Memorandum on the German-Russian Economic Negotiations
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No. 619

BERLIN, February 21, 1938.

I. The German-Russian Economic Agreement of October 12,1925, forms the contractual basis for trade relations with the Soviet Union. In addition to the normal exchange of goods, German exports to Russia were from the very beginning promoted by the fact that through various successive credit operations the Russian Trade Mission in Berlin was granted credits for the financing of additional orders in Germany, for which the Trade Mission had to negotiate bills of exchange payable in Reichsmarks. The last such agreement, the "Fourth Credit Operation, Special Transaction of 1935," was concluded on April 4, 1935. It placed at the disposal of the Russians until June 30, 1937, credits in the amount of 200 million Reichs-marks, to be repaid during the period from 1940 to 1943. This credit was used to the extent of 183 million Reichsmarks. The preceding credit Operations have been liquidated except for 5 million Reichsmarks, which are to be repaid in 1938.

The normal trade with Russia and the additional trade promoted by the credit operations led to a brisk exchange of goods, which reached its highest point in 1931 (exports to Russia 762 million Reichsmarks, imports from Russia 550 million Reichsmarks). Although it has steadily decreased since that time, it still amounted in 1937 to 117 million Reichsmarks in exports to Russia and 65 million Reichsmarks in imports from Russia. The bulk of the imports from Russia always consisted of raw materials equivalent to foreign exchange, and, even in 1937, 95 percent were raw materials. The Russians always punctually fulfilled the obligations arising from their bills of exchange.

In addition to these agreements, after the introduction of German foreign exchange control, short-term economic agreements (clearing agreements) for the regulation of German-Soviet trade and payments were concluded. The first agreement of this kind was concluded for 1936, and was extended through 1937 in December 1936. It was then agreed, among other things, that the Russian obligations arising from bills due in 1937 in the amount of approximately 27 million Reichsmarks were to be paid with the proceeds from the sale of raw materials especially important to us (manganese ore, lumber, hax, etc.) -

II. The Economic Treaty for 1937 could not be renewed for 1938 on time, because the Russians were unable at first to appoint plenipotentiaries for negotiations either in Berlin or in Moscow. The deliveries and orders from Russia, therefore, have been at a stand-still since the end of 1937, to the detriment of the German economy. Not until January 5, 1938, did the Russian Trade Mission here declare that it was prepared and authorized to enter into negotiations. In view of our situation regarding raw materials and foreign exchange it is important for us in these negotiations to maintain and, if possible,, to increase the raw material purchases from Russia without expending foreign exchange. The Russians on their part are prepared to make further deliveries to us only insofar as this is required for covering their capital obligations and balancing their purchases of goods from Germany. Under those circumstances we stated that we were prepared to accept goods for the settlement of bills falling due in 1938, just as in 1937, but with the reservation that this should not be considered a precedent for the payment of bills falling due at a later date. Since the bills falling due in 1938 amounted only to the comparatively small amount of 5 million Reichsmarks, we suggested to the Russians that the obligations on bills from the "Fourth Credit Operation," amounting to 183 million Reichsmarks, be paid I as early as during the period from 1938 to 1939, instead of during the period from 1940 to 1943, and likewise in goods of our choice. In order to make this palatable to the Russians we offered them after the approval of Field Marshal Goring had been obtained a new paper credit in the amount of 200 million Reichsmarks for additional purchases from Germany (i.e., exceeding the normal purchases under the clearing agreement to be renewed). If the Russians agree to this proposal, we should obtain from them in 1938 goods, that is, mainly raw materials equivalent to foreign exchange, for

a. about 80 million Reichsmarks of the normal imports under the Clearing Agreement,

b. 5 million Relchsmarks for the payment of bills falling due in 1938,

c. most of the 183 million Reichsmarks in bills arising from the "Fourth Credit Operation."

According to the present status of the negotiations, it may be expected that an agreement will soon be reached regarding points a and b, i.e., renewal of the Clearing Agreement and payment of the bills in the amount of 5 million Reichsmarks. Contract drafts for these were handed by us to the Russians on February 18. On the other hand, it is doubtful whether an agreement regarding point c can be reached. The Russians, to be sure, have stated that they are prepared to accept an additional credit of 200 million Reichsmarks or more, but have refused the payment of the credit amounting to 183 million Reichsmarks before maturity a solution which is of course out of the question for us.

Negotiations are continuing.

III. At the request of Party Member Hess a conference was held about 2 weeks ago regarding the status of German-Russian economic relations and of the negotiations, which was also attended by Ministerial Director von Jagwitz and the Chief of the Office for Foreign Commerce of the Auslandsorganisation, Party Member Bisse. At first, doubt was expressed as to whether, in view of the political tension with Russia and possible complications, it would really be advisable to grant the Russians further credit. After the situation was explained, however, the line followed during the negotiations was approved by all who attended the conference. Within the framework of the above-mentioned point of view the question of selling abroad the Russian bills of exchange deposited with German banks was also brought up. Such a sale, in the opinion of the Foreign Ministry, would not be advisable, since it would definitely put an end to the trade with Russia, which is still advantageous to Germany, and since, moreover, the bills could be sold abroad only at such a discount as to make the transaction unprofitable, even from the point of view of foreign exchange.

Submitted through the State Secretary to the Foreign Minister.


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