259. Telegram From the Embassy in Yugoslavia to the Department of State1

333. From Murphy. Accompanied by Riddleberger and Killen I met almost two hours afternoon September 27 with Tempo, Nenad Popovic,2Prica and Milovanovic. At my suggestion Tempo launched into presentation Yugoslav economic position along lines very similar to other recent expositions. In listing economic problems, he first noted hard terms of inescapably recurring short-term debts for raw materials and then went on to outline medium term debt repayment difficulties. Next topic was investment program total of which had to be curtailed while remaining amounts were redirected into agriculture at first priority with metallurgical development as low second. Current trading pattern led to chronic annual dollar deficit, particularly for wheat, coke, petroleum and certain rolled steel products. Hand to mouth status of material reserves was also major problem since it made health of economy subject minute fluctuations in supply situation.

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Tempo pointed to regime’s plans solve difficulties and explained how Soviet economic agreement helps Yugoslavs.3 Hard currency and a gold loan may be used to redeem gold now being held by IMF and/or BIS, thereby saving interest charges. He expressed hope approaches to Western creditors will (after bilateral talks) result in rescheduling present medium term debts to long term basis. Expanded Soviet trade will reduce dollar import needs (cotton, petroleum, coke) but not displace dollar exports significantly except for 6,000 tons lead annual. Soviet three year $54 million credit will help finance this increased trade and contribute to liquidation of short term debt now used for new material purchases. Soviet investment credits (fertilizer plants, etc.) will then fit perfectly into new Yugoslav emphasis on boosting agriculture.

Nevertheless Soviet assistance is neither wholly adequate nor satisfactory re terms. Although Russians seemed hold out offer of wheat, purchase from Soviets would upset balance of payments plans or tie up $54 million credit needed for other items. Moreover Yugoslavia will need about 500,000 tons wheat annually next 3 to 5 years. It hoped for US grant of 700,000 to 800,000 tons FY 1956 and then it might be able cover needs later years void US commodity loan. In any event speedy decision was necessary since only two months supply now on hand and purchases from peasants moving slowly. Yugoslavs recognized essentiality of increased exports (possible Majdanpek and other non-ferrous mining and mineral processing loans aimed at this, as did “austerity” cutback in new industrial investments to increase items available for export and new attention to agriculture so as reduce food import costs for rapidly growing population), but this was longer term issue not affecting current wheat problem.

I explained to Tempo that we viewed problems sympathetically from unchanged friendly position towards Yugoslavia. Yet we had number of unresolved questions with Yugoslavs in economic, political and military fields. Latter issues seemed simple, and, since they had been worked out between US and all other countries involved in MDAP programs, I was optimistic on results here. I had come however to review all these things, and Tito had urged me see Yugoslav officials concerned to work out difficulties. I was to see Defense Minister Gosnjak next day and could address myself to Tempo’s needs better after I assessed military picture because many Congressmen viewed all kinds of aid together and also wanted to know where [Page 676] Yugoslavia was heading. I was personally hopeful that we could help Yugoslavs on economic matters but this would have to await second meeting with Tempo later.

Tempo responded with reiteration position on Battle Act (no intention violate since that would be political gesture) and then declared with some emotion that friendship with US permanent whether future aid given or not because past generous aid had made present Yugoslav position possible. Our feeling is that Tempo was both frank and friendly and that trip to Moscow may have eliminated certain illusions about relations with Soviets.

My approach was intended as bargaining tactic to give Yugoslavs impression I intend associate economic with military aid although I have not categorically made granting of one depend on other. I feel meeting with Gosnjak today may well be key to whether this tactic will bear fruit. If Gosnjak sticks to hard line on military problems, we shall have to weigh line most carefully before revisiting Tempo since final clean-up meeting with Tito now set for September 294 at which anything might happen (including break in log jam if one still exists by then).

Although Mark has informed me of Export-Import Bank position on mention to Yugoslavs of possible favorable US attitude on Majdanpek, I feel it might be highly useful in second meeting with Tempo (assuming Gosnjak talk goes well) for me be able for political reasons give him some indication of favorable US reaction.

  1. Source: Department of State, Central Files, 110.13–MU/9–2855. Secret; Niact; Limit Distribution.
  2. Economic Counselor, Yugoslav Secretariat of State for Economic Affairs.
  3. Telegram 549 from Moscow, September 2, contained a summary of the Yugoslav-Soviet economic negotiations which took place August 23–September 1 and of the agreement reached at the end of the discussions. (Department of State, Central Files, 661.68/9–255)
  4. No record has been found of another meeting between Murphy and Tito.