With the 1918 British takeover and denationalization of the Baku oil fields, hopes in the European stock markets soared on the expectation that the weak Bolsheviks would never come back. Moving fast in hopes that it could establish a presence in the area where previously it had been weak, Standard Oil of New Jersey signed a contract in January 1919 with the independent government of Azerbaijan.34 It paid one-third of a million dollars for drilling sites. The Nobels toyed with the idea of selling their shares to the Anglo-Persian Oil Company but quickly grabbed yet another offer from Standard Oil. A tentative agreement was signed on April 12, 1920. Despite the fact that the Bolsheviks retook the area later that month and nationalized the region’s oil fields, Standard Oil remained convinced the Bolsheviks would not be able to hold on. Reflecting its confidence, it paid Nobel half a million dollars for some additional land. Ultimately Standard Oil paid Nobel several million dollars for its stock that had already become worthless. According to Robert Tolf, this Standard Oil purchase was later to constitute one-tenth of the entire American claim against the Bolsheviks for American property seized during the revolution.35 However, this speculative fever was not limited to Standard Oil. Shell Oil, along with other European investors, also bought what turned out to be worthless shares.
While the Soviets had gained physical control over the territory, they soon discovered that without the technical and managerial help of foreigners and others who had fled the area they could not really operate the oil fields. Output continued to fall until it reached a low in 1921 of 3.781 million tons, a level not seen since 1889. To add to their headaches, the Bolsheviks also found that the Western oil companies had united to boycott Russian oil exports, a pattern that was fairly common whenever oil fields were nationalized (these boycotts were usually only partially successful), at least until the late 1960s.36 Formed in mid-1922, the Front Uni represented an oil consortium of fifteen companies, all of which promised they would not buy Russian “illegally produced petroleum.” But because of Western greed and Russian connivance, the Front Uni’s embargo was broken even before it began to operate. Shell, itself a leader of the boycott, made a purchase of Russian oil in February 1923 and the French followed soon after.37
THE FOREIGNERS RETURN
The oil company embargo broke apart even earlier, particularly after it looked like Lenin had come to recognize that the nationalization of private property and the expulsion of foreign companies was a mistake. Acknowledging that they could not properly operate their newly nationalized oil fields, the Soviets began to solicit foreign help and the oil companies responded. Lenin personally approved such measures under the New Economic Policy (NEP), which authorized extending concessions for foreigners. One of the first to respond to the Soviet request for help was an American company, the Barnsdall Corporation.38 Signed in October 1921, the Barnsdall contract actually predates the embargo. This was an important breakthrough for the Soviet Union. Not only did Barnsdall help the USSR restore production but it also served to attract several other foreign companies, including British Petroleum, the Societa Minerere Italo Belge di Georgia, and eventually a Japanese group in Sakhalin.39 Once a breach had been made, the embargo failed.
The foreigners did what they were supposed to do. They restored the oil fields and started new ones. Barnsdall brought in advanced rotary drills and deep well pumps. Production rapidly recovered, and although there is some uncertainty as to how much Barnsdall made out of the venture, by 1924 when it left the Soviet Union, production was back up to 7 million tons. Production continued to increase, as did foreign technical help. Besides work at the wells, foreign help included American, German, and British assistance in the building of a second pipeline from Baku to Batumi, the French supply of a Schlumberger well-logging process, and American (Standard Oil of New York), German, and British support for refinery construction.40
Once output had recovered, the Soviets began systematically to revoke their concessions. By December 1930 most of them had been closed out. Standard Oil, however, was allowed to retain its concession at the kerosene refinery built in Batumi until at least 1935 and the Japanese stayed on Sakhalin until 1944.41 But ultimately all foreign concessions were terminated.
At first glance it might seem that expelling foreign private companies was merely a response to traditional communist doctrine. But from the perspective of the post-communist Putin-era presidency, expelling foreign companies once Russia’s own companies have begun to prosper has become standard Russian practice. Certainly today Shell Oil and Exxon-Mobil would agree that the harassment they recently faced in 2006 designed to make them walk away from their several billion dollar operations off the island of Sakhalin is more a form of nationalist than communist pressure.
Soviet petroleum policy then, just like Russian policy today, is not consistent. Almost at the time the Soviets were closing down Standard Oil’s concession, they issued a new series of contracts. The critic Anthony Sutton records how companies such as Badger, Universal Oil Products, and Lummus were called back to rebuild and reconstruct refineries.42 Having been supported by wartime Lend Lease contracts, some of their work continued until 1945. With this help, production and exports rose rapidly. Because of the damages inflicted by the Germans in World War II, production fell from its 31 million tons record in 1940 to 22 million tons in 1946. But with foreign help, as Table Intro.1 shows, by 1949 they had established a new production record
Soviet Control Inside but Capitalist Outside
As production increased, so did the amount of administrative control emanating from Moscow. In the early days, however, there was more control in principle than in practice. Theoretically control over industry was centered in the Supreme Council of the National Economy (VSNKH), which was created shortly after the revolution in 1917. VSNKH in turn derived its power from the Council of People’s Commissars (CPK).43 The CPK (the forerunner of the Council of Ministers) also created the Chief Oil Committee (Glavny Neftianoi Komitet) under the VSNKH on May 17, 1918. But only a few months later the Turks and then the British pushed the Bolsheviks out of the Baku region.
Meaningful control by the Russian authorities had to wait until they sent the British and Turks home in the spring of 1920. Then, recognizing the communication problem between Moscow and the Caucasus, the Chief Oil Committee authorized the creation of three local operating trusts. Azneft, which apparently was the most efficient and aggressive of the three, took over control of the Baku region. Grozneft took over Grozny, and Embaneft took over the fields in the Emba area.44 The three trusts in 1922 formed a commercial syndicate, Neftesyndikat (later succeeded by Soiuzneft) to handle exports and other foreign activities.45 Neftesyndikat proved to be a very aggressive monopoly. It joined together in a fifty-fifty partnership in 1923 with the English firm Sale & Company to market oil in the United Kingdom.46 Neftesyndikat reserved the right to buy out all Sale & Company shares in ten years. This first British company was followed by the second. This time the partnership was between Neftesyndikat and Royal Dutch Shell. The Soviets also entered an arrangement with Standard Oil of New York to market Russian oil in the Near and Far East. They made other deals with British-Mexican Petroleum, Asiatic Petroleum, and Bell Petrole.
Neftesyndikat kept expanding and set up the Russian Oil Products (ROP) company in London jointly with Arkos, a Soviet foreign trade organization set up by the Soviet Ministry of Foreign Trade. By 1925 Russian Oil Products had its own filling station network. The Soviets also set up a filling station network in Germany called Derop through its subsidiary Deutsche-Russische Naptha Company. Ultimately other wholesale and filling station subsidiaries were formed in Sweden, Spain, Portugal, and Persia. With such a network to supply, Soviet oil exports increased rapidly. Soviet oil exports surpassed the previous level in 1926–1927 even though the production level was not exceeded until two years later. Reclaiming and in some cases going beyond its pre-revolutionary penetration, Soviet oil had an important impact in world markets. According to W. Gurov, who at the t
ime was chairman of Soiuznefteeksport, at their peak from 1929 to 1933, Soviet oil exports amounted to 24.8 million tons over the five-year period. This accounted for 17 percent of all the petroleum imported by West Europeans.47 Soviet statistics also show sales to the United States of as much as 50,000 tons in the peak year 1930.48
The most important purchaser by physical volume and market share was Italy. According to Gurov’s calculations, Soviet oil accounted for 48 percent of Italy’s total oil imports during the ten-year period from 1925 to 1935. In addition to their economic significance, these exports took on political importance after Mussolini became prime minister in 1922 and dictator in 1925. In other words, politics, at least in this instance, was no barrier to export. Only in 1938 and 1940 did the Soviet Union refuse to export petroleum to Mussolini’s fascist government.49 The Soviets were only slightly more discreet in selling petroleum to Hitler’s Germany. Sales remained at the relatively constant level of 400,000–500,000 tons until 1936.50 Exports to Germany then fell to about 350,000 tons in 1936 and to 275,000 tons in 1937. In 1938 and 1939 they dropped to almost nothing but shot back up to 657,000 tons in 1940 after the signing of the Nazi-Soviet Pact. In fact, in 1940 Soviet sales to Nazi Germany accounted for 75 percent of all Soviet petroleum exports that year.
PETROLEUM AND THE SOVIET BALANCE OF TRADE
Given their magnitude, Soviet petroleum exports were important not only for the purchaser but also for the Soviet balance of trade. Whereas before the revolution petroleum exports at their peak accounted for 7 percent of Russia’s export earnings, in 1932 Soviet petroleum earnings generated 18 percent of total Soviet export receipts. That was a pre–World War II record. Exports in that record year amounted to 6.1 million tons and accounted for 29 percent of total production. Soviet net exports of petroleum far exceeded American net exports in 1932–1933. It should be pointed out that while the 18 percent share of oil exports in overall Soviet export earnings was due in part to the increase in the physical volume of petroleum exports, it was also due to the sharp fall in Soviet grain exports. Forty years earlier, when Russia was the bread basket of Europe, grain exports accounted for 70 percent of national export earnings. However, by the twentieth century, Russia’s role as a grain exporter had diminished so much that grain generated only 53 percent of the country’s export earnings. Then with the advent of communism and collectivization in particular, grain never again accounted for as much as 22 percent of the export volume. On those rare occasions when the Soviets were able to export grain, these exports seldom amounted to more than 10 percent of the country’s overall total export revenues.
Important as petroleum was, however, it was not as crucial as some observers thought. Sutton, for example, mistakenly asserts that petroleum exports “became a significant factor in Soviet economic recovery, generating about 20 percent of all exports by value; the largest single source of foreign exchange.”51 In fact, in 1928 petroleum accounted for only about 14 percent of all earnings.52 Moreover, the relative earnings of timber exports exceeded those of petroleum throughout the 1920s and 1930s, often by a substantial margin. For that matter there were years such as 1922–1923, 1926–1927, 1930, 1931, 1937, 1938, and 1940 when grain earned more than petroleum despite poor harvests and widespread famine.
The fall-off in petroleum exports after 1932 was due to the depression that afflicted all exports. From a peak of 3.2 billion rubles in 1930, Soviet export revenues fell to 2.8 billion rubles in 1931 and kept falling yearly (except for 1937) until they reached a mere 462 million rubles in 1939. (All trade figures cited here are stated in terms of constant 1950 ruble prices.) Reversing the trend, export revenue rose briefly in 1940, but this was a by-product of the Nazi-Soviet Pact. Because of the increase in the sale of petroleum to Germany, exports to Germany amounted to 50 percent of all Soviet exports (including petroleum) that year. In part, some of the reason for the drop in exports was that the Soviet Union began to need more of its raw materials for its own domestic production needs. More important, Soviet efforts were undercut by the collapsing economies of their customers. Depression may be a capitalist disease and it may have had no ostensible effect on the internal workings of the Soviet economy, but there is no denying that a depression of this length and magnitude was bound to have a devastating effect on the world demand for raw materials. This in turn affected Soviet petroleum export earnings. The Soviets quickly realized that they were exporting more but earning less. Thus, while 4.7 million tons of petroleum exports earned them 548 million rubles in 1930, two years later in 1932 when they increased export volume to 6.1 million tons, they generated only 375 million rubles in revenue.
It would take more than twenty years before the volume of Soviet petroleum exports would exceed the 1932 level. While production continued to expand, at least until the chaos of World War II, Soviet authorities began to direct more and more of the country’s production inward. This was partly because of the realization that exports could be sold only at a low price and partly because the growing Soviet economy came to need more and more petroleum at home. Soviet planners also had to deal with a drop in yield at the Baku oil fields. That had an adverse effect on the state’s efforts to meet the yearly production plan targets. The annual plan was a system introduced by Joseph Stalin in 1927–1928 to stimulate economic growth. When the USSR nationalized all the country’s factories and means of production, it also did away with the private profit and loss system. But the Soviets needed an incentive system, so in place of profit and loss the state set out yearly and five-year plans specified in physical terms such as meters, tons, and product units. Managers and workers were rewarded with bonuses when the plan targets were met and penalized when they were not, and it was a disappointment when oil production fell temporarily in 1932. Fortunately it rose again sharply in 1934 but thereafter increased only modestly. As a result, petroleum output lagged far behind the targets set out for the Second Five-Year Plan, which ended in 1938. Production totaled 30 million tons, significantly behind the 46.8 million goal.53 With the technology then at their disposal, the Soviets could not increase the production rate at their traditional fields in Baku and at Grozny.
Yet just as production seemed to be tapering off in the Caucasus, important new fields were discovered in the region between the Volga and the Urals. Eventually called the “Second Baku,” the first discoveries in this area were made as early as 1929.54 As in earlier years, however, a shortage of proper drilling equipment delayed the region’s expansion. Only after the Second World War was petroleum in the newly discovered fields produced in large quantities, and the region, particularly its giant field at Romashkino, then came to outproduce Baku.55
CONCLUSION
There was nothing unique about what happened to the Soviet petroleum industry prior to the Second World War. Many of the trends and practices had already been established in the pre-revolutionary years and, as we shall see, would be repeated after the Second World War ended. For that reason it is worth summarizing what happened so that in the pages ahead we can more easily note the similarities when they recur.
To sum up, foreign help was very important to the Russian petroleum industry prior to the revolution as well as before the Second World War. That includes technological assistance at the drilling, extracting, and refining stages. Nor did the Soviets refrain from seeking foreign help to facilitate the foreign marketing of their petroleum. Often that meant selling to companies like Standard Oil or Shell so they could do the distributing. In other instances, it meant joining together with a Western company to form a joint Russian-local venture not only to handle wholesale distribution overseas but also on occasion to operate retail filling stations abroad as well. The concept of trading with multinational and notorious capitalist enterprises or even creating their own multinational network evidently posed no ideological hurdle for the Soviets. Nor, for that matter, was politics much of a barrier. The Soviets abandoned their previous party line and agreed to sell their petroleum to Mussolini’s fascists
and Hitler’s Nazis, even when decency, if not self-interest, should have precluded such action. The politics of ideology was seldom allowed to stand in the way of the principle of profit.
One justification for seeking foreign help was the Soviets’ periodic fear that their reserves might run out and that they were utilizing their output ineffectively. They expressed the same fears prior to the revolution, and—as we shall see—this would recur in later eras. Increased production was essential, not only because of the need to supply domestic demand but also because of the role petroleum played as an earner of foreign currency. At its peak, in 1932, petroleum accounted for 18 percent of foreign earnings. That depression year also saw the Soviet Union export more petroleum than did the United States and probably more than anyone else in the world. But to export that much, the Soviet Union had to divert 29 percent of its crude oil production from domestic use within Russia, a level not reached again until 1976.
Petroleum is indeed important as an exportable commodity, but its importance depends not only on Russia’s ability to pump oil but on prices in the world market. When crude oil prices fall, the impact on the whole Russian economy can be serious as it was in the 1930s and would be in the 1980s and 1990s. Conversely, when energy prices are high, Russia finds itself with unprecedented power. Prior to 1973, while it needed the earnings from petroleum exports to pay for its imports, the world still regarded the Soviet Union as a spoiler, a price discounter, willing if not eager to cut petroleum prices and unsettle the capitalist oil companies. After 1973, the Yom Kippur War, and the resulting Arab oil embargo, the Soviets switched tactics and, more often than not, they sought to sustain prices at a level as high as possible to enhance the country’s earning power. Profits, not politics, became the priority.
Petrostate:Putin, Power, and the New Russia Page 5
