Soviet oil exports (1920 and 1930s) - By Prof. Vladimir Kostornichenko

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By Prof. Vladimir Kostornichenko,
Dr. Sc. (Economics)
No. 2, 2006


Soviet oil exports as the main factor behind industrialization in the 1920 and 1930s in the USSR

After the tragic events of the 1917 Revolt and the terrible trials of the Civil War period from 1918 to 1920, the Soviet oil industry found itself in an extremely difficult

situation. Under these conditions, the policy pursued by the Communist Party leaders with respect to the oil industry was geared to restoring the volume of oil production in the country and developing the export of oil and petroleum products to the maximum, this being the main source of currency revenues for implementing the grandiose plans for the country's industrialization.

At the intersection of multiple decision

In 1913, 58.2 million poods (948 thousand tons) of oil and petroleum products were exported from the Russian Empire. In 1918, only 104.4 thousand poods (one pood is equal to 16,38 kg) petroleum products, including to Finland 16.5 thousand poods and to Sweden 87.9 thousand poods, were exported via Petrograd. In the spring of 1920, units of the Red Army occupied the Apsheron Peninsula, restoring the Transcaucasian oil industry as an integral part of the economy of Soviet Russia. With the fall of the government of the Georgian Democratic Republic and the opening of the transport corridor for Baku oil to Batumi, the volume of exports of oil and petroleum products began to grow rapidly. When the Soviet government took control over foreign trade, this led to a sharp increase in the volume of oil exports. During the period from December 1, 1921 to May 1, 1922, 2 million 661.5 thousand poods were exported, for instance, while the corresponding figure for May 1, 1922 to October 1, 1922 was already 6 million 78 thousand poods. During the entire 1922-1923 operating year, 19 million 846 thousand poods of oil and petroleum products were exported.

Currency revenues from oil exports made it possible in the early 1920s to prevent the oil industry stagnating further, but the Soviet government's plans went much farther. The intention was for the accelerated growth of exports not only to provide for full restoration of the Russian oil industry, but also to turn it into a source of the significant currency revenues required for modernizing the country's entire national economy.

The eminent British businessman Lesley Urquart, who worked for a long time in Russia, saw problems in these plans. In the "Financial Times" of May 10, 1922, he expressed his frank skepticism with respect to the possibility of increasing the volume of Soviet oil exports.

Soviet economists were of a different opinion regarding the prospects for restoring Russian exports and the Russian oil industry as a whole. According to calculations made by the Supreme Soviet for the National Economy (March 1922), 196 million rubles gold in capital outlays and 44.5 million rubles of working capital would be needed to bring oil industry output back up to its prewar level within a period of 3-4 years.

The Soviet state was not in a condition to allocate the required funds. Nor was it possible to obtain this sum by selling petroleum products within the country in view of the very limited capacity of the domestic market. The only way out was a substantial increase in currency revenues from exports. This seemed a very attractive solution for the difference between the production cost within the country and prices on the world market reached 300-400%.

The only way for the Soviet government to achieve a serious expansion of overseas sales was to organize cooperation directly with the oil "majors" of the Western business world - the American company Standard Oil of New Jersey and the Anglo-Dutch company Royal Dutch/Shell. Interaction with them was, however, largely obstructed by indecision over the fate of the nationalized property of these companies in Russia. Not by chance did the biggest Western oil industry entrepreneurs take an active part in the Genoa and Hague conferences (April-May 1922 and June-July 1922, respectively), where the discussion focused mainly on restoring property to the former owners of foreign enterprises in Russia. Since they had not achieved restitution or any concessions from the Soviet side with respect to property rights at the talks, these companies tried to put pressure on the Soviet government by organizing an "oil blockade." On the day following the end of the Hague Conference, July 21, 1922, the heads of three companies, Standard Oil of New Jersey, Royal Dutch/Shell and Branobel, met in London where they adopted a decision to put up a united front against the Bolsheviks, and declared a boycott of Soviet petroleum products on the world market. On September 19, 1922, in Paris, under the auspices of Royal Dutch/Shell and Branobel, the International Group of Russian Oil Companies was set up for the purpose of restoring the property, together with recompense for the losses caused by the nationalization, or full compensation for these. The initiators of the "oil front" used a boycott of Soviet oil exports as one of the main levers for putting pressure to bear on the government of Soviet Russia, calling on participants on the world market not to purchase the oil the Soviets had "stolen" from them.

The fall of the "oil blockade"

The "oil blockade" initiated in the fall of 1922 led to serious difficulties in selling Soviet petroleum products on foreign markets. At the end of 1922, for instance, a number of transactions that Russian Oil Syndicate had prepared for signing were broken off. The most important of these included a contract with Standard Oil for supplying a large quantity of gasoline and lubricating oils, an agreement with Royal Dutch/Shell on the sale of 100 thousand tons of kerosene, etc. Problems also arose in selling petroleum products to France, Scandinavia and other countries.

According to the well-known German researcher into problems of the world oil industry, Wilhelm Mautner, however, "the Soviets managed to put a wedge into the gap caused by the differences between Franco-Belgian and Anglo-American interests. They did this by concluding contracts for large deliveries with independent British companies."

Then such big corporations as Standard Oil and the Anglo-Persian Company began holding talks with Russian foreign trade organizations. Thus, at the beginning of March 1923, a representative of Standard Oil who had came to Moscow, Dodge by name, announced that he was not bound by any international obligations with respect to purchases of Soviet petroleum products.

Even the chief organizer of the boycott, the management of Royal Dutch/Shell, breached the agreement on the boycott and, on March 26, 1923, informed the Group that it had been compelled to acquire several batches of Soviet oil, supposedly in order to balance the critical situation on the British oil market. The Group was indignant about this behavior on the part of Henry Deterding and announced that "to purchase oil from the Soviet government is to provide it with funds for continuing its malicious policy of confiscation" and called on Royal Dutch/Shell to withdraw from the deal. The Anglo-Dutch company's offer to share the purchased Soviet oil with the participants in the Group merely aroused their ire, which was exacerbated even further when they found out that the agreement to purchase the oil had been concluded on March 29, 1923, three days after the members of the Group had met.

As a result of this transaction, Royal Dutch/Shell acquired 70 thousand tons of Soviet kerosene at average world prices, with the option of purchasing another 200 thousand tons in the near future. Later, on May 11, 1923, the company signed an agreement with the Soviet government on organizing a joint venture to sell Russian oil through a specially created dealers' network. The authorized capital of the newly created company amounted to 1 million 250 thousand pounds sterling and 50% of the shares belonged to the Soviet party. The agreement remained in force for ten years, during which time the company received 10% commission.

In addition, according to the historian Anthony Sutton, in May-June 1923, Royal Dutch/Shell organized purchases of Soviet oil through the firm "Sale and Company of London," which purchased 30 thousand tons of crude oil with the option of acquiring an additional 170 thousand tons. Sale and Company signed an agreement with the Neftesyndicate on setting up a joint venture with an aggregate capital of 250 thousand pounds sterling. The Neftesyndicate held half the shares in the new company, with the right to purchase the remaining part after ten years.

Continuing the purchases it initiated in 1923, the following year Royal Dutch/Shell acquired, through the Anglo-American Company, another 125 thousand tons. The other half of the batch of the Soviet petroleum products received by the Anglo-American Company was bought for the American firms Standard Oil of New Jersey, Vacuum Oil Company and Standard Oil of New York.

As a result, during the 1923-1924 operating year, 45 million 816 thousand poods of petroleum products from Baku and Grozny were exported from the USSR and a year later - already 83 million 500 thousand poods.

Decisive steps

In the years that followed, Soviet foreign trade organizations started striving to diversify oil sales, orienting themselves on expanding the group of purchasers. In 1925, the firm Belle Petrole concluded a five-year agreement with the Russian Oil Syndicate for deliveries of crude oil from Grozny to France. The Anglo-Mexican Company and Blue Bird Motor supplied Soviet petroleum products to British refineries for subsequent sale right until modern cracking installations were built and commissioned in the USSR. Asiatic Company imported Soviet oil on to the markets of India and Ceylon.

State purchases by other countries made up a considerable proportion of Soviet oil exports. The Russian Oil Syndicate supplied fuel for the navies of at least 5 states - Britain (for the ships based in Malta), France, Italy, Greece and the USA. Noteworthy among the major naval orders in the 1920s are the purchases made in 1927: 150 thousand tons for the Italian navy, 33.3 thousand tons for the French navy, and 200 thousand tons for the Navy Ministry of the USA. The state trading organizations of other countries also made considerable purchases. In 1928, for instance, Turkey and Spain acquired 532 thousand tons of Soviet petroleum products for distribution through the state trading system.

In an attempt to counter the dependence on sales of oil to the biggest Western companies, the Bolshevik government began, in 1924, actively developing its own distribution network abroad, especially in countries where the Soviet products were already known to the consumers. In August of that year, a Soviet company called Russian Oil Products opened business on British territory, its objective being to organize retail trade in Britain. The legal grounds for its operations were provided by the Anglo-Russian trade agreement of 1921. By the beginning of 1925, this firm had set up its own trading system, built oil distribution storage facilities in Bristol and Cardiff, and entered into fierce competition with local companies. In the initial stages, Russian Oil Products pursued a dumping policy, selling petroleum products for 1-3 pence less than other firms did. The Soviet company managed to grasp a place on the British market: of the 250 thousand tons of oil imported into Britain over the first nine months of 1925, Soviet petroleum products accounted for about a fifth.

A distribution network was organized similarly in other countries. In the mid-1920s, Soviet foreign trade organizations set up their own company Deutsche-Russische Naphtha Kompanie to distribute petroleum products. In Sweden, a Soviet company, Nordiska Bensin Aktiebolaget, was set up. After a brief period of dumping (cutting prices by an average of 30%), it was able to become one of the six companies controlling oil sales in the country.

Apart from purely Soviet oil-trading companies, joint ventures were also founded abroad. The Neftesyndicate and the Barcelona Argus bank formed a joint venture that enjoyed exclusive rights to sell petroleum products from the USSR in Spain, Portugal and their colonies. Of major significance for trade along the eastern frontier were the Russo-Persian joint trade ventures Shark and Persazneft.

This company operated very efficiently and soon managed to fill the Persian market with Soviet petroleum products. In 1924-1925, 32.9 thousand tons of petroleum products were sold in Iran, including 28.8 thousand tons of kerosene, 1.6 thousand tons of fuel oil, 1.1 thousand tons of petrol, and so on.

Thus, the sharp increase in the volume of Soviet exports at the end of the 1920s was a consequence not only of the rapid restoration of the Russian oil industry and the increase in oil production, but also the skilled, assertive policy pursued by Soviet foreign trade organizations on foreign markets, by which they managed to persuade many foreign businessmen to engage in mutually beneficial cooperation