861.24/9–344: Telegram
The Secretary of State to the Ambassador in the Soviet Union (Harriman)
2221. Your 3283, September 3, 1944. We have concluded our negotiations with Stepanov. On September 8, he was given a draft of the text of the agreement and preambles of schedules I and II which brought together the results of the negotiations with him, and he was informed that this draft stated the United States position on matters in which difference of opinion exist. On September 9 and 12, we discussed the text with him and agreed to certain minor changes. These changes were incorporated in a new complete draft which was forwarded to him on September 14. The written text of this draft will be included in the Department’s next following telegram.32
In submitting this final draft Stepanov was told, and you may so advise Soviet authorities, that we are prepared to add to the items in schedule II as they appeared in enclosure no. 6 of the Department’s [Page 1136] instruction of August 14,33 all of the items referred to in enclosure no. 7 to that instruction (those additional plants which were under consideration for inclusion in schedule II) except the buna–S plant which is still under consideration.
With regard to the items in enclosure no. 8 to the above instruction for which financial assistance was not offered under lend-lease, our position remains unchanged. You may inform Mikoyan that, in conformity with the principles underlying the agreement under discussion, the competent American authorities, after giving consideration to these items, reached the conclusion, on the basis of information available, that these plants are for the production of materials for general reconstruction purposes and therefore can not be justified under lend-lease since they would not apparently contribute directly to the Soviet war effort.
It was agreed with Stepanov that he may now either obtain instructions from Moscow regarding the signing of the agreement here, or he may return to Moscow with the draft of the agreement which represents the final United States position. It was emphasized to Stepanov that it is in the interest of both Governments to decide promptly whether the agreement is acceptable since, if it is not acceptable, we must proceed along other lines such as the International Bank or the Export-Import Bank which would necessarily cause a delay in putting into production items which the Soviet Government apparently desires to obtain as soon as possible, in order that they may contribute to the Soviet war effort.
It was also pointed out to Stepanov that in proposing this agreement the United States was making it possible for the Soviet Union to place orders now, that the Soviet Union could not obtain any lower prices if it placed the orders itself, that we are offering more favorable credit terms than could be obtained commercially, and that we did not feel we could be expected to do more.
The following points were discussed with Stepanov on September 9 and 12:
1. For the first time Mr. Stepanov stated that he was seriously concerned over the provision in Article III that the United States undertakes to transfer only those supplies which it shall have contracted for or shall have title to prior to the date of the President’s determination. He requested that this provision be deleted or modified since it did not allow the Soviet Government much time to place orders. He said that the preliminary work of preparing requisitions and engineering might occupy as much as 6 months before a contract could be executed. He suggested that it would be in the mutual interest of both governments to modify the provision in Article III to allow more time for the placing of orders.
[Page 1137]It was pointed out to Stepanov that the provision in Article III was fundamental and that the President had no legal authority to place contracts for these long-range supplies for the Soviet Union after a determination by him that the military resistance of the common enemy has ceased. It was mentioned that this provision has been in every draft of the agreement and that the United States representatives have consistently stressed the need for speed in executing the proposed agreement so that schedule II orders might be placed promptly. It was recalled that the agreement had been originally submitted to the Soviet Government in May and that every day consumed in the negotiations made the agreement less valuable to the United States and the U.S.S.R. It was made very clear that the requested change could not possibly be made.
2. Stepanov asked that there be included in the agreement a paragraph covering technical items such as the details of transfer, acceptance, number of documents, warranties, testing, etc. After considerable discussion, it was agreed that this was a matter that should be worked out with Foreign Economic Administration and Treasury Procurement, and therefore, it would be advisable to cover these matters in a separate letter. On September 12, General Wesson addressed a letter to General Eudenko covering these points. The text of this letter is contained in the Department’s next following telegram. It will be noted that the letter also indicates the extent to which the Soviet Purchasing Commission may participate in the negotiation of contracts. (Paragraph 4 of Department’s 2066, August 29).
3. Stepanov mentioned that the United States draft did not include provision for payment for shipping on a credit basis. He was informed that we are not prepared at this time to agree to such a provision.
4. Stepanov was told that we could not agree to his proposal that the Soviet Government would not be liable for storage costs in case transportation of supplies is delayed after the President’s determination, and supplies are stored without Soviet consent. It was explained that the United States might still be at war, could not assume liability for delays in transporting supplies which the Soviets called to port but that naturally we were as anxious as the Soviets to have supplies exported, and that they would have to proceed on the basis that we would act in good faith in moving supplies as fast as possible.
5. The following are the pertinent parts of the final price provisions for schedule I items incorporated in the draft:
The price of standard supplies would be the current price at which sales of similar standard supplies are made by the United States or the contract price less 5 percent to cover any possible recoveries through renegotiation, whichever is the lower. It was stated that the United [Page 1138] States expects to have sufficient standard supplies in inventory to fill Soviet needs. Similarly, the price of non-standard supplies which are delivered to the United States by the contractor prior to 30 days following the President’s determination, and which are therefore either practically completed or already in inventory, would be sold at the current sale price of similar standard supplies or the contract price less 5 percent, whichever is the lower. If the current sale price is not determined the price would be the contract price less 5 percent plus an additional 5 percent which is thought to be a reasonable average deduction for sales of supplies in inventory.
In the case of non-standard supplies delivered to the United States subsequent to 30 days following the President’s determination, the price would be the contract price less 5 percent to cover on the average any costs of cancellation which the United States would have to pay if the Soviet Union had not agreed to take and pay for the supplies and the contracts were cancelled.
In order to minimize argument, it is provided that the various determinations in the computation of prices be made by the President or a United States Government official.
The general principles underlying the United States proposal are that the United States does not wish to make a profit or take a loss on the supplies, with the exception that the United States is prepared to sell the supplies to the Soviet Union at the same prices at which similar supplies are sold to others.
6. In regard to prices of items in schedule II it was made clear that, in view of the present military situation, the United States did not intend, and had no authority, to pay for the production of long-range schedule II supplies at one price and sell them to the Soviet Union at a lower price. Therefore, Stepanov was informed that in schedule II items the price would have to be the contract purchase price paid by the United States Government. It was again explained to him that the Soviet Government, if it thought the cost of any item too high, was free to reject the offer and only pay any engineering costs which might have been incurred.
7. In submitting the final draft, it was made clear that the United States is prepared to offer either a fixed rate of interest of 2⅜ percent for the 30-year period of repayment, or the average rate of interest on the United States public debt for each year. Both are based on the principle of the cost to the Government of borrowing the money needed to procure the supplies covered by the agreement.
8. It will be noted that in the draft agreement, provision has been made for payment in either dollars or in gold at the current buying rate for gold at the time of delivery of any specific item.