How a Great Power Falls Apart
Decline Is Invisible From the Inside
ON MAY 28, 1901, William Knox D'Arcy obtained an exclusive petroleum concession for a period of sixty years covering all of Persia except the five northern provinces. On November 27, 1932, the Persian Government announced the cancellation of the concession, which since 1909 has been owned by the Anglo-Persian Oil Company, a British corporation in which the British Government is a majority stockholder. Great Britain promptly denied Persia's right to cancel the contract. After rejecting a British proposal to refer the dispute to the Hague Court, Persia agreed to its submission to the Council of the League of Nations. During the February meeting of the Council, Great Britain and Persia agreed that the League proceedings should be suspended until the Council meeting in May, and that meanwhile direct negotiations would be carried on by the Anglo-Persian Oil Company and the Persian Government regarding a new concession.
The commercial production of petroleum in Persia, all of which is monopolized by the Anglo-Persian Oil Company, amounted in 1932 to about 6,000,000 tons. In the preceding year Persia ranked fifth among the producing countries of the world, being exceeded only by the United States, Russia, Venezuela and Rumania. The Anglo-Persian Oil Company -- an organization which has great financial strength and which possesses extraordinarily rich petroleum deposits, a worldwide marketing system, and strong alliances -- ranks at present among the leading petroleum companies of the world. It has developed in Persia a modern industry, the only one of any importance that the country has had.
In its communication of November 27 to the company, the Persian Government declared that it "cannot legally and logically consider itself bound to the provisions of a concession which was granted prior to the establishment of a constitutional régime, in view of the manner in which such concession was obtained and granted at that time." About two weeks later, more specific reasons were advanced, including charges that the concession had been obtained under pressure, that the amount of royalty had been unfairly calculated, and that the oilfields have not been fully exploited.
That the D'Arcy concession was in form legally granted does not appear to be questioned. The Grand Vizier in 1901 showed no lack of bargaining ability; and the royalty agreed upon -- 16 percent of the net profits -- compares favorably with that stipulated in similar concessions granted elsewhere during the same period. The written constitution of Persia was not established until 1906-08. Successive governments, including those of the present Shah, have recognized the validity of the contract; and until the past year there appears to have been no official denial of its validity.
Cancellation is provided for only in case, during the first two years, no exploitation company was established; but the obligation of the concessionaire in this connection was admittedly fulfilled. It is further prescribed that any question or difference with respect to the interpretation of the concession or the rights or responsibilities of one or other of the parties must be submitted to arbitration. Nowhere does unilateral cancellation seem to be contemplated. Substantial amounts were risked by foreign investors in what was at first a highly speculative enterprise, presumably on the understanding that a bona fide contract existed. Persia, like other poor and weak nations, could attract capital for economic development only by offering assurance of security.
But there exist certain objections to the concession of an equitable nature. Royalties paid by the company have amounted to a substantial sum, but they can hardly be considered at present a fair return to Persia; and they have proved an unstable budgetary resource, decreasing from £1,288,000 in 1930 to £307,000 in 1931. It would seem that, if Persia's equitable case seems convincing in other respects, the company might well agree to pay her in the future a percentage of the gross receipts, a somewhat larger percentage of the net profits, or a fixed per ton royalty.
As a matter of fact, questions of this nature have arisen from time to time in the past and have been discussed between the Persian Government and the company. An agreement of December 22, 1920, settled the questions then outstanding. Discussions began in 1928 looking to a revision of the concession; a preliminary royalty agreement was approved by the Persian Council of Ministers in February 1932; and a final draft of this agreement was initialled in London by representatives of the two parties but has not been ratified by the Persian Government.
As the present dispute deals with oil in substantial quantity it must be given consideration in the light of general world welfare. It became evident at the close of the Great War that the commercial and strategic significance of this commodity had injected into international affairs a fertile subject for controversy and competition. The wise utilization and scientific conservation of petroleum resources presented national and international problems both complex and acute. As a result, a network of agreements governing the marketing of petroleum products has been worked out by the major oil companies.
The fact that she possesses important petroleum resources involves Persia, whether she wills it or not, in an international problem, and she cannot escape the resulting responsibility. The concession in dispute has become a feature of an international system which, despite its shortcomings, has introduced a semblance of order and justifies a measure of hope. "It is natural for the government and people of any country in which large deposits of oil have been found to regard their possession jealously and to think of it in merely national terms. But in a country of small consumptive power the mere possession of natural oil is an asset only in so far as a whole complex of external conditions -- financial, technical, distributive -- makes it so."[i] At this juncture, an act which might throw the Persian oilfields open to international competition could hardly be viewed as less than disquieting. On the other hand, Persia has neither the capital, the technical resources, the distributing and marketing connections, the economic statesmanship, nor, let us hope, the courage, to conduct her petroleum industry as a nationalistic undertaking.
The recent history of Persia is a story of internal decay. Up to the period of the Great War, the country was a typically exploitable one, and was exploited. The central government was shot through with incompetence and corruption and exercised only nominal authority over outlying tribes. Tsarist Russia and Imperial Britain were the upper and nether millstones which were grinding from an ancient land the last vestiges of real political and economic independence; and the 1907 division of the country into spheres of influence by the two Powers simply gave recognition to what appeared inevitable. But the situation twelve years later was different. Persia came out of the Great War demoralized, disrupted and devastated, but with a fresh opportunity.
Soviet Russia announced the abrogation of the concessions which had been obtained from Persia by the Tsarist régime. The renunciation involved little of real substance; but in appearance it was a benevolent gesture confirming the general conviction prevalent in Persia that all pre-war concessions were iniquitous in origin, unfair to Persia, and in derogation of her sovereignty. Since then, Soviet policy south of the Caspian has been one of persistent and on the whole successful commercial penetration. All in all, at the present time the proximity of Soviet Russia constitutes the most serious, perhaps the only, external threat to Persia's independent existence.
The British Government did not feel itself in any position to proclaim a wholesale renunciation of privileges which were far more valuable than the Russian and which were the private property of British and other nationals. But an effort, apparently a sincere one, was made to assist in the reconstruction of the country by means of a treaty providing for a British loan and for British military, financial and engineering advisers. The rejection of this treaty in 1919 by the Persian parliament was symptomatic of the revival of Persian nationalism and of the decline of British prestige. Since then, by negotiation and mutual agreement nearly every important economic privilege held by the British in the country, except the petroleum concession, has been either terminated or drastically curtailed.
The British and the Russians nevertheless remain the real rivals in this region. Persians are individualistic and are not likely to be quickly influenced by Soviet example or propaganda, so that the absorption of their country into the Soviet system is not probable. But it is not impossible, and such an event would clearly be of sinister import to Britain. Persia in the past has shown consummate skill in the playing off of friends and enemies against each other. Her safety as a nation still lies in a common-sense realization of her weakness. She needs, perhaps as she has never needed before, a powerful friend with a substantial economic interest in the maintenance of her independence.
The rejection of the Anglo-Persian agreement of 1919 was a phase of the movement which established the dictatorship of the present Shah. Since his coronation in 1926, Persia has had only the appearance of constitutional parliamentary government. The government has again become a personal autocracy resting on efficient but momentary military power. Members of the parliament, nominally elected, are in fact appointed by the Shah and possess practically no freedom of discussion or of action. The ministers enjoy little independence; and on questions which interest the sovereign they are careful to advise him in accordance with his known inclinations. The press is muzzled. Probably 95 percent of the people are impoverished, illiterate, ignorant and inarticulate. It is evident, therefore, that the will of the remarkable man who rules Persia is not to be too closely identified with that of his subjects, nor his policies with their aspirations.
Praise must be accorded certain of the Shah's accomplishments, for example the establishment and maintenance of law and order, the disarming of the tribesmen, the building of highways, the recovery of tariff autonomy, the abrogation of the capitulations, and the support accorded for some time to the American financial mission. But the basic needs of the country are for agricultural development, education in the broadest sense, the development of wholesome living conditions, the conservation of what is best in Persian culture, and the patient building up of social and political habits which make for stability. Tested by these needs, the Shah's policies seem largely misdirected, and when he passes from the scene, internal disorder and further decay seem more than likely to follow.
It appears that the revenues of the Persian Government have been increased since the departure of the American financial mission in 1927 by approximately 25 percent, in the face of a considerable decline of national wealth and national income. While per capita taxation in Persia is comparatively low, it imposes an excessive burden on the impoverished masses. Nevertheless, military and police expenditures, which are the special concern of the Shah, have more than doubled during the last five years. Indeed, of the total increase in the ordinary budget, almost 75 percent has gone to the army and police; and their current maintenance now absorbs about 44 percent of the total revenues. Compared with this figure, education receives about 6½ percent and public health 1½ percent. During the last five years, the army has grown from 40,000 to about 80,000, and a further increase to 100,000 is contemplated; conscription has been introduced; an air force has been created; and even a miniature navy now floats in the Persian Gulf. The government is executing, out of current revenue, an extravagant railroad project which promises no substantial economic, financial or social benefits. It is of course the privilege of the Persian Government to spend its money as it pleases; and mistakes that it may make in no way prejudice its legal rights. But it is difficult to wax enthusiastic over a proposal to reduce the earnings of British investors merely in order that the Shah may build up a top-heavy structure of military autocracy.
Nor are the indirect contributions made by the Anglo-Persian Oil Company to the welfare of the Persian people negligible. To their purchasing power the company adds over £2,000,000 annually in wages and local expenditures. In technological research, in the reduction of nomadism, by providing hospital facilities, housing, and vocational education, the company has probably done more quantitatively and done better qualitatively within the limited area of its operations than the Persian Government has in the country in general. In the building of roads, in providing public sanitation, and in the conduct of elementary and secondary schools, the company has set influential examples and standards. Except during the chaotic years during and immediately following the Great War, the company's operations have been conducted, so far as available information goes, without military support by the British Government and, until the Persian act of cancellation, without diplomatic intervention.
It is conceivable that the Shah may have had no portentous purposes in view when he ordered the cancellation of the concession. His immediate aim may merely have been to improve his bargaining position. It is possible that he did not contemplate the diplomatic intervention of the British Government or the submission of the dispute to the League Council. There is some evidence that he regrets his action. In any event, no overt act against the company's properties has been reported; operations are said to be proceeding normally; and Great Britain has apparently made no show or threat of force. How far-reaching the Shah's plans are no one probably knows except himself. Though impulsive, he has in the past demonstrated ability to mask his designs and to bide his time. On the other hand, it will be difficult for him to retrace his steps. His own prestige must now be considered. The chief usefulness of the League in the present controversy may be found to lie, not so much in deciding legal and technical questions, as in maintaining a mutually satisfactory basis for direct negotiations between the two parties.
[i] J. W. Williamson: "In a Persian Oil Field," 1930, p. 120.