861.24/8–244: Telegram
The Secretary of State to the Ambassador in the Soviet Union (Harriman)
1965. General Deane is taking with him an instruction dated August 14, 194412 enclosing all pertinent information on negotiations with Stepanov which took place up to that date.
[Page 1116]There is also included with this instruction the revised detailed schedule I referred to in point 5 of the Department’s 1869, August 5 as well as a tentative list of the offerings we are prepared to make under schedule II. The detailed list of schedule I and the tentative offerings in schedule II represent the items requested by the Soviets under the Fourth Protocol which we propose to make available to them in the new protocol.
In the instruction you are requested to obtain from the Soviet authorities as soon as possible their decision regarding the items in schedule I which they desire to obligate themselves to take under the conditions of the proposed agreement (item 4(b) of the Department’s 1889, August 5). The instruction also requests you to impress upon the Soviet Government that if they are not prepared to obligate themselves to take most of the items of schedule I, which have a definite postwar use, we will be reluctant to sign the proposed agreement. You are also requested, in connection with any discussions you may have with the Soviet authorities regarding the agreement, to impress upon them that the agreement must be signed prior to the collapse of Germany since, if it is not signed by that time, Government credits, in all probability, could not be made available to them and private concerns could not conclude contracts with them to provide postwar items on a credit basis.
The following is a summary of pertinent points discussed at the last three meetings we had with Stepanov:
1. Stepanov accepted the redraft of Article IV (cancellation clause), the text of which is enclosed with the instruction under reference. We submitted to Stepanov the new detailed schedule I as well as the tentative offerings which we would be prepared, by mutual agreement, to include in schedule II provided the Soviet authorities were prepared to comply with the conditions stipulated by us. The full text of these conditions are enclosed in the above mentioned instruction.
Stepanov states he has telegraphed the new revised schedules to Moscow and sent copies by airmail via Siberia. He was informed that on the basis of these lists it was hoped that you and the Soviet authorities could decide which items the Soviet authorities desired to obligate themselves to take under the proposed agreement.
2. We informed Stepanov that, after calculating various amortization schemes, Treasury had come to the definite conclusion that the best interest rate we could offer the Soviet Government was 2.⅜ percent which represents the minimum cost which the U.S. Government would have to pay for the type of credit which it is proposed to make available to the Soviet Government. Mr. Stepanov again argued that we should not charge more than 2 percent since the average cost of all U.S. Government obligations today is slightly less than 2 percent. [Page 1117] He was informed that we could not use the average cost today as the basis for the interest rate for the proposed credit since we, in all probability on the basis of present calculations, would be offering the Soviet Government a credit at a better rate than the U.S. Government itself could obtain. Despite our detailed explanations, he stated that he could not accept an interest rate higher than 2 percent which brought us to a practical impasse. In pleading for a 2 percent interest rate, Stepanov stated that we should take into consideration the “special” factors of this particular credit to the Soviet Government and the general spirit of the lend-lease agreements. While we promised to give consideration to his arguments, we informed him that we did not feel that we could offer a lower rate than 2.⅜ percent since, in all probability, Congress would not appropriate money for the credit in the event that the rate was lower than the U.S. Government could obtain, and he was further informed that if we granted such a rate to the Soviet Government this would be a precedent for other countries which we would not be willing to establish.
While we have not again discussed interest rates, we plan to tell Stepanov, after having discussed amortization and costs with him, that if he can not accept our proposed rate of interest, he will have to seek new instructions from his Government if we are to continue negotiations at this time.
3. Regarding amortization, Stepanov stated that while he felt that repayment should not begin until the end of the 11th year, he was prepared, in order to meet partially the American proposal that the first payment should start after the 5th year, to propose that amortization payments start at the end of the 9th year. We are discussing this question with Treasury and feel that it may be possible to accede to this Soviet request.
4. At our last meeting we presented to Stepanov a cost formula, the pertinent parts of which are as follows: a) Costs of supplies under the agreement shall be the contract purchase price, f.o.b. point of origin, or if contract purchase price can not be determined, the cost shall be the estimated average contract purchase price for similar articles during the three months prior to the determination by the President that the military resistance of the enemy has been overcome, b) The cost of supplies transferred under the agreement will be subject to the following deductions: 10 percent for supplies which shall have been delivered by the contractor to the U.S. Government prior to the date of determination by the President or in case such supplies shall not have been delivered to the U.S. Government prior to that date, the reduction shall be 5 percent.
It was explained to Stepanov that the 10 percent reduction would be applied to goods which might be in surplus and that the reduction included the best estimates that can be made at this time to cover [Page 1118] renegotiations of contracts and other items which would reduce the cost after the termination of hostilities and that the price after the deduction represented the price at which it was anticipated the U.S. Government, on the average, would sell surplus items of the nature of those in schedule I. Contracts covering supplies which have not been delivered to the U.S. Government prior to the determination by the President could be cancelled at an approximate cost of 5 percent and therefore if the Soviet Government obligated itself to take these items, these contracts would not have to be terminated and thus the Soviet Government could be granted the 5 percent reductions which otherwise the U.S. Government would have to pay.
Stepanov argued at considerable length that he did not feel that a flat reduction would be acceptable but wanted to receive whatever reductions might be applied to any item after consideration had been taken of savings from renegotiations of contracts, excess profit taxes, and other factors which might reduce the price of surplus items. We explained that if the Soviet Government should obligate itself to take the items in schedule I, they would be assured that these items would be delivered to them, while if they did not obligate themselves to take these items, there was no certainty that any particular item would be in surplus and available for sale. Furthermore, in the latter event, they might have to compete with other bidders for the surplus products with no assurance that the Soviets would be the successful bidders. Stepanov, however, urged that we accept the general cost formula he had submitted at the first meeting (attachment C to minutes of first meeting which are enclosed with instruction under reference), which provides among other things that the cost in any case shall not exceed the cost at which we will dispose of similar items in stock. We explained again the various reasons why we could not accept this provision and Stepanov promised to give further consideration to our proposals and discuss the question at a later date.
Since drafting the above, we have had a further talk with Stepanov, the results of which will be reported subsequently.13