and industrial significance of the Moscow-Tokio Saghalin agreement is far-reaching, the political consequences arewhat the future makes them. Mr. Louis Fischer says:172
The Saghalin contract is thus not merely an indication of a spirit of trust and friendship between the two great Far Eastern Powers, but also in a way a guarantee against future trouble. ... It [Saghalin oil] is without a doubt an important component part of the mortar of the still imperfect Sino-Soviet-Japanese bloc. In support of this view Mr. Fischer quotes Admiral Nakasato and Mr. Kshahava, officials of the Japanese Saghalin corporation. The latter is represented as saying:
This is the best stimulus for the formation by our countries, together with China, of a triple union which would play a decisive role in Far Eastern affairs. The establishment of such a trinity could not, of course, interfere with the various interests within the several nations. The realization of such an idea is already quite possible at the present moment.
Perhaps ! But the general opinion in diplomatic and military circles outside of Moscow and Tokio seems to be that Japanese economic penetration will probably parallel the Manchurian precedent, which has ended in Japanese economic and military hegemony of nominally independent Chinese territory. If North Saghalin coal and oil are exhausted within the 40-year lease period, Japan may conceivably withdrawotherwise not. Certainly Moscow will never be able to cancel the Tokio lease as easily as she did the Sinclair contract.
Saghalin may thus become a flame between Russia and Japan instead of a lubricant for the desired Asiatic alliance. Meanwhile Saghalin, as the chief fuel source of the Japanese navy, is down on the war-plan maps of the Powers as a major point for defence or attack in any Pacific naval war of the future.
While Moscow was favouring the then powerful Sinclair interests, Great Britain with the help of France was making another effort to wrest the Caucasus from the Soviet Government. The method employed was the familiar one of supporting disaffected Georgian groups in a counter-revolution. If the rebellion were successful it would eliminate the Bolshevistss indirect control over north Persian oil, besides putting a puppet capitalist regime in power in the Baku-Grosni fields. Moscow suppressed this 1924 revolt. The Soviet commander, General Ordzhenekidze, captured documents purporting to show that the rebels received British-French funds.173 Rebel proclamations had informed the populace French and British ships would land troops at Batum.
Two years later the same counter-revolutionists of the Caucasus sought help from the Washington Government. A resolution was introduced in Congress for defraying the expenses incident to the appointment of a diplomatic representative to the National Republic of Georgia. At the congressional hearings,174 it was testified that the White Georgian Government had continued its existence in Paris since being driven from the Caucasus by the Bolshevists in 1921. This Georgian Government was represented at the hearings by Dr. Vasili D. Dumbadze and by Mr. John A. Stuart of New York, chairman of the board of governors of the Washington-Sulgrave Institution, a British-American organization. Mr. Stuart was identified as connected with the Ajax Iron Company, producers of oil-drilling machinery. Mr. John Hays Hammond, Mr. Barron Collier, and other American promoters were listed as committee members of the Caucasian Society, supporting this recognition drive. But the State Department was convinced by this time of the relative permanence of Soviet rule in the Baku-Grosni oil fields, and its official frown withered the Georgian resolution in committee.
In the midst of abortive concession negotiations with British and American companies, and of these counter-revolutionary outbreaks supported by foreign interests, the Soviet Government rehabilitated the Caucasian fields and increased production. From 1924 the Soviet State oil trust became an important factor in the world market. In that year the Anglo-American Oil Company bought 250,000 tons of Russian petroleum.
Anglo-American was acting in this deal as agent for a group including Dutch-Shell, Standard of New Jersey, Vacuum, and Standard of New York. Dutch-Shell took half of the consignment. This co-operative buying by foreign companies was broken up when Sir Henri and Standard caught each other trying to deal separately with Moscow. Both were trying in 1925 to purchase on advance contract most or all of Russias export production for several years in the future. Standard was acting on direct advice of its counsel, Mr. Charles Evans Hughes,175 who as Secretary of State had insisted that Moscow could not be trusted to keep faith in any sort of capitalist transaction.
Standard set out early in 1926 to break the sales dominance of Dutch-Shell in the Mediterranean-Suez Canal region. This could be accomplished only with supplies from the nearby Caucasian fields. Dutch-Shell, foreseeing the danger, tried unsuccessfully to buy up the Russian surplus. The Standard company, Vacuum, obtained from the Russian Naphtha Syndicate in March 1926 an Egyptian consignment of 800,000 tons of crude oil and 100,000 tons of kerosene. This order was followed by another from Standard of New York for 500,000 tons of kerosene. Moscow agreed in these sales contracts not to compete with the Standard distributing organizations in the eastern Mediterranean area. Mr. Louis Fischer believes Standard of New Jersey at this time was trying secretly to get a concession for the Emba fields, which rank second only to those of Baku and Grosni.
At any rate Standards publicity agencies suddenly stopped their long anti-Russian campaign and became actually pro-Russian. Mr. Ivy Lee, Rockefeller public relations adviser, now wrote a friendly book on Russia.176
Co-operation between Russia and Standard enraged Sir Henri. In the zigzag course of oil diplomacy since the war he had been accustomed to defeating Standard, and especially with Moscow. But latterly he had a Caucasian concession within his grasp several times, only to lose it, as he lost the Russian sales contracts to his American competitor. Worse, the Bolshevists were setting up a sales organization under Sir Henris very nose, taking away his business in England of all places.
Napoleon decided to stop this. He chose the method he had learned from Mr. Rockefeller. He began a price-cutting war, figuring that poverty-stricken Russia could not possibly stand the strain. But Russian Oil Products Company matched him cut for cut. Soon Dutch-Shell with its larger turnover was losing millions of dollars. As a State company, the Russian organization could exist for a while without profits. But Deterding share-holders wanted to know why their dividends were falling.
Such was Sir Henris extremity on the night of May 11, 1927. The next day his friends in control of the British Home Office made a sudden Government raid on the London headquarters of the Russian commercial agency, Arcos, Ltd. The alleged purpose of the raid was to find stolen British military documents. This would force a break in diplomatic relations. The military papers were not found, though certain alleged espionage records were discovered by the raiderswhether by design is not clear. Anyway, the purpose of breaking diplomatic relations was achieved.
By Sir Henri ? Many informed persons think so. A strong case against him has been drawn up by Francis Delaisi in Foreign Affairs (London), October and November 1927. Two facts stand out from the mystery. One, the British Foreign Office and Cabinet were not consulted in advance of the raid. Two, the night before the raid the Soviet Government had obtained a $50,000,000 credit from the great Midland Bank of London, with the knowledge of the British Foreign Office. That credit had been sought for years by Moscow in every large money market of the world. It was to be about the biggest thing that could happen to Russia. Incidentally it would enable Russia to go on protecting herself against Sir Henri. Whoever caused the mystery raid knew such tactics supported by an inspired press campaign would force the British Premier and Foreign Minister to break with Moscow and force the Midland Bank to cancel the all-important loan.
What is worrying a good many members of Parliament is the suspicion that we have been forced to take this very grave action at this juncture in order to justify an ill-timed raid on the Arcos offices, undertaken without due consideration, and without Cabinet authority, the London Spectator declared.177 This attitude was voiced also by the Opposition leaders, Mr. Lloyd George and Mr. Clynes, in their questions to the Government in Parliament. Mr. Lloyd George proposed a Commission of Inquiry, which of course was blocked by the Tory Government. So the opportunity for a Deterding investigation passed.
The Russians charge that Sir Henri, a few months before the Arcos raid, destroyed an agreement between Russia and the British-American oil interests settling the old nationalization-compensation dispute. He insisted on a Dutch-Shell monopoly.
Towards the end of the year  negotiations were in progress concerning the marketing of Soviet oil in foreign countries, between representatives of the Soviet Oil Syndicate and representatives of the foreign oil interests, according to the official Soviet Union Review (Washington), November-December 1927. Formulas were being worked out for the distribution of the Soviet product. In this connexion an agreement was reached, accepted by the foreign companies, covering compensation for foreign claimants of Russian oil lands. The conferences broke up early in January 1927, when Sir Henri Deterding, representing Royal Dutch-Shell, insisted upon a monopoly of Soviet oil export and a limitation on Soviet exports of crude oil. Thereafter began a campaign against the use of Soviet oil in England and a series of sharp attacks on the Soviet Union in a section of the British press. The situation was aggravated by irritation in certain circles in Britain over Nationalist successes in China. The attacks increased in intensity. In May came the Arcos raid and the breaking of relations by the Baldwin Government. In the summer the newspapers reported that Sir Henri Deterding and certain foreign associates were seeking a monopoly for oil distribution in France, where Soviet oil sales had made heavy gains in the past few years. Sir Henri Deterdings effort failed. Thereafter, in certain French newspapers, was started a heavy barrage of attacks against the Soviet Union, curiously similar to the attacks in the British press following Sir Henris failure to secure a monopoly of Soviet oil export. The attacks spread. An announcement from Moscow that an agreement had virtually been reached for the funding of the Tsarist debts contracted in France seemed to stir the Die-Hards to more frantic efforts to break relations. In October  the French Foreign Office requested the recall, as persona non grata, of Mr. Rakovsky, the Soviet Ambassador who had conducted the difficult debt negotiations for a long period. A new Soviet Ambassador has since been appointed.
Thus after 10 years the economic and diplomatic blockades sporadically continue. There has been a revival throughout the world of slanderous and absurd stories about the Soviet Union. Sir Henri Deterding has recently launched in the United States a publicity campaign against the Soviet oil industry.
The Rockefeller interests took advantage of the break between Dutch-Shell and Moscow by filling larger orders for Russian products. In June 1927 Standard of New York bought 500,000 tons of fuel oil for its Near East market, to be delivered over a five-year period, and six months later ordered 360,000 tons more. Vacuum extended for three additional years its May 1926 contract with the Soviet Government. By January 1928 the contracts of the two companies called for 432,000 tons annually, on a progressive scale. This was about one-fourth of the total Soviet export. Several more contracts in April 1928 increased the total Russian sales to Vacuum-Standard of New York to $10,000,000 a year.178
But long before that Sir Henri had been driven to new paroxysms of fury. The time has come when the purchase of stolen goods from Russia should be treated in fact and in law precisely as the purchase of any other stolen goods, he declared. To which The Outlook (London) replied: Both the British Government and the American authorities regard business in Russian oil as legitimate. ... The point is simply that the various companies have been trying to do each other in the eye. ... The sordid intrigue and competition is a grim enough business; the attempts to explain it in terms of morality and ethics is sheer hypocrisy. It is indecent and disgusting.179
Mr. Deterding succeeded in producing an apparent split in the Rockefeller forces. Standard of New Jersey issued public statements disclaiming that its hands were soiled by the so-called stolen goods. It neglected to mention that it had joined with Sir Henri and others in buying Soviet oil two years earlier. The impression that the Standard Oil Company of New Jersey has any trade relationship with the Soviet Government is incorrect, the company announced on behalf of its president, Mr. W.C. Teagle. Referring to its negotiations with Moscow representatives, the company explained that as the Soviet Government was unwilling to agree that private property rights should be thus recognized, negotiations terminated and have not since been resumed with the Standard Oil of New Jersey or any of its foreign subsidiaries.180 Mr. G.P. Whaley, president of Vacuum, another Standard organization, plunged into the press controversy with a justification for dealing with Moscow.
The Vacuum Oil Company believes that trade contracts with Russia will make for wholesome reconstruction, and, further, that it is only common sense to recognize that Russia is the economic source of supply for certain markets, according to Mr. Whaley. An opportunity given to Russia to dispose of some of its surplus in its natural markets will avoid such surplus being forced into competition with American products in markets where transportation costs are in favour of the United States. ... We expect in due course of time to negotiate for compensation covering the large values that were taken over at that time [of revolution] and to make satisfactory recovery, but this can be in time best adjusted without involving the question of either buying from or selling to Russia.181
To what extent the apparent division between the Standard companies is real, or how much is camouflage for the benefit of Dutch-Shell, is not clear. Certain price-fixing agreements between Standard of New Jersey and Dutch-Shell in central and western Europe may explain the formers desire to placate Sir Henri. Furthermore Standard of New Jersey does not need Russian oil as much as Standard of New York and Vacuum need it to compete with Dutch-Shell in the Near East market. In view of past dealings of Standard of New Jersey with Russia, and the fact that it and Standard of New York and Vacuum are all Rockefeller companies, the public does not take too seriously the much advertised split within the Standard organization over Russian policy.
It is considered significant that Mr. Charles F. Meyer, the official responsible for making the Soviet contracts and carrying the offensive against Dutch-Shell into India, in April 1928 was promoted to the presidency of Standard of New York.
Dr. Wilhelm Mautner of Amsterdam, who is generally recognized as one of the best informed Europeans on Dutch-Shell and Standard relations abroad, doubts very much that Standard of New Jersey is forming an actual alliance with Dutch-Shell against Vacuum-Standard of New York. Writing in the Wirthschaftsdienst August 26, 1927, he said:
Still keener competition in harder times, because of the new agreements, is the threat that Sir Henri means to hurl at the Standard Oil Company of New York and the Vacuum Oil Company from beside the ruins of his boycott plans against the Russians. A scrutiny of the markets and their distribution among the Standard Oil concerns, as well as the agreements of the New Jersey Company with Dutch Shell makes the matter clear, but at the same time shows the difficult task to be faced by Mr. Teagle for other reasons.
For these markets, arranged somewhat schematically, are so distributed that the Vacuum Oil Company must reckon with strong competition in Europe, but need not fear a price war with Dutch-Shell in many other fields. The Standard Oil Company of New York, whose sales territory is the eastern Mediterranean and the Near, Middle, and Far East, must keenly compete there both with Dutch-Shell and the Russians, especially as these regions are about the only markets in which the Standard is active, outside of America. The Standard Oil Company of New York has to consider a future competition with Dutch-Shell and the Russians. It must also prepare for competition with the Dutch-Shell in many other fields. Besides, the Standard [N.J.] has certain, though perhaps not written, agreements with the Dutch-Shell concerning a satisfactory price policy in Europe, and a conflict would jeopardize an understanding reached after much labour.
So there are many ties that bind Mr. Teagle to Dutch-Shell and he would not care to break them except when extremely necessary. But it is doubtful whether these ties are as strong as those which still bind his company to the concerns which he formerly directed, but which are now outwardly entirely independent. These same circles which own controlling capital interests in his Standard Oil Company of New Jersey are also predominant in the other large Standard Oil companies. A common Standard Oil policy, a distribution of the aims and tasks among the various companies has no doubt been the program up to the present day.
What has been pointed out makes it clear that a struggle between the New Jersey Company on one side, and the New York and Vacuum Companies on the other, is not probable.
Dutch-Shell is hard hit. I had no knowledge or even suspicion that Standard Oil Company after expulsion of Russians from England would profit by the absence of buyers to make large contracts for five years to invade the British Indian market or to supplant American oil there, Sir Henri said in a press statement August 5, 1927. My intention is to fight the matter to the bitter end, if necessary over the whole world, as we wish the public to know who caused this dishonest upset of the petroleum industry.182
In the Indian sales war to which Sir Henri refers, the British Government is directly involved through the interlocking connexion of its own company, Anglo-Persian, with the Burmah Oil Company. Burmah Oil and Dutch-Shell have merged their interests in India to fight Standard.
Standard of New York and Vacuum are inexpensively winning a market in this battle while Dutch-Shell and Burmah are losing heavily. The Rockefeller companies are buying cheap oil from Russia and other producers. Meanwhile the British allies take losses in both production and distribution. Despite general depression in oil stocks, Vacuum shares increased in value about 50 per cent in the six months following the Arcos raid. Its net profit in 1927 was $25,500,000. Largely as a result of its Soviet contracts, Vacuum in April 1928 paid a 100 per cent stock dividend and negotiated for control of the Medway Oil and Storage Company (London) to enter the English market with Russian oil against Dutch-Shell. In contrast, within a half-year of Arcos, Dutch-Shell had to borrow $80,000,000 in the New York market alone, besides reducing dividends. Burmah Oil was unable to pay its regular dividend in January 1928. The market value of its shares fell from 96 to 58 rupees in the last half of 1927.
Standard of New York on January 15, 1928, broke the traditional Rockefeller policy of silence. At last the public was given an inside view of the international oil war—of which diplomats and oil men are accustomed to deny the existence. The Standard statement follows:
Standard Oil Company of New York has until now refrained from making any public comment upon the attacks directed against it by Sir Henri Deterding, chairman of the Royal Dutch-Shell Company, on account of the purchases of Russian oil. These attacks have now assumed such a character, however, that it is considered by Standard Oil Company of New York that the public should have the facts.
Standard Oil Company of New York had made purchases of Russian oil in conjunction with several other companies, including the Royal Dutch-Shell interests, for several years prior to 1926. In that year Sir Henri Deterding came to the conclusion that his companies would buy no more Russian oil. Standard Oil Company of New York was asked to refrain from further purchases, but saw no sound reason to comply with this suggestion.
The long distance between the United States and India makes the cost of transport of oil from this country to the Indian markets a substantial item. If, therefore, Russian oil could be supplied to the Indian markets at a fair price, there was an obvious economy in shipping such oil from Black Sea ports by saving at least 5,000 miles of distance. As the Royal-Dutch had large production in Roumania, it was in position to be fairly independent of supplies of Russian oil, whereas, unless Standard Oil Company of New York was assured of products on a favourable basis in its south-eastern European markets and Asia Minor it would be involved in heavy losses.
But before proceeding with additional purchases of Russian oil, Standard Oil Company of New York again reviewed the situation in the light of American policy. In July 7, 1920, Secretary of State Hughes had announced that it would be proper for American business men, at their own risk, to trade with Russia. The formal announcement of the State Department read: The restrictions which have heretofore stood in the way of trade and communication with Soviet Russia were today removed by action of the Department of State. Such of these restrictions, however, as pertained to the shipment of materials susceptible of immediate use for war purpose will, for the present at least, be maintained.
There were no other reservations in the statement, other than the statement that trading with Russia would be at the traders risk. There was no suggestion by the State Department that trading with Russia was in any respect improper, and no subsequent modification has been made in State Department policy.
Contracts were made in 1926 for purchase of a substantial amount of Russian petroleum over a period of years; Standard Oil Company of New York considers these contracts to be upon a favourable basis.
It would appear that the views of Standard Oil Company of New Yorki.e., that the problem of buying and selling Russian oil is a purely business propositionare not only in accord with American policy but are also supported by the policy of the British Government, whose political relations with the Soviet are the same as those of the United States.
The marketing of Russia petroleum in England is done by the Russian Oil Products Co., Ltd., known to be a Soviet-owned institution. On August 26, 1927, after the break between England and Russia, the British Government (through the Home Office) issued a statement, the main part of which was as follows: In view of certain inaccurate and misleading statements which have appeared in the press with reference to his decision requiring two of the directors of Messrs. The Russian Oil Products to leave the country, the Home Secretary wishes to make it plain that his decision involves no new departure in the policy of H.M. Government. As has been stated frequently, the Government desires to place no obstacle in the way of trade between this country and Russia so long as those conducting the trade do not indulge in propaganda or conduct contrary to the interests of this country. It is not the policy of the Government to terminate the activities of any Soviet trading organization which is engaged in trade to the benefit of this country and is not otherwise harmful.
Official figures indicate that while the importation of Russian gasoline into the United Kingdom for 1927 has fallen off as compared with 1926, importations of kerosene into the United Kingdom were actually greater in 1927 than for the preceding year. Indeed, in 1927, England imported twice as much Russian kerosene as in 1925. The actual figures as reported by the British Custom House were as follows:(Expressed in imperial gallons) Year Year Jan. 1, '27 to 1925 1926 Dec. 7, '27 Motor spirits 33,485,014 55,110,882 39,951,539 Lubricat. Oil 4,588,733 4,963,336 6,754,377 Kerosene 15,771,605 35,444,044 34,137,540
Prior to the arrangement being made between Standard Oil Company of New York and the Russians, the Royal Dutch-Shell Company had been seeking to obtain from the Soviet Government a monopoly for the sale of Russian petroleum products for a term of years, these negotiations having been carried on continuously from May to December, 1926, inclusive. The Royal Dutch-Shell Company had, indeed, actually purchased some 200,000 tons of Soviet Russia oil as far back as 1922.
Standard Oil Company of New York had subsequently participated with the Royal Dutch-Shell Company in making additional purchases. When Sir Henri Deterding decided to make no more such purchases, and found that it was the purpose of Standard Oil Company of New York to go forward with the contracts it had made with the Russians, he issued a statement announcing his purpose to fight to the last ditch every effort of Standard Oil Company of New York to market Russian oil in India.
That the considerations dictating the policy of the Royal Dutch-Shell Company were of a purely business character rather than having to do with any other phase of the subject, and that the Royal Dutch-Shell interests were quite prepared to handle and sell Russian oil when, as, and if they could obtain that oil on terms satisfactory to themselves, is indicated by the fact that the Asiatic Petroleum Company, Ltd., a subsidiary of the Royal Dutch-Shell Company, imported the following quantities of Russian kerosene oil into India and Ceylon: During 1923 over 8,460,000 imperial gallons; during 1924 over 10,690,000 imperial gallons; during 1925 over 4,730,000 imperial gallons.
Up to the end of 1927 Standard Oil Company of New York had imported into India a total of between 400,000 and 500,000 barrels, or 21,000,000 imperial gallons.
In September 19, 1927, the New York representative of the Asiatic Petroleum Company, Ltd., which is the Royal Dutch-Shells subsidiary in India, handling also the products of the Burmah Oil Company, the Royal Dutch-Shell pool supplying about 70 per cent of the oil used in India, notified Standard Oil Company of New York that the Royal Dutch-Shell interests would reduce prices on superior oil as soon as any more Russian oil arrived at Indian ports.
No one familiar with conditions in India would seriously suggest that the importation of Russian oil or other foreign oil into India constituted a menace to the Indian or Burmah oil industry.
That there was no surplus of Indian-produced oil to justify price cuts such as these is indicated in a pamphlet the Burmah Oil Company, Ltd., recently sent out, with the compliments of the directors of the companyin which it is said: Indigenous production of kerosene never was and is not now either potentially or actually sufficient to meet the Indian demand for the product.
True to their promise, the Royal Dutch-Shell interests, on September 23, initiated the threatened reductions in India. An additional cut was made the following day. And a few days later the prices of all inferior grades of refined oil were reduced correspondingly.
On November 4 last Royal Dutch-Shell agents were authorized to allow a secret rebate on sales and on November 25 the company notified its agents that it would give an additional bonus for all increased deliveries of high grade oil over the corresponding periods in 1926.
This kind of competition still continues. The cut prices in all cases were initiated by the Royal Dutch-Shell interests. They were not justified by economic considerations. Standard Oil Company of New York has met certain earlier reductions in order to hold its market position, but its prices are today higher than those being charged by its competitors. The significance of this price warfare will be realized when it is stated that this form of competition, if continued, will cost the Royal Dutch-Shell and Burmah Oil Companies approximately $12,750,000 a year and Standard Oil Company of New York approximately $4,000,000 a year.
This price-cutting was conceived and organized and initiated by the Royal Dutch-Shell interests. Standard Oil Company of New York has followed it only insofar as seemed absolutely necessary to protect its market position. At no time has this company deliberately undercut the prices of its competitors or offered secret or other rebates to undermine the position of its competitors.
Standard Oil Company of New York will continue to supply its markets effectively; it will carry out all contracts into which it has entered; and it will not be swerved in any manner from its clearly conceived policy by such desperate and destructive measures as are being followed in India, and threatened in other parts of the world.183
Sir Henri returned Standards press attack. On January 18, 1928, the New York Times published the following formal statement and supplemental interview with Mr. Richard Airey, Dutch-Shell representative in New York:
While Mr. Airey issued the statement over his own name, he announced that he was speaking for the Royal Dutch group, and it was understood that he was doing so under authority cabled to him by Sir Henri. The statement follows:
'The Standard Oil Company of New Yorks statement that they are taking a loss in India of $4,000,000 per annum, owing to substituting Russian oil for American oil, is a big penalty to pay for lack of foresight. The negotiations which they mention as having been carried on continuously from May to December, 1926, inclusive, had two objects: Firstly, to obtain compensation for the former owners of the Russian oil lands, which had been confiscated without compensation by the Soviet Government. Secondly, to prevent a demoralized market. If these negotiations had been successful the oil would have been shared with other companies and so insured a steady market. The question of compensation for the former owners was being seriously entertained, but the action of the Standard Oil Company of New York prevented its success as by their purchases relief was given to the Russian Soviets and they no longer had any reason to consider provision for the former owners. So long as the Standard Oil Company of New York was marketing American oil in India things went along as usual, but with the importation of Russian oil, which is described by Sir Henri Deterding as stolen goods, to substitute the American oil, the Royal Dutch-Shell group decided to try and prevent it being marketed and will continue to do so. I do not anticipate a price war in any other country, but this is entirely in the hands of the Standard Oil Company of New York. If they ship Russian stolen goods to any other country, the Royal Dutch-Shell group will fight it.
Mr. Airey said that up to this time the Standard of New York has been marketing only American oil in China and he saw no reason, under present circumstances, for a fight between the two organizations there. Should the Standard of New York begin using Russian oil there, however, the Royal Dutch will offer resistance, he indicated. The same course will be pursued in any other country in which the Standard of New York tries to market Russian oil.
Mr. Airey denied reports that the Royal Dutch was preparing to retaliate against the Standard of New York in its American markets. There has been no recent extension of the markets of the Royal Dutch subsidiaries in this country, he said.
The efforts to have the Russian Government compensate former owners of the oil properties seized were frustrated by the Standard of New York, in the opinion of the Royal Dutch interests. Mr. Airey said he understood the Soviet Government at one time was willing to arrange some plan of compensation.
He said he did not know whether it was true that the Soviets, in their contracts with the Standard of New York and the Vacuum Oil Company, had agreed to set aside a portion of the proceeds of the sale of oil as a fund to be used eventually in the settlement of the claims of the former owners of oil properties in Russia. It has been reported from time to time that such an agreement was made.
In this bitter dispute between Dutch-Shell and Vacuum-Standard the American press in the main supported the latter. Here are some of the reasons:184
The policy of the Vacuum is defended by its president, G.P. Whaley, on the ground that it is not more unrighteous to buy from Russia than to sell to it. He seems to have the better of the argument. No one objected when the Russian Government exchanged some of the confiscated jewelry of the nobility for cash and then bought American farm implements. No one objects when Russia places a big order here for American cotton, or even thinks of inquiring where the money came from. If we are to be consistent, no middle ground is possible. We must either place an absolute embargo on Russian trade or else we must recognize de facto ownership and let the reparation for confiscated property await Russias return to economic sanity. New York World, July 27, 1927.
There seems to be no cogent reason why American public opinion should force American oil companies to forgo their only chance of business in the Near East (and leave this business to Sir Henris Royal Dutch-Shell companies) for the sake of compelling the Russian Government to return Sir Henris property to him in just the way Sir Henri wants it returned. New York American, August 6, 1927.
One reason why some of the students of the oil situation cannot believe that the Dutch-Shell group and the New Jersey company are guided only by the alleged unethical procedure in dealing with a nation which does not respect private property rights is the fact that both companies have been very anxious to get Russian oil. Washington Star, July 31, 1927.
The head of the European oil combine has not been successful in his attempt to affix a stigma of immorality to all those who deal in Russian oil. He has only succeeded in exposing his own inconsistency in this matter. It now looks as if his statistical offensive would also collapse, if it has not already done so. New York Journal of Commerce, October 8, 1927.
American buyers and friends here maintain their original position that, since the Soviets have oil to sell and are willing to dispose of it cheaply, somebody is bound to buy it. They consider it better to buy the product and regulate marketing than to leave it for the Russians to dump promiscuously in eastern markets. New York Wall Street Journal, July 20, 1927.
Stupidly we boast of producing 70 to 80 per cent of all the oil consumed in the world, apparently utterly oblivious of the fact that the faster we sell our limited and fast-dwindling stores the quicker we will be at the mercy of every aggressor. Standard Oil of New Jersey may be indignant because of the rumored oil deal with the Soviets, but Standard Oil of New Yorka member of the same familyshould be warmly congratulated if it is true, as stated, that it plans large purchases from Russia, however Red or otherwise unorthodox the Russians may be. New York Telegram, July 29, 1927.
One of the amusing aspects of this situation was that the United States Shipping Board, at the height of Standard-Deterding competition and invective in the winter of 1927-28, ordered 24,000 tons from Standard for delivery to American Government vessels at Near East ports. The United States Government, which once carried its horror of dealing with Russia to the point of near-mania, now buys Russian oil. Incidentally the United States Government is thereby liable to suit in British courts by Sir Henri for receiving stolen goods allegedly owned by him through his possession of Tsarist stocks and bonds. The Shipping Boards excuse is that it got Standard-Russian oil for $10.95 a ton, while Sir Henri tried to charge the Board $13.66 a ton. That price gap shows what Russian oil means to Standard and Dutch-Shell in dollars and cents competition.
While fighting Standard, Sir Henri is not neglecting his direct war on Moscow. In addition to heavy holdings in Tsarist oil stocks at the time of the Genoa Conference, he was reported to have spent $30,000,000 from 1923 to 1927 in acquiring titles to other Russian oil properties nationalized. He therefore had an increasing financial stake in the overthrow of the Soviet Government. This was the situation when local and foreign press correspondents in Berlin connected Dutch-Shell with the so-called chervonetz forgery scandal.
In order to clear up the chervonetz forgery scandal the Berlin police have asked permission of the German Government to search the local offices of the Royal Dutch-Shell Company, the Berlin correspondent of the New York Times reported November 22, 1927. According to persistent rumors, the confidential agent of Sir Henri Deterding, president of the British petroleum concern, spent some time in Germany and was under suspicion as active in financing the counterfeiting scheme. Although the Foreign Office and the British Embassy declare that nothing will be kept from the public, it is an open secret that the police have orders to hush up the whole matter.185
Russia so far has not suffered from its quarrel with Dutch-Shell, except through loss of the Midland Bank loan and Great Britains break in diplomatic relations.
While Great Britain estimates the decrease in Englands oil imports from Russia at 60 per cent in 1927, Russias world oil business rather has improved. In addition to sales contracts with Standard, Moscow has sales agreements with the Spanish oil consortium. Soviet statistics indicate Russia is supplying 49 per cent of Italys oil consumption, 21 per cent of the French, 60 per cent of the Turkish, 16 per cent of the German, 15 per cent of the Belgian, and 4.4 per cent of the English import.186 Russian oil exports in the fiscal year 1927 increased 115 per cent to France, 85 per cent to Egypt and India, 44 per cent to Germany and central Europe, and 25 per cent to Italy. According to the Soviet Union Information Bureau, Washington: Soviet oil exports for the fiscal year ending September 30, 1927, amounted to 2,038,000 metric tons, breaking all Russian records. The previous high mark was 1,837,000 metric tons, back in 1904, before the decline in production under the old regime. Exports for the year were 123.4 per cent higher than those in 1913 and 38.4 higher than in 1925-26.187
There was a record production of 72,400,000 barrels in 1927, the output having doubled in four years. Russia now ranks second to the United States in world production, after displacing Mexico in second rank for the first time in 25 years. New drillings increased 30 per cent during 1927.
Estimates of M. Lomov, president of the Russian Naptha Syndicate, quoted by Mr. Louis Fischer, rate Russias oil reserves as the largest in the world, or 8,000,000,000 barrels alone in its richest oil regions, exclusive of Emba, exclusive of recently discovered oil lands, and exclusive of Turkestan.188 The United States Geological Survey estimates Soviet oil reserves at approximately 6,755,000,000 barrels. This places Russias resources above the estimate of the United States reserve of 5,500,000,000 barrels by the Coolidge Federal Oil Conservation Board.
With the rapid depletion of American reserves, and increasing demand for oil in peace and war pursuits, the future importance of Russian petroleum seems assured. Soviet equipment in the Caucasus has been modernized. In Baku 95 per cent of the wells are electrified, compared with 30 per cent pre-war. Under its sales contract, Standard is building a new refinery there. New pipe-lines are being constructed. In 1927 Russia put $95,000,000 of new capital into exploitation and plant. With larger capital investment the Baku and Grosni production can be increased, and many new fields developed. The latter include, besides Emba, the districts of Maikop, Chelekea, Gora, Derbent-Berekee, Kertch, Kakhetia, Uchta, and Izbekstan. Present Moscow policy aims at State retention of Baku and Grosni, with probable disposition of lesser fields to foreign concessionaires.
Soviet oil men are playing a waiting game in the hope of holding large oil reserves for decades after America and other countries will have exhausted their own supplies, Mr. Frederick Kuh, United Press correspondent, wrote from Grosni November 25, 1927. If successful, this policy would assure the Russians of one of the most valuable trump cards in the diplomatic gamble and economic struggle of the future. They are deliberately curtailing production in the Grosni fields. Were these oil wells and gushers allowed to work at full capacity, their output could be doubled immediately.
Russia frankly is trying to use her oil riches to obtain foreign capital. Despite increased Soviet production and export, the low oil market due to excessive world production has held Russias profits to a minimum. Therefore petroleum has not freed Moscow from the necessity of seeking loans from abroad. This search has been unsuccessful so far. After collapse of the British Midland Bank credit, Moscow tried without results to get loans in Paris, Berlin, and New York. President Mitchell of the National City Bank of New York had secret conferences in Paris in August 1927 with M. Rakovsky, before the latter was declared persona non grata as Soviet Ambassador to France. Though these negotiations were unfruitful, M. Rakovsky tried to use them to bolster his French loan negotiations. The French replied by ordering his expulsion. It was charged later that the French Secret Service had concealed a dictaphone in the Rakovsky-Mitchell conference room.
Since the Arcos raid and rupture in British relations Moscow has renewed its efforts to obtain loans in the United States. Such loan efforts are of course closely connected with general trade and concessions as well as with oil. Russia in the fiscal year 1927 placed orders in this country to the amount of $72,631,378, surpassing all previous records.189 She is willing to increase such purchases if loans can be obtained. So far American bankers and manufactures have granted only short-term credits, raising the price of their goods in ratio to the time-length of the credits. As a part of its American drive, Moscow awarded to a Chicago firm a favorable Dnieper improvement contract, originally given the Germans. It also revised the Harriman manganese concession in Chiaturi to the advantage of the Americans. Losses of the Harriman enterprise, the only large American concession, made poor bait for other American concession capital. Harrimans losses were due in part to over-production and competition from the Soviet State Nikopol fields, whose output was marketed by a German agent. Under the 18-year amended contract of June 4, 1927, Harriman obtained a measure of control over total Russian production, involving reduced Nikopol output, and a lower production tax, though he is still dissatisfied.
Besides this more liberal concession policy, Moscow desires to place in America most of the orders which Arcos at the time of the raid was handling in England. Russian trade with Great Britain had risen in value from $30,000,000 in 1921 to $220,000,000 in 1925. Soviet imports from Great Britain during the fiscal year ending September 1927 including three months of the post-Arcos slumpamounted to $76,000,000.190 Russian-American total trade turnover in the fiscal year 1926-27 was given by Moscow as approximately $90,000,000. The United States Department of Commerce stated on January 9, 1928:
Soviet purchases in the United States, since the Anglo-Russian break and the refusal of German firms to extend further long credits to Russia, have greatly increased; orders placed by the Amtorg in the 1926-27 fiscal year [October 1-September 30] were double those for the previous 12 months. Over 60 per cent of orders were for raw materials, semi-fabricates, and industrial equipment; another 25 per cent was for tractors and agricultural supplies. For 1928 this policy will be continued, with a still greater increase in orders to America promised, particularly for equipment for gold mining, hydro-electric development, and for other industrial machinery.
Russian-American trade fluctuates according to political and credit conditions elsewhere. Despite handicaps inherent in the lack of a formal trade agreement between the two countries, the annual turnover, beginning with the Soviet fiscal year 1924-25, has been about double the prewar figure, the Soviet Union Information Bureau, Washington, points out: In 1924-25 the turnover reached a high point of $118,000,000 of which American exports to the Soviet Union were $103,618,000. Thereafter, by establishing large trade credits under government auspices, Germany has succeeded in diverting a considerable amount of the Soviet purchases. The United States held second place on the Soviet trading list in 1924-25, but has since slipped to third position.191
The State Department in November 1927 liberalized to a very limited extent its Russian loan policy. Before that the Department had opposed everything but short-term secured credits. Then the Department said it had no objection to loans and long-term credits provided such money was used exclusively in payment for American goods ordered prior to the loan, and provided public sale of bonds was not necessary to float the loan. This policy was laid down in connexion with the Departments expression of disapproval of the proposed $40,000,000 Farquhar loan for steel plant construction at Makeyeva in the Don coal and iron basin. Washington objected on the basis of reports that New York banks were to furnish the money but German companies were to get the material orders. Russia, in conformity with the new Washington policy, sent buyers to this country to obtain the Makeyeva materials. Later the Soviet Government rejected the Farquhar contract because of his inability to obtain funds on satisfactory terms.
In the autumn of 1927 Moscow attempted to float a $30,000,000 railroad bond issue, and about $100,000 of this paper was sold by mail in the United States. The Chase National Bank of New York, which had been extending short-term credits to Russia for several years for the purchase of cotton and machinery in this country, advertised that it would act as agent of the Moscow Government, paying interest to these American railroad bond holders. The New York Life Insurance Company and others protested to the State Department on the ground that they held Tsarist railroad bonds which they valued at about $20,000,000. The Department informed the guilty banks of its disapproval of their action, and on February 1, 1928, issued the following formal statement:
The Department objects to financial arrangements involving the flotation of a loan in the United States or the employment of credit for the purpose of making an advance to the Soviet regime. In accordance with this policy, the Department does not view with favour financial arrangements designed to facilitate in any way the sale of Soviet bonds in the United States. The Department is confident that the banks and financial institutions will co-operate with the Government in carrying out this policy.192
The Department in all foreign loan matters exercises an extra-legal and much criticized function in advising banks. Though such advice is not binding it has never been disregarded by the bankers. The Chase National Bank was reported to have bowed to the Departments Russian ban. This, however, does not prevent Americans from continuing to buy such bonds and collecting interest directly through Moscow. Nor does the Departments statement prevent banks from extending credits to Russia for purchase of American goods provided no cash goes to Russia and no public loan flotation is involved.
Discussing Russian relations in 1928, Secretary of State Kellogg argued that political non-recognition did not retard trade. He said:
No result beneficial to the people of the United States or, indeed, to the people of Russia, would be attained by entering into relations with the present regime in Russia so long as the present rulers of Russia have not abandoned those avowed aims and known practices which are inconsistent with international friendship. ...
As concerns commercial relations between the United States and Russia, it is the policy of the Government of the United States to place no obstacles in the way of the development of trade and commerce between the two countries, it being understood that individuals and corporations availing themselves of the opportunity to engage in such trade do so upon their own responsibility and at their own risk. The American Government has interposed no objection to the financing incidental to ordinary current commercial intercourse between the two countries, and does not object to banking arrangements necessary to finance contracts for the sale of American goods on long-term credits, provided the financing does not involve the sale of securities to the public. The American Government, however, views with disfavour the flotation of a loan in the United States or the employment of American credit for the purpose of making an advance to a regime which has repudiated the obligations of Russia to the United States and its citizens and confiscated the property of American citizens in Russia.193
Russia hopes ultimately to get a straight loan or cash advance in this country through Standard. Standard has its own banking facilities which would permit such a transaction on a private basis, without going into the open market and running foul of the State Department. But so far Standard has been unwilling to advance a large loan to Moscow until Russian-American relations are regularized by diplomatic recognition.
In the event of an oil shortage in this country Russias resources will become a more important, though probably not a determining, diplomatic factor. That point has not been reached. But there has been some change. Washington policy is less emotional and more cynical. Formerly the United States would not discuss recognition with Russia largely because of fear.194 Now recognition negotiations are postponed because of the belief that time weakens the position of Russia and strengthens the United States, leading to a crisis in which Moscow will seek recognition practically on Washingtons terms. Washington thinks Russia must have large loans which cannot be obtained outside of this country. Some day the Communist dictators will have to compromise with the strongest capitalist government in the world, in the judgment of American officials.
There is little public pressure in this country for Russian recognition, not enough to outweigh opposition of the American Federation of Labour. Recognition is dependent upon Russia making a satisfactory deal with a few men in New York and Washington. Washington will insist that Moscow agree to prevent Communist International propaganda in this country, to recognize and fund the Kerensky debt to the United States Government, and to return or compensate for expropriated American private property.
The State Department is not now afraid of Communist propaganda and, unless Russian negotiations were held at a time of economic stress and labour unrest in this country, would probably be willing to accept in good faith the pledge of non-propaganda which Moscow is ready to give. Russian officials have expressed their willingness to negotiate funding of the Kerensky debt, which amounts to somewhat over $250,000,000 including interest. On the basis of the American-Italian debt funding settlement of 25 cents on the dollar with payments spread over 62 years, the Kerensky obligation is considered relatively unimportant. The principle involved in such a settlement is more important to Moscow because of the larger Russian debts to France and other countries. The principle rather than the cash is equally important from the opposite angle of the United States as the world banker whose future depends on the sanctity of financial obligations. There remain expropriated property claims of Americans, which amount to more than $400,000,000. A mixed claims commission would require several years to consider and dispose of these cases. Russia now would insist upon presenting counter-claims growing out of United States military intervention in Siberia. But Washington hopes that Russia may be in such financial need before recognition negotiations begin, that the Bolshevists will not be able to force American settlement of counterclaims.
Recognition terms, therefore, apparently will depend on this race between Russias need for outside capital, forcing Moscow to compromise, and on Americas need for Russian oil.195
American dependence upon Russian oil in the future is perhaps overestimated by Moscow. It is true that Standard, as indicated by its Russian contracts, must have Caucasian petroleum if it is to compete successfully against Dutch-Shell in the Mediterranean-Suez area and in India. Moreover there are indications that Standard will use to the full its influence in Washington for Russian recognition, if this is necessary to turn the scales in the coming competition between Dutch-Shell and Standard for Russian concessions. But Russian oil contracts and concessions are not imperative from the standpoint of the Washington Government because of any anticipated depletion of American oil supplies. American officials look rather to Mexico, Colombia, and Venezuela in event of probable American shortage.
156. Cf., Appendix B.
157. Commerce Department, Foreign Capital Investments in Russian Industries and Commerce, M.S. No. 124. 1923.
158. Cf., Vacuum Oil Company statement, New York Times, July 22, 1927.
159. Federal Trade Commission, supra, pp. 103-104.
160. Cf., Standard Oil Company of New Jersey, Genoa Conference press statement quoted in New York American, July 29, 1927.
161. For fuller treatment of the Genoa and The Hague conferences, cf., Louis Fischer, Oil Imperialism, pp. 38 ff. 1926. Davenport and Cooke, supra, pp. 127 ff. Mohr, supra, pp. 93 ff.
162. New York Times, May 12, 1922.
163. London Petroleum Times, May 26, 1923.
164. Cf., Chap. II.
165. Fischer, supra, p. 209.
166. Letter to London Times, Dec. 26, 1921.
167. 68th Congress, 1st Session, Senate Document No. 97, pp. 113-116.
168. August 3, 1918.
169. Commerce Department, Foreign Trade Notes, Dec. 31, 1927.
170. New York Times, Nov. 21, 1927.
171. Commerce Department, Foreign Trade Notes, Oct. 8, 1927.
172. Fischer, supra, pp. 205-206.
173. United Press, Tiflis dispatch by Frederick Kuh, Oct. 4, 1924.
174. Cf., Washington United States Daily, April 6, 1926, for Georgian recognition resolution and hearings.
175. Cf., New York American, July 29, 1927: It is said here in New York that Charles Evans Hughes advised the Standard of New York and Vacuum in their latest contracts for Russian oil. That ought to make them feel comfortable.by Edwin J. Clapp. For this, and collection of other statements by the press, Standard companies, Sir Henri Deterding, and Soviet representatives, on purchases of Russian oils, cf., Amtorg Trading Corporation, New York, Soviet Oil Industry. 1927.
176. Ivy Lee, U.S.S.R., A World Enigma, 1927.
177. Boston Living Age, July 1, 1927.
178. New York Times, April 3, 1928.
179. Boston Living Age, Sept. 15, 1927.
180. New York Current History, September 1927.
181. Ibid., September 1927.
182. New York Times, Aug. 5, 1927.
183. Ibid., Jan. 16, 1928.
184. Soviet Oil Industry, supra.
185. New York Times, Nov. 23, 1927.
186. United Press, Baku dispatch by Frederick Kuh, Nov. 30, 1927.
187. Press release, Nov. 3, 1927.
188. Fischer, supra, p. 10.
189. Soviet Oil Industry, supra, p. 30.
190. Washington Soviet Union Review, January 1928.
191. Ibid., November-December 1928.
192. New York Times, Feb. 2, 1928.
193. Kellogg, supra, pp. 49-50.
194. Cf., Hughes, supra, pp. 35-45, for Reasons Why United States Refused Recognition to Russia. Also, New York Current History, February 1926, for articles on Russian recognition by Leon Trotsky, E.M. House, Irving Bush et al. Also, American Trade Union Delegation Report, Russia After Ten Years. 1927.
195. Cf., Soviet Union Information Bureau, Washington, Commercial Handbook of the U.S.S.R., 1927, for Russian economic conditions.