Foreign Relations of the United States, 1948, Eastern Europe; The Soviet Union, Volume IV

CFM Files: Lot M–88: Box 104: TIC Documents

Memorandum Prepared in the Division of Commercial Policy of the Department of State¹

secret

[Washington,] May 25, 1948.

Subject: The situation in regard to the outstanding problems which have arisen in connection with the enforcement and implementation of the Peace Treaties with Bulgaria, Hungary and Rumania.

problem

On September 15, 1947 the peace treaties with Bulgaria, Hungary and Rumania went into effect. Each one of these treaties contained an article on General Economic Relations which was designed for the purpose of establishing fair and equitable trade relations between the ex-enemy states and the United Nations. Among the basic economic principles to be observed were non-discrimination in trade and economic opportunity and unconditional most-favored-nation treatment to be extended on a reciprocal basis.

The recent history of economic developments in these countries, resulting from the totalitarian policy and conduct of the Communist-controlled governments, leads to the realistic belief that there will doubtless be no hesitation on the part of these countries to discriminate against U.S. interests in favor of the USSR in economic matters and to make impossible the continued existence of any American business interest in Eastern Europe which could be considered to stand in the way of current programs directed toward complete socialization of their economies.

action taken

The United States Government, through its diplomatic missions, has lodged, and continues to lodge, protests with the governments of these countries with regard to each and every action contemplated or actually taken against American economic interests which the U.S. considers clearly to constitute a violation of the economic provisions of the respective peace treaties.

These protests, in most cases in the form of diplomatic notes, have usually had only a limited remedial effect although they have served in many cases to postpone, or at least temporarily suspend, action which would otherwise adversely affect U.S. interests.

Since March 1, 1948 when U.S. export controls were placed on goods destined for Europe and certain contiguous territories, the U.S. position in protesting treaty violations has been weakened in that the U.S. licensing program is in itself a violation of the principles of non-discrimination and unconditional most-favored-nation treatment.²

conclusion

Short of U.S. force, the real threat of the use of force or a highly improbable reorientation of Soviet foreign economic policy vis-à-vis the “satellite states” which would provide a greater degree of free enterprise therein, it will doubtless be increasingly difficult effectively to enforce and implement the economic clauses of the peace treaties with Bulgaria, Hungary and Rumania.

In fact, it is anticipated that the treaties will continue to be violated both in letter and in spirit.

recommendations

The Department should

(1) not only continue but redouble its efforts to solve as completely and expeditiously as possible the outstanding economic problems which have arisen in connection with the enforcement and implementation of the peace treaties with Bulgaria, Hungary and Rumania. All effective and positive means of bringing about fulfillment of the obligations contained in the economic clauses of the treaties should be utilized.

(2) in cases where expropriation or nationalization can no longer be forestalled (a) demand adequate compensation for expropriation and (b) vigorously prosecute claims of US citizens for war damage while continuing to freeze ex-enemy assets in the US until all claims have been satisfactorily met.

(3) protest and publicly condemn violations of the economic clauses of the peace treaties, keeping before world opinion at all times the continued efforts of the “satellites” and the USSR to evade the obligations under the treaties, whether in the letter or in the spirit.

These recommendations are applicable to the present situation, which should be kept under constant review, in the light of changing circumstances.

There is attached hereto (Part II) a list and summary of specific cases which have arisen in connection with the enforcement of the economic articles of the treaties of peace with Bulgaria, Hungary and Rumania.

[Annex]

Paper Prepared in the Division of Commercial Policy of the Department of State

[Extracts]

secret

[Washington, undated.]

Outstanding Economic Problems In Connection With Enforcement of the Peace Treaties With Bulgaria, Hungary and Rumania

Specific cases which have arisen in connection with the enforcement of the economic articles of the Peace Treaties with Bulgaria, Hungary and Rumania, to date, are listed and briefly summarized below:

a. in bulgaria

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1. The Petrole Company of Bulgaria in which there was a substantial U.S. (Socony Vacuum) interest through a Rumania parent company was taken over by the Bulgarian Government early in 1948 on the basis of nationalization decrees. The company was taken over, in fact, before the nationalization law came into effect. The illegality of this procedure as a violation of the Peace Treaty was made known to the Bulgarian Government through a note from the Legation at Sofia. It was pointed out that Petrole was primarily a distributing agency and not properly to be included under the Nationalization Law. However, Petrole has now become the integral part of the Bulgarian State Petroleum Monopoly.³

2. The law for the Nationalization of Industrial and Mining Enterprises was passed December 24, 1947. It provided for nationalization of nearly all private industrial enterprises but did not affect enterprises which were the property of other states. This law provided not only for the taking over by the government of industrial properties but also the owners’ private houses and their contents.

3. The restitution of Bulgarian property in Germany has been proceeding but it has been recommended that U.S. facilitation of such deliveries be based on fulfillment by Bulgaria of terms of the Treaty.

4. With the nationalization law, and other legislation and regulations, all of the large firms engaged in foreign trade are now virtually organs of the State. Bulgaria has signed bi-lateral trade agreements with all of the countries in the Soviet sphere and with nine Western Europe countries. It has become practically impossible for a private foreign enterprise to establish and or maintain a business in Bulgaria.

5. Bulgaria has not extended international commercial aviation rights to the United States. U.S. policy states that “the obligations in connection with international civil aviation are imposed for a period of only 18 months and are qualified by the requirement of reciprocity. ‘Equality of opportunity’ is to be understood in the sense that a request by the United States for international commercial aviation rights will be weighed by the same standards as a similar request by any other United Nation. If rights are requested and denied, any representations resulting from such refusal would have to be made on the basis that ‘equality of opportunity’ in this sense was denied. The right which Bulgaria and other ex-enemy states are required to extend, and then only on condition of reciprocity, is the right to fly over their respective territories.

In the case of Bulgaria, at Soviet insistence the following sentence was inserted in the Peace Treaty:

“These qualifications shall not affect the interests of the national defense of Bulgaria.”

The ex-enemy states, like Bulgaria, for example, may attempt to interpret this statement in a restrictive fashion. It may be argued that exclusive or discriminatory rights may be granted to a nation undertaking to come to the defense of the ex-enemy. The Department has asked that the missions report any attempts on the part of Bulgaria or other ex-enemy states to invoke this provision, or “escape clause.”

6. The American College, located near Sofia, which is wholly U.S. owned, being a property of the Near East College Association is a potential problem because of the law with regard to the nationalization of urban real estate. The college is not going to re-open. It is valued at about $1,000,000 and claim will be made, under the Peace Treaty, for “prompt, adequate and effective compensation” whenever such property is taken over by the Bulgarian Government.

7. How to attack the discriminatory features of the urban real property law, which provides for expropriation and nationalization of urban holdings has become one of the central problems of the treaty implementation officers at the Legation in Sofia. The case above, of the American College, is a case in point.

8. In connection with the capital levy tax the Department has expressed the belief that there might be some advantage in requesting of the Bulgarian authorities that they agree that U.S. nationals are not required to pay the tax pending a determination as to whether or not the tax is applicable to them. It has been suggested that the Legation present a note reserving all rights which the U.S. and its nationals may be determined to have under the Peace Treaty, inviting the attention of the Bulgarian Government to the action of the Hungarian Government in agreeing that U.S. nationals would not be required to make tax payments pending determination of the applicability of the tax to U.S. nationals and requesting that the Bulgarian Government take parallel action.

b. in hungary

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1. maort (Magyar-Amerikai Olaj Reszvenytarsasag), the Hungarian-American Oil Company which accounts for approximately 99 per cent of Hungary’s crude oil production, has been under continual fire from the present Hungarian Government. The MAORT war claims are based on five categories of losses: (1) actual war damages; (2) losses of income attributable to arbitrarily low prices paid to the company for crude oil; (3) destruction of buildings belonging to the pension fund for which the company has financial responsibility; (4) gas rights purchases in Yugoslavia (upon the order of the Hungarian Government); and (5) for monies expended by the Company for the construction of a gas line in Transylvania.

MAORT is presenting these claims against Czechoslovakia and Hungary.

During the long Easter weekend the Hungarian Government clamped down restrictive controls over both MAORT and Vacuum as well as Hungarian industries and placed Hungarian Government administrators over the companies.

2. The transfer to the Soviet Union of German external assets, in which there is U.S. beneficial interest, or even actual ownership has been the subject of considerable negotiation.

The position taken by the Hungarians is that the transfers were made upon the order of the Allied Control Council for Hungary, in which the United Kingdom and the United States were represented, hence the role of the Hungarian Reparations Office was merely that of executing a higher command. The Hungarian-Soviet Mixed Commission had been the agency responsible for the transfer to the Soviet Union of these assets. However, during the Armistice period, when a Legation representative appeared before that body to represent an American interest, he was confronted by Russians only, there being no Hungarians present. The Department understands that this Commission has refused to accept on its agenda, any case which would involve the restitution from the USSR of a German external asset.

In this situation the Hungarian authorities state that they are powerless to act and that representations should be made by the Legation to the USSR, although the Hungarian Reparations Office has agreed to accept evidence of proof of ownership by United States nationals.

The position of the U.S. Legation at Budapest is that it is accredited to the Hungarian Government at Budapest and not to the USSR; furthermore, that the United States Government deals with the responsible parties and that, in this case the Hungarian Government is responsible for the illegal transfer of these properties in which there are American interests.

3. The expropriation of U.S.-owned rural property in Hungary during the Land Reform has been the subject of negotiations between the Legation and the Hungarian Government and concerns various properties in which American nationals have beneficial or full ownership. This is a claims matter for settlement under the Treaty terms.

4. The problems with regard to the restitution of identifiable Hungarian property removed by force or duress to Germany without compensation have continued to cause considerable concern because, with each restitution consignment, the already feeble bargaining position of the United States, in obliging the Hungarians to live up to their Treaty responsibilities, is weakened.

In contrast with the slow and grudging implementation of the other economic Articles of the Treaty, the Hungarian Government, during December 1947, settled by compromise with the Soviets, the so-called “debts of Hungarian natural and legal persons to German physical and judicial persons”. Under this agreement Hungary agreed to pay $45 million in cash and commodities as settlement for some $200 million claimed by the Soviets as the total amount owed by Hungary or its nationals to German enterprises transferred to the U.S.S.R. as German external assets. The Soviets produced paragraph 4 of Article 30 to cancel the Hungarian claims against these former German interests.

The Hungarians have implemented their agreements with the Soviets by several decrees, as, for example, the recent decree cancelling all claims existing prior to January 20, 1945 against companies in Hungary, half or more of the ownership of which has been transferred to Soviet Union on the grounds of the Soviet interpretation of the Potsdam agreement. While the Legation has received no complaints, it is foreseen that investigation may reveal that this decree has cancelled legitimate American claims against what are today Soviet enterprises in disregard of the spirit of Articles 26 and 31.

5. The changeover in Hungary from private foreign trading operations to State trading has now been practically completed. By legislation and decrees nearly all foreign trade is channelled directly or indirectly through official or semi-official trading companies or similar organizations.

Foreign trading operations are carried on not on a multi-lateral basis but on a bi-lateral basis. Hungary has bi-lateral trade agreements with all of the Soviet satellite states and with ten Western European countries.

In a recent query as to the position of the bi-zonal trading organizations in Western Germany vis-á-vis Hungary the Department pointed out that there are no U.S. policy objections to bizonal trade with Hungarian Government controlled agencies; that U.S. policy is to encourage private trade whenever and wherever possible but that application of this policy does not extend to refusal to deal with State trading agencies. When State trading agencies and private traders both function in a country, such as in Hungary, the choice of dealing should be based principally on commercial considerations and not on those of private versus government trading. This policy discussion was presented as an amplification of the Peace Treaty article on General Economic Relations.

6. The claims presented by the oil companies for adequate compensation for petroleum products furnished on requisition to the Soviet Army have been principally those put forward by MAORT.

The Hungarian Government arbitrarily fixed very low prices, which were paid to the Company, for crude oil. These prices have usually been considerably less than the basic cost of producing the crude oil. The Company has hoped to receive satisfaction from a claim against the Hungarian Government for losses suffered by the Company due to these arbitrarily low prices.

7. The situation with regard to international commercial aviation rights in Hungary showed considerable improvement in the first part of 1948, when negotiations for a US-Hungarian exchange of air rights made considerable progress. However, shortly thereafter the Communist high command apparently learned of the negotiations and took immediate steps to bring about a breakdown of the discussions.⁴

As in the case of the Peace Treaties with Bulgaria and Rumania, the right which Hungary is required to extend, and then only on condition of reciprocity, is the right to fly over its territory. At the insistence of the Soviet delegation at the Peace Conference the following qualification was introduced:

“These provisions shall not affect the interest of the national defense of Hungary.”

It has been feared that the ex-enemy states might attempt to interpret this qualification in a restrictive fashion. It might be argued, for example, that exclusive or discriminatory rights may be granted to a nation undertaking to come to the defense of the ex-enemy. The Department has requested that any attempt to invoke this provision be reported immediately.

8. The case of Mopex and motion picture distribution in Hungary has been an increasingly more difficult one in recent months. It has become very difficult if not practically impossible to obtain import permits for American films. From the standpoint of discrimination the basis for the difficulties of MOPEX, which is a branch of the Motion Picture Exporters Association, Inc., has been in the fact that the Communist-owned competitor in Hungary has desired to force Mopex to close down in order that it might be able to buy the motion pictures of the leading producers represented by the Association, on a fixed price basis, and thus be able to keep all of the profits from their distribution.

9. The Soviet-Hungarian monopoly of Danubian shipping and shipping facilities has apparently made it practically impossible for non-riparian States to utilize this channel of trade although, on paper at least, any company is free to apply for license to operate. It is considered improbable that such a license would be granted, but if it were it is considered unlikely that port, loading or other facilities would be available.

10. The Standard Electric, Rt., 100 per cent U.S.-owned and Telfongyar, Rt., 62 per cent U.S.-owned properties were required, early in 1948, to appoint Communists as Directors of Personnel, but since then there have been no forced resignations as have occurred in MAORT and Vacuum Oil Co. Rt. Standard has, however, been under press attack for the alleged defective quality of its deliveries to the USSR.

11. The nationalization program in Hungary has “been going ahead by leaps and bounds,” according to the Commercial Attaché to the Legation at Budapest, “and now applies to the greater part of the economy. Except for Soviet-controlled countries [companies], the remaining enterprises are becoming increasingly dominated by the State, which exercises an arbitrary control on the basis of mere ministerial orders.”

12. The secret protocols to the USSR’s long-term economic cooperation agreement with Hungary present some of the most blatant examples of imperialistic exploitation of a small country by a Great Power that have ever come to light.

The Department’s position with regard to these agreements and their secret protocols is set forth in the following statement:

“Problem

Determination of how the United States may derive the greatest benefit from exposure of recent secret protocols to the USSR’s long-term economic cooperation agreements with Hungary and Rumania.

Background

Legations Budapest and Bucharest have transmitted authentic texts of secret protocols to the USSR’s economic agreements with Hungary and Rumania. Discreet arrangements are now being made in Paris to make public the texts of the Soviet-Hungarian protocols.

These economic agreements, and their protocols, assure Soviet control of the basic industries and natural resources of these countries and promise a significant redirection of their trade from its prewar pattern. The latter policy may adversely affect the increase in East-West trade in Europe that is envisaged under the European Recovery Program. The restrictive nature of the protocols invites comparison with the types of agreements the United States proposes to sign with the countries participating in the ERP.

The special privileges which Hungary and Rumania have agreed to afford to Soviet interests constitute violations of the non-discriminatory provisions of the peace treaties (Hungary, Article 33; Rumania, Article 31), which came into force on September 15, 1947.

Recommendations

Approval of the following tentative course of action, subject to modification in the light of developments, is recommended for the appropriate operating divisions of the Department:

(1) Formal requests to Hungary and Rumania for complete texts of all economic agreements and protocols entered into with other signatories to their respective peace treaties.

(2) Subsequent presentation of formal communications to the Hungarian and Rumanian Governments protesting that the protocols violate the provisions of the Peace Treaties, thus initiating a dispute under the arbitration mechanism of the treaties.

(3) Initiation of an intensive overseas informational campaign to focus public attention abroad on the protocols and on their implications for all countries in connection with Soviet economic penetration of Hungary and Rumania; and to counter Soviet charges that U.S. economic foreign policy is imperialistic.”

13. The Single Capital Levy, the Levy on Capital Increases and the Property Tax are extraordinary revenue measures which have had a most damaging effect upon remaining private enterprise in Hungary.

The Legation has succeeded in persuading the Hungarian Government to rule that insofar as American citizens are concerned the imposition of the capital levy and the levy on capital increases shall be suspended until definitive settlement. It is understood that similar instructions were sent to the French and British missions.

14. The nationalization of the Ajaka Electric Power Plant, a former capital asset of United Incandescent Lamp, (Tungsram) was originally forestalled by the Legation on the basis of the fact that it would constitute a discrimination against an American interest in violation of most-favored-nation treatment guaranteed by the Peace Treaty. However, the Hungarian Government soon discovered another law under which the Ajaka Electric Power plant was nationalized, i.e. because it was “necessary for the welfare of the economy.” Tungsram made no effort to resist this action, as there appeared to be no legal basis for complaint, and it was thought that, through receiving indemnification, the company would receive more than sufficient to pay off its debt of forty million forints to the Government. After AJKA became nationalized, it soon became apparent, however, that the Hungarian Government had no intention of paying any indemnification whatsoever.

15. The case of the Ford Motor Company is one of economic strangulation by the Hungarian Government which is forcing the company to eventually liquidate because of the limiting of its operations resulting from (1) the loss and damage of its plant and equipment during the war, for which no compensation has been paid by the Government; and (2) the refusal of the Hungarian Government to issue import permits and the necessary dollar exchange for the importation of Ford motor cars.

c. in Rumania

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1. The Rumano-Americano Oil Company case has been the most outstanding case in Rumania because of the major importance of this company in the petroleum industry and economy of the country and because of the efforts of the Rumanian Government to bring it under eventual State control. Using legislation which was originally passed to control Nazi nationals and interests the Rumanian Government has now placed an Administrator over Rumano-Americano.

2. The Industrial Offices law which came into effect on June 6, 1947 authorized the Rumanian Government to exercise practically arbitrary control over all those private industries which were still permitted to exist.

The preamble of the Law states that the Industrial Office is to be “a combination of State and private enterprise, the State to contribute its guidance and authority while the companies contribute their assets and experience.” The companies, however, subscribe the entire amount of the stock and pay all expenses of the Industrial Office, but in effect the State runs the organization for its own ends.

3. The expropriation of U.S.-owned rural property in Rumania during the 1945 land reform has resulted in the preparing of claims under Article 24 and other provisions of the Treaty. The delaying tactics of the Rumanian Government has made the preparations for the settlement of claims of this type a time-consuming procedure.

4. In connection with the illegal transfers to the USSR of allegedly German assets in which beneficial interest, or even actual ownership is in the hands of U.S. nationals it appears that, despite the wording of Article 26 of the peace treaty which provides that the Soviet Union is entitled to all German assets in Rumania transferred to the Soviet Union by the Control Council for Germany, the Rumanian Government has transferred to the Soviet both previous to and since the coming into force of the Peace Treaty those assets which the Soviets decided were German. Included among the assets transferred have been certain properties whose beneficial interest, or even whose actual ownership, has been in one of the United Nations or its nationals. Also included were assets of liberated countries transferred to German ownership by force or duress during the war. During the existence of the Allied Control Commission many representations were made to the Soviet chairman on individual cases with little success, and certain cases involving American ownership were referred to the Department when efforts vis-à-vis the Soviets were exhausted.

5. The restitution of Rumanian property in Germany is being carried out by a Rumanian Restitution Commission which has been operating in the French and U.S. zones of occupation in Germany and Austria. This Commission’s work commenced in 1946.

The Legation at Bucharest is of the opinion that “any further restitution of property should await a fuller knowledge of the performance by Rumania of her obligations under the Treaty.”

6. The change from private to State trading and from multi- to bi-lateral trade has not progressed to the point that has been reached in Hungary and Bulgaria but through its controls the Rumanian Government manipulates virtually all trade to meet its public policies as well as to favor the Soviet Union. Rumania has signed bi-lateral trade agreements with all of the “satellite states” and with a number of Western European countries.

7. International commercial aviation rights in Rumania have not been extended to the United States. A Departmental statement with regard to U.S. policy vis-à-vis Rumania follows:

“The obligations in connection with international civil aviation are imposed for a period of only 18 months and are qualified by the requirement of reciprocity. ‘Equality of opportunity’ is to be understood in the sense that a request by the United States for international commercial aviation rights will be weighed by the same standards as a similar request by any other United Nation. If rights are requested and denied, any representations resulting from such refusal would have to be made on the basis that ‘equality of opportunity’ in this sense was denied. The right which the ex-enemy states are required to extend, and then only on condition of reciprocity, is the right to fly over their respective territories.”

The qualification introduced by the final sentence, i.e.

“These provisions shall not affect the interests of the national defense of Rumania”.

was inserted at the insistence of the Soviet delegation and the ex-enemy states may attempt to interpret it in a restrictive fashion. It may be argued, for example, that exclusive or discriminatory rights may be granted to a nation undertaking to come to the defense of the ex-enemy. Any attempt to invoke this provision, or “escape clause”, should be reported to the Department for consideration.

“The terms ‘commercial aviation rights’ and ‘commercial aircraft’ are not defined in the treaty and the ex-enemies may wish to interpret these terms in a restrictive sense. In American usage ‘commercial’ is used to refer to any operation for hire. Any attempt to restrict the definition by introducing the concept of scheduled services should be resisted.”

8. Discrimination of various types has been practiced against American films in Rumania. Censors have banned many pictures; there has been a continuing press campaign against U.S. “decadent” films; special privileges have been given to Soviet films and film organizations; foreign exchange difficulties and import controls have plagued the distributors.

9. The disputes between U.S. oil interests and the Rumanian Government as to prices paid for reparation goods await eventual settlement through claims machinery based on Article 33 of the Peace Treaty.

Price compensation claims procedure is still under study.

10. The Soviet-Rumanian monopoly of Danubian shipping, largely through the joint Soviet-Rumanian company, Sovromtransport, has made use of the Danube by non-riparian countries practically impossible at the present time.

This problem falls not only under the clauses of the Peace Treaty with regard to navigation on the Danube but under the general economic clauses as well.

11. The Standard Fabrica, de Telefoane si Radio, a Rumanian corporation whose stock is owned by a subsidiary of I. T. & T., was included early in 1948 as a company in the Industrial Office for the Electro-technical industry.

The attitude adopted by the officials of standard Fabrica de Telefoane si Radio is that rather than attempt to resist the inevitable, the company’s most prudent course is to drift with the tide of events. Something may be said for such an attitude since it is axiomatic that the company could not hope to exist long as a private enterprise outside the Industrial Office. What might be of some concern is that nowhere in their inclusion in the Industrial Office does there appear to be any desire or intent to present a protest purely for the sake of record. The International Standard Electric Corporation has instructed Standard Fabrica de Telefoane si Radio to present a protest to the Rumanian Government reserving all rights and interests accruing to the company. It is to be hoped that this letter, when presented, will-have the effect of buttressing the legal position of the company even though it would have been presented some 3 months after the actual act of inclusion.

12. Representatives of Fratii Wurm, a Rumanian manufacturing concern substantially U.S.-owned are understood to be submitting an Article 24 treaty claim for compensation for several items of indirect war damage which our mission in Bucharest considers of doubtful eligibility.

. . . . . . . . . . . . . .

13. The law for the suppression of illicit speculation and economic sabotage may be applied to U.S. nationals in violation of the economic clauses of the peace treaty. The provisions of this law are at the same time so broad and so intricate that no enterprise or person can be cerrtain of observing the provisions or of avoiding its penalties.

14. The secret protocols to the USSR’s long-term economic cooperation agreement with Rumania present some of the most blatant examples of imperialistic exploitation of a small country by a Great Power that have ever come to light.

The Department’s position with regard to these agreements and their secret protocols is set forth in the following statement:

[Here follows the statement quoted on page 347.]

1. This memorandum was prepared for the information of the Department of State’s representatives to the Conference on the Implementation of the Treaties, held in Rome, June 14–21, 1948. Regarding that Conference, see footnote 1, p. 353.
2. For additional documentation regarding United States policy with respect to trade with the Soviet Union and the countries of Eastern Europe, see pp. 489 ff.
3. Regarding the Petrole case, see also telegram 573, May 9, from Sofia, p. 332.
4. For documentation on United States civil aviation policy toward the Soviet Union and East European satellite states, see pp. 436 ff.