William Henry Chamberlin | Soviet Russia: A Living Record and a History
POTENTIALITY the Soviet Union represents an enormous field for the activity of foreign capital. Actually its commercial and financial contacts with the outside world are much slighter than was the case before the War.
A few facts and figures may help to illustrate the gap between possibilities and realities in this connection. Cut off from its normal import requirements ever since the beginning of the War, and committed to an ambitious programme of industrialization, Russia to-day could absorb indefinite quantities of industrial and electrical machinery and equipment, tractors and other agricultural machinery, and raw material, which either cannot be produced within the country or are produced in insufficient quantities. But the foreign trade of the Soviet Union is still a little less than half of the pre-war volume. Before the War Russia contributed 3 per cent of the world's trade turnover. To-day this share has shrunk to a little less than 1.5 per cent.
The same discrepancy exists in the matter of concessions, or industrial, agricultural, and commercial enterprises which are leased to foreign capitalists for exploitation over a term of years. As a comparatively undeveloped country, which is attempting to enlarge its industrial equipment and increase its output at a very rapid rate, the Soviet Union would unquestionably benefit by the importation of considerable sums of foreign capital in the forms of loans or concessions.
The natural resources of the country are sufficiently extensive to constitute a genuine inducement for the foreign investor. Russia has two billion acres of forest land - the largest timber reserve in the world. It has 35.1 per cent of the world's oil reserves;(1) and while the largest two oil fields of Baku and Grozny are reserved for state exploitation, there is a rich untapped oil district in the neighborhood of Emba, north-east of the Caspian Sea, in addition to other promising and unexplored oil resources in Central Asia and in the North Caucasus. Large potash deposits near Solikamsk, in the Urals, huge deposits of iron ore in Kursk Province, and the vast coal reserves of Siberia, which are estimated to exceed by more than five times those of the largest working coal field in the Donetz Basin, are only a few among numerous examples of valuable natural wealth which the Soviet Union has not yet been able to develop with its own resources.
Only recently an imposing list of possible concessions in almost every field of Russian economic life, to a total estimated value of three and a half billion rubles, was published in the Soviet press. But the actual investments of foreign capital in concessions are very small, amounting to approximately 45,000,000 rubles, whereas it has been estimated that before the War foreign capital was flowing into Russia at the rate of 80,000,000 rubles a year. Foreign capital accounts for less than one per cent of the industrial output of the Soviet Union at the present time.
No doubt the strongest factor in obstructing the inflow of foreign capital into Russia has been the controversy centring around the policy of the Soviet Government in repudiating the pre-war foreign debts of the Russian Government and the Russian municipalities and nationalizing foreign industrial properties. The sum total of Russian liabilities under these heads has been estimated at 13,823,000,000 rubles,(2) divided as follows: -
Pre-war state debt 3,850,000,000 rubles
Guaranteed loans 870,000,000 "
Municipal bonds 422,000,000
Industrial investments 2,000,000,000. "
War loans 6,681,000,000 "
As against these foreign claims, the Soviet Government, besides upholding the juridical validity of its decrees repudiating foreign debts and nationalizing foreign property, holds in reserve large compensation claims for damage suffered as a result of the policy of blockade and intervention pursued by the Allied powers during the period of the Russian civil war. At the same time it has repeatedly intimated its willingness to consider the debt and property compensation claims of the foreign creditors, on condition that any payments in this connection be directly linked up with the question of granting new credits to Russia.
Hitherto the opposed viewpoints of the foreign creditors in demanding unconditional recognition of their claims and of the Soviet Government in requiring new credits as a prior condition to considering compensation claims have led to something in the nature of a deadlock. The Soviet Government has paid no compensation and has received no new loans and very scanty long-term commercial credits. Two of the most important of these credits have been the 300,000,000 marks advanced by German banks with a partial guaranty from the German central and state governments, and the contract, concluded in 1929, under which the American General Electric Company granted a five-year credit and abandoned its claims in connection with the sale of $26,000,000 worth of electrical equipment to the Amtorg, the Soviet trading organization in America.
In addition to the deadlock on the pre-revolutionary debt and credit question, other factors which have hindered a resumption of more normal commercial relations between the Soviet Union and the rest of the world are prejudice against the political character of the Soviet state and unfamiliarity with the new organization of Russian foreign trade, which is a strict state monopoly, regulated by the Trade Commissariat. A plan regulating the country's imports and exports is drawn up at the beginning of each new business year; and no important import or export operation can be carried out without the knowledge and approval of the Trade Commissariat, although certain, organizations, such as the consumers' and agricultural cooperatives and the buying organs of such large state industries as the oil and textile trades, are granted a certain amount of autonomy in foreign market operations.
Notwithstanding credit and other difficulties, Soviet foreign trade has been gradually reestablishing itself, although its pace of recovery has been notably slower than that of other branches of Russian economic life. The Soviet foreign trade turnover for the year which ended October 1, 1928,(The Soviet business year runs from October to October. ) was 1,722,900,000 rubles as against 2,894,000,000 rubles for 1913. If the rise in world prices is taken into consideration the volume of foreign trade is still below 50 per cent of the pre-war figure, although some allowance should be made for the loss of trade involved in the separation of Poland, Finland, the Baltic States, and Bessarabia from the territory of the former Russian Empire.
Soviet exports for 1927-1928 reached the figure of 768,100,000 rubles, with imports at 944,800,000 rubles, thus yielding an unfavorable trade balance of 176,700,000 rubles. In 1926-1927 the corresponding figures for exports and imports were 770,543,000 rubles and 712,691,000 rubles.
While final figures for the year 1928-1929 were not obtain-able at the time of writing, it seems that a small favorable trade balance in the neighborhood of 25,000,000 or 30,000,000 rubles was created, as against the unfavorable balance of 175,000,000 rubles in 1927-1928. The change was achieved in about equal measure by curtailment of imports and expansion of exports, oil and lumber being among the principal items of export which yielded a marked increase.
Besides diminishing in quantity, Soviet export has changed radically in character, as compared with pre-war times. In 1913 Russia exported over 10,500,000 tons of grain to a value of almost 600,000,000 rubles. Grain was the back-bone of the country's export trade. At no time since the Revolution have Russian grain exports reached a third of the 1913 figure, and in 1927-1928 grain almost vanished from the list of export items. Exports over the European frontier amounted to a little over half a million tons to a value of 51,510,000 rubles; but these were half offset by imports of wheat to the value of 26,969,000 rubles. The causes which have led to Russia's temporary elimination from the ranks of the world's grain-exporting countries are numerous and complicated, and are discussed in detail in another chapter. It may be sufficient to observe here that resumption of grain exports on a large scale within the next year or two seems unlikely, while the development of grain export in a more distant future depends on comparatively unpredictable factors, such as the agrarian policies of the Soviet Government and the character of the weather.
Flax is another article of agricultural export which has declined very heavily. In 1913, 272,440 tons of Russian flax were sold abroad for 86,818,000 rubles. In 1928, 29,967 tons brought in 21,505,000 rubles. Increased domestic consumption and lower yield of flax per acre account for this falling off. Butter and eggs are growing items in the Soviet export list, but they are still far below the pre-war level. Eggs realized 90,648,000 rubles and butter 71,558,000 in 1913. The corresponding figures for 1927-1928 were 40,462,000 and 39,119,000.
Lumber yields much less in the export budget of the country than was formerly the case. The Soviet Union exported about 90,000,000 rubles' worth of timber products during 1927-1928, as against 164,930,000 rubles' worth in 1913. Despite the fact that it boasts the largest forest reserves in the world, the Soviet Union exported 5,000,000 cubic metres of lumber during 1927-1928 as against 10,000,000 for Finland and over 11,000,000 for Poland.
On the other hand the export trade in furs and oil is distinctly above pre-war figures. Furs have acquired the place of honor as the most valuable item on the Soviet export list, realizing about 120,000,000 rubles, as against 17,052,000 rubles in 1913. Oil products reached a value of about 105,000,000 rubles, compared with 50,086,000 rubles in 1913. In volume the export of oil products has practically trebled the pre-war amount.
One marked feature of Soviet export at the present time is the shift in the centre of gravity from agricultural to industrial products. Whereas before the War agricultural products accounted for almost three quarters of the export, to-day industrial products, among which lumber, oil, and textiles (sold to the neighboring Asiatic states) are most important, slightly outweigh the very strongly decreased volume of agricultural products. An article published by the Soviet Commissar for Trade, Mr. A. Mikoyan, in the Encyclopedia of Soviet Export (Volume I, p. 19) indicates Russia's decline as a producer of agricultural goods for the world market. Over the five-year period 1909-1913 Russia exported 18.1 per cent of its wheat, 31 per cent of its barley, 27.7 per cent of its corn, 31.1 per cent of its eggs, 80.5 per cent of its flax and tow, and 15.6 per cent of its hemp. The percentages for the same articles in 1926-1927 (before the disappearance of grain from the Soviet export balance) were as follows: wheat, 6.5; barley, 8.5; corn, 9.6 eggs, 9.6; flax and tow, 12.9; hemp, 1.1. The pre-war Russian export of food products was unquestionably carried out to some extent at the expense of the undernourishment of the population, and there is no doubt some truth in the claim of the Soviet economists that the peasants now have more to eat. Other factors in the situation would seem to be absence of stimulus for the peasant to throw his surplus produce on the market, owing to the shortage of manufactured goods and the annihilation of the estates and large farms which were formerly the chief producers for the foreign market.
The character of Russian import has also changed, although not quite so strikingly as in the case of the export. Different as the two systems were in most other respects, Tsarist Russia and the Soviet Union both aimed at the rapid development of the country's industries; and the lion's share of imports, both in 1913 and in 1927-1928, consisted of machinery, equipment, and industrial raw material. This so-called productive import was about 66 per cent of the total import for 1913 and about 85 per cent in 1927-1928. This difference is explained by the fact that, taking advantage of its foreign trade monopoly, the Soviet Government, so far as possible, excludes all luxury articles and also clothing and goods of everyday consumption, making limited exception only for such popular dietary articles as tea and herrings and rice.
The Soviet Government in 1927-1928 spent abroad 247,885,000 rubles on industrial and transport equipment and 330,038,000 rubles on raw material, cotton (134,886,000 rubles), colored metals (64,730,000 rubles), and wool (42,582,000 rubles) being the leading items in this category. One is rather impressed by the small amount (37,282,000 rubles) spent on agricultural equipment. It may be noted, however, that the internal production of agricultural machinery is increasing from year to year. So, 54.2 per cent of the agricultural machines used in 1913, 69 per cent in 1925-1926, and 8o per cent in 1926-1927 were made within the country.
A study of Russia's foreign trade according to countries indicates a sharp decline in commerce with England during the last year, accompanied by a rise in the trade turnover with Germany and the United States, the latter country ousting England from second place in Russian trade. In 1926-1927 the volume of trade carried on between the Soviet Union and Germany, England, and America amounted, respectively; to the following sums: 289,885,000 rubles, 274,691,000 rubles, and 139,266;000 rubles. For eleven months of 1927-1928 Soviet trade with Germany increased to 394,533,000 rubles, and Soviet trade with America reached the figure of 182,401,000 rubles, whereas the commercial turnover with England declined to 174,297,000 rubles. Russian purchases from Great Britain decreased by more than half (from 94,228,000 rubles to 41,396,000 rubles), clearly indicating the decision of the Soviet Government to place as few orders as possible in England after the police raid on the headquarters of the Soviet trade mission and the severance of diplomatic relations between the two countries in the spring of 1927. The increased trade with Germany was due in some degree to the use of the credit for 300,000,000 marks which was advanced for the purchase of German industrial goods in 1925.
Despite the decline in the total volume of Soviet foreign trade and the absence of any sort of formal political or economic agreement with America, the volume of commercial transactions between the Soviet Union and that country, as measured in dollars, has more than doubled since 1913. Russian-American trade turnover in 1913 amounted to $52,286,000, while Mr. Saul G. Bron, chairman of the Amtorg (the chief Soviet trading organization in America), estimated the total value of Soviet-American trade in 1927-1928 at $120,000,000, as against $92,600,000 in 1926-1927. The balance of trade between the two countries is heavily favorable to America, Soviet purchases of cotton alone exceeding by almost three times the value of the furs, casings, and minor articles of export which Russia sends to America.
These purchases of cotton represent the chief factor in the striking increase of Russian-American trade, amounting to $42,713,000 in 1926-1927, as against $6,432,000 in 1913. Formerly Russia purchased a considerable amount of American cotton through European brokers; now 96 per cent of the cotton is bought directly in America. The Soviet trade organizations are also buying considerable quantities of mining and industrial equipment and machinery in America, and most of the thirty thousand tractors which are working on Russian fields originated in the factories of Henry Ford. The credit of $26,000,000 recently extended by the General Electric Company over a period of five years doubtless will increase Russian purchases of electrical supplies in America; and the Soviet metal and chemical industries are hungrily waiting for similar credits in order to expand their buying operations.
The most complete and detailed commercial treaty signed by the Soviet Government was concluded with Germany in 1925. Besides regulating the commercial relations between the two countries on the basis of the "most favored nation" principle (with certain exceptions for nonindustrial Asiatic countries), this treaty covers a wide range of general economic points, including navigation, trade arbitration, taxation, and defense of industrial property. Germany's high hopes of finding in Russia an almost unlimited field of commercial expansion have not been altogether realized; German business firms have been disappointed by the failure to make any breach in the iron wall of the Soviet foreign trade monopoly; and German commercial experts, when asked about the status of Soviet-German trade relations, are apt to shake their heads and point out that Russia's trade with Germany in 1927 was less than 3 per cent of the total German foreign trade. How-ever, Germany cannot afford to neglect a yearly business of $200,000,000; and the contest for the Russian market in the immediate future seems to lie largely between Germany and America. The former country has the advantages of greater familiarity with Russian conditions, geographical proximity, and regular consular service; America, on the other hand, has vastly greater financial facilities for granting long-term credits.
The Soviet Government has two commercial policies: one for the non-industrialized countries of the East and one for the West. In commercial dealings with China, Afghanistan, Persia, and Turkey the strict application of the foreign trade monopoly is relaxed, and more latitude is granted to the activities of private merchants. These Eastern countries supply various forms of food and raw material, such as dried fruits, wool and cotton, tea and rice, while the Soviet Union finds there a market for textile goods and timber, oil and glass products.
In the case of Western countries the principle of state monopoly of foreign trade is enforced in all its rigor; and inasmuch as this monopoly is considered one of the "commanding heights" of socialized economic life, there is no likelihood that it will be abandoned, notwithstanding the complaints of foreign firms which feel handicapped in dealing with state organizations, rather than with their direct customers, and the less audible grumblings of the Soviet state trusts and syndicates, which sometimes chafe under the restrictions which the monopoly imposes upon their operations. The chief criticism of the state foreign trade monopoly is that it involves a certain amount of red tape and delay. Its advantages, from the Soviet standpoint, are obvious. It permits large-scale maneuvring with import and export orders on foreign markets and makes it possible, whenever political or economic considerations render this advisable, for the Soviet Government to shift its custom rapidly from one country to another. While standing for the maintenance of the principle of a unified monopoly on their side, Soviet commercial circles manifest keen resentment whenever there are suggestions of a national or international combination of firms dealing with Russia with a view to keeping prices at an agreed level.
Unless there is an improbably rapid revival of agricultural export, it seems unlikely that Soviet foreign trade will reach pre-war dimensions for several years. At the same time there is a full realization of the desirability of increasing, almost at any cost, the export, which is Russia's chief and almost only means of paying for her imports, which in turn are an important if not decisive element in determining the speed and success of the industrialization of the country. The peculiar Russian currency situation makes it possible in some cases to export at a loss with profit, if such a paradoxical expression is permissible. The Russian ruble is not exchange-able at par value, or anywhere near it, outside the Soviet frontiers; and in fact exportation of rubles is forbidden by law, with a view to checking currency speculation. So forced exports, even at a loss in rubles, may be economically defensible, in so far as they realize foreign currency, which in turn strengthens the commercial link with the outside world.
So one may anticipate strenuous efforts to increase the exports of oil, which has conquered a secure place for itself in the markets of Europe and the Near East, of furs and timber, and of a number of dairy products and secondary articles. Russia's import requirements, especially in the field of machinery and certain kinds of raw material, are almost unlimited. How far these requirements may be satisfied depends first on the volume of exports and second on the credit facilities which Soviet buying organizations may obtain in foreign markets. So far as payment of commercial debts is concerned, the element of business risk is less in the case of Russia than in that of some other countries, because the state is a direct participant in every large import operation, and the Soviet regime, while repudiating responsibility for pre-revolutionary Russian obligations, has always been scrupulously accurate in fulfilling its own.
How large a commercial debt the Soviet Union could carry safely is a question which for some time will probably possess theoretical rather than practical importance. The answer probably lies in the degree to which a liberal credit policy on the part of foreign business firms would hasten the development of Russian export trade up to and beyond the pre-war level and facilitate the increased production of gold and other precious metals within Russia itself. As yet there is no indication that the Soviet Union is likely to receive more credit than its natural wealth and resources would enable it to repay.
After foreign trade, concessions constitute the most important commercial link between the Soviet Union and the outside world. The number of concessions in operation fluctuates from time to time with the withdrawal of some concessionaires and the conclusion of new agreements with others; but during the last year it has generally been in the neighborhood of a hundred, only a few of which could be said to possess large-scale economic significance. According to a list published by the Soviet Main Concessions Committee, as of June 1, 1928, Germany was first in the number of concessions held by its citizens, with thirty-one, America was second, with fourteen, and England third, with ten. Twenty-eight of the concession agreements were for technical aid, twenty-four affected manufacturing and mining enterprises, the remainder being distributed among such fields as forestry, agriculture, fishing, building, transport and communication, trade and finance.
Concession agreements are negotiated between foreign capitalists and the Soviet Main Concessions Committee, which works directly under the Council of People's Commissars. While each contract naturally has its own special provisions, there are certain features which are common to practically all concession agreements and which may be said to define the concessions policy of the Soviet Government.
Concession enterprises are not held as absolute property, but are leased for varying terms of years. Ten and fifteen years are customary terms for manufacturing undertakings with a quick turnover; on the other hand a mining concession which requires extensive preliminary work may be granted for as long a time as fifty years. At the expiration of the term of the lease the whole undertaking reverts to the Government, the concessionaire receiving agreed compensation for improvements which he may have installed during the last years of the functioning of the contract. The concessionaire is required to fulfill a definite production programme and to pay, to the Government a rental for his lease, in cash or in kind, as the contract may specify. He is also liable to an excess-profits tax when his enterprise is unusually profitable.
So long as he fulfills the terms of the contract and complies with the labor laws of the country the concessionaire may operate his enterprise as he sees fit. He is assured against confiscation or requisition of his property. His profits may be converted from rubles into foreign currency at the official rate of exchange. Disputes relating to the interpretation of a contract may be submitted to the arbitration of a board consisting of representatives of the Government and the concessionaire, with an impartial chairman. One of the large mining concession agreements provided for the inclusion in the arbitral board of a scientist on the staff of the State Mining Academy of a European country other than that of the concessionaire.
Concessions in the Soviet Union do not involve any abrogation of national sovereignty, and according to the precedent set when the grant of the provisional concession in the island of Sakhalin to the American Sinclair Consolidated Oil Company was set aside, the Soviet economic authorities may sue in the Soviet courts for the annulment of contracts when the concessionaire is accused of failing to carry out his side of the bargain. The guaranty for the activity of the foreign capitalist in Russia lies not in any extraterritorial arrangements but in the sense of self-interest of the Soviet Government, which is anxious to attract foreign capital, and would, therefore, be unlikely to alienate it by harsh or oppressive measures.
The largest concession now operating in the Soviet Union is held by the Lena Goldfields Company, which is incorporated in Great Britain but which draws some of its capital from American sources. This company has already invested about 18,000,000 rubles in a large mining enterprise which calls for the immediate development of the placer gold deposits of the Lena River, in Siberia, and for the exploration and ultimate exploitation of copper mines in the Ural Mountains and lead and zinc deposits in the Altai Province of Siberia. The Lena Goldfields Company is already producing about a quarter of the total Russian gold output. Part of its concession runs for thirty years and part for fifty years from the date of signature in 1925.
Some manufacturing concessions which have benefited by the very high Russian internal price level have proved very profitable for their holders. Among these may be mentioned a pen and pencil factory, operated by a Russian American, Mr. A. Hammer, and a factory for the production of ball bearings, which has been leased to the Swedish company "SKF." The regular airplane communication between Moscow and Konigsberg and Berlin is maintained by a mixed company, the Soviet state aviation lines and the German Luft-Hansa Company sharing the capital investment and the and iron resources in which Northern Sakhalin is rich. A comparatively small royalty is paid to the Soviet Government for every ton of coal and oil extracted from these Sakhalin concessions. This oil concession is of special importance to Japan because it provides a cheap and accessible source of fuel for the Japanese navy. Japanese firms have also acquired forestry and fishing concessions, together with the right to operate fish-canning factories in the Kamkatcha peninsula.
The so-called technical-aid concessions represent an increasingly popular form of cooperation between Soviet industries and foreign capital. Perhaps the most significant of these is the engagement of Colonel Hugh L. Cooper, the well-known American hydroelectric power plant construction engineer, as chief consultant for the building of the $100,000,000 combination dam and electrical station which is being erected on the River Dnieper. The American engineering firm of Stuart, James, and Cooke is working in an advisory capacity in the Donetz coal region. The Freyne Engineering Company of Chicago has undertaken a contract to project the construction of a new steel plant in the Telbess district of Siberia. These are only a few of the agreements by which the Soviet Government has endeavored to enlist the most modern foreign technical skill in its programme of industrial reconstruction. Such contracts almost invariably operate to the general advantage of the foreign trade of the country with which they are concluded, because as a rule engineers are apt to recommend for use the machines of their own country, with which they are most familiar.
A large concession for the exploitation of the manganese fields of Chiatouri, in the Caucasian Republic of Georgia, granted in 1925 to the W. A. Harriman Company of America, was liquidated in 1928 by mutual consent. The Harriman Company apparently signed this contract in the expectation that it would enjoy practically a monopoly of the world's manganese, with consequent high prices; the development of new manganese areas in Brazil and Sierra Leone destroyed the prospect of such a monopoly, and the concession proved unprofitable. The profits Japanese capital is gradually penetrating into the Russian Far East. The restitution to Soviet sovereignty of the north-ern half of the island of Sakhalin, occupied by the Japanese during the period of intervention, was quickly followed by the granting to Japanese firms of long-term concessions, of forty-five and fifty years, for the development of part of the coal Soviet Government has agreed to compensate the Harriman Company for its invested capital through an issue of bonds payable in ten years and bearing 7 per cent interest.(3)
If every foreign concession now operating on Soviet territory should be terminated overnight the effect on the economic life of the country would scarcely be more than a mild ripple. The following three figures illustrate as clearly as possible the negligible contribution of foreign concession enterprises to the volume of Soviet industrial production: 45,000,000 rubles of in-vested capital, an annual production to the value of 112,000,000 rubles (out of over thirteen billion rubles of total industrial production), 26,000 employed workers (as compared with more than 2,500,000 workers in the state industries).
In the latter part of 1928 the Soviet Government inaugurated a more active concessions policy. Instead of waiting for offers from foreign capitalists, the Main Concessions Committee published a long list of enterprises in almost every field of national economic life which may be leased on a commission basis. It was semiofficially intimated that the delays and red tape which hitherto have impeded the progress of many negotiations for concessions would, so far as possible, be eliminated. Mr. Ksandrov, head of the Concessions Committee, told the writer that one of the features of the new con-cessions policy was to offer no enterprise for lease which would not yield a reasonable profit to the foreign, capitalist. When asked to define the term "reasonable profit" Mr. Ksandrov declared that in Russia, in view of the newness of the field, the foreign investor might expect a somewhat higher return than the average rate of profit in other countries. The head of the Foreign Department of the Supreme Economic Council, Mr. S. I. Aralov, made the following statement in this connection: -
"We fully understand that under new conditions even the most well-established foreign capital will come to us, especially in the beginning, only on condition that there is a prospect of considerable profits. We reckon with this fact and we have no objections against it, provided that this profit will be drawn from values created by the new investments and the technical skill of the concessionaires." (See Izvestia, No. 234 of October 7, 1928. )
The estimated value of the objects listed in the number of possible concessions offered by the Soviet Government reaches the imposing figure of three and a half billion rubles. One should not, however, make the assumption that foreign industrial investment will quickly expand to that figure, or anything like it. In the first place, it takes two to make a bargain, and the offering of a concession by the Soviet Government does not mean that a capitalist will be found to take it up. Secondly, the list of projected concessions is of an optional character and is avowedly designed to give foreign capital a wide range of choice. If, for example, one or two very large agreements should be concluded in forestry, metallurgy, or any other field, the Soviet Government might decide to with-draw its other offers in this particular branch of economic life.
The list of suggested concessions indicates that the Soviet Government is most anxious to attract foreign capital into pioneer enterprises and also into the development of such industries as mining and metallurgy, where supply in Russia conspicuously fails to meet demand. Factories and mines which are functioning to full capacity under state control are not placed on the market; but to the concessionaire is given a wide range of undeveloped or inadequately developed under-takings from which to take his choice. The list of possible concessions includes oil fields in the Emba district, northeast of the Caspian Sea, in Central Asia, and in the North Caucasus; coal mines in the Donetz Basin; iron mines in the Krivoi Rog district of Ukraina; more than 30,000,000 acres of forest land; 400,000,000 rubles' worth of public utility works, either in the form of new construction or of reequipment, etc.
There are two respects in which Russia differs from most of the countries where foreign capital operates on a concession basis. It has a strongly organized labor movement and an elaborate set of labor laws, observance of which is obligatory for every concessionaire. Looking for political support first to the industrial working class, the Soviet Government could not be expected to permit workers in concession enterprises to accept worse conditions than those which prevail in state factories. Wages are not high in the Soviet Union, as compared with Western Europe and America; but the labor laws impose on the employer the obligation to pay insurance and other contributions which may come to about 15 per cent of the sum paid out in wages. The prospective concessionaire should bear this fact in mind in calculating his future working costs. A second point which also should be considered with a view to averting misunderstandings is that Russia possesses a centralized economic system under which every import operation is under state control, and supplies of raw materials, when there is a shortage, cannot easily be bought in the free market, but are largely rationed out to enterprises in proportion to their supposed utility, from the standpoint of the state. In view of this situation it behooves the concessionaire to insert into his contract some protective clauses which either guarantee him his essential supplies from state sources or permit him, in case of necessity, to import them from abroad.
Russia's need for foreign capital grows from year to year. With the increase of industrial production beyond the pre-war level the problem of new construction comes very much to the fore, and the need for foreign machinery and equipment, foreign raw material, and foreign technique is intensified. It is questionable whether the more ambitious Soviet projects of rapid industrial expansion within the near future can be realized fully unless economic ties with the outside world, in the shape of foreign trade, are broadened and strengthened.
Moreover, the Soviet Union, despite its comparative poverty, represents an inevitably expanding market, for countries with highly developed machine-building industries, and a potentially rich field for the daring prospector in mining and other forms of industrial pioneer development. Making every allowance for the difficulties which hitherto have hindered the restoration of normal economic relations between the Soviet Union and the capitalist world, and which to some extent still exist, it seems probable that Russia's significance in the world economic system will substantially increase during the next few years. Just how quickly the Soviet Union will assume the place in international commerce to which it is entitled by size, population, and natural wealth depends on several more or less incalculable factors: on Russian need for foreign capital, on the world's need for the Russian market, and on the willingness of both sides to make the compromises and adjustments which are necessary if there is to be cooperation between two radically different economic systems.
(1) Soviet Union Year Book, 1928, page 65.
(2) See Pasvolsky and H. G. Moulton, Russian Debts and Russian Reconstruction, p. 21.
(3) A $110,000,000 contract for the construction of cement plants, grain elevators, flour mills, and miscellaneous industrial enterprises throughout the Soviet Union was obtained on November 11, 1929, according to a Moscow dispatch to the Associated Press, by the MacDonald Engineering Company of Chicago in competition with foreign engineers. A staff of forty-five American engineers will direct and supervise the work. Several million dollars' worth of American machinery will be used.