Foreign Relations of the United States, 1958–1960, Eastern Europe; Finland; Greece; Turkey, Volume X, Part 2

143. Memorandum of Conversation⁰

Belgrade, May 12, 1959.

SUBJECT

• Yugoslav Request for Additional Credits

PARTICIPANTS

• Mijalko Todorovic, Vice President FPRY in charge of Economic Matters
• Teodosije Glisic, Chef de Cabinet for the Vice President
• Svetozar Markovic, Deputy Director, Political Division IV, Foreign Affairs Secretariat
• K.L. Rankin, Ambassador of the United States
• Leonard Weiss, Counselor for Economic Affairs and Deputy Director, USOM

The Ambassador and Mr. Weiss met with Vice President Todorovic at his request at noon on May 12. Vice President Todorovic is in charge of economic matters within the Yugoslav government. Also present at the meeting were Teodosije Glisic, Chef de Cabinet for the Vice President, and Svetozar Markovic, Deputy Director responsible for economic matters in the department of the Foreign Secretariat concerned with American affairs. Mr. Markovic served as interpreter in the meeting. The session was a long one, lasting an hour and three-quarters, with the Vice President doing most of the talking.

The Vice President opened the discussion by expressing appreciation for the economic assistance given in the past by the United States to Yugoslavia. He noted that this assistance was primarily in the form of agricultural commodities and other raw materials. He recognized that this assistance was very worthwhile and helpful in overcoming the problems and difficulties which Yugoslavia faced from the devastation of the last war, drought, and the economic blockade instituted by the Soviet bloc in 1948. He stated that U.S. assistance had helped Yugoslavia to maintain its independence and policy of coexistence. He said that the Yugoslav government has publicly acknowledged the value of this assistance and that the Yugoslav people are aware of it and its value.

He noted that in addition to agricultural commodities and raw materials, Yugoslavia needs other means to promote its economic development, namely credits for investments. In this field, however, cooperation with the United States has not been as effective as it has been in the provision of agricultural commodities and raw materials. He argued that assistance in industrial investment would enable Yugoslavia to increase its exports to the United States and improve its ability to buy from the United States, and thus result in increased ties between the two countries on a more permanent basis.

He noted that a basic policy of the Yugoslav government is to pull the country out of its backwardness, raise the standard of living, and develop democratic institutions. This policy has had some positive results. Yugoslav resources, however, to carry this policy further are very limited. Yugoslavia has only small possibilities of capital formation, he said, and thus must think in terms of getting foreign assistance to promote its economic development.

Accordingly, he noted that Yugoslavia had approached the United States a year ago for credits for its economic development.¹ It had then submitted a request for financial assistance in an amount of $200 million, with particular projects being specified for $125 million.² Yugoslavia submitted this request to the DLF and also got in touch with the Ex-Im Bank and the IBRD. At the same time, he noted, Yugoslavia approached other governments, and Yugoslav enterprises had also contacted economic and financial circles in other countries.

The Vice President then outlined the results of these various approaches. The DLF granted a $22.5 million loan on Pancevo and a $5 million loan for diesel locomotives. He noted that negotiations were in process for DLF credits for two power plants. On the latter he stated that there had been signs that a decision would be made sometime in January and then April but that it now looks as if a decision is likely to be made only with respect to one of the power plants in question and the credits are still uncertain.

As regards the approach to the Ex-Im Bank, he said that Ex-Im, much to the surprise of the Yugoslavs, had taken the attitude that because of Yugoslavia’s existing burden of foreign debt, it would not be able to sustain increased debts. He stated that the Yugoslavs do not consider this an accurate judgment and that Yugoslavia’s capacity to repay exceeds the volume of debts which it now holds.

As regards the IBRD, he noted that Yugoslavia had been informed that it must solve the problem of its pre-war debts before it can expect additional assistance from the IBRD. He stated that Yugoslavia has been trying to settle this problem and that in fact it has settled the bulk of the problem by the settlement it reached last year with the French. He noted that Yugoslavia was now negotiating with the Foreign Bondholders Protective Council.³ He said that the Yugoslavs have requested the Department to help them develop an appropriate basis for the settlement of these debts. He said that against this background of steps taken and in process for the settlement of the pre-war debts, there is now no impediment on this score, in the opinion of the Yugoslavs, for starting discussions with the IBRD for financial assistance.

He stated that the IBRD has granted in the past year over a half billion dollars in credits and that Yugoslavia did not get anything. He noted that the Ex-Im Bank has also granted substantial credits, without Yugoslavia’s getting anything, and that the DLF has granted very substantial credits in total but that Yugoslavia got only $27.5 million of the total. He said that Yugoslavia has not been able to get any credits from private circles in the United States.

He indicated that in Western Europe the Yugoslavs have been able to get some credits but under inconvenient conditions, for example a short term of repayment (four to six years) and a high interest rate (6 to 7%). He stated that repayment of these credits will engage a great portion of the new credits which Yugoslavia is getting. He said that when one balances off the new credits against the repayment of existing credits, the net capital inflow is less than $20 million per year.

He stated that Yugoslavia’s economic development is thus currently very largely based on Yugoslavia’s own resources and that the only substantial external assistance which it has received hitherto has been through PL 480 and MSA. He noted that Yugoslavia has gotten a 3 million pound credit from the United Kingdom, but deprecated it as being very small and said that Yugoslavia had accepted it only because Yugoslavia did not wish to create difficulties in its relations with the United Kingdom.

He said that Yugoslavia’s need for credit is of great concern to the Yugoslav government. He stated that the existing situation could have negative effects for the internal development of Yugoslavia and for its foreign position. While the Yugoslavs are seeking to maintain a certain rate of economic development, problems have arisen, notably an increase in unemployment. This increase in unemployment has occurred despite the fact that the existing level of employment is above that projected under the Social Plan.⁴ He said that unemployment has increased from 155,000 (representing 5% of the non-agricultural labor force) in February 1958 to 257,000 in February 1959. These figures represent persons who apply for jobs and cannot get them. Some of these people are not completely unemployed since they may work for a few months of the year in agriculture but most of these people are dependent on social insurance. The unemployment reflects the substantial movement from the country to the city.

Under these circumstances, he said, the Yugoslav policy of seeking to develop economically and increase living standards comes into question. These circumstances create a situation which could be exploited by the Soviet bloc and which lends itself to foreign propaganda. He noted that the alternative to seeking additional credits is to slow down Yugoslavia’s rate of development and its efforts to raise living standards, but, he emphasized, this is an alternative which his government cannot accept.

In addition to the difficulties this situation creates in relation to the Soviet bloc, he also noted the difficulties which Yugoslavia faces as a result of the process of economic integration occurring in Western Europe. This process, he said, means an increase in the productivity of Western European countries and thus raises problems of increased competition for Yugoslavia.

He stated that in these circumstances Yugoslavia must reassess its position, particularly in view of economic pressure which it was still getting from countries in the Soviet bloc. He indicated with reference to Yugoslavia’s international position that it was providing some credits and other assistance to Middle Eastern countries but it was doing so in large part to maintain its political position there.

In order to maintain its policy of independence, peace and coexistence, a policy which he said it has in common with the United States, Yugoslavia needs a stronger internal basis. He said that Yugoslavia does not exaggerate its international role but he thinks that in the past Yugoslavia’s policy has exercised a positive influence, particularly in relation to other countries seeking to maintain independence and peace. He expressed appreciation that the United States has understood this policy and as a result has provided assistance both directly and through international institutions.

He noted that another reason why the Yugoslav government decided to approach the U.S. government at this time relates to developments in agriculture which were likely to result in a reduction of United States-Yugoslavia economic ties unless some compensatory measures were taken. He said that Yugoslavia’s efforts to increase its agricultural production were now beginning to have results. He indicated that next year Yugoslavia’s need for wheat would be radically reduced and that a similar situation would prevail in edible fats. Accordingly, the need for PL 480 assistance, and the trade and economic ties represented by that assistance, are bound to be reduced. He argued that since Yugoslavia does not want to decrease economic relations with the United States, since, to the contrary, it wants to develop them even further, we must find other forms of economic cooperation to compensate for the likely drop in PL 480 sales.

The most effective way to offset this development would be to provide credits to Yugoslavia to develop its industry, increase its exports to and imports from the United States, and thus give a more permanent and enduring form to economic cooperation with the United States, a cooperation which thus far he believes has proved mutually beneficial.

Based on the foregoing analysis, he said, his government has decided to make an approach to the U.S. government to see whether the latter is prepared to enable an improvement in the economic cooperation between the two countries by providing assistance in the form of credits. In this connection he then outlined the following three problems for which Yugoslavia is seeking a solution:

(1) Provision of credits for the Kosovo and Trebisnjica power projects in this fiscal year, that is prior to June 1, 1959.

(2) Fulfillment of a program of projects amounting to about $60 million. This list of projects has already been submitted to the DLF and is contained in the Aide-Mémoire which he indicated he intended to submit to us upon the completion of his presentation. He stated that this list contains projects going up to 1961. He indicated that the list contains projects which can be implemented speedily and help develop Yugoslav exports, and thus were projects to which Yugoslavia attached special importance.

(3) The further development of an iron and steel industry in Yugoslavia. He stated that in order to raise living standards and solve other related problems, the Yugoslav government had previously decided to hold down investment in the iron and steel industry. However, he said, the development of the economy has gone so much ahead that Yugoslavia is now having more and more difficulty because of a shortage of steel. Because of balance-of-payments problems it is difficult for Yugoslavia to import steel to satisfy its needs. For these reasons the government has accepted a long term plan to increase steel production in Yugoslavia from 1 million tons to 3 million tons over the next ten to twelve years. Under this program it is planned to increase steel production in Skopje. He said that this project has special importance both economically and politically. It is important economically because of the lignite and iron ore resources existing in Macedonia. It has importance politically because Macedonia is an area particularly subject to foreign pressure and propaganda from the East. He also noted that some of the Soviet bloc countries, for example Poland and Bulgaria, have plans to increase their steel production. With these considerations in mind the Yugoslavs are seeking U.S. assistance for developing a complex of iron and steel works at Skopje and an electric plant at Kosovo.

He accordingly formally requested credits directly from the United States and U.S. support for credits from the IBRD at an appropriate time. He emphasized the importance of Yugoslavia’s receiving a prompt answer to this request since the carrying out of Yugoslavia’s plans would be affected by the reply. He accordingly requested a reply as soon as possible.

He concluded his presentation with expressions of appreciation for past U.S. assistance. He stated the program of assistance to Yugoslavia has been one of the best which the United States has extended both because the assistance has been used effectively and because the extension of it to Yugoslavia represents a practical demonstration of the U.S. policy of peace and coexistence.

Upon the close of these remarks the Vice President submitted to the Ambassador an Aide-Mémoire summarizing the presentation he had made and requesting U.S. financial assistance. A copy of the Aide-Mémoire is enclosed.

The Ambassador indicated that we were sympathetic and understanding of Yugoslavia’s problems and that we want to help to the extent that we can. He noted that there were some problems in providing additional assistance. One, recognized by the Vice President, was the settlement of Yugoslavia’s pre-war debts. A second was obtaining adequate funds from Congress. He noted the substantial requests for assistance from the United States by other countries and the limited amount of funds we have available. A third point relates to the question of what Yugoslavia is doing to bring its international accounts into balance and whether it has a target date by which it intended to balance its international accounts. He stated that this question is important in getting loans from institutions like the Ex-Im Bank and the IBRD which try to work on the basis of economic rather than political considerations.

The Ambassador acknowledged that past U.S. aid has been mostly in the form of agricultural commodities and raw materials. However, he indicated that the provision of this aid has reduced Yugoslavia’s need for foreign exchange and has made foreign exchange available to Yugoslavia for other purposes, including investment. Thus the economic effect has been much the same as the extension of a direct credit for investment purposes. The Ambassador noted that the reduction in Yugoslavia’s need for agricultural products and raw material under PL 480 and other assistance programs was good as evidence of progress in Yugoslavia’s economic development and in bringing its international accounts into balance. He acknowledged that we shall have to seek other forms of economic cooperation but that this raises a world-wide problem, namely that of finding sufficient capital to meet foreign developmental needs, a problem for which we have not yet found a complete solution. He noted in this regard that the development of both the United States and Eastern Europe before World War I had been helped by private capital from Western Europe. He indicated that this type of large-scale private financing is no longer practicable today due in part, so far as Yugoslavia is concerned, to Yugoslavia’s own laws and institutions. He indicated that PL 480, the DLF and other similar assistance are in a sense experimental measures to meet this general problem, and that what the United States can do will have to be limited by the funds available.

The Ambassador indicated that we would send to Washington with our sympathetic comments the Aide-Mémoire presented by the Yugoslavs. He suggested that it would be desirable for Mr. Weiss and possibly other members of the Embassy staff to get together with Mr. Markovic or whomever else the Vice President might designate to assess the problem in greater detail, to determine how much foreign credit Yugoslavia can effectively use annually, to review what other countries can provide, and to consider any other relevant matters.

Mr. Weiss complimented the Vice President on the effectiveness with which he had presented the Yugoslav case. While emphasizing our sympathetic attitude, he noted that Yugoslavia already has an extremely high rate of investment. He pointed out, for example, that approximately 30% of Yugoslavia’s GNP is now devoted to investment. With regard to the substantial development needs which still exist, Mr. Weiss emphasized the point made by the Ambassador as regards the limited availability of funds from U.S. governmental sources and in this connection indicated our interest in supplementing these resources by capital from private sources. He noted that thus far our efforts to promote a flow of private capital were almost completely without success but indicated the need of continuing to consider this possibility in view of Yugoslavia’s great need in relation to our available resources.

Mr. Weiss also picked up the Vice President’s remarks about continuing economic pressure from the Soviet bloc. He stated that if we are to assess Yugoslavia’s request for credits and its economic position generally, we need more detailed and exact information as to the precise measures which he and other Yugoslav officials have indicated the bloc has been applying against Yugoslavia. He noted that we had requested this information from the Yugoslav government a number of times but thus far it has not been provided and indicated we would appreciate getting it in connection with the current request of the Yugoslav government.

Mr. Weiss noted that there was a good chance of a DLF credit being granted for the Kosovo project if sufficient additional funds were obtained by the Administration in the supplemental appropriation now being sought from the Congress.

Vice President Todorovic indicated his readiness to deal in private credits. He stated that there seems to be some difference of attitude between United States and European investors as regards their willingness to invest in Yugoslavia since Yugoslavia was getting some private credits from European countries. Some of these credits were coming in under guarantees by the government of the private party providing the credits; this was the case, for example, with Italy. But in other cases, for example, Germany, the Yugoslavs were getting credits from private sources without governmental guaranties.

The Ambassador noted that to the extent that the government guarantees the credits, to that extent the private nature of the credit is lost since the ultimate risk-taker is no longer a private party but the government. He also noted that the credits which Yugoslavia has been receiving from European countries are really short to medium term supplier credits, not normal private investments which are out of the question in view of Yugoslavia’s laws and institutions.

In response to our questions Vice President Todorovic indicated that the list of projects provided in the Aide-Mémoire would not replace previous lists and should be considered as the latest, up-to-date request of the Yugoslav government on the United States for financial assistance. He noted that the iron and steel project to which he had referred was not in the list of projects contained in Annex 1 of the Aide-Mémoire and previously submitted to the DLF. He said it was not in this list because this project was not intended to be started until next year.

One general remark which the Vice President made as the discussion was breaking up was that Yugoslavia’s institutions could develop in a more liberal, democratic way if essential capital assistance and the necessary internal economic base could be provided.

0. Source: Department of State, Central Files, 768.5–MSP/5–1359. Confidential. Drafted by Weiss and sent to the Department of State as an enclosure to despatch 513 from Belgrade, May 13. In addition to the memorandum of conversation, the despatch included a May 12 Yugoslav aide-mémoire, which summarized the points made by Todorovic in his presentation, and two annexes prepared in the Embassy, which analyzed the Yugoslav investment requests.
1. Presumably the June 9 conversation between Kohler and Primozic; see Document 127.
2. See footnote 1, Document 134.
3. A private organization established during World War II in the United States to represent and assist banks and other corporate entities in recovering prewar assets seized or nationalized during the course of the war.
4. An official Yugoslav economic planning document designed to set goals for both economic development and the equalization of the standard of living among Yugoslavia’s constituent republics.