Foreign Relations of the United States: Diplomatic Papers, 1944, The Near East, South Asia, and Africa, The Far East, Volume V

761.91/259½

Memorandum by Mr. Harold B. Minor of the Division of Middle Eastern Affairs

[Washington,] February 14, 1944.

Soviet Exploitation of Iran

There has been noticeable for some time a tendency on the part of the Soviet Government to negotiate with the Iranian Government agreements and contracts in which the scales are tipped heavily in Russian favor. This trend has developed to the point where it amounts to consistent Soviet exploitation of the Iranians. The agreements find Iranian acquiescence only because the Iranians fear the consequences of opposing the much-feared Russians.

Previous examples of such agreements in which the Russians have imposed their desires on the Iranians include an arms agreement²⁵ in which the Iranians provide capital and materials to produce arms for the Russians, a financial agreement²⁶ in which the Russians dictated terms much less favorable than those given to the Iranians by the United States and United Kingdom, and an arrangement under which the Iranians finance to a great extent the railways and roads which the Russians are using for war purposes in the north of Iran. There are many instances of less important but equally objectionable action on the part of the Russians, such as failure to pay rent on premises occupied. A more detailed statement of examples of such Soviet exploitation is contained in the annex hereto.²⁷

Two new examples of this Soviet attitude toward Iran have just come to light: one in the form of an agreement already signed;²⁸ and the other an agreement now proposed by the Soviet Government.

The first of these consists of two contracts, on a cash basis, under which the Iranians will furnish the Russians 36,000 tons of rice at half the price the Iranian Government must pay to acquire the same rice, in exchange for cotton piece goods, newsprint and miscellaneous goods. The cotton piece goods, which comprise two-thirds of the value of the Russian items, are to be furnished at almost 50 percent more than the same goods would cost the Iranians in India.

The second case concerns an agreement the Soviet Government is now endeavoring to negotiate with the Iranians covering the operation of the northern section of the Trans-Iranian Railway. This agreement, discussed in the annex, is considered consistently unfair to the Iranians. Preliminary examination of the text bears out this statement.

The Iranians naturally wonder whether the guarantees of the Atlantic Charter²⁹ have any significance if a strong nation is able to impose its will upon a weaker one through this kind of negotiation. We have every reason to hope and expect that the Russians will cooperate more fully and frankly with the allies in matters of common interest in Iran as a result of the declaration on Iran made at the Tehran Conference, which pledged the three powers to assist Iran economically. We have the right also to anticipate, as a result of this declaration, more friendly and fair treatment of the Iranians by the Soviet Government in economic matters. We may, in fact, take the Tehran Declaration as a point of departure to mark the inauguration of a new era of better allied cooperation in Iran and of more considerate treatment of the Iranians. It is believed that the British Government, which gave evidence at the Moscow and Tehran Conferences of desire to support such a policy, would welcome any suggestions we might make as to how to bring about this desired end.

Some Instances of Soviet Economic Exploitation of Iran

1. The Agreement for Manufacture of Small Arms. A Soviet-Iranian agreement was made early in 1943 providing for the manufacture of certain small arms and ammunition in Iranian plants for delivery to the Soviet Government. Under this agreement, the Iranian Government is required to finance the preparation and operation of the plants and to furnish raw materials. The Russians agree to cooperate with technical advice, plans and, in some instances, machinery and tools. Soviet military delegates are to be stationed in the plants to observe and stimulate production. Severe financial penalties are to be levied against the Iranian Government in case of failure to meet the impossible rates of delivery called for in the contract. In spite of the fact that the Iranians finance the plants, the Russians have not yet agreed as to the price to be paid for the finished products or the method of payment, these matters being left to a later date.

The contract is regarded by all observers as unfair to the Iranians. It was agreed to by the Iranian Government only because there seemed no other course than to acquiesce in the Russian demands. The Iranians have thus bound themselves to a contract which is clearly impossible to fulfill and have had in addition to make a cash outlay of several million dollars at a time when the country is in a financial crisis.

2. The Financial Agreement. A general financial agreement was signed by the Iranian and Soviet Governments on March 18, 1943. The financial treatment accorded the Iranians under this agreement is substantially less favorable than that given the Iranians by the British under their financial agreement and than that accorded the Iranians by the United States Government in the absence of an agreement. Briefly, this agreement provides for the advance by the Iranian Government of the rials needed by the Soviet Government for its operations in Iran. Balances are convertible at the end of each semester into 60 percent gold and 40 percent into a special dollar account. The gold thus converted is held in Russia for delivery after the war. The dollars can be utilized only for the purchase of goods from the United States and only after other dollar funds available to the Iranian Government have been utilized. Under the British-Iranian Financial Agreement, the British obtain rials by the direct sale of sterling and convert at the end of each semester the accrued balances of sterling held by the Iranians into 60 percent deliverable gold and 40 percent sterling guaranteed in terms of gold. The United States Government also obtains its rials for use in Iran by direct sales of dollars, not on credit as in the case of the Russians, and has expressed its willingness to convert 100 percent of Iranian dollar holdings into gold.

Dr. A. C. Millspaugh, Administrator General of Finances of Iran advised the Iranian Minister of Finance against signing the agreement on the grounds that Iran’s basic interests were not sufficiently safeguarded.

3. The Rice–Cotton Piece Goods Deal. The Iranian and Soviet Governments signed in November 1943, two contracts calling for sales of Iranian rice to the Russians and of Russian cotton piece and miscellaneous goods to the Iranians. The terms of the contracts, which are on a cash basis, are briefly as follows: The Iranians agree to sell to the Russians 36,000 tons of rice at prices averaging about three rials per kilo, although this rice, purchased from growers by a company especially set up for the purpose, will cost the Iranian Government more than six rials a kilogram. The Russians, in partial compensation for this loss, agree to transport 24,000 tons of Iranian rice to Tehran. In the second of these contracts the Soviet Government sells the Iranians 115,000,000 rials worth of cotton piece goods, newsprint, glassware and miscellaneous goods. The cotton piece goods, which comprise three-quarters of the value of the Russian deliveries under the contract, are sold the Iranians at fifty percent above prevailing prices in India. The Iranian loss on the rice sales is estimated at several million dollars. While the Iranians will sustain no actual monetary loss on the entire deal, since the cotton piece goods will be sold to the public at sufficiently high prices to offset the loss on rice, the net result is the payment by the poverty-stricken Iranian public of a rice subsidy to the Soviet Government.

The Iranian Government, as in other agreements and contracts, was fully aware of the disadvantageous nature of these two contracts. In this case Dr. Millspaugh agreed to its signature for political reasons, mainly in the hope that if the Russians were appeased on this deal they might be more cooperative in other matters, especially the essential task of collecting and transporting wheat from the province of Azerbaijan. It was feared, too, that unless the contract were signed, the Russians might simply take the rice they wanted from the northern part of the country, using their own agencies and disregarding the needs of the population.

4. The Proposed Soviet-Iranian Railway Agreement. The Soviet Government has been endeavoring for several months to negotiate an agreement with the Iranian Government covering the operation of the northern section of the Iranian railway. A draft agreement was drawn up to be signed on January 3, 1944, but the Iranians were successful in obtaining Soviet consent to its withdrawal on the understanding that a subsequent draft would be prepared and presented. This proposed agreement is said by the Legation in Tehran to be consistently and thoroughly unfair to the Iranians and substantially less favorable than treatment provided for in the general railway agreement now under negotiation in Tehran between the allied military authorities on one hand and the Iranian Government on the other. For example, under the proposed bilateral Soviet-Iranian agreement, the Iranians would be required to pay the Soviet Government for certain services rendered by the Russians while under the general proposed agreement these services would be performed by the allies free of charge. The Legation at Tehran takes the logical view that the Russians should not be permitted to sign a bilateral agreement with the Iranians on the subject of the railways until the conclusion of the general allied-Iranian agreement now under negotiation.

5. Statement of Dr. Millspaugh regarding Soviet Treatment of Iran. Dr. A. C. Millspaugh, Administrator General of Iranian Finances, takes a serious view of the unfair treatment of the Iranians by the Soviet Government. In a confidential memorandum of June 29, 1943.³⁰ he set forth his views on the matter and capitulated some of the instances wherein he felt the Iranian Government was receiving inequitable treatment at the hands of the Russians. This memorandum, prepared for internal Iranian Government use and intended as a statement of the Iranian case for possible future use in making an approach to the Soviet Government to seek correction of abuses, made the following points in addition to some of the cases discussed above.

(1) The Soviet Government owed the Iranian Government 5,800,000 rials on account of advances to the Soviet Trade Delegation against goods sold in Iran. Also owing were 3,400,000 rials for detonators and fuses for use on the railway.

(2) The Soviet Government owed the Iranians an amount of 57,000,000 rials for advances made in the year 1320^30a to the Soviet Trade Delegation.

(3) Under a contract for operation of the Shahi canning factory, the Iranian Government is required to finance the plant for production of goods for Soviet use. The Russians made the suggestion that they would pay an outstanding debt of 1,172,934 rials to the Iranian Ministry of Commerce if the entire proceeds were used to buy raw materials for the canning factory.

(4) The Russo-Iranian Fisheries Company is running a deficit, fifty percent of which must be borne by the Iranians. The deficit appears to be due to the fact that the Russians have a monopoly on the caviar obtained and fix the prices themselves.

(5) The Russians are utilizing the shoe factories in Azerbaijan and exporting the shoes, while the Iranians must endeavor to obtain shoes from abroad. Similarly the Russians are taking the products of the cotton goods and blanket factory, although the Iranian Army is badly in need of these articles.

(6) The Russians are making no payments to the Iranian Government for maintenance of roads in the north of Iran. The Iranian Government has had to build roads at its own expense for Soviet use. An item in the Iranian budget calls for 22,500,000 rials for road repairs requested by the Soviet Government. The Ministry of Roads has asked for the sum of 126,800,000 rials for maintenance of roads in the entire country, roads used to a great extent by the allies for military purposes.

(7) The Soviet Government owed the Iranian Government the sum of 80,000,000 rials for work performed on the railways in the year 1321.³¹ (It is understood that the British Government has agreed, on its part, to pay the Iranian Government this year more than 300,000,000 for the use of the southern section of the Trans-Iranian Railway.)

(8) The Iranians were paying during the current year 7,525,000 rials for maintenance of Caspian Sea ports being used by the Russians. The Americans and British, on the other hand, are said to be paying themselves for the upkeep of the Persian Gulf ports they are using.

(9) The Russians occupy buildings and facilities in northern Iran without payment of rent. In addition, they sometimes demand that the Iranian Government pay for repairs on these properties.

(10) The Russians owed the Iranians on April 22, 1943, the sum of 50,000,000 rials for customs duties.

(11) The Russians are said to cut trees in Iranian forests without payment of the three percent tax on timber.

25. Signed January 23, 1943; for correspondence regarding United States interest in this agreement, see Foreign Relations, 1943, vol. iv, pp. 628 ff.
26. Signed March 18, 1943; text transmitted to the Department in despatch 513, April 8, 1943, from Tehran (not printed).
27. Not printed.
28. This agreement of November 4, 1943, consisted of two contracts, one for the sale of rice to the Soviet Union by Iran and the other for the sale of certain manufactured goods to Iran by the Soviet Union; in actual fact related to each other, they were understood by the Legation to be legally separate (891.6131/4). Texts of these contracts were transmitted to the Department in despatch 811, January 24, 1943, from Tehran (not printed).
29. Joint statement by President Roosevelt and British Prime Minister Churchill, August 14, 1941, Foreign Relations, 1941, vol. i, p. 367.
30. Not printed.
31. i. e., 1941.
31. i. e., 1942.