861.24/8–2444: Telegram
The Secretary of State to the Ambassador in the Soviet Union (Harriman)
2066. ReDeptel 1997, August 22. There are given below the pertinent results of the eighth, ninth, and tenth meetings with Stepanov:
[Page 1124]1. In connection with the three proposals put to Stepanov at the previous meetings regarding interest rate, amortization, and cost, he at first replied that he was only authorized to accept an interest rate of 2 percent and desired to record our differences in order that we could discuss the other two proposals.
In a later discussion, Stepanov proposed that the Soviet Union be given an option to pay either interest at the average yearly cost to the United States Government (original American proposal), or if the average yearly cost should go above 2⅜ percent, that figure would be the maximum amount the Soviet Government would be called upon to pay. We gave consideration to this proposal and informed Stepanov that, since it was possible that the yearly average cost of credit to the United States might go above 2⅜ percent, we could not bind ourselves by accepting this formula, since it might mean that the United States would be giving credit to the Soviet Government at a lower rate than it could receive itself.
At the last meeting, we told Stepanov that we could not, under any circumstances, accept an interest rate other than either the average yearly cost or a flat rate of 2⅜ percent.
2. In regard to amortization, a lively discussion took place as to whether, if repayments begin during the 9th year, the Soviet Government should have the following 25 years in which to repay the credit, or whether the entire credit should be paid in 30 years from the termination of hostilities. We explained that, in accepting the Soviet counter-proposal to start repayments during the 9th year, we had not altered our position that the final payment should be made at the end of the 30th year. On Stepanov’s insistence that his proposal to begin the repayments during the 9th year also had contained the provision that these payments should take place during the ensuing 25 years, we promised to discuss the matter with Treasury and inform them of our decision later.
At the last meeting, we informed Stepanov that, since the fixed interest rate which we had offered was based on a 30-year credit, we could not, under any circumstances, extend the time of the credit to 34 years as he had suggested.
3. Cost. Stepanov stated that, after studying our new cost formula, he felt that we had made a substantial effort to come nearer the Soviet proposal, although he felt that the reduction provided for nonstandard goods was too small and cited figures which he stated showed that the renegotiation of contracts in 1942 had brought about recoveries of considerably larger sums than 5 percent.
Stepanov then asked for clarification of what goods we would consider as standard, and asked specifically whether we would consider [Page 1125] as non-standard supplies those goods which were standard in every respect except certain minor attachments or features which might be placed on the equipment to meet special Soviet requirements such as metric gauges, etc. We studied this question and wrote into the new cost formula a definition of standard supplies along the following lines: Standard supplies shall not be deemed to exclude standard supplies which have minor adjustments, features, or attachments which are non-standard. Stepanov seemed satisfied with this definition.
After giving further study to our cost formula, Stepanov reiterated his belief that the percentage reduction for non-standard goods was too low since, according to the figures available to him, the renegotiation recoveries were larger than 5 percent, and he again argued at great length to try to convince us that we should also deduct from the contract purchase price a percentage which would take into account the high excess profit and other war taxes. He therefore proposed that the reduction on manufactured goods should be 20 percent and on raw materials, 15 percent. He also argued that he felt that these reductions should apply to standard goods which we were offering to them at the surplus goods price at which similar goods were sold to other purchasers. We informed Stepanov categorically that, since taxes did not enter into the price of goods, we could not in any circumstances give consideration to reductions in the cost price because of high taxes, and we informed him that we could make no percentage reduction for standard goods which we were offering at surplus goods prices.
We explained to Stepanov that the various proposals we had made to him represented the maximum which we could legally accept, and that, if he felt that the interest rate, amortization arrangements, or the cost formula were not acceptable, it might prove impossible to conclude the agreement, and we could not in all probability put into production any of the schedule II items desired by the Soviet Union for its war effort which took a long time to produce and were also useful for peacetime purposes. Stepanov argued that he felt this was not in harmony with the original proposals which he alleged the United States had initiated, and he indicated that he was of the impression the United States had proposed the agreement since we were most desirous of giving business to American firms to help tide them over from a wartime to a peacetime basis. Stepanov was reminded that the original suggestion to purchase industrial equipment on a credit basis had come from Mikoyan, and that we had worked out the proposed agreement in an effort to assist the Soviet Government in this matter.
[Page 1126]In an effort to obtain a greater reduction than 5 percent for nonstandard goods, Stepanov stated that, if it would be possible for us to grant a greater reduction to cover possible recoveries from renegotiation of contracts, etc. he would be prepared to propose to his Government that it accept an interest rate higher than 2 percent. We promised to study this question and inform him at a later date. He was informed, however, that on the basis of all calculations we had made, 5 percent more than covered any possible deductions which would come from renegotiation.
4. Cost of items in schedule II. We asked Stepanov if he agreed to the cost formula covering schedule II items. He replied that he felt that the same principles as applied to schedule I articles should apply for goods furnished under schedule II. We explained that, since items in schedule II were special supplies to be manufactured for the Soviet Government, we could not accept any reduction whatsoever in the contract purchase price for these items. It was explained to Stepanov that, for items in this category, the Soviet Purchasing Commission could take part in the negotiating of the contract and before the contract was entered into with the supplier, the Soviet authorities could decide whether they desired to have the particular item at the cost at which it was offered. If they should decide not to accept the offer, the only expense the Soviet Government would obligate itself to pay would be engineering costs in connection with the proposed project. Stepanov promised to study this question further.
5. Shipping. In regard to shipping, Stepanov had asked whether we could guarantee to make available shipping to move the supplies during the life of the agreement. After studying this question, we informed him that we could make no concrete commitments on this point, but would undertake to use our best efforts to obtain shipping facilities for the Soviet Union provided it was consistent with the security of the United States.
Stepanov expressed the hope that we could make a firmer commitment on shipping, and also asked whether it would be possible for us to include shipping costs in the credit arrangements. We promised to study this question but informed him that a) since we could not guarantee to make the shipping available because of the possible needs of the United States for the prosecution of the war in the Pacific, and b) since we could not make a firm contract under the agreement except during the lifetime of the lend-lease act, it might prove difficult to provide credits for shipping since, as a general rule, shipping contracts were made on an individual voyage basis.