THE trade strategy of Soviet Russia has been created inevitably as a consequence of two principles basic to the structure of the Communist state -- repudiation of the debts of preceding governments and nationalization of private property. Through nearly ten years of Bolshevik administration these two factors have worked constantly to develop the present situation of Russia as a nation dominated by a strict official monopoly of her commerce. By setting Russia economically at war with other nations, these revolutionary policies have laid upon her new rulers the unique task of utilizing her exports and imports to buttress their own position within Russia. Their effort to accomplish this aim has been the key to an understanding of many of the events in Russia since the winter of 1917, and is still the key to what is happening in Russia today.

The feeling aroused by the withdrawal of Russia from the war, when the Bolsheviks made their separate peace with Germany at Brest Litovsk in 1918, at the outset confused and obscured this real issue. The treaty signed there was the first important agreement negotiated by Soviet Russia. Together with it went a trade compact embodying, with modifications, the principles of the earlier German-Russian agreements of 1894 and 1904. The Brest Litovsk treaty was, of course, cancelled at Versailles; but it constituted the first recognition of the Soviet Government and set the stage for a series of significant later events. After its cancellation Russia was left absolutely devoid of diplomatic relations. Then, as the emotions aroused in the Allied countries by the surrender at Brest Litosvk subsided, the true outline of the fundamental differences between Russia and the rest of the world -- particularly the Allies and America -- appeared more distinctly.

The Soviet Government took the stand that the complete change in Russia automatically altered not only legal relations within Russia but also the status of relations with other nations, robbing treaties and agreements of all force except as they might be specifically declared to be still in effect. To this view was opposed the contention of the western Powers that unexpired treaties must of right be regarded as still binding. This principle was included in definite form in the British correspondence regarding the de jure recognition of Russia in February, 1924, which admitted at the same time the need of a new attitude toward old treaties. In the Russian reply the opposed theory was made equally obvious by the statement that the Soviet Government was ready to negotiate with the British Government regarding the replacement of earlier treaties which had lost legal force through the events of the war and post-war period. A. N. Makarov[i] has explained this position of the Soviet Government as being justified by Soviet jurisprudence not merely on the ground of the fall of the Empire and the formation of a new administration, but by the fact that the state had been completely transformed and the theory that consequently existing treaties must be affected. The new order, it was argued, must find external expression either in a new system of agreements or in specific reaffirmation of old agreements.

Proceeding on this theory, the Soviet Government by decree declared still binding certain collective treaties to which Russia was a party, such as the Red Cross conventions of Geneva and The Hague, the Paris Treaty of 1884 for the protection of submarine cables, and the Brussels Convention of 1910 regarding collisions and aid at sea. Its first new treaties, preceding even de facto recognition, dealt with the return of war prisoners and interned civilians. These interests being settled in 1919 and 1920, Soviet Russia turned to the establishment of necessary relations with the states which had formed part of the old Empire. The independence of Finland had been recognized in January, 1918. In 1920 accords were reached with Estonia, Latvia and Lithuania, which carried with them de jure recognition of the Soviet Government. The treaties were based on the principle of self-determination and the full independence of the former subject states. In turn, a preliminary treaty of peace was negotiated with Poland in October, 1920, and a final treaty in March, 1921. Trade agreements, which had been expected in consequence of these treaties, were not realized, but there followed a series of agreements regarding railways, post, telegraphs and telephones, boundary traffic, fisheries, shipping, and timber floating. Later, when the present Union of Socialist Soviet Republics was formed, it took over the execution of various treaties which had been negotiated by individual constituent republics.

The arrangements which regulated the dealings of Russia with states which had been wholly or in part subject to her cleared the way for an effort to establish contact with the world at large. This was accomplished by a series of provisional trade agreements, carrying with them de facto recognition. The first strong sentiments of repulsion inspired by the violent phases of the Bolshevik revolution had begun to die down, and the European nations particularly were considering how to revive exchange with a country which had formed an essential part of the economic system of Europe. Great Britain was the first to act, by the agreement of March 16, 1921. Germany followed on May 6 with the recognition of the war prisoner commission of Soviet Russia as a consular and trade mission. Then came accords with Norway on Sept. 2, 1921, with Austria on Dec. 7, 1921, with Italy on Dec. 26, 1921, with Czechoslovakia on June 5, 1922, with Denmark on April 23, 1923, and with Hungary on Sept. 18, 1924. Under most of these arrangements, the de facto recognition which was granted meant that relations were resumed only to the extent necessary for trade. The agreements provided for juridical recognition of the Soviet trade monopoly and for its responsibility for contracts, and in some cases conceded extra-territorial privileges to Soviet trade delegations -- as, for instance, those with Czechoslovakia, Great Britain and Norway. The Soviet trade delegations exercised many of the functions and rights of consuls. Few of these provisional agreements, however, endured in their original form. Czechoslovakia alone has made no change in the status of her relations with Russia. The other nations who established contact accorded de jure recognition later and restored diplomatic services, and many of them concluded commercial treaties.

It was natural and logical that Germany should have taken the lead in doing this, and should have gone further than any other nation. Her Brest Litovsk treaty with the Soviet Government had set the precedent of recognition during the war. Furthermore, after the war the two Powers found themselves outside the political order that had been set up in Europe. For two centuries they had had close contact and had maintained a constant exchange of raw materials from the Russian side and manufactured goods, machinery and technical services from the German side. So, in the new situation, they sought instinctively to achieve a kind of working partnership. In April, 1922, they concluded the Treaty of Rapallo, giving informal guarantees of neutrality and -- what is most significant -- mutually surrendering claims arising from the war and revolution. The Rapallo agreement repeated certain of the principles of the Brest Litovsk treaty which cut Russia off from the Allies and which they in turn sought to nullify at Versailles. It emphasized the repudiation by Russia of the rights accorded to her by the Versailles treaty, and so finally marked the end of the old Entente system. But further, by its provisions Germany not only relinquished her war cost and damage claims but also her revolutionary damage claims. The understanding was that Russia should indemnify Germany only if she should indemnify others. Thus Germany took an attitude which recognized the basic Communist position and encouraged the Soviet Government in maintaining it. Diplomatic contacts began, but the results in actual trade were below expectations. The chief effect of the Rapallo accord remained political.

A more important commercial and industrial treaty followed in Moscow in October, 1925. Germany and Russia then agreed on reciprocal "most favored nation" treatment (excluding the Versailles treaty Powers on the German side and the constituent member republics of the Soviet Union on the Russian side). The structure of the Soviet state and the Soviet trade monopoly were recognized. Certain members of the Soviet trade delegation in Berlin received recognition of extra-territorial status and rights, and a plan was outlined for shipments of goods. Finally, just preceding Germany's entry into the League of Nations, a treaty of neutrality was signed at Berlin. It pledged Germany and Russia to friendly consultation for agreement on all political and economic questions. Further, in order to provide against German participation in any application to Russia of the military and economic sanctions of the League Covenant, it included promises of neutrality in case of attack by other nations and guarantees against joining in any economic boycott of other of the parties. The Berlin treaty thus revealed finally the political meaning of the Rapallo compact. It completed a consistent group of agreements placing Germany in a position of unique significance in relation to Russia and tending to make her an intermediary between Russia and the Powers of western Europe. One evidence of this tendency is the settlement reached in Berlin of the dispute between Soviet Russia and Switzerland over the killing of the Soviet envoy to the Lausanne conference, Vorovsky. In consequence, the Soviet Government has abandoned its refusal to participate in international gatherings in Switzerland and has sent delegates to the Economic Conference under the auspices of the League of Nations.

Only a few other European nations have negotiated full commercial treaties with Russia, even when they have accorded unreserved recognition to the Soviet Government. Italy replaced her provisional trade agreement on Feb. 7, 1924, with a trade and tariff convention. It originally contained a paragraph aimed at the Soviet foreign trade monopoly, but this was suppressed before the treaty was ratified on March 7th. Italy even conceded to the Soviet trade delegation wider extra-territorial rights than Germany had granted, and her tariff treaty was the only one of its kind to be concluded with Soviet Russia. Sweden made a commercial treaty with the Soviet representatives on March 15, 1924, giving force to an earlier Swedish-Russian treaty, and Norway supplanted her provisional trade agreement on December 15, 1925, with a full commercial treaty including "most favored nation" privileges. With Greece, on June 23, 1926, Soviet officials concluded a customs and tariff convention.

After her settlements with the Baltic states and with Germany, Soviet Russia had to wait a long time for full de jure recognition by any other European nation. At the end of November, 1923, Premier Mussolini of Italy announced after a series of preliminary interchanges between Italian and Russian representatives that he was prepared to grant such recognition to Soviet Russia in connection with a new commercial treaty. Negotiations were in progress all during January, 1924, and plans were formed for the signature of the treaty outlined earlier, and for simultaneous extension of de jure recognition early in February. But Prime Minister MacDonald of Great Britain, acting also as Secretary for Foreign Affairs, anticipated the Italian action by wiring unconditional recognition to Moscow on February 1. Recognition by Italy followed on February 7. With these precedents, full recognition came to the Soviet Government in the course of 1924 from Norway on February 15, from Austria on February 25-26, from Greece on March 8, from Denmark on June 18, from Mexico on August 4, and finally on October 28 from France. The French recognition was accorded to the Soviet administration "as the successor of the former Russian Governments" -- thus raising afresh the question of the validity of existing treaties and providing a basis for French bond and property claims.

The most significant failures of the Soviet Government to secure desired trade treaties have been with Great Britain and France. In the case of Great Britain, the aim was nearly achieved. At the London conference that opened in April, 1924, Prime Minister MacDonald of the Labor Cabinet proposed a general commercial treaty to replace the provisional trade agreement. The negotiations were troubled by differences over the principles of repudiation of debts and nationalization of property, and by controversies over Communist propaganda. British bankers and holders of bond and property claims against Russia also voiced active opposition. But a treaty was finally signed on August 8th. Prime Minister Baldwin and the Conservatives, coming into power in the autumn, shelved it. In May of this year, following a raid on the Soviet trade offices in London which showed that they were used as centers of Communist intrigue, the Cabinet decided to break off all relations with Soviet Russia.

In France, the same conflicts of interest that really underlay the deadlock in Great Britain -- those concerning debt and property claims -- have continued to block any commercial treaty.

In the Orient, Soviet representatives have pursued an active policy of seeking diplomatic and commercial accords with more success than in the Occident. Their dealings with eastern countries have been based on the principle of recognition of the equality of both parties, excluding the special privileges, extra-territorial rights, capitulations and concessions from which citizens of the western nations generally have benefited. The result has been a network of treaties connecting most of Asia with Russia. In the case of Afghanistan, contrary to the terms of an earlier Russian agreement of 1907 with Great Britain, the Soviet Government concluded a treaty on February 28, 1921, terminating recognition of a British protectorate and establishing direct contact. This was followed by a treaty of neutrality on August 31, 1926, and in turn by negotiations for a trade agreement.

With Turkey, on March 16, 1921, the Moscow Government made a treaty abolishing the capitulations and jurisdiction of consular courts and defining boundaries, and followed it with a neutrality treaty on December 17, 1925. On March 11 of this year a trade agreement was signed, making provisions for commerce and navigation on the principle of "most favored nation" treatment and according diplomatic privileges to the heads of the Soviet trade delegation and extra-territorial status to their premises.

To Persia the Soviet statesmen granted exceptional advantages, in a treaty of February 26, 1921, including not only the main principles of treaties with other Oriental countries but also renouncing Russian state property in Persia -- except embassies and consulates -- and all debts and concessions. Persia also gained the right to a fleet in the Caspian Sea, refused to her by treaty since 1828. Russia secured the right to intervene in Persia in case of activities by organizations hostile to the Soviet Government which the Persian Government could not suppress. But attempts to arrive at a workable commercial agreement have failed. Contacts between Soviet Russia and Persia have been complicated by suspicion and unfriendliness. Last year the Soviet Government declared an embargo on various classes of Persian goods, in the attempt to compel compliance in the sort of trade agreement that Russia seeks. But Persian merchants replied with private boycotts on Russian goods, and negotiations remained deadlocked.

Further east, a somewhat different course was followed in Mongolia. In 1921 preceding treaties were terminated and the jurisdiction of consular courts was ended, with provisions to safeguard Russian citizens against judgments calling for corporal punishment. Diplomatic and consular relations were established under a treaty containing the principle of "most favored nation" treatment. Moreover, in this land of nomadic herdsmen, a so-called independent Soviet Republic has been proclaimed.

With China, in May, 1924, a complicated new arrangement was made, comprising a general treaty, eight declarations, and a provisional agreement concerning joint management of the Russian-built Chinese Eastern Railway in Manchuria. All previous treaties were repudiated, including those with third Powers affecting China, and all special privileges and concessions were renounced, as was the Russian share of the Boxer Indemnity. Equality having been thus established, a period of active Russian diplomacy in China and of encouragement of the Nationalist anti-foreign sentiment began -- with consequences which recently have become sufficiently well known.

A Soviet settlement with Japan was reached in Peking in January, 1925, in a treaty which recognized the Portsmouth treaty of 1905 and also admitted the Japanese right to oil concessions in the northern half of the island of Sakhalin off the coast of Siberia. A trade treaty on the basis of "most favored nation " treatment was hoped for, but was not realized.

The elaborate framework of Soviet diplomatic accords and commercial treaties has failed to produce very impressive results in terms of actual trade. Furthermore, the figures do not show that any important difference is made whether or not other nations have recognized the Soviet Government or concluded agreements with it. The tendencies of Russian trade seem to be determined by other factors.

Before the war, in 1912, Russia's total export and import trade across all borders amounted to roughly 2.5 billion rubles. In the fiscal year 1924--25, it amounted to a little less than 1.3 billion rubles, and in 1925--26 to a little over 1.4 billion rubles. But at the same time the wholesale index number of the Soviet State Plan Commission, combining both agricultural and industrial products, as compared with 1913, stood at 174.2 in October, 1925, at the end of the fiscal year, and at 178.8 in October, 1926. Consequently, the actual volume of trade was estimated at about one-third of the pre-war volume. Part of this shrinkage is explained by the fact that the pre-war figures are for the trade of the whole Russian Empire, including states which have become independent.

Of the total trade in 1924--25, according to the official journal "Soviet Trade," exports accounted for about 575 million rubles and imports for nearly 720 million rubles, giving an unfavorable trade balance of about 145 million rubles. Trade across European boundaries amounted to nearly 508 million rubles in exports and 644 million rubles in imports, while across Asiatic boundaries goods were exported to the amount of 67.5 million rubles and imported to the amount of 76 million rubles. In 1925--26, the total exports ran to the amount of nearly 668 million rubles and imports to nearly 756 million rubles, reducing the unfavorable trade balance to about 88 million rubles. Of the totals, about 589 million rubles covered exports across European boundaries and a little less than 79 million rubles represented exports across Asiatic boundaries. Imports across the western and eastern boundaries ran to nearly 674 million rubles and 82 million rubles respectively. The total figures indicate an increase of 16 percent in exports and of 4.6 percent in imports. During the first five months of the fiscal year 1926--27, or up to the end of February, the figures compiled by the People's Commissariat of Trade show a total trade across European frontiers of nearly 537 million rubles, with exports accounting for over 322 million rubles and imports for 214.5 million rubles. Thus both a considerable gain in exports over the corresponding period for 1925--26, and a favorable trade balance of more than 107.5 million rubles for the period were shown. Exports, it should be borne in mind, do not necessarily represent cash actually paid, being often secured on long-term credit.

When attention is turned to the figures for individual countries, indications of suggestive interest at once appear. The three nations of most importance in the foreign trade of Soviet Russia are Germany, Great Britain, and the United States. The Soviet Government buys primarily where it can best secure equipment and raw material for industry. The volume of trade with other countries individually is markedly less, as indicated by the following selected list:

(In millions of gold rubles)
Russian Exports Russian Imports
1924-25 1925-26 1924-25 1925-26
Belgium 19.3 18.6 3.3 1.9
Czechoslovakia 0.4 0.5 21.8 18.1
Denmark 13.7 10.4 1.6 1.6
Egypt 6.2 2.9 23.0 26.6
Estonia 14.0 17.0 4.2 6.5
Finland 2.5 4.5 18.6 14.7
France 22.1 39.8 9.1 19.0
Italy 15.4 33.5 5.2 23.2
Latvia 62.7 63.5 2.8 4.4
Netherlands 20.5 21.1 33.9 6.8
Poland 3.8 3.1 10.3 9.7
Sweden 1.0 3.3 15.5 20.4

Czechoslovakia, whose government has withheld de jure recognition of the Soviet Government, is seen at a glance to hold a strikingly large share of the Russian import trade in comparison with the amount of exports she takes. Egypt's position is explained by importations of cotton for the Russian textile mills. France and Italy, following their full recognition of the Soviet Government, have managed to increase their transactions with their former ally, but not impressively, and in both cases they buy more than they sell. The Soviet monopoly uses a favorable balance of trade with many nations with whom its volume of traffic is comparatively small, to finance its purchases in the great industrial countries where it can get the things it most wants.

Russia's Oriental trade is on the whole negligible in comparison with her Occidental trade. This is immediately comprehensible when it is considered that the Orient can not furnish the machinery and manufactures that Russia needs. Persia -- despite diplomatic difficulties with the Soviet Government -- leads in both the export and import branches, with China half-way behind, and Japan third, buying four times as much as she sells.

For purposes of study of the tendencies of Soviet trade, therefore, the three countries of major importance are taken for the past three years. Even across the Asiatic borders, a considerable share of the commerce goes to them. The following tables show their relative positions:

(In millions of gold rubles)
Russian Exports Russian Imports
1923-24 1924-25 1925-26 1923-24 1924-25 1925-26
Germany 66.4 87 111 44.9 101.6 172.2
Great Britain 80.4 185.4 187 48.8 107.8 125.4
United States 6 21.2 25 49.9 199.1 111.9

Russian Exports Russian Imports
1925-26 1926-27 1925-26 1926-27
Germany 32.2 49.8 39.3 29.2
Great Britain 59.2 68.2 42.7 26.5
United States 7.7 2.4 31 32.6

A first glance at the Russian trade figures might give the impression that politics enter into the direction of commerce in the sense that there is a tendency to throw business to nations from whom the Soviet Government desires and expects recognition. But second thought suggests that politics play their part rather in terms of the internal economic needs of the government. With the United States, under present circumstances, the Soviet Government can have slight hope of establishing diplomatic relations. Yet one fact that immediately commands attention is the disproportionate share of the United States in the Russian imports. If reference is made to the situation before the war, the significance of this fact becomes even more striking. Of Russian exports the United States always has taken only a small share. On the other hand, averages for the Russian import trade before and after the war (recently compiled by Mr. Simeon Strunsky of the New York Times) show the following suggestive contrasts:

Pre-War Percentages Post-War Percentages
1912 1913 1924 1925 1926
Germany 50 53 22 16 26
Great Britain 13 13 24 17 19
United States 7 7 25 30 18

The marked increase in imports from Germany in 1926 is attributable partly to the 300 million gold mark trade subvention which the German Government granted in April, as well as to the conclusion of a comprehensive commercial and industrial treaty. But aside from these considerations, the reasons both for the depression of the total volume of Russian trade and for the directions which it has taken in the past three years are not far to seek. State banking and trading monopolies command absolute control of the operations in foreign exchange and of the volume of imports. The system makes it possible both to keep purchasing abroad within the bounds indicated by the volume of exports and the reserves of foreign currency, thus creating an artificial economic balance, and also to direct purchasing in accord with governmental policy. The trade monopoly is part of the Soviet political machine. It is a cumbersome apparatus which hampers commerce, and the cost of administering it and of maintaining trade delegations abroad is high. But it was brought into existence to meet vital necessities of the Soviet régime. The Soviet power -- apart from the Red Army -- is based on the proletarian class of factory workers. In order to encourage them and to develop the strength of the class as much as possible in a land populated chiefly by farmers, it was desired to emphasize the development of industry. But little capital for this purpose could be secured abroad. Neither foreign governments nor bankers would loan money to a government which had repudiated national debts and confiscated property belonging to their citizens. So the Soviet leaders turned to the manipulation of exports and imports -- in other words, to the trade monopoly. It is the essential line of entrenchment of Communist strategy.

For the sake of industrialization of the country, the Soviet Government has been buying factory equipment and agricultural machinery and barring manufactured products so far as possible. In 1913, it is estimated, the proportion of consumption goods imported was 45 percent. That was in the days when Russia was based on an agricultural economy and was willing to buy abroad the finished articles that she needed. In 1925--26, the proportion of consumption goods imported was 15 percent, while 83.6 percent of the total represented productive imports and cotton for textiles.

Further, a high tariff has been adopted, for an open trade frontier would mean a flood of goods competing with the products of Soviet industry and exhausting the reserves of foreign currency. This spring the Council of People's Commissars have announced an even higher degree of protection, raising the average customs duties on the value of imported goods from 22--24 percent to 30--33 percent, and reducing the free list from 80 to 45 articles -- among which, significantly, are included temporarily agricultural machinery not made in the Soviet Union and live stock.

The tariff exemption in favor of agricultural machinery points to the central domestic difficulty of the Soviet strategy, the greatest weakness behind the line. The system of forcing home industry has inevitably made prices high within the country. As a consequence, the peasants have to pay constantly more in produce for the manufactured articles which they need. They are compelled to finance the revival of industry, through real prices three to four times above those that prevailed before the war. At the same time, since foreign trade depends on the margin of purchasing power of the government and since prices are both controlled by government agencies and affected by world market quotations, the rates offered for grain and other agricultural products for export are generally so low as to discourage the cultivation of surplus crops. With manufacturing costs remaining practically level, the difference between the selling prices of manufactured articles and the buying prices of agricultural products for export has been steadily widening in recent months. The forces developing peasant antagonism to the government program may be gauged by the estimate of Keynes that the city population is about 85 percent as well off as before the war, while the country population is about one-half as well off.

Fear of rising resentment among the peasants was one of the main reasons for the division in the past year within the ranks of the Communist party, between the government faction of Stalin advocating a more moderate policy to lighten the load on the peasants and the extremists advocating an unmodified industrialist program. The peasants are capable of formidable opposition. Investigators reported that peasant hostility to Soviet levies on crops, and consequent concealment of grain or even refusal to plant, considerably intensified the Russian famine of 1921-22.

The present trade policy of the government runs the risk of developing a form of practical state sabotage on the farms. Discouragement of production of an agricultural surplus for export strikes at the basis of the foreign trade monopoly, and hence at the plan of building up Soviet state industry. So, side by side with the effort to secure equipment for the factories, there now goes the effort to provide better equipment for the farms and an intensive campaign to cut manufacturing costs. "Vestnik Finansov," a new monthly publication of the Commissariat of Finance, reports intensive studies in the Soviet Institute of Economic Research of the method of financing import trade.

The internal position of the Soviet Government requires retention of the foreign trade monopoly as a means of building up industrial strength. It is the only alternative to foreign loans for the development of industry, which cannot be secured except by the sacrifice of the Communist policies of repudiation of the Russian debts and nationalization of property. Under the system of trade control, the Soviet economists have lately been endeavoring to attract development funds by limited concessions and by the admission of foreign investment in Russian corporations. Centralized state industry has broken down. It was transformed first into so-called "trusts," and many of these, in turn, are being changed into licensed "mixed companies." Up to October, 1926, there were in all 144 concessions -- 40 German, 22 British, 15 American, others scattering -- and some 36 "mixed companies."

The Bolsheviks may be said to be repeating, in altered form, their tactics of ten years ago. Then they accepted German funds, given in the interest of eliminating Russia as a military factor in the war, in order to establish their own political power. The Allies and America retrieved what they had lost for Russia. Now they are accepting capitalistic support in the hope of consolidating their industrial power. But it is a question whether they can resist the expansive forces which, inevitably, they are releasing in exactly that sphere which is the citadel of Soviet defense.

[i] Prof. Dr. A. N. Makarov. Das System der Staatsverträge Sowjetrusslands. Zeitschrift für Politik. Berlin, 1926. Band XVI, Heft IV. P. 331.

[i] Figures for 1923-24 from "Russia: General Review and Commercial Report," Institute of Commercial Research, London, December, 1926; for 1925-26 and 1926-27 from "Commerce Reports," U. S. Department of Commerce, Jan. 24, 1927.

[ii] Figures from Soviet Union Review, April 1927, as compiled by People's Commissariat of Trade and Industry.

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  • MALCOLM W. DAVIS, during the war a representative in Russia and Siberia of the Committee on Public Information, author of "Open Gates to Russia"
  • More By Malcolm W. Davis