On March 13, 1922, the VTsIK adopted a decree “On Foreign Trade,” which reaffirmed that foreign trade was a state monopoly and operated only through the People’s Commissariat for Foreign Trade [NKVT]. Under this decree, state agencies and enterprises, as well as the Russian Federation Central Alliance of Consumer Societies [Tsentrosoyuz], were authorized to deal directly on the foreign markets with special permission of the NKVT, but only if contracts and agreements were submitted in advance to the NKVT for approval.
This entailed substantial changes for the oil industry. A VSNKh resolution dated July 1, 1922 formed a new economic agency, the All-Union Oil Trading Syndicate [Neftesindikat], which merged the huge Azneft, Grozneft, and Embaneft trusts, and was to engage, among other things, in trading operations abroad. Valentin Trifonov (1888–1938), an Old Bolshevik and professional revolutionary, was named head of the new entity.
In syndicate trade, prices were set primarily from above in a centralized manner. The People’s Commissariat for Railroads, the army and navy departments, defense plants, and the power stations of Moscow and Petrograd were entitled to firm prices.
Neftesindikat’s first serious practical action was to enter into a concession agreement, which initially seemed very promising, with the American International Barnsdall Corporation. The latter was to deliver several dozen rotary drilling rigs and powerful pumps to the Baku oil fields, and then place more than 1,000 abandoned wells in service. Payment for both the equipment and the work was specified in the traditional form—the company would receive up to 20% of the oil produced.
The idea was supported by Deputy Chairman of the Labor and Defense Council Aleksey Rykov (1881–1938), People’s Commissar for Foreign Trade Krasin, VSNKh head Pëtr Bogdanov, and Deputy People’s Commissar for Foreign Affairs Lev M. Karakhan. At their recommendation, the RCP(b) Politburo adopted a resolution on September 21, 1922, “On Well Drilling Concessions in Baku.” Provisions of the resolution included: “a) No objection shall be made to the execution of a concession agreement with International Barnsdall Corporation; b) On the question of arbitration (Para. 24), an attempt shall be made to alter the makeup of the arbitration tribunal in order that the chief arbitrator be selected from among six (or more) candidates nominated by the Academy of Sciences, without framing this as an ultimatum; c) The draft agreement shall be distributed to all Politburo members.” Under the concession agreement, the American company was required to deliver 20 rotary drilling rigs with the necessary tooling and downhole pumps, and in exchange, it was promised 20% of all oil produced.
For a number of reasons, the high hopes on both sides for the successful fulfillment of the agreement were not realized. Ultimately, the American company was unable to meet its obligations, and after two years the RCP(b) Politburo was forced to invoke the most fitting form of denouncement in a resolution “On the Barnsdall Corporation:” “a) The Main Concession Committee is directed to place a series of notes in the foreign press, under NKID supervision, indicating a breach of contract on the part of the concessionaires; b) The Main Concession Committee is invited to present a report to the Labor and Defense Council on the economic performance of the Baku contract drilling concession.”
In early 1923, the journal Azerbaydzhanskoye neftyanoye khozyaystvo [“Azerbaijan Oil Business”] published an article by the economist Bondarevsky titled “More Attention to the Oil Industry,” in which he said: “Other countries have taken into account and realized the importance of the fact that their future well-being will be built on an oil foundation. We seem not to have completely grasped all this, nor have we recognized the colossal scale of the game. The true objective of state power is to create an apparatus from Russian oil that will, in the future, support an industrial life for the entire country, make us independent, and place us on a par with the powers that dictate oil policy to the world.”
However, following the Genoa and Hague Conferences, the Soviet government was decidedly aware of the colossal role that the export of Soviet petroleum products abroad could play, especially in terms of providing the hard currency so badly needed to restore the economy.
And soon, by skillfully playing the oil giants Royal Dutch Shell and Standard Oil Company off against each other, RSFSR representatives were able to crack the initially monolithic front of Western countries, thereby finally burying the ultimatum-like terms of the 1922 Genoa Memorandum.
In late 1922, Royal Dutch Shell began secretly purchasing Soviet kerosene, which it then resold in the Far East. At the time, it managed to conceal these ties. The company’s head, Sir Henri Deterding, was guided in this by a desire not only to obtain short-term profit, but also to stake a claim in Soviet Russia for further development to spite his main competitor, John D. Rockefeller. Then in the spring of 1923, the small English firm Sal purchased 33,000 tons of Soviet kerosene, which was immediately reported throughout the Western press. Admittedly, it was not known at the time whether Royal Dutch Shell was behind the deal. In any event, Deterding immediately took the opportunity to announce that no oil blockade of the USSR now existed, and not because of Royal Dutch Shell, but because of the actions of Sal, whose example others would certainly follow. Almost immediately, “in view of changed circumstances,” Royal Dutch Shell openly purchased 1.3 million barrels of kerosene from the Soviet Neftesindikat. Responding to criticism, Deterding declared that he had been forced to make the deal because Sal was pursuing a separate policy anyway.
The concern in the press over Royal Dutch Shell’s relations with the USSR gradually eased, and in September 1923, Deterding received authorization from the International Association of Oil Companies in Russia35 to conduct negotiations with the Soviet government. In response, the Franco-Belgian entrepreneurs refused to support the decision, and recalled their representative from the International Association. The oil blockade’s unified front thus collapsed, and Deterding could make full use of his monopoly advantage as the only major company trading with the USSR.
With the blockade lifted, the Soviet government was free to openly pursue economic relations with a vast array of partners. Over the course of a single year, from October 1, 1922 to October 1, 1923, the USSR Neftesindikat achieved much: it created two foreign offices, one in Berlin for Western European countries headed by Yakov Ter-Oganesov, and one in Baku for the Middle Eastern countries headed by Aleksandr Serebrovsky. Neftesindikat built tank farms in London to hold 28,000 tons of oil, in Hamburg for 9,900 tons, and in Reval [Tallinn] and Riga for 4,400 tons each. Using the three ports of Batumi, Novorossiysk, and Leningrad, Neftesindikat sold about half a million tons of various petroleum products (kerosene, gasoline, machine oil, residual oil, diesel oil, and crude oil) for 23.4 million gold rubles, a very considerable sum for the USSR.
With the enormous demand for cash assets, Neftesindikat found a way to obtain bank loans collateralized by goods. To this end, it signed two agreements with the State Bank [Gosbank]: one to transfer oil storage facilities in six western provinces to the bank for leased operation, and another to sell the bank up to 180,000 barrels of kerosene for cash. This brought Neftesindikat some relief, although it was not a complete solution to the financial issue for the oil industry. To further consolidate its market position, Neftesindikat set up production of new petroleum products. For example, at its Baku refineries, it began making petroleum lacquer drying oil, naphthalene, and lubricant grease. Neftesindikat’s participation in the All-Union Agricultural Fair in Moscow in August 1923, where it exhibited a wide range of products, was especially important for expanding the petroleum products market.