Memorandum by the Chief of the Division of Eastern European Affairs (Kelley) 10

Problems Pertaining to Russian-American Relations Which, in the Interests of Friendly Relations Between the United States and Russia, Should Be Settled Prior to the Recognition of the Soviet Government

In order that the United States may derive from the recognition of the Soviet government the benefits which normally follow the recognition of a foreign Government, the recognition of the Soviet government [Page 783] should involve the establishment of relations with Russia on a basis which would render possible the maintenance of friendly cooperation between the Governments of the United States and Russia and the development of trade and intercourse between the two countries. The experience of countries which have extended recognition to the Soviet government has shown pretty conclusively, it is believed, that there are serious obstacles in the way of the establishment of relations with Russia on such a basis, and that so long as these obstacles remain, official relations, established as a result of recognition, tend to become, in view of the extraordinary nature of these obstacles, the source of friction and ill will rather than the mainspring of cooperation and good will. It would seem essential, therefore, that every endeavor should be made to remove these obstacles prior to the extension of recognition. Until a substantial basis of mutual understanding and common principles and purposes has been established, official intercourse, with its increased contacts, is bound to lead to friction and rancor. Formal diplomatic relations may be established, but the substance of a useful relationship will be lacking, as much for the Russians as for ourselves, unless and until we have cleared up the existing difficulties through mutual agreement and worked out a modus vivendi for the future.

problem of communist world revolutionary activities

The fundamental obstacle in the way of the establishment with Russia of the relations usual between nations in diplomatic intercourse is the world revolutionary aims and practices of the rulers of that country. It is obvious that, so long as the Communist régime continues to carry on in other countries activities designed to bring about ultimately the overthrow of the Government and institutions of these countries, the establishment of genuine friendly relations between Russia and those countries is out of the question. Even when these activities do not constitute a present menace to the established order, the systematic interference of a foreign power in the domestic affairs of a country constitutes ipso facto a source of deep resentment and unavoidable friction. The persistence of such interference after diplomatic relations have been established leads inevitably either to the rupture of relations—as has taken place in the case of England, China, and Mexico,—or to serious tension and the reduction of the existing diplomatic relations to a barren, meaningless relationship—as has taken place at times in the case of France, Germany, Poland, et cetera. It would seem, therefore, that an essential prerequisite to the establishment of harmonious and trustful relations with the Soviet government is the abandonment by the present rulers of Russia of their world revolutionary aims and the discontinuance of their activities designed to bring about the realization [Page 784] of such aims. More specifically and with particular regard to the United States, this prerequisite involves the abandonment by Moscow of direction, supervision, control, financing, et cetera, through every agency utilized for the purpose, of communist and other related activities in the United States.

question of repudiated debts and confiscated property

Another serious difficulty in the way of the establishment of mutually advantageous relations with the Soviet government is the unwillingness of that government to observe certain generally accepted principles governing the conduct of nations towards each other. Among these principles is the duty of a State to respect the rights of citizens of other States which have been acquired within its jurisdiction in accordance with its laws, and the duty of a Government to honor the financial obligations contracted by a State under preceding Governments. The Soviet government has confiscated the property of foreign nationals in Russia and has repudiated the contractual obligations of Russia to foreign Governments and foreign nationals. It is to be noted that through these acts not only has damage been done to the interests of foreign States, but what is more important, the Soviet government has rejected international obligations which the experience of mankind has demonstrated are vital to the satisfactory development and maintenance of commerce and friendly intercourse between nations. These acts have severely handicapped the development of commercial relations between Russia and foreign countries, since they have practically destroyed the basis of ordinary credit to the Soviet government or Soviet organizations. Any substantial improvement of Russian credit would appear to be unlikely until a settlement has been reached with respect to repudiated bonds and confiscated property, and until Russia has furnished adequate evidence of its purpose to maintain its international relations in accordance with recognized standards.

Losses Suffered by the United States

The United States has suffered the following losses as the result of the Soviet policies of repudiation and confiscation:

(a) Repudiated Russian obligations held by the United States Government (principal only) $192,000,000
(b) Repudiated Russian obligations held by American citizens (principal only):
(1) Floated in the United States
(2) Floated elsewhere
(c) Confiscated property rights and interests of American citizens in Russia 330,000,000

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It is to the interest of the United States to obtain a settlement of the questions of repudiated bonds and confiscated property on the basis of accepted international practices, not only on account of the material losses involved, but especially in view of the fact, as indicated above, that the settlement of these matters is of great importance for the establishment of a sound basis for trade between the United States and Russia. Moreover, it is to be noted that the Government of the United States has a profound interest in the maintenance of the sanctity of international obligations, not only in view of the world-wide activities of its citizens, but even more in consequence of its earnest desire to see strengthened those forces making for the promotion of peace and international good will.

Settlement Desirable Prior to Recognition

It is to be especially emphasized that if the questions of repudiated debts and confiscated property are not settled prior to recognition, there is little likelihood that subsequent negotiations would result in a mutually satisfactory settlement. Evidence of this is to be found in the fruitlessness of the long-drawn-out negotiations in regard to these questions conducted by France and Great Britain subsequent to their recognition of the Soviet government.

Related Questions Requiring Consideration

In connection with the settlement of these questions, it is important that an agreement be reached with regard to the disposition made of Russian Government property and property rights in the United States in the period from November, 1917, to the date of recognition. Unless a complete agreement is reached with regard to outstanding questions, it would be desirable to obtain from the Soviet government an undertaking analogous to that incorporated in the Trade Agreement between Great Britain and Russia of March 17, 1921,11 under which the Soviet authorities agreed to take no action with reference to funds or property of the Russian Government in Great Britain pending a settlement of the matter with the British Government.

Another question requiring careful consideration is that of the effect of recognition on property and property rights in the United States which have been determined by judicial decisions based on the circumstance of nonrecognition. Appropriate action should be taken so that recognition would not have any retroactive effect which would be prejudicial to American interests.

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problem of bridging the differences between the economic and social structure of the united states and russia

A third major problem requiring solution in the interest of the establishment of harmonious and mutually beneficial relations between the United States and Russia is the difficulties arising out of the profound differences between the economic and social structure of the two countries. Reference is made here specially to the State monopoly of foreign trade in Russia and to the class character of the Soviet State.

Commercial relations between a country with a State monopoly of foreign trade and a country with its foreign trade carried on by private individuals cannot be conducted on the same basis as trade between two countries of the latter category. None of the accepted principles governing international commercial relations, such as most-favored-nation treatment, national treatment, et cetera, is applicable to trade between Russia and other countries. Those countries which have concluded trade agreements with Russia on a most-favored-nation basis, such as Germany, Great Britain, et cetera, have learned to their cost that the application of the most-favored-nation principle in treaties with Russia is, as the British Minister for Foreign Affairs recently said, “distorted and ridiculous.” Furthermore, a government monopoly of foreign trade, in carrying on commerce with foreign countries, has a natural advantage over individual business concerns in such countries. In practically every country trading with Russia endeavors have been made, usually with little success, to find ways and means of putting trade relations on an equal footing and removing the disadvantages under which the individual business man labors in dealing with the Soviet monopoly of foreign trade. Finally, it is to be noted that the existence of this monopoly has given rise to difficulties and misunderstandings in the case of several countries that have recognized the Soviet government in connection with the determination of the status of Soviet Trade Delegations, the extent of the responsibility of the Soviet government for acts of Soviet commercial organizations, the right of Soviet organizations to participate in retail trade, et cetera.

Another question which has led to serious friction between Russia and foreign countries, especially Germany and Great Britain, is the treatment to which foreigners in Russia are subject under Soviet laws and practices. While it is a principle of international law that aliens are amenable to the laws of the country in which they are residing, the system of justice existing in Russia is so far removed from that maintained in the countries of Western Europe, and the Communist conception of justice is so alien to that held in such countries, that foreign countries have been obliged at times to take vigorous measures of reprisal in connection with the application to their nationals of Soviet [Page 787] judicial procedure and certain Soviet criminal laws to which Soviet nationals are subjected. For example, the Soviet conception of espionage, especially economic espionage, is of such a broad nature that almost every foreigner in Russia commits acts which may readily be interpreted as violating the laws on this subject. Soviet practices with regard to arrest and incarceration of foreign nationals constantly lead to friction with foreign States. Matters such as these, involving the question of the protection of life and property of American citizens in Russia, should be settled by agreement in order to create a satisfactory basis for intercourse with Russia.

I. Russian Government Obligations Held by Government of the United States

A. Obligations of Provisional Government:
1. Obligations representing cash advanced under Liberty Loan Acts $187,729,750.00
B. Other Obligations:
1. Obligations received on account of sales of surplus war material 406,082.30
2. Obligations received on account of relief supplies furnished 4,465,465.07
Total 192,601,297.37

II. Russian Government Obligations Held by American Nationals

A. Loans floated in the United States:
1. Imperial Russian Government external loan (5 year) issued in the United States on November 18, 1916, by syndicate of New York banks $25,000,000.00
2. Imperial Russian Government 3 year credit granted by syndicate of New York banks; participation in credit offered to public on June 18, 1916 50,000,000.00
3. Russian Treasury notes purchased by National City Bank in April, 1916 $11,000,000.00
Total 86,000,000.00
B. Loans floated elsewhere—chiefly domestic War Loans sold by Russian Government in the United States (estimate based on claims filed)
1. Bonds of 5½% War loan of 1915–16 12,802,598.24
2. Bonds of Liberty Loan of 1917 5,138,016.31
3. Bonds of Loan of 1894 2,614,025.70
4. Miscellaneous issues of Russian bonds 329,517.50
Total 20,884,157.75
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III. Confiscated Property Rights and Interests of American Nationals (estimate based on claims filed)

A. Properties and assets of American concerns and real and personal property of individuals confiscated by Soviet authorities $115,141,931.03
B. Bank deposits confiscated 209,825,348.82
C. Debts of Russian Government to private concerns 2,667,281.14
D. Miscellaneous claims 9,057,210.04
Total 336,691,771.03
  1. Copy handed to President Roosevelt by the Acting Secretary of State, July 27.
  2. Signed at London, March 16, 1921; League of Nations Treaty Series, vol. iv, p. 127.