861.6363/7–1345

No. 324
The Secretary of State to the Ambassador in the Soviet Union ( Harriman )1
secret
No. 698

The Secretary of State transmits herewith, in duplicate, a policy document under the subject “Use of American Property by Satellite Countries for Reparation”.

It is requested that the Mission be guided by this document in all matters relating to the subject and that one copy thereof be transmitted [Page 427] to the American representative on the Reparations Commission for his information and guidance.

J[ohn] A L[oftus]
[Enclosure]2
secret

CC–63

Use of American Property by Satellite Countries for Reparation

the problem

The armistice agreements signed by the four former Axis satellite states (Finland, Rumania, Hungary, and Bulgaria, but not Germany) oblige those states to pay reparation for war damage. The Finnish, Rumanian and Hungarian Armistices provide for payment to the Soviet Union in each case in a specified amount of United States dollars payable over six years in designated commodities. Transfers under these reparations provisions may be in the form of either (1) capital equipment including existing plants, or (2) current output including inventory accumulations, and are now being made in accordance with bilateral agreements negotiated by the USSR with each satellite country. In the case of Hungary there is also an obligation to make deliveries of a smaller sum to Czechoslavakia and Yugoslavia. The Bulgarian Armistice contains merely a provision that Bulgaria will make such reparation for loss and damage caused by the war to the United Nations as may be determined later. The United States was a signatory to the Rumanian, Hungarian and Bulgarian Armistices; and in becoming signatory did not contemplate that a part of the real burden of the reparations payments agreed upon and included in the reparations clauses should fall upon American nationals. Even in the case of the Finnish Armistice, to which the United States Government is not a signatory, it would be unreasonable if the burden of reparations were shifted to anyone other than the government and people of the defeated country.

All four armistices contain provisions for indemnification by satellite states of losses caused during the war to property of Allied Nations and their nationals in those states. There is also a provision in each armistice for the restoration of all legal rights and interests of United Nations and their nationals as they existed before the war and for the return of their property in complete good order.

[Page 428]

American property situated in these countries which might be taken by the respective governments in order to fulfill their reparations obligations to the USSR consists principally of two large subsidiaries of the Standard Oil Company of New Jersey in Rumania and Hungary, representing roughly 33 and 59 million dollars respectively. There are also in those two countries smaller American interests in the refining and distribution of petroleum products, in textile plants, factories for telecommunications equipment, distilleries, et cetera, as well as property connected with organizations for the sale and distribution of American-made products. American property interests in Bulgaria are unimportant aside from the property of certain educational institutions. In Finland American property interests are confined principally to facilities for the transportation and marketing of petroleum.

In the fulfillment of their reparations obligations to the USSR the satellite governments apparently have not attempted to discriminate against American property, nor have the Russians made a practice of demanding American-owned plants and factories under the respective reparations clauses. The two most important cases in which American property interests have been affected by removals by the Soviet authorities, that of the “lifting” of oil equipment from the Romano-Americana Company in Rumania and the dismantling of the Tungsram bulb factory in Hungary, in which American nationals held only a minority interest, were justified by the Russians on the basis of the property being German and therefore liable to seizure as war booty.

As a result of the use for reparations payments of property in which American nationals have interests, the Department must determine the position which should be taken by this Government in future in order to provide realistic solutions for the problems involved in such payments and at the same time afford the maximum protection possible for American property in ex-enemy satellite countries.

It should be noted that this document deals only with the problem of American property taken as reparation—not with the seizure of such property as war booty. Where American properties are concerned the Russians have shown a tendency to remove equipment as war booty rather than as reparations.

recommendations

1.
A note should be addressed to the chairman of the Allied Control Commission of each of the satellite countries pointing out that the use for payment of reparations of property in which there is an American interest is a matter of concern to the United States Government. The chairman should consequently be requested to inform [Page 429] the American representative on the ACC of the intended transfer as well as past removals to the Soviet Union or other countries of any capital equipment or current output on reparation account in order that full data on such property may be furnished to the United States Government.
2.
In cases where the property involved in making reparations payments consists of capital equipment in which American nationals have a substantial interest, the United States should make appropriate representations to the Soviet authorities against the removal of the property, pointing out:
a)
the American interest therein.
b)
the loss that would accrue to American nationals as a result of (1) destruction of plants, (2) the consequent loss of foreign markets and trading connections.
c)
the fact that seizure of American property for reparation makes impossible the fulfillment by the satellite country of its obligation under the armistice to restore intact the rights and interests of the United States and its nationals.
d)
the anomaly of a situation in which part of the burden of reparation payable by an ex-enemy country is in reality borne by American nationals.
e)
that in case equipment has already been removed the United States Government would look to the Soviet Government for its return.
f)
that, where such equipment will not or cannot be returned by the Soviet Government, the United States will demand of the satellite country in question adequate, effective, and prompt compensation to American nationals for the loss of the property; that such compensation will be expected to have a priority equal to that of reparations payment by the satellite country; and that the Soviet Government will be expected so to adjust its reparations demands and/or trade relationships with the satellite country in question as to make possible the payment of adequate, effective, and prompt compensation by it to American nationals suffering loss of their property.
3.
In cases where the property involved in reparations payments consists of current output in which American nationals have a substantial interest, the United States should make appropriate representations to the Soviet and satellite authorities for the attainment of the following objectives:
a)
that the satellite country be required to provide immediate and adequate compensation to the American nationals and that such compensation in part be in the form of satisfactory foreign exchange or in kind as a means of ultimately obtaining satisfactory foreign exchange.
b)
that these claims on the satellite government should have equal priority with reparations being paid by that government.
c)
that the Soviet Government make the necessary adjustments in its economic relationships with the satellite country to insure that the burden of reparations remain on the ex-enemy satellites and not be shifted to American nationals because of the inability of the satellite country to make adequate, effective and prompt compensation.
4.
The United States representative on the ACC should be instructed to issue protection cards to American enterprises only in cases where he has definite knowledge that there is a direct majority American interest. In other cases, protection cards should be issued only after approval by the Department.

discussion

In dealing with the expropriation of American property for use in payment of reparations, it is necessary to distinguish between capital equipment on the one hand, and current output and inventories of finished products on the other. When capital equipment is expropriated and removed the American concern is destroyed, the intangible values disappear, and future participation in foreign trade is denied. Furthermore, the satellite nation is deprived of its ability to produce goods to be used in payment of its reparations obligations, and its internal economy is disrupted.

When current output is taken against payment in local currency, but plant and equipment are left intact, the enterprise retains the opportunity of continuing the manufacture or production of materials. Continued operation by the enterprise beyond a relatively short period of time, however, depends on its ability to meet current costs and to make replacement of worn-out equipment. Moreover, the American nationals have the right to expect some profit on their investment. Insofar as local currency is required by the enterprise to meet current costs it, of course, constitutes a satisfactory compensation for current output. However, in order to meet other financial items such as costs involved in making replacements of equipment which must be secured abroad or effective transfers of profits, the enterprise must be able to dispose of a certain amount of its current earnings in the form of satisfactory foreign currencies. These currencies may be secured by the enterprise exporting part of its product to selected foreign markets and retaining the proceeds therefrom or through allocations to it from the general fund of foreign exchange accruing from the country’s exports. A realistic approach to a solution of this problem where a country lacks foreign exchange, as do the ex-enemy satellites, would be to allow the American-owned enterprise a certain percentage of its production, which would be freely exportable in order that the enterprise realize a suitable currency which it might use to make effective transfer of its profits and to provide [Page 431] for its replacement or depreciation costs. Such a plan would avoid placing the reparations burdens on American nationals which would result from the exchange of all current output for local blocked or depreciated currency.

The degree of protection to which rights and interests of American nationals are entitled will be determined in each case in light of the proportion or money value of the American interests, the directness or remoteness of the American ownership, and the relations between American and ex-enemy interests. Wholly owned subsidiaries of American enterprises, for example, should have their property rights and interests protected to a much greater degree than holdings acquired through cartel agreements involving ex-enemy firms.

The United States Government took the position in the Mexican case in 1938 that the properties of American citizens could not be expropriated “without adequate, effective and prompt compensation. … The taking of property without compensation is not expropriation. It is confiscation. … We cannot question the right of a foreign government to treat its own nationals in this fashion if it so desires. This is a matter of domestic concern. But we cannot admit that a foreign government may take the property of American nationals in disregard of the rule of compensation under international law.” (Press Releases July 23, 1938, No. 1202, pp. 51–52)

Since practically all the seizures in question are effected either by the Soviet Government or on its demand, it is believed that representations to the Soviet Government along the suggested lines afford the best available means of protecting American interests. By its control of a vast industrial potentiality, a highly advanced scientific and engineering technique, and carefully developed sources of raw materials, the United States enjoys powerful bargaining advantages in its foreign relations with other nations. These advantages can be used in support of the American position as outlined in Recommendations above, especially when a case for protection of American property interests also involves broader aspects of our economic policy. Nevertheless, it is recognized that the issue under discussion is but a small part of the much larger problem of our over-all relations with the Soviet Union and must be approached in the light of our general policy toward that country.

The case for demanding that compensation by the satellite country to the United States nationals suffering a property loss should have a priority equal to that of reparation rests on the following grounds. Vis-à-vis the satellite country it may be argued that since American property is being used to pay reparation, the United States’ claim arising out of such action by that country should be put on a par with reparation claims. If the Soviet Union objects to the American [Page 432] claims having a priority equal with its reparation claim, it may be pointed out that the Russian seizure of American property makes it impossible for the satellite country to restore American rights and interests in accordance with the armistice, or at best permits only a formal compliance with that obligation; therefore, the least that this Government can expect is that the claims arising out of such action should not be subordinated to the reparation claims of the Soviet Union.

  1. Similar instructions were dispatched on the same date to the American Representatives in Bulgaria, Hungary, and Rumania.
  2. Not attached to the file copy of the above instruction; supplied from the files of the Department of State Coordinating Committee (a body comprising the Under Secretary of State, the Directors of Offices, and the Special Assistant to the Secretary for Press Relations).