On February 28, 1929, The New York Times reported: “On Thursday, Deterding and British oil firms made peace with the Soviets. An agreement has just been signed for three years that not only ends the price war between the British and the Soviets (ROP) on the British market..., but also puts an end to Deterding’s political hostility towards the Soviets.... The key achievement for the Soviets is that there is no clause in the agreement regarding compensation to be paid to Deterding for the nationalized property on which he continued to make such persistent claims.”
Prominent Soviet figure Grigory Sokolnikov (Brilliant) (1888–1939), who chaired Neftesindikat at the time, commented on the agreement: “The recently concluded oil agreement in London between companies representing all the world’s largest businesses on the British market— Standard Oil, Shell, the Anglo-Persian Company, and Neftesindikat as represented by ROP—has an importance that goes far beyond resolving their commercial relations on the British market. This agreement is one of the most important phases in the process of strengthening the USSR’s position on foreign markets; it directly concerns the main issues of the policy of the imperialist powers towards the Soviet Union.... The political importance of the agreement is that, first, it was concluded with no discounts offered to former owners of oil fields and, second, as the British press emphasized, oil policy issues in England are not resolved without the participation of organizations connected with the government.”
The agreement with the Western oil corporations, however, was more of political than economic importance for the USSR. With the start of the Great Depression in late 1929, oil prices fell sharply on the global market and the Soviet Union and the Western companies were therefore unable to agree on a further price policy. Global oil production (excluding the USSR) fell 17% from 1929 to 1932, while oil output in the Soviet Union increased 56.5% in the same period. By 1932, oil production levels in the USSR exceeded refining capacity by more than 3.3 million tons.
From the start of the 1930s, the USSR understandably began to develop new, more distant oil markets. Soviet petroleum products appeared in southern China and Korea for the first time in 1931 and in Canada and New Zealand in 1932.
On the whole, the first decade of the Soviet oil industry’s development following nationalization in 1918 can rightly be considered a success. The Soviet Union managed to turn the export of oil and petroleum products into a huge source of currency revenue by skillfully taking advantage of conflicts between Standard Oil Company and Royal Dutch Shell. The Soviet oil industry not only emerged from the crisis in which it found itself during years of turmoil but also managed to restore production by first achieving the prewar production level and then surpassing it. In 1928, the USSR produced 12 million tons of oil, a level consistent with the industry’s output under the Russian Empire in the early 20th century when the country was recognized as the global leader.
At the same time, this period marked the end of any illusions within the oil industry of continued NEP-era freedoms. On December 5, 1929 the Central Committee of the All-Union Communist Party (of Bolsheviks) passed a resolution, “On the Reorganization of Industrial Management.” The “economic independence” of Azneft, Grozneft and Embaneft soon came to an end as these entities were merged as business units into Soyuzneft, the All-Union Oil Industry Association.
John D. Rockefeller’s Envoy
The oil factor was one of the key components that helped form mutually beneficial economic relations between the Soviet Union and the US in the second half of the 1920s. Ivy Lee (1877–1934), a well-known American journalist who handled public relations for John D. Rockefeller, Sr., played a key role in this process. Lee visited the USSR in 1927 and paved the way for the subsequent establishment of diplomatic relations between the US and Soviet Russia.
Relations between the two countries were rather complicated and contradictory during this period due to profound changes and social upheaval throughout the world. Like other Western nations, the US broke off diplomatic relations with Russia after the Bolsheviks came to power in 1917, a move that created serious barriers for the development of business ties which remained frozen for a long time.
US businesses, however, began visibly expressing more interest in this new economic partner in the mid-1920s. After persistent lobbying by businesses, the US government decided to allow trade with Soviet Russia in summer 1920, but only at the individual company’s own peril and risk. The business community, however, remained dissatisfied with the government’s inconsistent position on trade with the USSR since it was only through mutual diplomatic recognition that the two countries could develop trade via lending, set up embassies and consulates, simplify visa procedures, validate the rights of citizens and organizations in both countries, and participate in global politics on equal terms.
The US government’s nonrecognition policy led to an artificial decline in trade volume between the two countries, including US exports to the USSR. This policy repeatedly created all kinds of barriers and obstacles in Soviet–US economic relations throughout the 1920s. Statistics show a rather sharp decline in US exports to the USSR in fiscal 1925–26 compared to 1924–25 (94 million rubles versus 158 million rubles).
This was primarily due to the fact that the development of Soviet trade organizations within the US depended largely on financing of purchases by banks and companies as well as a transition to short-term and long-term lending for imports. Representatives of the Soviet company Amtorg noted on several occasions that short-term loans would not increase the volume of Soviet purchases in the US. From 1925 to 1927, some licenses issued for operations on the US market had to be transferred to Germany, where long-term loans could be obtained.
Given the development of relations between the two countries in trade, concessions, science, and technology, as well as the growing number of requests from significant business circles for closer economic relations with the USSR, it became more and more difficult for the US government to justify the advisability and validity of continuing its nonrecognition policy against Soviet Russia.
The international oil business, in turn, was a kind of barometer for the political state of affairs at the time. On May 27, 1927, when the British government, in Neville Chamberlain’s famous note, accused the USSR of fomenting anti-British sentiment and carrying out subversive activities in Britain and subsequently broke off diplomatic relations with the USSR, Rockefeller’s corporation decided to take advantage of this favorable situation and go behind the back of its chief competitor Royal Dutch Shell.