Oil of Russia

On the Wave of Soviet Nationalization

The October Revolution and the ensuing political and military battles ushered in a series of drastic changes for all aspects of Russian cultural, political, and economic life.

On October 25, 1917, the Second All-Russian Congress of Soviets opened at 10:45 p.m. at the Smolny Palace in Petrograd. Delegates came to this congress from 400 Soviets [councils] of workers’ and soldiers’ deputies from all over Russia, and also from isolated peasants’ Soviets. Of the 649 delegates that were registered at the beginning of the Congress, 390 were Bolsheviks, 160 were Left Social Revolutionaries and 99 were Right Social Revolutionaries. The agenda of the Congress included the following key items: the organization of power, war and peace, and the Constituent Assembly. While the delegates were working, they received a report that the members of the Provisional Government had been arrested at 2:10 a.m. in the Winter Palace by resolution of the Military Revolutionary Committee. After that, Anatoly Lunacharsky (1875–1933) read an appeal on behalf of the Bolshevik faction from the Military Revolutionary Committee of the Petrograd Soviet of Workers’ and Soldiers’ Deputies “To the Citizens of Russia,” which stated: “The Provisional Government has been overthrown. State power has passed into the hands of the Petrograd Soviet of Workers’ and Soldiers’ Deputies of the Military Revolutionary Committee, which stands at the head of the Petrograd proletariat and garrison.” The approval of this document by the delegates of the All-Russian Congress of Soviets thus legalized the Bolshevik overthrow of the Provisional Government, the liquidation of the former Russian Republic, and the establishment of a dictatorship of the proletariat.

On October 26, 1917, at the following plenary session of the Congress, the Bolshevik leader Vladimir Lenin (Ulyanov) (1870–1924) gave speeches about peace and land. After his speeches, the delegates approved the “Decree on Peace,” which proposed that all countries and peoples “immediately begin negotiations for a just democratic peace,” a peace without annexations or reparations, and conclude an armistice until the negotiations were finished.

A second act, the “Decree on Land,” abolished landed estates in Russia, and did so “immediately, without any compensation.” Land, mineral resources, forests, and waters were declared the property of the entire people. Landed estates, as well as monastery, church, and appanage lands, with all livestock, implements, and buildings, passed without compensation into the hands of local land committees and Soviets of peasant deputies. A component of the decree was the peasant mandate on land, which had already been written by the Socialist Revolutionaries before the October Revolution on the basis of 242 local peasant mandates. These mandates equalized the use of land, which was divided based on labor or usage. The “Decree on Land” called for peasants to receive 412.5 million acres of land from Soviet rule at no cost, and to be excused from repaying 3 billion rubles of debt to banks and landowners, and also from paying an annual land rent of 700 million rubles in gold.

The Congress of Soviets made a series of other decisions as well, including abolishing capital punishment at the war front; releasing imprisoned soldiers and officers arrested for revolutionary activity; and arresting the chairman of the Provisional Government, Aleksandr Kerensky (1881–1970).

The Second Congress of Soviets approved the Council of People’s Commissars (CPC), headed by Vladimir Lenin, as the highest executive and administrative body of state power. The Congress of Soviets resolution, in particular, said: “A temporary government of workers and peasants shall be formed, which will be called the Council of People’s Commissars, to administer the country until the Constituent Assembly is convened.”

At the time it was created, the CPC included 13 commissions that managed separate branches of state life: internal (domestic) affairs, agriculture, labor, military and naval affairs, railroads, trade and industry, foreign affairs, foodstuffs, public education, finance, justice, post and telegraph, and ethnic affairs. The chairmen of these committees—people’s commissars appointed by the Congress—became members of the first Soviet government.

The Congress also elected an All-Russian Central Executive Committee [VTsIK], headed by Yakov Sverdlov (1885–1919), and comprising 101 members (62 Bolsheviks, 29 Left Socialist Revolutionaries, six Social Democrat Internationalists, and four representatives of other parties).

On December 5, 1917, the CPC adopted a decree on the Supreme Council for the National Economy [VSNKh], which specified that, “The task of the VSNKh is to organize the national economy and finances. With this goal, the VSNKh shall develop general standards and plans for regulating the country’s economic life, and for coordinating and unifying the activity of central and local regulatory institutions (conferences on fuel, metal, transportation, the central foodstuffs committee, etc.).” The VSNKh included representatives of all people’s commissariats, and also the All-Russian Council of Workers’ Control. All of the most important bills on national economic questions were introduced to the Council of People’s Commissars only after they had been approved in the VSNKh.

For the next three months following the October Revolution of 1917, general democratic and republican moods continued to persist in Russian society. The clearest expression of these sentiments was the idea of convening a Constituent Assembly to determine Russia’s future system of government. Before the decisions of the Constituent Assembly, all executive bodies that came into being and functioned on the territory of the former Russian Empire were unavoidably qualified as temporary, with the exception of the governments of Finland and the Kingdom of Poland, which had become part of the Empire with special rights.

Although the convening of the Russian Constituent Assembly contradicted the fundamental interests of the Bolsheviks, they were nevertheless compelled by prevailing mood of the public to confirm November 12 (25), 1917 as the date of Assembly elections.

Despite struggling with the harsh conditions of war, the country held elections for delegates to the Constituent Assembly. Of 90 million eligible voters in 79 districts, around 45 million persons voted in 54 districts. To the enormous disappointment of the Bolsheviks, they received less than a quarter of the seats in the Constituent Assembly. A total of 715 deputies were elected, of which 370 were Right Socialist-Revolutionaries, 175 were Bolsheviks, 40 were Left Socialist-Revolutionaries, 17 were Constitutional Democrats, 15 were Mensheviks, and 86 were deputies of various national organizations and movements. A decree of the Council of People’s Commissars of December 20, 1917 (January 2, 1918) set a new date for convening the Russian Constituent Assembly: January 5 (18), 1918.

However, the Bolsheviks were not prepared to assume the minority role in the new Russian government, no matter what the majority of voters wanted. On December 12 (25), 1917, the Central Committee of the Russian Socialist Democratic Labor Party (of Bolsheviks) adopted the theses of Vladimir Lenin: “The Constituent Assembly, convened on the basis of the rolls of parties that existed before the proletarian-peasant revolution, clashes with the will and interests of the workers, and the interests of the revolution stand higher than the formal rights of the Constituent Assembly. The only chance for a painless resolution of the crisis... is an unequivocal declaration of the Constituent Assembly to recognize Soviet power, the Soviet revolution, and its policies in the question of peace, land, and workers’ control.... Unless these conditions are met, the crisis connected with the Constituent Assembly can only be resolved by way of revolution, no matter what slogans and institutions counterrevolution might use to cover itself.” Explaining this decision at a rally, the prominent Bolshevik functionary Yakov Sverdlov (1885–1919) declared: “For us there is no doubt that the highest power is that of the working people personified by its Soviets, and that there can be no higher power in Russia.”

The Bolshevik leadership’s policy caused a vigorous protest throughout Russian society, and the democratic community decided to hold a mass demonstration in Petrograd on the opening day of the Russian Constituent Assembly in support of freedom and democracy in the country.

The Bolsheviks decided to take harsh measures in response. On January 5 (18), 1918, the newspaper Pravda [“Truth”] published a resolution signed by Moisey Uritsky (1873–1918), a member of the Presidium of the All-Russian Extraordinary Commission for Combating Counterrevolution and Sabotage, prohibiting any rallies or demonstrations in regions adjacent to the Tauride Palace. The resolution went on to state that any such demonstrations would be suppressed by military force.

Despite the threats, the demonstration in support of the Constituent Assembly did take place in Petrograd. According to several estimates, the lead column numbered around 60,000 persons. It was composed of blue-collar and white-collar workers, the intelligentsia, and students. They moved toward the Tauride Palace and were fired upon by machine guns and rifles of Bolshevik regiments of Latvian and Lithuanian Red Army soldiers. According to official data published on January 6 (19), 1918 in the newspaper Izvestiya VTsIK [“News of the All-Russian Central Executive Committee”], 21 persons were killed and several hundred were wounded. The dead included prominent members of the Socialist-Revolutionary Party. Even the proletarian writer Maxim Gorky was unable to hold back his indignation about the events: “The People’s Commissars fired upon the workers of Petrograd without warning and ambushed them, firing through openings in fences in a cowardly way, like real murderers.”¹

On January 5 (18), 1918, at 4 p.m., the first and only meeting of the Russian Constituent Assembly opened in Petrograd; it was attended by 410 of the 715 deputies who had been elected. At the very beginning of the meeting, the Bolshevik representative Yakov Sverdlov unceremoniously interrupted the speech of Semën Shvetsov, the oldest deputy of the convention, and proposed himself as chairman of the meeting of the Constituent Assembly. In the voting, Viktor Chernov (1872–1952), one of the leaders of the Socialist-Revolutionary Party, was elected as chairman by a majority of votes, while Socialist-Revolutionary Party member Mikhail Vishnyak was elected secretary of the meeting. Fierce debates erupted concerning acceptance of the agenda, on which the Bolsheviks were trying to place items that were most acceptable to them.

In his speech, the well-known political and public figure Irakly Tsereteli (1881–1959) made the following declaration: “The Social Democratic bloc calls on the entire working class of Russia to reject the unrealizable and disastrous attempts to thrust the dictatorship of a minority on the entire revolutionary democracy, to stand up in defense of the sovereignty of the Russian Constituent Assembly, and to demand that all agencies of power that arose because of the Civil War recognize the supreme power of the Constituent Assembly.” In voting, this proposal of the Socialist Revolutionaries received a majority of 237 votes.

After a short break in the meeting, it was decided, on the basis of an extraordinary petition of the Social Democrat Matvey Skobelev (1885— 1938), to elect a nonpartisan committee to investigate the circumstances of the shooting that occurred during the worker demonstrations on the opening day of the Constituent Assembly and to establish who was responsible for these shootings. After this, the Bolshevik Fëdor Raskolnikov (Ilin) (1892–1939) read a statement from his faction: “A large majority of Russia’s workers demanded that the Constituent Assembly recognize the achievements of the great revolution: the Soviet decrees on land, peace, workers’ control, and above all to recognize the power of the Soviets of workers’, soldiers’, and peasants’ deputies. The All-Russian Central Executive Committee proposed to the Constituent Assembly that it recognize this will as binding on it. A majority of the Constituent Assembly rejected this proposal... we declare that we are leaving this Constituent Assembly to allow Soviet power to make the final decision about its position vis-à-vis the counterrevolutionary part of the Constituent Assembly.” After finishing his statement, the Bolshevik functionary, along with the members of his faction, left the hall of the Tauride Palace. The discussion continued, but around 3 a.m. on January 6 (19), the Left Socialist-Revolutionary bloc also decided to leave the meeting. Their leader Vladimir Karelin (1891–1938) announced: “The Constituent Assembly has entered on the path of struggle with Soviet power to turn everything to the advantage of the class of exploiters while the two camps struggle. We are leaving this assembly.”

Toward 4 a.m. on January 6 (19), 1918, with 215 deputies remaining in the hall, the anarchist sailor Anatoly Zheleznyakov (1895–1919) made his infamous appeal to Viktor Chernov, chairman of the Constituent Assembly: “I have been instructed to let you know that everyone present should leave the meeting hall, because the guard is tired.” After this ultimatum, the Constituent Assembly quickly accepted the part of the law on land that was read, as well as a peace resolution, an appeal to allies, and a resolution proclaiming the creation of the Russian Democratic Federal Republic. A recess was announced, and the meeting was adjourned at 4:40 a.m. on January 6 (19). The members of the Constituent Assembly who gathered at 5 p.m. later that same day found all doors of the Tauride Palace tightly locked. That night, the All-Russian Central Executive Committee, which was under the control of the Bolsheviks, adopted a decree dissolving the Constituent Assembly.

Subsequently, CPC Chairman Vladimir Lenin, in a discussion with his closest comrade-in-arms, Leon Trotsky (1879–1940), characterized the position of the Bolshevik leadership rather precisely: “The dissolution of the Constituent Assembly by Soviet power is a complete and open liquidation of formal democracy in the name of the revolutionary dictatorship.”

On January 18 (31), 1918, the Third All-Russian Congress of Soviets of Workers’, Soldiers’, and Peasants’ Deputies in Petrograd adopted a resolution, “On the Federal Institutions of the Russian Republic,” giving the country a new state name: the Russian Socialist Federative Soviet Republic. The resolution said that the state was “founded on the basis of a voluntary union of the peoples of Russia, as a Federation of the Soviet Republics of these peoples.” Moreover, the congress approved the dissolution of the Constituent Assembly and adopted a resolution updating the language of all Soviet laws by removing references to their nature as provisional, “pending the convening of a Constituent Assembly.”

Nevertheless, according to the logic of the political struggle, the flag of the democratic national Constituent Assembly was convenient to use against Soviet power, and this was in fact done at the very first opportunity. A catalyst for the explosion of “democratic counterrevolution” of 1918 and the beginning of the Russian Civil War that lasted many years was provided by the mutiny of the Czechoslovak Volunteer Corps on May 26, 1918.

Having taken power into their own hands, the Bolsheviks began, from the very start, to place economic policy under state control. As early as April 1917, Lenin had delineated the party’s position in relation to highly developed industries: “... our proposal must be immediately practical: these mature syndicates must be made the property of the state. If the Soviets want to take power, then it is only for such purposes. There is no reason for them to take anything more.”²

Lenin reaffirmed this platform position on the eve of the October Revolution of 1917. In his pamphlet, The Impending Catastrophe and How to Combat It [Grozyashchaya katastrofa i kak s ney borotsya], which was published in September 1917, he wrote: “Nationalization of the oil industry is possible immediately, and is obligatory for the revolutionary democratic state, especially when it is suffering a great crisis, when it is necessary at all costs to spare the people’s labor and increase the production of fuel.”³

The Bolsheviks considered the establishment of workers’ control at enterprises to be an important step along the path of “socialization” of Russia’s industry, and the law on workers’ control was adopted on November 14, 1917. Lev Kritsman, a well-known party activist of those years, wrote: “The idea of workers’ control is first to learn from your class enemy how to run all parts of the enterprise, the technical, administrative, and commercial, to check all his actions and, consequently, to observe all his habits.”

The idea of creating “peoples’ oil fields” soon followed and was discussed at the CPC meeting of January 27, 1918. It was during that same meeting of the Soviet government that the question of nationalizing the Russian oil industry was first considered. The CPC decision instructed the VSNKh to develop, without delay, a plan for nationalizing the industry. The VSNKh responded by creating a special committee on the nationalization of the Russian oil industry, which immediately began working on ideas.

On February 15, 1918, the CPC considered a draft decree on nationalization, which was accepted as a basis, and a committee was created to definitively resolve this issue. On February 21, the draft was sent to the People’s Commissariat for Finance for an opinion, and on March 1, the CPC created a new committee, made up of representatives of the VSNKh and of the people’s commissariats of labor and finance, to complete a draft on methods of carrying out the nationalization of the oil industry.

Given the dire economic and political circumstances in the country, the Bolshevik tactic proved successful; by the spring of 1918, real preconditions had arisen for establishing Soviet power in many regions of the country. Practical production questions appeared on the agenda for resolution, with regard to which the government undertook a series of steps to organize oil industry management.

A VSNKh resolution dated March 2, 1918 appointed a chief commissar for the oil industry, who was given broad authority, in particular, the right to sequester individual enterprises. The reliable party functionary and former bookkeeper Isidor Gukovsky was confirmed in this post. One of his first actions was to prepare a government resolution, dated March 25, 1918, establishing price controls on petroleum products.

However, the small staff of the chief commissar of the oil industry and the lack of a clear definition of his authority in relations with other departments and people’s commissariats proved to be insurmountable obstacles to carrying out such a large-scale operation as nationalization of the oil industry.

Therefore, two-and-a-half months later, on May 17, 1918, the CPC of the RSFSR issued a decree abolishing the post of chief commissar of the oil industry and establishing, in its place, a special body: the Main Petroleum Committee [GNK], which had broad authority and was called upon to control and regulate “the entire private oil industry and trade in petroleum products.” The Main Petroleum Committee was composed of the Bolsheviks N. Solovyëv (chairman), G. Pylayev, I. Gukovsky, A. Shibinsky, K. Makhrovsky, Sahak Ter-Gabrielyan, and the well-known geologist Ivan Gubkin, who was later appointed the Committee’s deputy chairman.

The Main Petroleum Committee was authorized to administer the oil business on an all-Russian scale, and was charged with developing and implementing measures related to the organization of the state oil economy. The decree emphasized that: “The Main Petroleum Committee shall be the sole body managing all questions connected with production, refining, distribution, and consumption of crude oil and petroleum products. The Main Petroleum Committee shall control and regulate the entire oil industry and trade in petroleum products; develop and practically implement measures related to the transition of the private oil industry to state ownership, and manage the state petroleum economy.”

The establishment of a special organizational body to administer the oil industry and the government’s efforts to gain control over trade in petroleum products were decisive steps on the road to the planned government takeover of the oil industry.

A decree dated June 20, 1918 nationalized the Russian oil industry and began a new chapter in the industry’s history.

The basic tenets of the decree were laid out as follows:

“1. The following are declared to be state property: oil producing, refining, and trading enterprises, ancillary drilling and transportation equipment (cisterns, oil pipelines, oil storage facilities, docks, pier structures, etc.), with all real and personal property, wherever located and however composed.

“2. Minor enterprises of the type named in paragraph 1 shall be exempt from this decree. The justifications and procedure for a designated exemption shall be defined by special rules to be elaborated by the Main Petroleum Committee.

“3. Trade in oil and its products is declared a state monopoly.

“4. Administration of nationalized enterprises as a whole, as well as determination of the procedure for carrying out nationalization, is assigned to the Main Petroleum Committee [Glavkomneft] under the Fuel Department of the Supreme Council for the National Economy.

“5. The procedure for forming local bodies to administer nationalized enterprises and the scope of their authority shall be defined by special instructions of the Main Petroleum Committee, upon approval by the Presidium of the Supreme Council for the National Economy.

“6. Pending full assumption of control over enterprises being nationalized by the Main Petroleum Committee, the former boards of the named enterprises must continue their operation to the full extent, taking all measures to protect the national property and assure that operations continue without interruption.

“7. The former board of each enterprise shall compile a report for the whole year of 1917 and for the first half of 1918, as well as a balance sheet for the enterprise as of June 20, which the new board will use to verify and take actual control of the enterprise.

“8. The Main Petroleum Committee shall have the right, without awaiting the presentation of balance sheets and before full transfer of the nationalized enterprises to administration by the agencies of Soviet power, to send its commissars to all boards of oil enterprises, and also to all centers of oil production, refining, transportation, and trade. The Main Petroleum Committee may, moreover, assign its authority to its commissars.

“9. All rights and obligations of the Soviets of congresses of oil workers are transferred to the corresponding local agencies for administration of the nationalized oil industry.

“10. All white-collar workers of enterprises and institutions being transferred to the control of the Main Petroleum Committee are directed to remain in their jobs, without interrupting their assigned functions.

“11. Until the Main Petroleum Committee issues the instructions, directives, and rules envisioned in the decree, local councils of the national economy (or other local agencies of Soviet power where these local councils do not exist) shall have the right to issue them for their region.

“12. This decree shall enter into force immediately upon publication.”

It should be noted that implementation of this decree in practice led to the rather hasty and ill-considered merger of private oil industry assets within the territory of Soviet Russia into a unified whole on the basis of existing major monopolies. As a result, the administrative structure turned out to be extremely irregular and chaotic. Moreover, the newly introduced equalizing tariff in the industry created little incentive for blue-collar and white-collar workers to work efficiently.

At the time of nationalization, there were 787 petroleum products storage facilities in Russia with a total capacity of 4.06 million tons. Storage facilities in various provinces contained 6.4 million barrels (0.96 million tons) of crude oil and petroleum products. Pëtr Imber, the authorized representative of Glavkomneft, sent a telegram to Moscow on June 20, 1918 that said: “In Tsaritsyn, private warehouses now contain no less than 12 million poods [1.4 million barrels] of various petroleum products, not to mention those in Rybinsk and Saratov.” The inland fleet consisted of 222 iron and 432 wooden vessels, capable of carrying 2.26 million tons. The railroad tanker fleet numbered more than 10,000 cars.

The all-Russian congress of white-collar and blue-collar workers of the Nobel Brothers Petroleum Production Partnership, held in June 1918 in Saratov, initially made a desperate attempt to hold off the hasty collectivization of the industry, and made a special appeal to the VSNKh. However, after receiving news of the publication of the decree nationalizing the oil industry, the delegates to the congress adopted a resolution stating that “for the benefit of the business and the state, the former Nobel Brothers Petroleum Production Partnership, as experienced people, temporarily offer their services for preliminary development of instructions to implement nationalization and further management of the business.”

It should be noted that the Bolshevik leadership did have a sense of pragmatism, which is evident in the following order issued by the Main Petroleum Committee: “The entire local administration of the former oil companies shall continue to perform its duties and bear full responsibility to the Main Petroleum Committee for safeguarding all the property of these companies and for correct management of the business, submitting to the control of the local agencies of the Main Petroleum Committee.... White-collar workers in positions of responsibility at these companies can be dismissed only with the prior permission of the Main Petroleum Committee.”

Meanwhile, the VSNKh decided that, starting July 1, 1918, price controls would be imposed on kerosene, and effective November 15 of the same year, controls would be imposed on all other petroleum products. Soon the country was showing the first outlines of an impending “fuel famine.”

On the whole, the nationalization of foreign and private property was the result of a general tendency of the system of state socialist administration that was taking shape in Soviet Russia. It was not by chance that this nationalization, a phenomenon whose economic and political consequences were far from uniform, was initiated by Lenin and his comrades-in-arms. They felt that the activity of private capital did not promote the development of the country’s economy and did not serve the interests of the broad masses. Therefore, they considered nationalization a measure intended to protect and strengthen Soviet power.

However, nationalization of the oil industry could not help but create serious problems for the fledgling Soviet state, especially in the realm of foreign policy, which was already on shaky ground. For example, on July 8, 1918, a Swedish envoy chaired a meeting of the ambassadors of the neutral governments of the Netherlands, Spain, Norway, Denmark, and Switzerland to discuss the problem of Russian oil industry nationalization and the property claims that arose as a result of it. The meeting issued a coordinated protest to the People’s Commissariat for Foreign Affairs [NKID] and the CPC in connection with the adoption of the nationalization decree, which had caused “great losses” to the foreign owners of the oil industry. The declaration pointed out that “the governments represented at the meeting reserve the right to make subsequent demands for restitution of the loss.”

In the “Fuel Famine” Wave

The beginning of the post-revolutionary period in Soviet Russia was characterized by extremely negative events in industry, transportation, and agriculture. After three-and-a-half years of war and the first months of the revolution, the country’s economy was in ruins. The Bolsheviks lost control of the richest regions: Ukraine, the Baltic republics, the Volga region, and Western Siberia. Furthermore, the economic ties between cities and villages had long ago been severed, while strikes and lockouts of business owners finished the destruction of the economy that the war had started. Meanwhile, the process of nationalization in various industries was at times disorderly, and often assumed the form of repressive measures against business owners who attempted to resist workers’ self-government. Even those enterprises that were nationalized could not be counted on to produce the necessary economic results. According to the data of the industrial census of August 31, 1918, Soviet Russia had a total of 9,750 nationalized industrial enterprises, of which 3,690, or 37.8%, were not operating.

Under these conditions, the Bolshevik government began to carry out harsh political and socioeconomic measures of an ambiguous character, which were given the name “war communism.” The basic motivations for this policy were both the extremely difficult economic situation in the country and the dogmatic Marxist outlook of the Bolsheviks. Ignoring the immaturity of the objective preconditions for a socialist revolution in Russia, a significant part of the Bolshevik leadership after the October Revolution insisted on immediate implementation of socialist transformations in all spheres of society, including, first and foremost, the economy. They stubbornly refused any compromises whatsoever with the world or Russian bourgeoisie, and insisted on the rapid expropriation of all forms of private property, curtailment of commodity-money relations, abolition of money, and introduction of the principles of equalizing distribution and socialist procedures literally “starting today.” Starting from the premise that every revolution is violence, they made wide use of revolutionary coercion. A popular Soviet poster of 1918 proclaimed: “We will use an iron hand to drive humanity to happiness!”

To a significant extent, the policy of war communism was also predicated on the hopes of Russian communists to accelerate world revolution. The Bolshevik leaders considered the October Revolution to be the beginning of the world revolution, which they were expecting to happen any day. This led them to the firm conviction that compromises with bourgeois counterrevolution were unacceptable, that the country had to be turned into a single fighting camp, and that all aspects of national life had to be militarized.

War communism was based on emergency measures to provide the cities and army with foodstuffs, to curtail commodity-money relations, to nationalize all industry, including small business, to manage food apportionment, and the provision of rationed foodstuffs and industrial products to the population, to establish a universal duty to work, and the maximum centralization of the administration of the national economy and the country as a whole. A class-equalizing principle of distribution was established and starting in June 1918, a ration card supply system was introduced.

A characteristic feature of war communism was extreme centralization of national economic administration. At first, the administrative system was built on the principles of collectivism and self-government, but as time passed the unsoundness of these principles became obvious. The factory and plant committees of workers had neither the competence nor the experience to administer production efficiently.

The Bolshevik leaders understood that they had previously exaggerated the degree of revolutionary consciousness of the working class, which was not ready to administer enterprises. Therefore, a fundamental decision was made to establish a rigid vertical line of state control over all economic life that emanated from the VSNKh and its main committees and centers, with each being a type of state monopoly in its corresponding branch of production. By the summer of 1918, local (province, district) regional economic councils had been created in all provinces that had submitted to the Soviet government and were subordinated to the VSNKh.

Overall, the economic system that had taken shape did not stimulate productive labor, and productivity steadily fell. Per-worker productivity in 1920 was less than a third of the prewar level. In the fall of 1919, the pay of a highly qualified worker exceeded that of an unskilled laborer by only 9%. Material incentives for labor disappeared, and along with them any desire to work. At many enterprises, absenteeism accounted for up to 50% of working days. Forced labor soon became a necessary measure in the absence of economic stimuli, and because of the catastrophic shortage of workers. Unfortunately, the Bolsheviks’ hopes regarding the proletariat’s class consciousness also proved unfounded.

Another basic feature of the policy of war communism was the complete curtailment of commodity-money relations. This was most apparent in the introduction of nonequivalent natural trading between cities and villages, especially as it pertained to grain. Under conditions of runaway inflation, peasants did not want to sell grain for depreciated money. In February and March of 1918, the consuming regions of the country received only 12.3% of the expected quantity of grain. In Russia’s industrial centers, the ration card norm for grain was reduced to 50–100 grams per day. To make matters worse, Russia had lost several of its largest grain-producing regions under the terms of the Treaty of Brest-Litovsk, which only served to aggravate the food crisis further. After acceptance of the “Decree on the Grain Monopoly” (May 13, 1918), trade was actually prohibited and food detachments were formed to confiscate foodstuffs from the peasantry. Such food detachments operated according to the principle formulated by Aleksandr Tsyurupa, people’s commissar of foodstuffs: “If it is impossible to take grain from the village bourgeoisie by usual means, then it must be taken by force.” To assist in these efforts, Poverty Committees composed of non-landed peasants and assorted hooligans from nearby towns were created on the basis of the Central Committee decrees of June 11, 1918. Such measures forced the peasantry to take up arms. In the words of the prominent economist Nikolay Kondratyev, “The village, which had been inundated with soldiers returning after the uncontrolled demobilization of the army, met the armed forces with armed resistance and a whole series of uprisings.”⁴ However, neither the foodstuff dictatorship nor the Poverty Committees were able to resolve the food problem. Attempts to prohibit city-village market relations and the forceful confiscation of grain from peasants only led to a widespread black market in grain at high prices. The city population was receiving no more than 40% of the grain it consumed from ration cards; the other 60% was received through illegal trade. Commodity-money relations were also further curtailed by the Bolsheviks’ complete prohibition in the fall of 1918 of wholesale and private trade in most of Russia’s provinces. After nationalizing the merchant marine (January 23, 1918) and foreign trade (April 22, 1918), the government started general nationalization of all enterprises having capital of more than 500,000 rubles in June of 1918.

The centralized administration system dictated a command style of leadership, and one of the features of war communism policy was the system of extraordinary agencies, whose tasks included subordination of the entire economy to the needs of the front. On November 30, 1918, the VTsIK resolved to create a new extraordinary agency of the Soviet state: the Council of Workers’ and Peasants’ Defense of the RSFSR. Its task was to mobilize all forces to wage the Civil War successfully. Resolutions of the Council of Defense were binding on all departments. It comprised representatives of the VTsIK, the Revolutionary War Council, the People’s Commissariat for Railroads, the Extraordinary Committee to Supply the Red Army, the People’s Commissariat for Foodstuffs, the All-Russian Council of Trade Unions, the VSNKh, and the Main Committee on Labor. The Council of Defense was directed by the chairman of the CPC, and as a rule, it met twice a week and decisions were made by majority vote. When necessary, the Council of Defense created numerous committees, including one on fuel, and sent authorized extraordinary representatives with broad powers into localities, including the right to dismiss all officials and prosecute them before revolutionary tribunals.

The oil industry also suffered shortages following the October Revolution. For a long time, the terrible events of the Civil War had interrupted deliveries to Central Russia of coal from the Donets Basin and the Kuznetsk Basin, as well as of oil from the North Caucasus and Transcaucasus. As recently as November 24, 1917, Chechen bandits had burned down new Grozny fields. In December 1917, the journal Neftyanoye delo published a report by the chairman of the Tersk Military Industrial Committee, who reported to Petrograd: “The oil fields of the new Grozny region, which were producing 5–6 million poods [600,000–720,000 barrels] of oil per month, have been destroyed and completely burned. It is impossible to restore the fields under existing circumstances.” The Grozny fields burned for almost 17 months, and according to some estimates this fire consumed oil worth almost a quarter of the annual prewar budget of the Russian Empire.

By the end of 1918, the situation was dire: Soviet Russia needed 2.6 million barrels to meet the plans of 1919, but only had around 10,000 barrels of fuel oil on hand. As for alternate energy sources, all the Soviet government really had left at its disposal at this time was the Moscow coal basin, which was capable of producing only a small quantity of low-quality brown coal.

The Red Army’s failures in the early spring of 1919 in the Volga region and in the east produced an even greater strain on the fuel supply. On April 26, 1919, Lenin sent the following directive to the Revolutionary War Councils in the Volga region: “In view of the critical situation with fuel oil, it is prohibited, under penalty of the strictest accountability, for anyone to use or issue fuel without permission of the Main Committee on Fuel. Those guilty of unauthorized seizure or distribution of fuel shall be immediately prosecuted by a revolutionary court.”⁵

Several days later, on April 29, 1919, he sent a new telegram: “The threat of [White Army leader Aleksandr] Kolchak to the Volga necessitates prompt measures to remove petroleum products from the threatened area, and timely transportation of petroleum products destined for wharves in the upper Volga through the threatened area. To carry out the indicated tasks successfully, it is ordered that: 1) The Main Petroleum Committee immediately send its representatives to the Volga wharves to load the petroleum products into pilotage barges of vessels carrying petroleum products; 2) The Main Water Committee provide the necessary loading vessels and tugboats per agreement with the Main Petroleum Committee; 3) All military and civilian powers cooperate fully with the representatives of the Main Petroleum Committee and in no way interfere with their directives on vessel loading or movement. Those in violation of this provision shall be subject to prosecution before military revolutionary tribunals under martial law.”

Table 8. Breakdown of the Soviet Russian Fuel Budget

Source: Civil War and Military Intervention in the USSR [Grazhdanskaya voyna i voyennaya interventsiya v SSSR]. Moscow, 1987, p. 598.

Removal of the oil was under the constant daily control of the Soviet government, and the stream of telegrams signed by Lenin was continuous. Another telegram, this one from June 25, 1919, provides further evidence of the dire fuel situation: “The Council of Workers’ and Peasants’ Defense orders that the most energetic measures be taken immediately to move all petroleum product reserves from Tsaritsyn to Saratov, in accordance with the directive of the Main Petroleum Committee. The measures taken and also every shipment sent should be reported by telegraph to the Supreme Council for the National Economy and Main Petroleum Committee; in the telegraph office, go to the head of the line without waiting, and use a direct line to send this report. No consumption of petroleum products shall be allowed without permission of the Main Petroleum Committee. Those guilty of disobedience will be prosecuted.”

It was also during this time that the oil industry was incorporated into another of war communism’s primary tenets—the militarization of labor. Initially, the policy covered blue-collar and white-collar workers in defense industries, but by the end of 1919, all industries and railroad transportation had been put on a war footing. On June 27, 1919, fuel industry workers accepted the resolution “On Counting of All Blue-Collar and White-Collar Workers in the Main Forestry Committee, the Main Coal Committee, the Main Petroleum Committee, the Main Peat Committee, and the Main Fuel Committee as Military Personnel, Leaving Them at Their Workplaces,” which said, in particular: “All blue-collar and white-collar workers of the Main Petroleum Committee, irrespective of their age, are considered called up for active military service, effective the day this resolution is promulgated.”

To monitor the fulfillment of the universal labor duty, a special committee was created, the All-Russian Extraordinary Commission [Cheka], headed by Feliks Dzerzhinsky (1877–1926). The system of military and communist measures included abolition of payment for urban and interurban rail transportation, for fuel, fodder, foodstuffs, mass consumer products, medical services, housing, etc. Furthermore, on November 14, 1919, the CPC of the RSFSR accepted the “Provision on Workers’ Disciplinary Comrade Courts.” It provided such punishments as sending malicious violators of discipline to hard-labor public works, and in the case of “stubborn unwillingness to submit to comrades’ discipline,” to subject them “as a non-labor element, to dismissal from enterprises and transfer them to a concentration camp.”

On November 1, 1919, only 204,000 barrels of oil remained in Soviet Russia. The country was in the grips of a “fuel famine,” which could have easily resulted in the Bolsheviks falling from power. However, understanding the importance of the energy problem as a whole, the Bolshevik leadership undertook extreme measures to solve the crisis in supplying the economy with fuel. In November of 1919, in a circulating letter from the Central Committee of the Russian Communist Party (of Bolsheviks) [RCP(b)] to party organizations titled “On the Struggle with the Fuel Crisis,” Lenin emphasized: “The fuel question has come to stand at the center of all other questions. The fuel crisis must be overcome at any cost; otherwise, it will not be possible to solve either the food problem, or the military problem, or the general economic problem.”⁶

Another of Lenin’s telegrams, sent in February 1920 to the party functionaries Ivars Smilga (1892–1937) and Sergo Orjonikidze (1886— 1937) regarding the Kuban and Grozny fields, read: “We desperately need oil. Consider a proclamation to the population saying that we will slaughter everyone if they burn and destroy oil or the oil fields, but on the other hand we will grant life to everyone if they turn over Maykop and especially Grozny intact.”

By the spring of 1920, the Bolshevik leadership considered the Civil War to be coming to a close and began looking ahead to developing the postwar Soviet state. At this time, the Ninth Congress of the RCP(b) discussed the transition to a militarized economic system, the essence of which “must consist of bringing the army as close as possible to the production process, since the living human force of certain economic regions is simultaneously the living human force of certain military units.”

Meanwhile, on June 15, 1920, the Council of Workers’ and Peasants’ Defense of the RSFSR resolved that the oil industry be separated into a separate strike force for supply. All state agencies had to satisfy the requirements of the Main Petroleum Committee for materials, equipment, etc.

In November 1920, the CPC of the RSFSR issued a decree extending nationalization in Soviet Russia to all “enterprises having more than 10 workers, or more than five workers using a mechanical engine,” of which there turned out to be around 37,000. Of these, 30,000 had not appeared earlier in the basic lists of the VSNKh.

At the end of December 1920, the Eighth All-Russian Congress of Soviets adopted a plan from the State Commission for Electrification of Russia [GOELRO], which, among other things, established priorities for developing the branches of the fuel energy complex. For instance, production of shale, Moscow coal, and peat needed to grow at the fastest rates, and oil at lower rates. The GOELRO plan was accepted at the peak of the policy of war communism, when an attempt was being made to administer everything possible from the center. Accordingly, the types of fuel were evaluated according to this basic criterion: Do they or don’t they contribute to centralization? Shale and peat, which had to be burned in small electric power plants (state power plants, of course), did contribute to centralizing administration. But, as Soviet leader Gleb Krzhizhanovsky (1872–1959) pointed out at the Congress, petroleum fuel, which could both be burned in oil burners and used in internal combustion engines, “contributed only to decentralization,” in other words, a producer that used such fuel was technologically independent of state power, in contrast to a consumer using only electricity.

However, the harsh realities of the time and the wave of popular uprisings that broke out in the country soon forced the Bolsheviks to reexamine the foundations of war communism, and thus the Tenth Party Congress (1921) declared war communism methods of management, which were based on coercion, to be obsolete. In the spring of 1921, the Bolshevik leadership announced the transition to the New Economic Policy (NEP), which was aimed first and foremost at the economic rebirth of the country. Helping the Bolsheviks in this regard was the fact that by this time all of the primary oil-producing regions of the former Russian Empire had fallen under the influence, if not outright control, of the Bolshevik government.

Caucasian Oil Gets a Red Bow

In 1915, oil production in the Russian Empire totaled 68.7 million barrels, of which 54.5 million barrels (79.3%) came from the oil fields of the Absheron Peninsula. The economic and geopolitical importance of the oil-producing Caspian region was not lost on the government of Soviet Russia, and the years following the October Revolution were marked by the ongoing struggle of the Soviet leaders to take control of this vital region.

After the end of the First World War, it became clear that development of the world economy in the 20th century would be determined largely by national access to and uninterrupted delivery of crude oil and petroleum products. Here, Caspian oil would play a critical role. The Soviet leadership’s position on this was articulated most clearly by Joseph Stalin (Iosif Dzhugashvili) (1879–1953), people’s commissar for ethnic affairs: “The Caucasus is very important to the Revolution not simply because it is a source of raw materials, fuel, and foodstuffs, but because of its position between Europe and Asia, in particular between Russia and Turkey, and the presence of critical economic and strategic roads (Batumi-Baku, Batumi-Tabriz, Batumi–Tabriz–Erzurum).... Who will ultimately gain a foothold in the Caucasus, who will use the oil and critical roads leading deep into Asia, the Revolution or the Entente? That is the question.”⁷

After seizing power in Petrograd in October 1917, the Bolshevik leaders were initially confident that their hold over the oil industry of the Absheron Peninsula was unshakable. This conviction was based on the fact that on October 31 (November 13), 1917, the Baku Soviet of Workers’, Soldiers’, and Sailors’ Deputies declared itself “the local authorized Revolutionary legislative body,” acknowledging the power of the Petrograd Council of People’s Commissars over it.

The Bolshevik leaders came to believe the entire Caucasus region would soon follow the Baku example and, as a result, on December 3 (16), 1917, the Petrograd Council of People’s Commissars appointed Stepan Shaumian (1878–1918) as its extraordinary commissar for Caucasian affairs. In his “Address to All Soviets and All Workers of the Caucasus,” published in the first issue of the Kavkazsky vestnik Soveta narodnykh komissarov [“Caucasian Herald of the Council of People’s Commissars”] of January 31, 1918, published in Azerbaijani, Armenian, and Russian, he emphasized: “Strive to make your uprising universal, so that Muslim peasants carry out an organized seizure of the beys’ land everywhere, and create peasant committees that are to take this land.”

In turn, adoption of the “Declaration of Rights of the Peoples of Russia” by the Council of People’s Commissars on November 2 (15), 1917, and of the subsequent “Address to the Working Muslims of Russia and the East,” gave a new impetus to the practical implementation of the idea of federalizing the country along geographic and ethnic lines.

However, as Professor Aleksandr Vasilenko, doctor of political science, emphasized in his study, “Caspian Oil in the Geopolitical Strategy of the Leaders of Soviet Russia (1917–1922)” in the anthology Soviet Union’s Oil [Neft strany Sovetov], the progress of political processes in the Transcaucasus in a relatively short time after October 1917 raised a number of substantial obstacles to the realization of Soviet Russian strategic interests in the region. Throughout the peripheral provinces of the former Russian Empire, a variety of ethnic states began to appear: the Transcaucasian Commissariat (November 1917), and then the Transcaucasian Democratic Federative Republic (April 1918), as well as the Mountain Republic (November 1917) and the North Caucasus Mountaineers Republic (May 1918), etc.

The creation on January 18 (31), 1918, of the Russian Socialist Federative Soviet Republic was “founded on the basis of a voluntary union of the peoples of Russia as a Federation of the Soviet Republics of those peoples.” The term “voluntary union” was understood by the Bolshevik leadership only in terms of class. However, just as the interpretation of the principle of ethnic self-determination was to be “the means of fighting for socialism and must be subordinate to the principles of socialism,” the leaders of Soviet Russia were “for autonomy, but for such autonomy where all power would be in the hands of the workers and peasants, where the bourgeois of all ethnic groups would be removed both from power and from participation in elections to government bodies.”⁸

On March 15, 1918, the Fourth Extraordinary All-Russian Congress of Soviets ratified the Treaty of Brest-Litovsk between Russia and the Quadruple Alliance (Germany, Austria-Hungary, Bulgaria, and Turkey). Under Article 4 of the treaty, several Transcaucasian territories, including Batumi, Ardahan, and Kars, passed to Turkey. For the leaders of Soviet Russia, Article 14 of a Supplemental Agreement to the Treaty of Brest-Litovsk was extremely important; it recognized Baku District as unconditional Russian territory, and required the delivery of a portion of the crude oil and petroleum products produced on the peninsula to Germany.

In his memoirs, the noted Georgian revolutionary Noe Zhordania (1869–1953) later wrote: “After the Constituent Assembly dispersed, we remained alone and had to think about ourselves. In practice, this meant secession from Russia and creating our life as we saw fit. This conclusion flowed from the following well-known facts: the Bolshevik revolution in Russia, whose authority we did not recognize; and the Treaty of Brest-Litovsk, which deprived us of part of our territory.”

On February 10 (23), 1918, the first meeting of the Transcaucasian Sejm, the region’s legislature, was held in Tiflis. The Sejm included deputies elected to the All-Russian Constituent Assembly from the Transcaucasian region. The Sejm was opened by Nikoloz Chkheidze (1864–1929), a noted politician and deputy to the third and fourth State Dumas and former chairman of the executive committee of the Petrograd Soviet of Workers’ and Soldiers’ Deputies. At the second session, Chkheidze was elected chairman of the Sejm. The Azerbaijani delegation consisted of 44 deputies representing the parties Musavat (“Equality”), Hummet (“Energy”), and Ittihad (“Union”), as well as a Muslim socialist bloc. The delegation was led by the noted politician Mammed Amin Rasulzade (1884–1955).

The region’s value was no doubt obvious to the Sejm, especially in light of the fact that, despite the burden of wartime and post-October unrest, the oil fields of the Absheron Peninsula produced 48.7 million barrels of crude in 1917, amounting to 77.8% of all Russian production.

Naturally, the Sejm’s discussion of Caspian oil did not escape the attention of the leaders of Soviet Russia. Based on directives from Moscow, the Bolsheviks switched tactics from direct boycott of the Sejm to organizing mass rallies and other activities in Tiflis, in an effort to impede and undermine its work.

On March 15, 1918, learning of a possible compromise between the Sejm blocs, the Baku Soviet decided to take preemptive offensive measures. The Soviet’s meeting resolution stated: “The Baku Soviet considers it its revolutionary duty to come to the aid of the fraternal working class and peasantry of the entire Transcaucasus and join with them to overthrow this counterrevolutionary criminal rule of the Sejm.” This position was immediately supported by the Soviet government. A telegram from Lenin to Stepan Shaumian in Baku read, “In ecstasy over your firm and decisive policy. Strive to combine it with most careful diplomacy, grounded, naturally, by the present difficult situation, and we will win.”⁹

In late March 1918, armed conflicts broke out in Baku between the soldiers of the “wild division”—armed units of the Dashnaktsutiun (“Armenian Revolutionary Federation”)—and detachments of the Military Revolutionary Committee of the Baku Soviet. On March 30, 1918, the Baku Committee of Revolutionary Struggle was formed in Baku as a Bolshevik organization. It was led by Stepan Shaumian, and proclaimed itself the city’s supreme military-political body. All oil workers were assembled in the Baku Soviet building, where the committee announced the imposition of a tax of 50 million rubles to organize armed units of the Red Army in Baku.

The centralization of power and skillful coordination of actions between military units ended with the destruction of the opposition forces and consolidation of Soviet rule in the city. By decision of the executive committee of the Baku Soviet in early April 1918, a military mobilization was declared in the city, enabling a considerable increase in the manpower of the armed units.

Around the same time, however, on April 22, 1918, the Transcaucasian Sejm proclaimed the creation of the independent Transcaucasian Democratic Federative Republic (TDFR), consisting of Baku, Tiflis, Kutaisi, and Yelizavetpol Provinces and the Batumi Region. The republic soon formed a government headed by Akaki Chkhenkeli, a noted politician, deputy to the Fourth State Duma, and former member of the All-Russian Central Executive Committee. The government also included five representatives of Baku: Fatali Khan Isgender oglu Khoyski (minister of justice), Khudadat bey Aghabey oglu Malik-Aslanov (minister of railroads), Nasib bey Usubbeyov (minister of education), Mammad Hasan Jafargulu oglu Hajinski (minister of trade and industry), and Ibrahim bey Heydarov (minister of state inspection).

Commenting on the formation of the Transcaucasian Democratic Federative Republic, Stalin wrote: “The Sejm ‘s declaration of the independence of the Transcaucasus (April 22), intended to give a free hand to the Tiflis ‘government,’ has actually thrown it into a trap of international predators.... One thing is clear: the independence of the Tiflis Mensheviks and their government from the Russian revolution will inevitably end in their enslavement to Turkish-German ‘civilized predators.”

One key point on the agenda of the meeting of the TDFR government was the question of establishing control over the Absheron Peninsula and its oil fields. At the suggestion of the Bolshevik faction, in order to counteract any actions by the TDFR government on this issue, a meeting of the Baku Soviet of Workers’, Soldiers’, and Sailors’ Deputies on April 25, 1918 resulted in the formation of a Board (Council) of People’s Commissars headed by Stepan Shaumian. The new governing body immediately declared that it did not recognize the jurisdiction of the Transcaucasian Democratic Federative Republic over the territory of Baku Province.

At the same meeting, Shaumian was also appointed people’s commissar for foreign affairs, while Baku trade union leader Ivan Fioletov was named people’s commissar for economic affairs. Later, the special position of people’s commissar for petroleum was added, to which Sahak M. Ter-Gabrielyan (1886–1937) was appointed while retaining his position as chairman of the Extraordinary Commission for Combating Counterrevolution and Sabotage.

On May 1, 1918, the Baku Council of People’s Commissars issued a special declaration stressing that it would “implement, taking local conditions into account, all decrees and directives of the worker-peasant government of Russia, i.e., the Supreme Council of People’s Commissars.” The Baku Council stated the main objective for the oil industry as follows: “Russia’s fate depends on the amount of oil sent from Baku. Without fuel, without our residual oil, without our lubricants, the factories of Moscow and Novovoznesensk, of St. Petersburg and the Volga, cannot run, villages cannot be supplied with chintz, nails, or farm implements... nor can the revolutionary Red Army be redeployed in time or with proper speed to defend the republic.”

On May 15, 1918, the leaders of Soviet Russia, striving to provide diplomatic support to the Baku Bolsheviks, sent a note to the governments of Germany and Turkey, stressing that “Baku has declared numerous Sejm members usurpers. Lankaran, Alyat, Derbent, Petrovsk, Hajigabul, Kurdamir and the whole eastern Transcaucasus in general as far as Yelizavetpol [Ganja] have expressed themselves similarly.”

At the same time, the first month of the Transcaucasus Democratic Federative Republic was marked by substantial differences in the positions of ethnic political parties. The sharp contradictions among members of the seven main blocs in the Transcaucasus Sejm—the Armenian Revolutionary Federation, the Social Revolutionaries, the Muslim socialist bloc, the Social Democrats (Mensheviks), the Russian Muslim Party, Musavat, the Socialist-Federalists, and the National Democrats— did not allow even for a brief period the survival of the new national entity. The governing bodies of the federative republic proved incapable of offering the population a real program to solve the crisis, while the Bolsheviks, not allowing even the slightest slip by the TDFR government to go unreported, made their own contributions to destabilizing the situation.

Thus, on May 26, 1918, at the initiative of the Georgian representatives and “in view of the fact that radical differences have appeared on the issue of war and peace,” the Transcaucasus Sejm decided to disband, bringing the brief existence of the Transcaucasus Democratic Federative Republic to an end.

In its place, three independent states immediately arose: The Georgian Declaration of Independence of May 26, 1918 proclaimed the formation of the Georgian Democratic Republic, in which Noe Zhordania (1869— 1953), the noted Social Democrat and deputy to the first State Duma, took command of the Georgian National Council, while the noted politician Nikoloz Chkheidze (1864–1926) was elected chairman of the Constituent Assembly.

The Azerbaijani Democratic Republic was formed on May 27, 1918. The Republic’s government was headed by Fatali Khan Khoyski (1875— 1920), a deputy to the second State Duma and former minister of justice in the TDFR government. Mammed Amin Rasulzade (1884–1955), chairman of the central committee of Musavat, became head of the Provisional National Council.

On May 28, 1918, the Armenian National Council proclaimed the formation of the Democratic Republic of Armenia, and approved Hovhannes Kachaznuni as head of its government.

The appearance of three independent ethnic states in the Transcaucasus provoked serious concern in Soviet Russia. Stalin stressed: “The so-called independence of the so-called independent Georgia and Armenia... is only a deceptive semblance, covering the full dependence of these, if I may say, states on this or that group of imperialists.”

The proclamation of an independent Azerbaijani Democratic Republic immediately provoked a corresponding reaction from the Baku Bolsheviks. On May 29, 1918, they held a meeting of the Baku Soviet of Workers’, Soldiers’, and Sailors’ Deputies and a congress of peasant deputies of Baku District, where all those who had voted for the formation of the Azerbaijani Democratic Republic were declared “enemies of the people.” The resolution emphasized that: “As an inalienable part of the great Russian Soviet Federative Republic, we tie our fate intimately to the fate of revolutionary Russia.”

Meanwhile, well-founded concern for the fate of Caspian oil prompted the leaders of Soviet Russia to take immediate steps to nationalize the oil industry on the Absheron Peninsula. First, on May 17, 1918, the presidium of the Supreme Council for the National Economy [VSNKh] directed the fuel section to wire a directive to all regional economic councils and local councils prohibiting the requisitioning of oil reserves in Baku Province without knowledge of the Fuel Department and its authorized organizations. Then, on May 22, 1918, the RSFSR Council of People’s Commissars allocated 100 million rubles to the VSNKh Fuel Department for payment of wages to oilfield workers and for removal of oil from Baku. And, finally, on May 23, 1918, Lenin sent a telegram to Baku that read: “The Council of People’s Commissars has resolved that a large lot of grain is to be sent by water from Tsaritsyn to Baku for disposition by the Baku Soviet of Deputies.”¹⁰

Thus, the groundwork was in place for decisive action. On May 28, 1918, Baku received a telegram from Stalin, which read: “The Council of People’s Commissars has approved nationalization of oil industry. Detailed instructions sent with [People’s Commissar for Petroleum] Ter-Gabrielyan, who departed May 26. Petroleum Commissariat abolished, all responsibilities assigned to Main Petroleum Committee.” Based on this telegram, the Baku Council of People’s Commissars adopted a decree on June 2, 1918 nationalizing the oil industry. In all, over 400 enterprises were nationalized. The same decree also abolished the Congress of Baku Oil Industrialists, which had operated since 1844 as the authoritative representative organization of Russian entrepreneurs.

The nationalization of the industry continued to be followed closely by Moscow, and on June 5, 1918, Lenin again ordered the chairman of the Baku Council of People’s Commissars Stepan Shaumian to “make petroleum your top priority.”¹¹

After the nationalization of the oil industry was complete, the Bolshevik leadership turned its attention to ensuring the reliable delivery of Baku crude to Soviet Russia. As the Caspian trading fleet was privately owned, the Baku Council of People’s Commissars nationalized it on June 5, 1918. Implementation of this decision, however, ran into wholesale resistance by small and medium shipowners, which was immediately reported to the leaders of Soviet Russia.

In response, Stalin told the Baku Council of People’s Commissars of the need to take the most radical actions: “On the question of nationalization of the Caspian fleet, you can act decisively.... You can be confident that the Council of People’s Commissars will support you.... Do not take all this as my personal opinion, but as the recommendation of Lenin, with whom I spoke directly by phone yesterday on all the issues raised.”¹²

This was followed by a telegram from Lenin, sent on June 18, 1918, in which he ordered the Baku Council to: “Take all steps to expedite shipment of petroleum products to Volga. Report daily to Main Petroleum Committee on status of oil industry.”

For the Baku Council of People’s Commissars, the whole of June 1920 was a period of considerable structural reorganization of the oil industry. The result was the creation of 19 major business associations, 17 of which covered the oil production fields, while the other two covered refineries and pipeline systems. Each of the associations was headed by a five-member board: two worker-elected representatives, one representative of the engineering and technical staff, and two representatives of the Baku Council of People’s Commissars.

On July 9, 1918, Stepan Shaumian sent a telegram to Stalin in Tsaritsyn, updating him on the situation: “From May through June 1, New Style, we shipped 16,609,332 poods [1,994,581 barrels] of petroleum products, and in June, from June 1 through July 1, New Style, we shipped 26,449,405 poods [3,176,256 barrels]. We reduced only the shipment of gasoline: in May we shipped 16,652 poods [2,000 barrels], but in June we shipped 12,216 poods [1,467 barrels], because of a lack of shipping vessels.”¹³ In all, 4.7 million tons of crude oil and petroleum products were shipped to Soviet Russia during the spring and two summer months of 1918.

At the same time, an alignment of forces in the region was steadily unfolding against the Bolsheviks and the threat of losing of strategic positions loomed ever greater. Under these conditions, the Bolshevik leadership decided that Soviet Russian armed units had to be deployed to the Transcaucasus. On August 31, 1918, Stalin wrote Lenin: “Dear Comrade Lenin, A struggle is underway for the south and the Caspian. To hold this whole region (and we can hold it!), we must have several light minelayers and about two submarines. I beg you to break down all barriers and facilitate this, to move the cause forward for immediate receipt of what is needed. Baku, Turkestan, the North Caucasus will (certainly!) be ours if these requirements are promptly met.”¹⁴

However, emergency transportation of the required warships could not be arranged from the Baltic to the Caspian via inland waterways. Instead, the Soviet Russian leadership decided to send an armed strike force down the Volga by ship. In a telegram sent to Saratov and Tsaritsyn, Lenin wrote: “The Lenin Regiment is advancing on Baku. Take urgent steps to expedite advance. Strict accountability for any delay.”

By then, some military units of Soviet Russia had seen action, such as the detachment under the command of former warrant officer Grigory Petrov (1892–1918), who had received a mandate from a commissar of the RSFSR Council of People’s Commissars in the Baku industrial region. From June 23, the Moscow armored car detachment also engaged actively in combat. However, their actions could no longer halt the rapid evolution of events in the region.

It was at this time that, faced with a joint Turkish-Azerbaijani offensive, sharp disputes regarding the organization of the city’s defense erupted between the Baku Soviet of Workers’, Soldiers’, and Sailors’ Deputies and the Council of People’s Commissars, leading the Soviet of Deputies to adopt, by a majority vote on July 25, a decision to invite an English detachment to Baku. In response, Council of People’s Commissars Chairman Shaumian, acting on behalf of the Bolshevik faction, declared: “We disavow the criminal policy that you are initiating, and resign from the positions of people’s commissars.” On August 1, 1918, in place of the Bolshevik Council of People’s Commissars, who had all resigned, the Baku Soviet of Workers’, Soldiers’, and Sailors’ Deputies decided to form a new executive body, which it named the Central Caspian Dictatorship. Its objective was to organize the city’s defense in order to prevent Turkish troops from entering Baku. However, despite stubborn resistance, Turkish-Azerbaijani troops entered the city on September 15, 1918, overthrowing the Central Caspian Dictatorship and the Baku Soviet of Workers’, Soldiers’, and Sailors’ Deputies. Shortly thereafter, the governing bodies of the Azerbaijani Democratic Republic settled in Baku.

On October 7, 1918, the government of the Azerbaijani Democratic Republic annulled the Baku Council of People’s Commissars decree of June 2, 1918 nationalizing the oil enterprises on the Absheron Peninsula and returned the oil fields and refineries to their previous owners. The further development of events at the close of the First World War led to Germany’s defeat, and under the terms of the Armistice of Moudros between Turkey and the Entente (October 30, 1918), Turkish troops were withdrawn from the Absheron Peninsula.

On November 13, 1918, negotiations were held between British and French delegations, which affirmed the agreement of December 23, 1917 on “division into spheres of influence” in Russia. On that basis, on November 17, 1918, the British 39th Infantry Brigade landed in Baku, commanded by Major General W M. Thompson, soon named Governor General of the city. On December 6, 1918, Captain Webster, representing the British command, arrived in Batumi, and in a conversation with Georgian government representative D. A. Topuridze, stressed that his aim was to learn about the status of the Baku–Batumi pipeline.

On December 7, 1918, the parliament of the Azerbaijani Democratic Republic, initially consisting of 97 members, began its work. As chairman, the parliament elected Alimardan Alakbar oglu Topchubashov (1862— 1934), former editor of the newspaper Kaspiy [“Caspian”] and deputy to the first State Duma (1906). (It should be noted that Azerbaijan became the first Muslim country to introduce a republican form of government.) On June 27, 1918, the Turkish (Azerbaijani) language¹⁵ was declared the national language of the Azerbaijani Democratic Republic. By government decision, essential steps were taken to establish a system of national primary and secondary education and to restore the people’s ancient cultural heritage. On September 9, 1918, the Azerbaijani Democratic Republic adopted a flag in the form of a tricolor consisting of light blue, red, and green bands with a white crescent and an eight-pointed star. In accordance with the decision of the Paris Peace Conference, British troops left the Absheron Peninsula in late August 1919, thereby voiding the Bolsheviks’ claim of a “foreign intervention” in Azerbaijan.

The loss of Baku crude in the summer of 1918 was a serious blow to the Soviet Russian economy, and proved unacceptable to the Bolshevik leadership. Likewise, the creation and continued confident existence of three independent states in the Transcaucasus, and their support by the Entente, convinced the political leaders of the RSFSR that the achievement of their geopolitical goals would require a change in tactics and the use of new methods, forms, and means to regain their lost positions.

At this time, Bolshevik policy continued to be dominated by ideas of the rapid coming of world revolution and the creation of a unified proletarian state throughout Eurasia. One Bolshevik leader, Leon Trotsky, spoke very frequently of this: “Revolutionary war is an indisputable condition for our policy.”¹⁶ The noted Bolshevik theoretician Nikolay Bukharin made a similar remark in his Economics of the Transition Period [Ekonomika perekhodnogo perioda]: “The dictatorship of the proletariat cannot win if the proletariats of the various countries are isolated from one another. So the struggle inevitably involves coupling, linking, welding, and uniting all the new proletarian republics.... For the proletariat, this economic and political unity is a matter of life and death.”

However, the Soviet leadership also had to take into account the links created among the independent Transcaucasian Republics by several international treaties. For example, on May 28, 1918, the Georgian Democratic Republic and Germany signed a treaty at Poti. On June 4, 1918, Turkey and the Azerbaijani Democratic Republic signed a treaty of peace and friendship. On November 23, 1919, with the mediation of the Georgian government in Tiflis, the governments of the Azerbaijani and Armenian Republics signed an agreement under which the parties committed to halting all armed conflicts underway between them and resolving disputes, including the border issue, by peaceful means. Even Soviet Russia had played a part in strengthening the cause of the independent Transcaucasian Republics: On August 27, 1918, the RSFSR and Germany signed a supplemental treaty, and in Article 13 of that treaty, Soviet Russia consented to Germany’s recognition of Georgia as an independent state.

The situation that emerged produced a so-called double standard in the RSFSR’s foreign policy. On the one hand, official diplomatic correspondence regarding the Transcaucasian Republics consistently avowed a striving to develop mutually beneficial relations and peaceful coexistence. On the other hand, with the ongoing strategic aim of realizing a proletarian revolution, a broad range of measures were undertaken to foment armed rebellion and overthrow the republic governments of Azerbaijan, Armenia, and Georgia. In this context, the Soviet Russian government regarded diplomatic activities in the Caucasus as a necessary step that could serve to mask preparations for more decisive action.

The Caucasian Territorial Committee of the Russian Communist Party (of Bolsheviks), or RCP(b), headed by Grigol “Sergo” Orjonikidze, became the coordinator of such subversive activities in the region. In November 1918, the Transcaucasian organizations of the RCP(b) held their first conference near the village of Digomi outside Tiflis and set their course for overthrowing the national governments.

The RCP(b) created a whole series of institutions to supervise and coordinate actions in the Transcaucasus. In Moscow, it formed a Central Bureau of Communist Organizations of the Peoples of the East, attached to the RCP(b) Central Committee, with separate Azerbaijani, Armenian, and Georgian sections within it. A second important agency was the Section for Transcaucasian Muslim Affairs, established on January 16, 1919 under the RSFSR People’s Commissariat for Ethnic Affairs. An important role in implementing decisions was accorded to the Commissariat for Muslim Affairs, headed by Nariman Narimanov (1870–1925), and operated out of Astrakhan.

On May 2, 1919, a meeting of the Baku city Party Conference formulated the slogan “Independent Soviet Azerbaijan” as the main political objective for the future. As historians have noted, “In view of the errors committed in 1918 on the ethnic issue, and in order to wrest the banner of struggle for national independence from the hands of the Azerbaijani bourgeoisie and landowners, communist organizations carrying out Lenin’s instructions have adopted the slogan, ‘Independent Soviet Azerbaijan.’ “¹⁷ The slogan of national independence was reinforced by another essential tactical change—the creation of a Communist Party of Azerbaijan. Initially discussed in May 1919 by the Party’s Caucasian Territorial Committee, the idea of an “independent” Communist Party of Azerbaijan and its future course of actions was thoroughly discussed at meetings in July, September, and December in Moscow of the Politburo and Organizing Bureau of the RCP(b) Central Committee.

At the same time, the Bolshevik leadership took a hard-line position on official recognition of the Azerbaijani Democratic Republic and establishment of diplomatic relations. In a telegram dated February 12, 1920, addressed to People’s Commissar for Foreign Affairs Georgy Chicherin (1872–1936), Stalin stressed that “we consider the unconditional and categorical recognition of the independence of Azerbaijan unacceptable.”

On January 3, 1920, the Politburo of the RCP(b) Central Committee adopted a resolution, one item of which read: “The struggle with local chauvinism and the creation of favorable conditions for promoting socialist revolution among ethnic groups under the aegis of tsarism makes it necessary for communist organizations in the ‘independent’ states that formed within the former Russian Empire to operate as independent communist parties. This method of organization is especially important in the East.”¹⁸

On February 11–12, 1920, a Congress of communist organizations was held at the Workers’ Club in Baku, where the Azerbaijani Communist Party (of Bolsheviks) was formed. Mirza Davud Baghir Huseynov was elected chairman of the presidium of the Central Committee and the Congress identified the preparation of armed rebellion to overthrow the government as the top priority for Party organizations.

The situation in the region soon escalated and on March 22, 1920, civil unrest and armed demonstrations initiated by local communist organizations broke out in densely populated Armenian areas in the Ganja and Kazakh Districts and in the Karabakh hills. This forced the government of the Azerbaijani Democratic Republic to send its few armed units to these areas, leaving its Dagestani border effectively undefended, so that by mid-April, units of the Caucasian Front’s 11th Army had marched right up to the northern borders of Azerbaijan.

The 11th Army was headed by former Staff Captain Mikhail Levandovsky (1890–1937), and Sergey M. Kirov (1886–1934) and Konstantin Mekhonoshin (1889–1938) were members of the Revolutionary War Council. The Caucasian Front was commanded by former Second Lieutenant Mikhail Tukhachevsky (1893–1937), and the old Bolshevik Sergo Orjonikidze (1886–1937) was a member of the Revolutionary War Council.

Before the military operation, Lenin told the Revolutionary War Council and commanders of the 11th Army: “I ask you once again to act cautiously and always show the maximum good will toward the Muslims.... In every way, demonstrate... sympathy for Muslims, their autonomy, and their independence in the most serious manner.”¹⁹

On April 15, 1920, the head of state of the Azerbaijani Democratic Republic, Fatali Khan Khoyski, sent an urgent telegram to People’s Commissar for Foreign Affairs Georgy Chicherin: “We are observing a concentration of considerable military forces of the Russian Soviet government within the borders of Dagestan in Derbent District along the border of the Azerbaijani Republic. The Azerbaijani government, which has not been informed of the Soviet government’s intentions, urgently requests an explanation of the reasons and purposes of the concentration of troops in these districts.” However, no response from Moscow to Baku was forthcoming.

On April 27, 1920, units of the Caucasian Front’s 11th Army crossed the border of the Azerbaijani Democratic Republic and entered Baku without opposition the next day. In his memoirs, the noted Soviet statesman Anastas Mikoyan (1895–1978) described the situation: “The Revolutionary War Council of the Army appointed me its representative, and I was to be dispatched along with the vanguard of trains commanded by Yefremov. This detachment had been charged with coming to the aid of the Baku proletariat, in order to prevent the bourgeois government from destroying the oil fields.... The lead armored train arrived at the Baku terminal at daybreak on April 28, where Soviet rule won peacefully, without bloodshed due to the overwhelming numerical advantage of the revolutionary forces.”

With the entry of Soviet troops into Baku, the Azerbaijani Democratic Republic ceased to exist. A statement by the Provisional Revolutionary Committee dated April 28, 1920 read: “All authority in the country has passed into the hands of the working classes. A bright new era of socialism is opening up for the workers and peasants of Azerbaijan.” The following day, April 29, 1920, Lenin noted that: “The position of Soviet Russia will change for the better; we know that our industry lacks fuel, and we have now received news that the Baku proletariat has taken power into its own hands.... This means that we now have an economic base on which to revitalize all our industry.... Thus, our transportation and industry will receive substantial assistance from the Baku oil fields.”²⁰

On May 5, 1920, Baku received a telegram from Lenin, stating: “The Council of People’s Commissars welcomes the liberation of the working masses of the independent Azerbaijani Republic and expresses its firm confidence that, under the leadership of its own Soviet Government, the independent Republic of Azerbaijan, together with the RSFSR, will defend its freedom and independence from the sworn enemy of the repressed peoples of the East, from the imperialists.”²¹

From its very inception, Soviet Azerbaijan began organizing massive shipments of crude oil by sea to Astrakhan. From April 30 to May 2, 1920 alone—that is, literally immediately after establishment of the new government on the Absheron Peninsula—it sent 12 steamers to the RSFSR carrying 156,115 barrels of crude. By late May of the same year, the quantity of crude supplied had increased to 1.8 million barrels, and by June it stood at 2.5 million barrels of crude oil and petroleum products. But even so, these delivery rates did not satisfy the RSFSR leadership. On August 4, 1920, the Council of Labor and Defense adopted yet another resolution on steps to increase petroleum products exports from Baku.

The newly proclaimed Azerbaijani Soviet Socialist Republic, formed on the model of the RSFSR, did not remain “independent” for long. On September 30, 1920, the RSFSR and Azerbaijani SSR signed a military and political alliance treaty that unified the military organizations and military commands of the two republics, as well as their regional economic councils, supply and transportation agencies, and people’s commissariats of finance, mail, and telegraphy. On the same day, a foreign trade agreement was also signed. In addition, the RSFSR and Azerbaijani SSR signed agreements to conduct a unified economic policy and consolidate their food supply policies.

Speaking in December 1920 at the Eighth All-Russian Congress of Soviets, Lenin emphasized with satisfaction: “Now, with the tremendous enthusiasm being exhibited by workers in the Azerbaijani Republic, with the friendly relations that we have established, and with the skillful leaders sent by the Regional Economic Council, the oil business is going well, and we are beginning to stand on our own feet.”

Once a regime controlled completely by the RSFSR had been established in Azerbaijan, there arose the question of delivering Baku crude to the European market via the port of Batumi on the Black Sea. In the opinion of RSFSR political leaders, the existence of republic governments in Armenia and Georgia was the main impediment to delivery of crude to the European and world markets, and so it was decided to apply the same successful scheme used in Azerbaijan to oust the national governments of these countries.

In June 1920, the Armenian Communist Party (of Bolsheviks) was formed, and in September 1920, the Caucasian Bureau of the RCP(b) Central Committee approved the membership of the Armenian CP(b) Central Committee. At the same time, Soviet Russian political leadership charged the People’s Commissariat for Foreign Affairs with the task of making full use of diplomatic methods to create a legal basis for the operation of national communist parties.

In late May 1920, negotiations began in Moscow between the government delegations of Soviet Russia and the Republic of Armenia. The Soviet Russian delegation included People’s Commissar for Foreign Affairs Georgy Chicherin and his deputy Lev M. Karakhan; the Armenian delegation was led by the Armenian politician Levon Shant. As it turned out, the agreement signed August 10, 1920 in Yerevan between the RSFSR and the Republic of Armenia was unable to prevent active hostilities by Turkish troops, and in September 1920, Turkish troops switched to the offensive. By the 20th of that month they occupied Sarikamish and Kaghzvan. On October 30, they took Kars, and on November 6 they took Alexandropol.

Amid these hostilities, the government of the Republic of Armenia resigned on November 4, 1920. On the same day, a new government headed by Simon Vratsyan was formed. In its declaration, the new government was forced to acknowledge the country’s untenable position, but was unable to identify a solution.

Then in mid-November 1920, the Armenian Revolutionary War Committee was formed in Baku, headed by Sargis Kasyan. Later that month, the Armenian Revolutionary War Committee relocated to the town of Kazakh, near the border, where the Armenian regiment, formed from rebels who had retreated to Soviet Azerbaijan after the rebellion of May 1920 was put down, was also located.

On the morning of November 29, 1920, members of the Armenian Revolutionary War Committee (ARWC) crossed the border along with the Armenian rebel regiment. The border troops of the republican army offered no resistance, and the ARWC’s declaration proclaiming Armenia a Soviet Socialist Republic was adopted in Ijevan the same day. The next day, again encountering no resistance, ARWC forces occupied Dilijan. The Armenian Revolutionary War Committee sent a telegram from there to Lenin asking for aid, after which units of the 11th Army of the Caucasian Front, previously stationed in Azerbaijan, crossed the border and commenced hostilities.

On December 2, 1920, Lenin sent a telegram to the Chairman of the ARWC, Sargis Kasyan, saying: “I greet you as the representative of a Soviet Armenia of labor liberated from the yoke of imperialism. I have every confidence that you will make every effort to establish fraternal solidarity among the workers of Armenia, Turkey, and Azerbaijan.”

Also on December 2, RSFSR Ambassador Plenipotentiary Boris Legran and ARWC Chairman Sargis Kasyan signed an RSFSR-Armenian SSR Friendship Agreement. Under this agreement, Armenia was allocated a cash loan in the amount of 3 billion rubles and was obligated to deliver 144,000 barrels of crude oil and petroleum products. The hurried signing of the Alexandropol Treaty between the governments of the Republic of Armenia and Turkey on the same day could no longer alter the state of affairs. On December 4, Red Army troops entered Yerevan, and the former Armenian government was finally deposed.

Once Soviet rule had been established in Armenia, the last obstacle to complete Soviet control of the Transcaucasus was the existence of the Georgian Democratic Republic. In conducting its policy regarding Georgia, the Soviet leadership was forced to reckon with the fact that the leading European powers of England, France, and Italy had recognized the independence of the Georgian Democratic Republic on January 20, 1920. Thus, energetic efforts along diplomatic lines came to the forefront. On May 7, 1920, Deputy People’s Commissar for Foreign Affairs Lev M. Karakhan and Georgian Constituent Assembly member Grigol Uratadze signed a treaty in Moscow, under which the RSFSR recognized Georgia’s sovereignty and full independence. Under the terms of the treaty, the government of Georgia assumed the obligation of assisting in the withdrawal from Georgia of the armed forces of Great Britain, stationed in Batumi.

In addition, a secret codicil to the treaty specified that the Communist Party would be legalized in Georgia and given freedom to operate, and that participants in rebellions and demonstrations organized by the Bolsheviks would be released from prison. Having been given complete freedom of action, the Georgian Communist Party (of Bolsheviks) was formed that same month.

In June 1920, a Soviet mission was sent to Tiflis, headed by noted Party leader Sergey M. Kirov, and rapidly grew to some 400 members. The enormous size of the mission raised doubts in Georgia about its diplomatic purpose. Shortly thereafter, in September 1920, Kirov was replaced as authorized representative of the RSFSR to the Georgian Democratic Republic by experienced diplomat Aron L. Sheynman.

After meeting with Kirov in Baku regarding the future of the Georgian Democratic Republic, Stalin was pointedly blunt in a September 30, 1920 conversation with a correspondent for the newspaper Pravda [“Truth”]: “The catastrophic economic and food situation in Georgia is a fact admitted even by the bosses of today’s Georgia. Georgia is entangled in the tentacles of the Entente and therefore deprived both of Baku oil and Kuban bread. This Georgia, which has been transformed into a major base for the imperialist operations of England and France and has therefore entered into hostile relations with Soviet Russia, is now living the last days of its life.”

On November 14, 1920, RSFSR Ambassador Plenipotentiary Aron Sheynman, Azerbaijan SSR People’s Commissar Mirza Davud Baghir Huseynov, and Georgian Democratic Republic Deputy Minister of Foreign Affairs K. Sabakhtarishvili signed a trade and transit agreement in Tiflis, under which the RSFSR and the Azerbaijan SSR were to deliver 120,000 barrels of crude to Georgia monthly, and Georgia agreed to the free-transit export of coal, timber, and other materials of equivalent value to the petroleum products received. A special secret codicil to the agreement stipulated the terms and conditions of operation of the oil tank farm at Batumi: “Georgia shall lease to Russia and Azerbaijan [the following facilities] for storage of petroleum products in the oil city at Batumi Station: tanks numbering no more than four stations, with a total capacity of 6 million poods [720,000 barrels], including 4.5 million poods [540,000 barrels] suitable for the storage of kerosene, 500,000 poods [60,000 barrels] suitable for the storage of crude oil and residual oil, and 1 million poods [120,000 barrels] suitable for the storage of lubricants and gasoline, rail spurs, loading facilities, appropriate pumping stations with necessary associated residential premises, pipelines to pumping stations and to a pier and loading facilities on the pier, with all listed storage facilities and devices in serviceable [condition] and suitable for immediate operation.... Russia and Azerbaijan shall pay Georgia for providing said tanks with the listed facilities and including a fee for the provision of tank cars for loading at 60 kopecks per pood [36 pounds] of tankage per month and at 60 kopecks per pood per month for storage of petroleum products over and above rated periods in the tanks of Kobuleti and Batumi Kerosene Pipeline Stations.”²²

On November 23, 1920, Stalin returned to Moscow from the Transcaucasus and presented a report on the situation to the Politburo. Afterward, in a resolution drafted by Lenin, the Politburo stated: “The most conciliatory policy possible shall be adopted with respect to Georgia, Armenia, Turkey, and Persia, aimed most of all at avoiding war.”²³

The “most conciliatory policy possible” with respect to Georgia became apparent on December 15, 1920, when a session of the Caucasian Bureau of the RCP(b), after hearing Orjonikidze’s report on the situation in Georgia, passed a resolution on the need to foment armed rebellion in the republic. Earlier, on December 9, 1920, the RSFSR government notified its ambassador to Georgia, Aron Sheynman, that he was to suspend the export of crude oil to Georgia in view of the latest actions of the Georgian government, which were not compatible with the friendly treaty relations established between the RSFSR and the Georgian Republic. Official Georgian assurances that no unfriendly actions had actually occurred were disregarded.

On January 2, 1921, Kirov and Orjonikidze sent another letter to Moscow justifying “immediate military assistance to the workers of Georgia in their struggle to establish Soviet rule.” The commander of the 11th Army, former Staff Captain Anatoly Gekker (1888–1938), presented a detailed plan for organizing combat operations of Red Army units on Georgian territory.

On January 20, 1921, Russian People’s Commissar for Foreign Affairs Georgy Chicherin reported to Lenin that “Georgia has become insolent again” and it had to be “Sovietized” by military force. On January 26, 1921, a plenary session of the RCP(b) Central Committee discussed the Georgian question, and adopted the following decision at Lenin’s recommendation: “1) The People’s Commissar for Foreign Affairs is directed to delay the break with Georgia, systematically collecting precise material on its violation of the treaty and more insistently demanding the passage of munitions into Armenia; 2) The Caucasian Front is to be asked about how prepared our available armed forces are in case of immediate or imminent war with Georgia, and a committee comprised of Comrades Trotsky, Chicherin and Stalin is directed to formulate the question, specifying Georgia’s extreme insolence; 3) A directive is to be issued to the Republic’s Revolutionary War Committee and the Caucasus Front to prepare for war with Georgia if this becomes necessary.”²⁴

The ensuing events followed the familiar scenario. First, on February 7, 1921, a revolutionary war committee was formed in the Lori neutral zone, headed by Ivan Lazyan. Armed demonstrations began on February 11, and soon Borchalo district was in rebel hands, whereupon the rebel leaders sent a message to Moscow requesting military assistance.

On February 14 and 15, 1921, Lenin sent successive telegrams to the 11th Army Revolutionary War Council, giving specific recommendations for the conduct of operations in Georgia. On February 16, 1921, a Georgian Revolutionary Committee was formed in the settlement of Shulaveri [now Shaumyani], consisting of Philipe Makharadze (chairman), Mamia Orakhelashvili, Aleksi Gegechkori, Shalva Eliava, Amayak Nazaretyan, and others. The Georgian Socialist Soviet Republic was proclaimed there on February 18, 1921, followed by a request to the RSFSR government for armed assistance to save the “insurgent Georgian proletariat.”

This request was immediately honored; units of the Caucasian Front’s 11th Army crossed the Georgian frontier and engaged Georgian border forces. The Georgian head of state, Noe Zhordania, attempted to contact Moscow by telegraph, but the leaders of the RSFSR People’s Commissariat for Foreign Affairs refused to correspond. At the same time, the RSFSR ambassador plenipotentiary to Georgia, Aron Sheynman, officially announced—on the first day the Red Army initiated hostilities—that Soviet Russia was uninvolved in the attack on Georgian border troops in Borchalo District.

The Soviet Russian government finally issued an official reply on February 18, 1921 via the Georgian Democratic Republic’s envoy to Poland, while a note from RSFSR People’s Commissar Georgy Chicherin to the Georgian government contained accusations of repressions against the population of the Lori neutral zone, which had provoked an uprising against Georgian occupation troops.

Multiple desperate radio appeals by Georgian head of state Noe Zhordania on February 20, 21, and 22, 1921 to the leaders of Soviet Russia demanding they halt the invasion of RSFSR armed forces into the territory of independent Georgia went unanswered.

The stubborn resistance of the armed forces of the Georgian Democratic Republic forced the government of Soviet Russia to utilize additional armed forces of its own. The Red Army offensive developed simultaneously in three directions: along the Georgian Military Road from Vladikavkaz; from Mamison Pass toward Kutaisi; and along the Black Sea coast from Sochi. Thus, the troop operation involved units of the 11th, 2nd, and 8th Armies coordinating with units of the 1st Cavalry Army under the command of Semën Budënny. Finally, on February 25, 1921, units of the Red Army entered Tiflis, and on March 18, Soviet rule was established in Batumi. The Georgian Democratic Republic had at last ceased to exist.

Following the fall of the Georgian Democratic Republic, one of the priorities of Soviet Russia’s representatives in Georgia was to ensure restoration of the transportation corridor in order to resume oil exports. By March 12, 1921, operation of the Baku–Tiflis pipeline had been restored. Lenin immediately brought this news to the delegates of the Tenth Congress of the RCP(b): “Have you read in the newspaper about the Baku–Tiflis oil pipeline opening? You will soon read about a similar oil pipeline to Batumi.... The point is to improve our economic situation, strengthen the technical equipment of our republic.... In this respect, any easing is of gigantic importance to us.”

On May 21, 1921, the RSFSR and the Georgian Socialist Soviet Republic signed a treaty creating a military and political alliance and integrating the main economic structures of the two states. Soviet rule had thus been established throughout the entire Transcaucasus. Later, characterizing the national policy of the RSFSR government in the region, the noted Azerbaijani writer, politician, and public figure Mammed Amin Rasulzade (1884–1955), who had fled Soviet Russia, wrote an open letter to Stalin which he published abroad in December 1923, saying: “What is happening in Russia is practically indistinguishable from what happened here 100 years ago. Just as was the case 100 years ago, Russia is again annexing more and more new colonies. The replacement of great-power chauvinism with workers’ cosmopolitanism essentially changes nothing, and will also ultimately result in the destruction of small nations. By the force of your arms, you are also suppressing national movements in the Caucasus and Turkestan, and you say that you are doing it in the interests of the local proletariat.... Without a shadow of a doubt, you have trampled on the lawful right of the absolute majority of the local population to self-determination and independence. Thus, it is perfectly clear that the dictatorship of the proletariat proclaimed in Azerbaijan and Turkestan is essentially that same dictatorship of Moscow, and nothing more.”

And indeed, even under conditions of limited sovereignty, the “independent” Soviet republics of Azerbaijan, Armenia, and Georgia would not have long to live. In November 1921, at Lenin’s recommendation, the Politburo adopted a resolution: “1) That the Federation of Transcaucasian Republics be deemed in principle absolutely correct, and certainly subject to implementation...; 2) That the Central Committees of Georgia, Armenia, and Azerbaijan (through the Caucasian Bureau) be invited to raise the question of federation more broadly for discussion among the Party and worker and peasant masses, and that federation be energetically promoted and carried out through congresses of the Soviets of each republic.”²⁵

On March 12, 1922, a conference of representatives of the Soviets of Georgia, Armenia, and Azerbaijan in Tiflis created the Federal Union of Soviet Socialist Republics of the Transcaucasus (the Transcaucasian Federation). Subsequently, in early October 1922, a Plenary Session of the RCP(b) Central Committee discussed the question of combining all the Soviet republics into a single state. On December 30, 1922, the Congress of Soviets adopted a declaration forming the Union of Socialist Soviet Republics.

Once Soviet rule had been established throughout the Transcaucasus, an unimpeded path for Baku crude was opened to the world market. Soviet control over this key region brought immediate results: while 320,000 barrels of petroleum products were exported in the period from December 1, 1921 to May 1, 1922, the export volume jumped to 814,000 barrels in the period from May 1, 1922 to October 1, 1922.

Thus, by the early 1920s in the Transcaucasus, the leaders of Soviet Russia, using Caspian oil both as a priority goal and as an effective means of military-political reorientation of Azerbaijan, Armenia, and Georgia, had basically solved the main geopolitical problem of establishing and strengthening their dominant positions in the region.

Oil Concessions in the RSFSR: Plans and Reality

By the spring of 1921, it had become clear to the Bolshevik leadership that the beginning of the world revolution would be “somewhat delayed.” Accordingly, Soviet Russia was forced to consider substantial adjustments to its domestic and foreign policy. The latter became especially critical as the RSFSR found itself encircled by an “imperialist blockade.”

As oil was one of Soviet Russia’s key commodities, it naturally played an important role in the strategic plans of the Soviet leadership. In early February 1921, the RCP(b) Politburo focused on a review of the problems of the oil industry, primarily from the standpoint of the practical realization of the oil concession policy in the RSFSR. In a memorandum presented at the meeting, People’s Commissar for Foreign Trade Leonid Krasin (1870–1926) noted the most important point up front: “Salvation is possible only through a very strong and decisive policy, which should consist of granting, to three or four major syndicates competing on the world market, as well as the governments of Italy and perhaps France and Belgium as well, attractive enough areas in respectable parts of Baku District and especially Grozny District.”

A resolution of the Politburo of the RCP(b) Central Committee adopted February 5, 1921 read: “On oil concessions: a) Comrades Krasin and [Deputy Chairman of the Labor and Defense Council Aleksey] Rykov are directed to submit to the Central Committee Politburo within three days— over their own signatures and those of responsible specialists—a precise formulation of specifically how, when, and for what reasons a catastrophe looms in the operation of oil fields in Baku and Grozny, and to give their thoughts on why and to what extent granting concessions could prevent this catastrophe. The report of the specialists must be transmitted secretly to obtain the opinion of local Baku and Grozny executives and workers, a list of whom will be drawn up at an upcoming meeting of the Politburo.”²⁶

We should note that several days later, on February 14, 1921, the RCP(b) Central Committee Politburo continued their discussion of the status of the oil industry and steps to turn it around. As in the past, the problem of transportation was critical, so a decision was made to order 500 Canadian and 1,000 English tank cars. The situation was also dire with the tanker fleet: in 1920, the Caspian oil fleet consisted of only six motor vessels, 52 steamers, and 14 scows. Thus, oil shipments via the Caspian Sea and Volga basin were equated to “super-priority military operational” assignments and serious steps were thereby undertaken to increase the volume of seagoing and inland petroleum products shipments.

On the evening of March 8, 1921, speaking at the opening of the Tenth Party Congress, Lenin declared the importance of oil concessions: “The Central Committee, and I personally, have come to view these concessions as necessary, and we will ask you to support this view with your authority. This alliance with state-owned trusts of other leading countries is absolutely necessary for us because our economic crisis is so deep that we cannot revive the damaged business by our own efforts without equipment and technical assistance from abroad.”²⁷

The position of the Soviet head of state was reflected in a resolution, which read: “1. The Congress approves the policy of Soviet authorities aimed at establishing normal trading relations between the Soviet republic and other countries by the execution of trade treaties and agreements. 2. The Congress also approves the Council of People’s Commissars decree of November 23, 1920 on the general economic and legal terms and conditions of concessions.”²⁸

Four days later, relying on the opinion of the Party’s majority, Lenin sent a telegram to Krasin in London: “The Party Congress has approved the line I proposed on concessions in Grozny and Baku. Expedite negotiations on this and on any other concessions. Send frequent updates.” People’s Commissar for Foreign Trade Krasin was in London at that time as the RSFSR’s official representative in Great Britain and had already signed the first Soviet-British trade agreement.

Nine days later, on March 28, 1921, Krasin received a directive that not only implied the complete acceptance of his February proposal on helping the Baku and Grozny oil fields find a way out of the acute crisis, but also gave him a certain freedom of action: “Basic provisions of oil concessions: 1. The concession term to be set at 25 years with the right of early buy-out after 15 years. 2. The following areas are to be offered for concession: a) the entire Bibiheybet oilfield area in the Baku District, not including offshore parts of Baku Bight; b) the entire western half of the Old Grozny oil area, approximately up to the meridian of Mamakayev Gorge; c) 80 desyatinas [220 acres] in the area of Solënaya Gorge in one section; d) the entirety of the Chermoyev lands in the New Grozny District. 3. Payment for concessions to be made by proportional deductions from gross productivity. The proportional deduction is to be about 3% for Bibiheybet, and about 40% for Grozny District. The annual minimum production, beginning from a specific date stated in the contract after the acceptance of the concession, is to be set at 90 million poods [10.8 million barrels] for Bibiheybet, and 50 million [6 million] for Grozny. 4. A condition for the concession of Bibiheybet, over and above the proportional deduction, is the delivery of necessary equipment for electrification of fields in Baku District and laying of a 10-inch oil pipeline from Petrovsk to Moscow. A condition for the concession of Grozny, over and above the proportional deduction, is the delivery of equipment for a paraffin refinery with a refining capacity of 100 million poods [12 million barrels] of crude oil and laying of a 10-inch oil pipeline from Grozny to Moscow. Both the oil pipelines and the refinery and the electrical stations, upon construction, shall be at the disposal of the RSFSR government. 5. Raw and ancillary materials shall be provided to the concessionaire by the RSFSR government under a special agreement applicable to foreign market prices, taking account of the difference in the cost of transportation. (We regard the above terms as illustrative, to give an immediate basis for the beginning of specific negotiations; we emphasize in particular that we will make specific concessions provided the paraffin refinery and oil pipelines are built and equipment delivery is expedited.)”²⁹

The negotiations, which Krasin pursued right away, ran into a virtually insurmountable obstacle almost immediately. Henri Deterding, head of Royal Dutch Shell, as well as the leaders of several other firms including Petrol Grozny Ltd., expressed their willingness to take some of the Baku and Grozny oil fields in concession, and even to begin construction of a paraffin refinery and oil pipelines. However, they all demanded that the Soviet state not grant them just the lands defined in the “Basic Provisions,” but also those that they had bought from the former emigrant owners after October 1917.

On June 30, 1921, the Council of Labor and Defense adopted a resolution creating the Concession Committee of the Supreme Council for the National Economy, headed by Pëtr Bogdanov (1882–1939), who monitored the progress of negotiations in London as well. Despite the involvement of this new committee, after eight months, People’s Commissar Krasin still could not agree with a single major foreign oil company, even in principle, on the basis of the “Basic Provisions of Oil Concessions” received from Moscow.

In October 1921, however, hope seemed to appear—negotiations began with the Foundation Company, one of the biggest American construction companies, which had long cooperated with leading oil concerns, and was studying the possibility of participating in new projects after having completed a refinery in Mexico.

On October 19, 1921, Leonid Krasin reported to Moscow as follows: “Colonel Abbott, representing the Foundation Company, visited me yesterday on the Continent and informed me that his company is interested in building a paraffin refinery and Grozny–Black Sea oil pipeline, and construction on credit with payment in proportional deduction of the oil carried is possible. An indispensable preliminary condition, however, is the performance of engineering studies by the company’s American engineers, otherwise financiers and politicians would not be drawn to the project. I asked him to draw up a preliminary estimate for the dispatch of several American specialists, with second-level technical staff to be provided by us. I will send you the figures when I receive them. I accord the highest importance to this matter as the first serious business contact with extremely prestigious Americans. Please review the question as a matter of urgency and wire instructions. In case of a favorable decision, I believe a trip to America is possible in the immediate future.”³⁰

Krasin received an answer 11 days later in the form of a specific decision by the RSFSR Council of People’s Commissars: “We agree to allocate up to $100,000 to pay for studies by the Foundation Company, provided our workers and specialists participate and all study requirements are communicated. We consider it hugely important to attract American capital to construction of a paraffin refinery and oil pipeline in Grozny. Please advance this matter with maximum speed and energy.”

However, information on the negotiations underway in London leaked into the local press, and subsequent negotiations suggested that the representatives of the Foundation Company had come under strong pressure from some third party. First, the American company unexpectedly abandoned its own proposal to build a paraffin refinery and oil pipeline, and then it limited its prospective activities to simply drawing up plans for those facilities. By early December 1921, the company broke off talks entirely.

On December 8, 1921, after receiving news of this from Krasin, the members of the RCP(b) Politburo discussed the turn of events and answered him the very same day, expressing their dissatisfaction in a rather harsh tone: “The Politburo is perplexed at your telegram of 12/8/21. 1) The question of oil concessions, previously formulated by you and discussed with your participation, was decided favorably by the CC. 2) At that time, you were also instructed to move the oil concession matter forward as energetically as possible. 3) We have received no specific proposals on oil concessions from you, so there can be no question of practical hindrance of the matter. 4) Now your telegram gives material for further discussion and includes no specific proposals. 5) The Politburo affirms its previous decision ordering you to move this matter practically forward as energetically as possible.”³¹

Meanwhile, on December 31, 1921, the first All-Russian Congress of Oil Workers opened in Moscow, drawing a more than representative group of industry workers. Among those attending were Mikhail Lyadov, head of the Central Oil Industry Administration of the Supreme Council for the National Economy; one Shteyngauz, head of the Central Shale Fuel Administration; Aleksandr Serebrovsky, manager of Azneft; Iosif Kosior, manager of Grozneft; and prestigious oil specialists Ivan Strizhov, Ivan Gubkin, and Vasily Frolov.

The congress’s resolution on the first agenda item, adopted on January 5, 1922, read: “Management of such a profitable business as the oil industry of Baku and Grozny must be a matter for the state itself; the granting of concessions to the operational fields in these districts must be recognized as unconditionally wrong.”

Despite such objections, Soviet representatives continued carrying out concession negotiations in London, and also began talks in Berlin with a group of German financiers led by the head of the well-known Deutsche Bank. The RCP(b) Politburo soon gathered again (also on December 31, 1921) to review reports from the Concession Committee. Concerning one report on oil industry concessions by State Planning Committee Chairman Gleb Krzhizhanovsky and Concession Committee Chairman Pëtr Bogdanov, an intermediate resolution was adopted deferring a final decision indefinitely, as had been done in the past: “d) The question of granting a concession to oil areas is deferred, requiring a precise formulation of an opinion opposite to that of the CC commission. Concrete proposals from Comrade Krasin in connection with negotiations shall be sent to the Politburo upon receipt; e) Comrade Smilga is directed to conduct negotiations with the Deutsche Bank without the right to make any final decisions without the Politburo; f) Comrade Smilga is asked to familiarize himself in advance with the status of negotiations being carried on by Comrades Krasin and Stomonyakov and to continue them in full contact with them. All materials must be delivered to Comrade Smilga.”³²

On February 18, 1922, a session of the RCP(b) Politburo reconsidered this issue, and adopted the following resolution: “On oil concessions: a) The Supreme Council for the National Economy is directed to send Comrade Smilga a telegram reporting the dispatch of materials and departure of requested experts, stating that specific instructions will be given after Comrade Krasin’s arrival in Moscow, and recommend that Comrade Smilga speak with Comrade Krasin if there is a possibility of arranging a meeting with him in Berlin, but to continue negotiations for now; b) It is recommended that the People’s Commissariat for Foreign Affairs take the most energetic steps for the immediate departure of oil concession experts Ramzin, Strizhov, and Shibinsky for Berlin.”

However, progress in Berlin proved to be slow, and the next RCP(b) Politburo resolution emphasized that: “a) In the matter of real implementation of concession agreements based on negotiations broadly underway in Berlin, nothing has yet been undertaken; b) The Concession Committee, jointly with Comrade Kursk, is directed to review the procedure for approval of concession agreements; c) Oil concessions with the Deutsche Bank, and Kryvyi Rih ore and agricultural concessions with Krupp, are deemed possible in principle, and it is recommend that the Concession Committee hear the reports of Comrades Stomonyakov and Krasin as soon as possible and move the matter forward on an expedited basis, before the Genoa Conference.”³³

It the opinion of the Soviet Russian leadership, it was precisely these oil concessions that would be the most “tasty” Russian proposal offered to the Entente countries at the upcoming international conference in Genoa in the spring of 1922.

The Russian Oil Question at the Genoa and Hague Conferences

In the early 1920s, Western oil entrepreneurs behaved as if they were certain that Soviet rule in Russia was just a temporary phenomenon. Even after the city of Grozny was captured by the Red Army, French financial groups founded the Société des Pétroles Essences, Naphtes joint-stock company in Paris on April 2, 1920. The company “acquired” parcels in Grozny that had previously belonged to the entrepreneur Chermoyev, as well as a controlling interest in the New Caucasian Oilfield Company. French specialists believed these parcels should yield up to 9.6 million barrels of crude per year.

In 1920, another company intending to pump oil from Grozny was founded in Antwerp: the French-Belgian Trust Franco-Beige de Pétrole joint-stock company. The company hoped to obtain up to 7.2 million barrels of crude per year in Grozny. Thus, all Grozny crude had “owners” in the West, and it was their opinion that this crude absolutely could not be sold on foreign markets by the Soviet government. The Franco-Belgians, who had also founded the Société-d’Emba Grosny company in that same year of 1920, also held stock in companies producing oil on the Emba. Moreover, the emigrant Chermoyev, together with Trust Franco-Beige de Pétrole, founded the Société pour le Transport du Naphte de Grosny in Paris in 1921 to transport Grozny crude via Novorossiysk and contracted with the “lawful owners” of the Vladikavkaz Railroad, who were residing in the West and had granted exclusive rights to build an oil pipeline along the railroad bed.

Accordingly, the West came to regard the Grozny and Emba oil fields as Franco-Belgian, and most of the fields on the Absheron Peninsula as English property, and this was the position promulgated and taken up among the West in preparation for an international conference in Genoa, which was to resolve the complex issues of the postwar economic system in Europe.

On April 10, 1922, an international conference of representatives from both the winning and losing countries of the First World War opened in the Italian port city of Genoa. This conference was intended to finally close the books on the recently concluded war and work out steps for Europe’s political and economic recovery. The participants included 29 nations and five dominions of Great Britain; the US declined to participate and was represented by only a single observer. Soviet Russia also sent a delegation, which was difficult to assign clearly to any of these groups.

At a preliminary meeting in Boulogne, France on February 25, 1922, British Prime Minister David Lloyd George (1868–1945) and French Prime Minister Raymond Poincaré (1860–1934) agreed that the main issue at the conference would be the “Russian question.” A special committee of experts, who worked in London from March 20 to 28, 1922, prepared a draft resolution in which Soviet Russia would be required to acknowledge all debts and financial obligations of all former Russian authorities, and to assume responsibility for all losses due to the actions of both the Soviet and preceding governments or local authorities. According to this draft, all loans concluded with Russia after August 1, 1914 were to be considered paid after payment of a certain sum yet to be determined, and all nationalized enterprises were to be returned to their foreign owners.

In its turn, the government of Soviet Russia carried out a series of important organizational and political preparations. To ensure the complete diplomatic unity of the Soviet republics, a protocol was signed in Moscow on February 22, 1922 granting the RSFSR the power to defend the rights of the Union republics (Ukraine, Belorussia, Georgia, Armenia, Azerbaijan, the Buxoro [Bukhara] and Khorezm Republics, and the Far Eastern Republic) at the Genoa Conference, and to execute and sign documents and certain international treaties and agreements developed at the conference on their behalf. A protocol was then signed in Riga on March 30, 1922 at a special conference of representatives of the RSFSR, Estonia, Latvia, and Poland dedicated to coordinating the actions of the delegates of these states at the Genoa Conference, in which the delegates of Estonia, Latvia, and Poland expressed the opinion that the Soviet Russian government had to be recognized de jure.

In addition, the RSFSR Council of People’s Commissars decided to create a special commission to calculate the debts of the tsarist and provisional governments and compute the losses inflicted on the Russian economy during the years of the anti-Soviet imperialist intervention of 1917–1922. As it turned out, Russia’s debts totaled 18.496 billion gold rubles, while the losses inflicted on the country’s economy were 39 billion gold rubles.

A speech given at the first session of the Genoa conference by RSFSR People’s Commissar for Foreign Affairs Georgy Chicherin (1872–1936) contained a proposal for broad economic, political, and cultural cooperation between capitalist and socialist countries, noninterference in internal affairs, recognition of the principles of nonaggression, full equality, and mutual benefit, as well as resolution of all conflicts by peaceful means, economic cooperation, and development of trade relations. The program set forth by the representatives of the Soviet state met the fundamental interests of the peoples of all countries, and was aimed at establishing world peace. The Soviet government was prepared to accept the prewar debts and preferential right of most owners to receive the property that had previously belonged to them via concession or lease, provided the Soviet state received de jure recognition and was granted financial aid, and its war debts and interest thereon were forgiven.

A proposal submitted by the Soviet delegation for universal arms reduction was very important. People’s Commissar Chicherin declared the readiness of the Soviet state to support all attempts aimed at eliminating the threat of new wars. But the Soviet delegation’s call for disarmament caused confusion among the conference delegates. French representative Jean Louis Barthou even spoke openly against the proposal, although the delegations of other powers, concerned about public opinion, refrained from making similar sharp comments.

In response, a resolution of allied delegations was announced on April 15, 1922 and contained the following requirements for Soviet Russia: “1. The allied creditor states represented in Genoa cannot accept any obligations regarding claims made by the Soviet government. 2. However, in view of Russia’s severe economic state, the creditor states are inclined to reduce Russia’s war debt to them in percentage terms, the amounts of which are to be determined later. The nations represented at Genoa are inclined to take under consideration not only the question of deferred payment of current interest, but also of deferred payment of some overdue or delinquent interest. 3. Nevertheless, it must be finally established that no exceptions can be made for the Soviet government regarding: a) debts and financial obligations assumed to citizens of other nationalities; b) regarding the rights of these citizens to restoration of their property rights or to compensation for the damages and losses they have suffered.”

As a result, the Soviet Russian delegation found itself in an unusually difficult position. Only Soviet Russia was presented this memorandum containing a series of harsh, ultimatum-like demands. Furthermore, when Georgy Chicherin and Leonid Krasin declared the government’s willingness to meet all financial obligations—but only those of tsarist Russia and those assumed before the beginning of the world war—it was evident from the ensuing speeches by representatives of the Entente countries that the issue really boiled down to a single question: How and in what form did the Bolsheviks intend to cover the losses of the former owners of the Baku and Grozny oil fields?

As the Genoa Conference continued, it became clear that British Prime Minister David Lloyd George and Foreign Minister Lord Curzon openly supported the position of Great Britain’s oil companies, and John D. Rockefeller’s American Standard Oil Company was secretly backing the French and Belgian delegations at the conference. It is telling that the representatives of companies interested in southern Russian oil enterprises soon openly declared the need to establish a special panel on petroleum affairs at the Genoa Conference, which would include the participation of Royal Dutch Shell, the Anglo-Persian Company, and the Standard Oil Company, among other groups.

It is no surprise that during the conference the topic of Russian oil was addressed by publications both abroad and in Soviet Russia. For example, alongside articles on the Genoa Conference and speeches by the heads of delegations, the official VSNKh organ, the newspaper Izvestia [“News”] began publishing materials that it would normally place under the rubric “Oil Concessions.” On May 5: “Krasin dismissed a report in the Paris paper Le Matin on the Soviet government’s signing of a treaty with some ‘foreign oil company’ for the exploitation of all Russia’s fields.” Then, on May 9 and May 25, coverage of an interview given by Leonid Krasin to a Matin correspondent: “I can absolutely assure you that we have not signed a contract with Shell. The supposition that we will give all our oil to one party is completely contrary to our principles and to our interests. Our oil riches were exploited before the war in a most foolish manner. The parcels were located extremely irregularly as small oases. The gaps between them were not exploited. Each parcel required special equipment and separate technical staff. In addition, each of the owners of these small parcels drilled at their boundaries in order to drain oil already found and being exploited from their neighbors. We intend to proceed completely differently. In Baku District, we will continue the experiment of direct exploitation of oil by the state on approximately a quarter of the territory. We will divide the rest into three or four areas, fairly large ones, to permit benefits from concentration of both equipment and technical supervision of the business. In addition, such wide areas allow drilling to be done along directional lines that match those of the petroleum deposits. But it is in our own interests to concede areas to different companies—English, American, French, Belgian. We will reward the previous owners with concessions in these areas. The Belgian viewpoint seems strange to me. The Belgians are the very ones who possess a large number of these small parcels, which have no value without renovating everything. In fact, what good is the parcel to its owner if electrical, hydraulic, and other services are not restored in the entire basin? The English completely agree with this scheme of ours, and the Russian government will also invest in the capital and materials needed for exploitation. This course is the best way to compensate former owners of small oil parcels, because they could invest in these companies.”³⁴

This interview with People’s Commissar Krasin, in which he disclosed the coordination and commonality of the Anglo-Soviet position, merely poured oil on the fire, as can be seen in the following report dated May 9: “Negotiations are underway in Genoa on the question of oil concessions. The English financier Samueli has come to Genoa, as has Grassouin from France. In addition, Rockefeller’s secretary is already in Genoa. Such a congress shows best of all that the question of Russian oil has been made a top priority. Standard Oil has filed a protest against all the exclusive concessions that Russia is considering granting to Royal Dutch Shell. Belford conferred on this matter with Secretary of State Hughes, and assured him that the US would not accept any agreements contrary to the interests of American capital in Russia. The American government has instructed its ambassadors in London and Rome to learn whether the Soviet government has conducted negotiations with Shell. If this turns out to be the case, the US will file a protest with the English government.” Then on May 10: “The French government has sent several oil production experts to Genoa, who intend to force Lloyd George to convene a special conference of representatives from countries interested in Russian oil concessions. Lloyd George has assured the American ambassador that England will not sign an oil concession agreement with Russia without American participation. Foreign newspapers note that the oil issue has thrown North America off balance. The Standard Oil representatives arriving in Genoa are interested in whether Krasin is negotiating with other oil groups. The members of the Commission for Assistance in Restoring Italian-Russian Economic Relations met with Krasin yesterday, specifically on the question of oil exports. The negotiations went well.” And again, on May 11, the respectable British newspaper, The Times, reported: “The whole conference reeks of oil,” and the London Daily Telegraph echoed: “When Lloyd George met with Barthou, the oil question played the leading role.” On May 14, the American paper New York World underscored the situation at the conference: “Russian oil is the big trump card in the Soviet delegation’s hand.”

On May 18, 1922, Izvestia published the following statement on Genoa by Soviet People’s Commissar Leon Trotsky: “How justified are the rumors that the Russian government is supposedly negotiating with English entrepreneurs to grant them concessions to Russian oil fields? I am not specifically informed on these negotiations, but I have no doubt that our petroleum resources represent a tremendous field for the application of foreign capital, both in the area of efficient exploitation and in the area of further exploration. The conduct of the negotiations is in the hands of Krasin, the people’s commissar for foreign trade. What role English entrepreneurs are playing at the moment I cannot say precisely. But I have no doubt that if Lloyd George were to finally abandon Urquhart’s ultimatums and ensure the success of a military and political agreement, economic negotiations would proceed swiftly and the Soviet Federation’s oil industry would occupy one of the primary positions in these negotiations.”

As Soviet Russia rejected the Entente’s ultimatum and the conference essentially collapsed, British Prime Minister Lloyd George offered to refer the “Russian question” for further study to a commission of experts, which was to gather a month later at a different site, in The Hague.

On May 19, 1922, commenting on the collapse of the conference, the French newspaper L’Internationale stressed that “the failure of the Genoa conference is due entirely to the fight between Royal Dutch and Standard Oil. The conference participants are not interested in the question of rebuilding Europe; they need only Caucasian oil.” The German paper Neue Freie Presse, reporting along the same lines, wrote that: “It is extremely important for Great Britain to gain a monopoly over Caucasian oil, mainly because the English merchant marine is switching more and more to petroleum fuel.”

The day after the conference ended, May 20, Izvestia wrote: “One thing is clear: the question of Russian oil was at the focus of all the behind-the-scenes intrigue at the Genoa conference. And the conference was killed primarily by the tacit interference of America, which is to say, of Rockefeller, the head of its oil trust. The second act of this oil tragicomedy will play out in The Hague. All other issues, right up to the question of our recognition of foreigners’ private property, are only secondary sideshows compared to oil. That isn’t the point; the discussion is about oil and only oil—the insiders know this—and oil is our main trump card.... And while Royal Dutch Shell has not yet signed a contract with us, they will. They or another trust; in the end, we don’t care. But they are the supplicants, not we.”

The Hague International Financial and Economic Conference that followed took place from June 15 to July 19, 1922, drawing delegations from the same nations as had attended the Genoa conference two months earlier. The Entente delegations again stubbornly tried to force the RSFSR to recognize the debts of the tsarist government, return nationalized businesses to their former foreign owners, and grant restitution of nationalized property as the sole form of realistic compensation.

Guided by the principle of equality among nations, the Soviet delegation defended the same position as it did in Genoa. The Entente representatives were told of Soviet Russia’s willingness to discuss demands provided the country was granted credits for restoration of the economy destroyed by the anti-Soviet imperialist intervention of 1917— 1922 and blockade, and the question of the repayment of war debts was taken off the table. Once again, the Soviet delegation presented a list of businesses that could be granted to their former foreign owners under concession or lease arrangements. As for private property, there would be no discussion of any mass restitution, although the Soviet delegation stated a willingness to discuss compensation on a case-by-case basis.

Further negotiations showed a general reluctance by participating nations to grant credit to the Soviet government. The implacability of the former foreign owners regarding restitution of oil fields and businesses ultimately forced the Hague Conference to a dead end.

At the last session, on July 19, 1922, RSFSR Deputy People’s Commissar for Foreign Affairs Maksim Litvinov (1876–1951) reiterated the Soviet government’s willingness, in principle, to repay its prewar debts and realistically compensate those foreigners who previously owned property in Russia and would not receive satisfaction through concessions by offering them profitable participation in joint ventures. However, in the end, the total unwillingness of the Western representatives to budge on oil restitution, and their unwillingness to continue The Hague Conference on a constructive basis, forced it to adjourn without achieving any positive results.

Soviet political leaders learned serious lessons from the experience, however, which were reflected fairly quickly in tactical changes by Soviet representatives in establishing mutually profitable economic relations with leading Western countries. Within a year after the Genoa and Hague conferences, Soviet Russia had concluded economic agreements with 14 European countries, in which the delivery of Soviet petroleum products to the European market played a far from minor role.

The First Successes of Soviet Russia’s Oil Strategy

After years of civil war and several transitions to rule by different political forces, the Soviet Russian oil industry region was in a difficult position. By early 1921, only 960 production wells were operating on the Absheron Peninsula, versus 3,500 in 1913. The volume of oil refined had also fallen to 110,000–165,000 tons, down from 275,000 in 1918. The situation in the Grozny oil region and the Kuban region was no better.

These difficulties were magnified by an “oil blockade” of Soviet Russia created by the combined efforts of several Western governments and leading corporations.

In a prescient interview in the March 1922 issue of Ekonomicheskaya zhizn [“Economic Life”], People’s Commissar Leonid Krasin noted the beginning of the collapse of the economic blockade of Soviet Russia as a result of trade treaties with Great Britain and Germany. He added that: “The same fate also befell the oil blockade, which the former oil owners tried to organize when we exported oil reserves.” Speaking further about the issue of oil exports, Krasin emphasized the importance of “the creation of special export agencies, which will supervise the export of critical products abroad.”

Likewise, RSFSR State Planning Committee [Gosplan] specialists assumed, in early 1922, that “Russia can export petroleum products and crude oil worth about 160 million gold rubles at current prices in 1925, and up to 500–600 million gold rubles by 1932.... Thus, we must export the maximum possible amount of crude oil and petroleum products, both to obtain critically necessary hard currency and to improve our fuel supply.”

Still, there were plenty of skeptics on the other side, voicing their doubts at the top of their lungs. For example, in an article in the Financial Times of May 10, 1922, the noted English businessman Leslie Urquhart, who had worked for many years in Russia, expressed frank skepticism regarding the restoration of the Russian oil business: “1) The Russian oil fields cannot export crude oil abroad; 2) In order to restore production even to the low level of 1917, they will have to begin by drilling new wells, which has not been done for five years; 3) This operation will require outlays amounting to at least £20 million, not to mention major outlays required to bring the fields back to their former condition; 4) Even if the 1917 production level is achieved, all production will be absorbed by Russian transportation and industry. For many years, Russia will remain an oil importer, not an exporter.”

However, the pessimistic forecasts of Western specialists would soon receive a convincing answer. In the early 1920s, the Soviet authorities, having achieved notable successes in the domestic and foreign policy arenas, diverged from the policy of war communism, with its militarized foundations, and began to implement the New Economic Policy (NEP). The principal characteristic feature of the NEP was the use of a series of market methods of management in a government-controlled economy. The main objective of the NEP was to revive the damaged economy and as a result, to restore it more quickly. In the same period, the administration of the oil industry was restructured through the so-called “trust reform.” To manage the biggest businesses, the Soviets created trusts—Azneft, Grozneft, Embaneft—which operated on a self-sufficient basis. Furthermore, in early March 1921, a segment of the Baku-Batumi pipeline to Tiflis was restored, considerably accelerating the export of petroleum products. It delivered its first batch of kerosene on May 22, 1921.

On March 21, 1922, the RSFSR Council of People’s Commissars began requiring all customers to pay for petroleum products. Using the newly formed state trusts, the Soviet government attempted to fully control the domestic and foreign markets, not allowing excessive unraveling of market relations, and eliminating competition within the industry.

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.

Once Neftesindikat’s export successes became obvious and indisputable, this aspect of its operation was codified. A VSNKh order dated September 12, 1923 determined that “the Syndicate is the monopoly for the sale of oil, both on the domestic and foreign markets, reporting directly to the USSR VSNKh as represented by the Main Administration for Fuel [GUT].”

With every passing year, the volume of Soviet oil exports rose exponentially. Whereas the Soviets exported 1.2 million barrels of petroleum products in 1921–22 to only five countries, by 1922–23, over 2.4 million barrels of Soviet oil was being exported to 13 countries. Thus, the battle for “a place in the sun” on the European and world markets intensified.

The success of Neftesindikat’s operations enabled the USSR to obtain considerable hard-currency income, which the country needed badly at the time, thus cementing the importance of crude oil and petroleum products exports in the minds of the Soviet political leadership.

Aleksandr Serebrovsky’s Trip to the USA

A significant contribution to restoring and accelerating the industrialization of the Soviet oil industry was made by the engineer Aleksandr Serebrovsky (1884–1938), an outstanding production organizer.

In 1911, he completed the full curriculum of the Brussels Polytechnic School and received a degree in mechanical engineering. Upon returning to Russia, he worked in various engineering jobs. In May of 1920, the RSFSR Council of People’s Commissars (CPC) sent him to the Absheron Peninsula to head Azneft, one of the newly created conglomerates of nationalized enterprises.

At that time, the oil industry of Soviet Russia was in an extremely serious position: its 1920 oil production total of 4.243 million tons was significantly less than the prewar volume of 10.147 million tons produced in 1913.

Serebrovsky warmly welcomed the transition from war communism to the New Economic Policy, since the NEP’s initial phase gave society certain hopes for positive change, including the accelerated recovery of the domestic oil industry. The basic principles of the NEP proposed giving limited independence, based on cost accounting, to commercial entities, which defined a type of “corridor of economic freedom.”

Serebrovsky’s strategy for restoring and modernizing the Russian oil business focused on the creative use of advanced foreign know-how, primarily American, on the assumption that Russia had the necessary technical and production culture to adopt American innovations in the oil industry. He was striving, through the use of the latest American technologies, to realize his strategic plans of converting Azneft into one of the most competitive oil companies in the world.

His business trip to the US in the second half of 1924, which lasted several months, played a decisive role in the realization of these plans.

The organization of his visit was one of the first successful transactions of the Soviet-American joint-stock company Amtorg (American Trading Corporation), which was created on May 27, 1924 and registered under the laws of the state of New York. This company was headed by Isay Khurgin (1887–1925), an experienced trade representative who simultaneously occupied the post of authorized representative of the USSR People’s Commissariat for Foreign Trade in the US.

Aleksandr Serebrovsky first set foot on American soil on July 29, 1924. The very next day, accompanied by Amtorg employees, he visited the central office of the Standard Oil Company of New York located on Battery Square in downtown Manhattan. During the negotiations, Walter Teagle, a Standard Oil executive director, showed great interest in cooperating with one of the highest directors of the Soviet oil industry and agreed to allow Serebrovsky to visit the company’s main oil fields and refineries without restrictions. Moreover, hoping to deepen and develop business relations, Teagle even expressed willingness to help the Soviet representatives purchase modern oilfield equipment. All this pointed to a sea change in the American oil giant’s steadfast position over the preceding two years, and in their subsequent relations with Soviet Russia, Standard Oil decided to pursue the convincing example set by their main competitor, Sir Henri Deterding of Royal Dutch Shell.

Aleksandr Serebrovsky’s main obstacle in acquiring American oilfield equipment, however, was the question of payment. At the time, Azneft did not have the necessary foreign currency resources and was totally unable to get credit from foreign banks. Nor could Standard Oil’s Teagle even give guarantees to equipment suppliers; in the American framework, this was viewed as granting Azneft long-term credit. According to Teagle, the question of payments could be decided only by the elder John D. Rockefeller, the founding father of Standard Oil Company, who in those years only involved himself in the corporation’s business in exceptional cases. (Incidentally, at that time the company was the largest in the world: its market capitalization on January 1, 1924 was $1,037 billion, while that of Royal Dutch Shell was only $826 million.)

The Russian oil representative decided to take a chance and wrote a letter to Rockefeller requesting a personal meeting; to everyone’s surprise, Rockefeller consented. Serebrovsky described this meeting in his memoirs: “The old man almost always lived at one of his country estates. Having traveled about a hundred versts [66 miles] from New York, we turned into a park enclosed by a fence with beautiful gates. The house was rather simple, as were all its furnishings, comfortable and adapted to the habits of the old businessman. The old man received me in his room, where he was relaxing after work. He was trying not to seem aloof or untidy, as I was told. He showed the ability to smile and said that now was the time in his routine for relaxation, but that he knew me as a pleasant person to talk with and was certain that he would get even more relaxation from our conversation. He was very well-informed about things in Baku... and about our resources. He emphasized several times that they were willing to support Soviet industry on the condition that we be his allies.... I proposed two arrangements. First, he would give a letter of guarantee to his bank to pay our supplier invoices from future earnings on petroleum products.... Rockefeller thought for a long time, and then looked at me attentively and unexpectedly agreed. Second, he would give a letter to suppliers in which he would recommend us as buyers well known to him and recommend that we be given the same discount on invoices as Standard Oil. Rockefeller accepted this much more readily. It was around five in the afternoon, and tea was served. The old man poured tea for me, offered me cookies with jam, and then invited me to take a stroll. He walked quickly and for a long time, half an hour, and we went around the entire forest park. I was hardly able to keep up with him, and my leg ached. The two of us dined, and then he went to look at his mail, leaving me to spend the night since I did not ask to go to New York.... In the morning I was awakened before dawn. The old man was going on a stroll before breakfast and wanted to talk along the way.... After breakfast I bid him farewell and left.”

Serebrovsky later found out one of the reasons why Rockefeller agreed so quickly to the Soviet proposals. It turns out that the oil magnate had noticed that one of the low-cut boots worn by the Azneft director had a small patch on it, and he told his financial director: “This man can be trusted in debt. He is not a spendthrift, does not drink wine, does not smoke, and I like him.” According to Rockefeller’s relatives and close associates, he was very stingy and was impressed by modest and thrifty people.

After meeting with “America’s oil king,” Serebrovsky spent several months visiting the oil-producing regions of the US. In Pennsylvania, he examined several refineries and studied in detail the organization of the supply of materials and equipment. Next, he visited all the main fields of the so-called “oil valley” and examined the famous sites of the “oil fever:” Oil City, Rouseville, Petroleum Center, and Titusville, and then he went on to New Jersey, Philadelphia, Chicago, Detroit, and finally to Texas and California.

At the Long Beach fields in California, Serebrovsky spent some time working at drilling, performing the difficult tasks required of the average worker, trying to learn how to drill like the best American specialists. He attentively studied the activity of oilfield equipment operators, getting into the particulars of the field service of machines and mechanisms.

Aleksandr Serebrovsky had reached Oklahoma when he received a telegram from Amtorg saying that he had to return to New York. There, after careful examination of drawings, templates, and instructions offered to him by American suppliers, he ordered the necessary oilfield equipment. It was at this point that, after studying the documentation, the Azneft director began to write a book about the oil industry, which later became a standard reference work that was used for many years by Soviet oil workers.

Afterward, Serebrovsky traveled to Tulsa, Oklahoma, where the International Petroleum Congress and national oil exhibition opened in early October 1924. There he gave a detailed talk about the status and outlook for development of the Russian oil industry. His talk enjoyed widespread media coverage, receiving commentary by the influential New York Times and other leading American newspapers, after which it was published in a series of English and French oil publications.

Over the course of his long return sea voyage from the US to Europe, Serebrovsky was able to finish his book The Oil and Gas Industry in America [Neftyanaya i gazovaya promyshlennost v Amerike], which summarized his stay in the US. During his brief stay in London, he had the book published in Russian.

After returning to Moscow, on January 15, 1925 Serebrovsky gave a public lecture at the Business Club, where he was already giving copies of his book out to oil industry workers as accompanying information.

On the whole, engineer Serebrovsky’s trip to the US had a long-term positive influence on the development of the Azneft trust, and, consequently, on the entire Soviet oil industry.

For example, in the area of production administration, he proposed, on the basis of his analysis of American administrative practice, that work at Azneft be organized according to the model of leading US companies, which had moved to a divisional organizational structure. Such a structure involved giving company subsidiaries practically full authority to make operational administrative decisions, while the company’s central office decided strategic administrative questions and controlled the activity of the company as a whole.

In trying to determine the most acceptable organization model for Russian conditions, Serebrovsky carefully analyzed, above all, the experience of the Standard Oil Company. He explained: “I will not speak about the nationwide unification of this company. This is too large a machine for us; let us take individual Standards, for example its California organization. What do we see there? First, the Standard Oil Company of California is a completely independent enterprise (and not just for the purpose of anti-trust law); it is connected with the center by the most tenuous of financial ties, which are imperceptible, but very strong. And in California itself, you will find fields that are completely independent and a completely independent refinery company. There is an independent pumping company, and there appears to be a completely separate supply company (National Oil Supply), but all these taken together make up California Standard. Their operations run much better than ours, because the very lowest-level companies do all the work, and the center only administers.”³⁶

Aleksandr Serebrovsky strived to realize this approach in the administration of Azneft by working to relieve the administrative center from getting involved in the minutiae of the trust’s daily operations and transferring part of the administration and part of the responsibility to separate regions and enterprises. He felt that providing greater independence to the regions and enterprises and putting them on full cost accounting allowed them greater freedom to develop and the ability to further technical and organizational improvements at their respective locations. As later events showed, the divisional structure that Serebrovsky proposed based on his analysis of American oil companies was perfectly suited to Azneft, since it took into account the large size of the trust, the geographic dispersion of its offices and enterprises, its orientation toward a wide assortment of petroleum products intended for completely diverse groups of customers, etc. However, implementation of his proposal turned out to be incomplete in many respects, as it did not take into account his recommendations regarding the introduction of market principles into the organization of petroleum products trade and the development of the oil economy as a whole.

Serebrovsky also made substantial contributions in the realm of oil production. The samples of oil production equipment that he purchased greatly helped promote the use of electric downhole pumps and put rotary drilling technology into practice. Russian oil workers called these methods of drilling and production “American.” As director of the trust, Serebrovsky started to put these methods into practice at Azneft as early as 1923, although it was not until 1925 that they started to have a perceptible economic effect. Serebrovsky’s contributions to production were critical to the development of the Russian oil industry: without electric downhole pumps rotary drilling was impossible.

Serebrovsky later wrote: “The first thousand downhole pumps received were from America and were the beginning of the transition to the systematic replacement of sand-line reels and bailers with modern economical machines. A great many obstacles stood in the way of this replacement: inertia, the habit of using the old methods, the shortage of qualified workers, the difficulties of operation at sandy sites, etc., but all this was overcome.” By October 1928, 2,554 (78.8%) of the 3,238 wells were already using downhole pumps, while the number of wells that employed bailing, an old production method that had been most common earlier, had sharply decreased from 86.5% in 1923 to 13.5%.

Overall, from 1924 to 1928, changes in drilling technology increased hole-making speed by more than tenfold, and the use of downhole pumps reduced the cost of oil production by approximately 50%. Over four years, the total savings from using the American methods for drilling, production, and electrification amounted to more than 200 million rubles (a significant figure compared to total oil industry capital investments during this period of 743.4 million rubles).

During his trip abroad, Serebrovsky placed special emphasis on refining. The technological backwardness of the Russian refining sector as compared to the rest of the world became acutely apparent in the 1920s, when significant innovations began to appear in the industry, for example, in the cracking process. There is no doubt that American companies were leaders in this field, and that these companies, which had more than 2,500 patents in this area by the beginning of the 1920s, had been leading the development of refining processes since 1860. Their experience convincingly demonstrated the promise of the cracking process, which made it possible to increase the output of light fractions and improve the quality of gasoline.

During Serebrovsky’s visit to the US, he conducted negotiations with the management of the Sinclair Oil Corporation for the purchase of $25 million worth of American refining equipment. And although the deal fell through, Serebrovsky’s presentation nonetheless prompted the Soviet government to purchase cracking units overseas and to enlist the help of foreign companies and specialists to get the acquired equipment working properly. Subsequently, the use of American technologies and equipment made it possible to produce a series of products that were new at the time (cracked gasoline, etc.). Moreover, modernization of the industry made it possible to produce special grades of lubricants (bright stock) from specific grades of Baku petroleum. The expansion in the production of high-quality petroleum products also made the goal of industrializing the national economy a much more realistic endeavor. Before that, no serious discussion had been possible on developing the industry for the domestic manufacture of tractors, automobiles, ships, etc. Moreover, the modernization of the refining sector played a key role in meeting the government’s fuel needs, as the improvement in fuel quality opened the way for the wholesale construction of modern military hardware.

Serebrovsky also paid special attention during his American business trip to acquiring the equipment necessary to create a modern domestic infrastructure for the production of drilling and refining machinery. The development of such an infrastructure allowed not only a subsequent reduction in the Soviet oil industry’s dependence on massive deliveries of imported equipment, but also accelerated the industry’s development by saving significant financial resources. As Serebrovsky noted: “Indeed, if we acquired all the equipment we needed overseas, we would not have enough foreign currency. If we ordered it at factories in the center of the Soviet Union, the equipment would be very expensive and would not arrive by our deadlines. Therefore, we first put our Baku machine– production plants on a firm basis by equipping them with machine tools ordered from America. We built two basic plants: one for making drills and drilling equipment, and the other for making only downhole pumps. The plants were built according to an American design and operated according to American methods.”³⁷ At his initiative, in 1925 the VSNKh created a standing committee on the oil industry to study the organization of production and to purchase machines and equipment overseas.

Thus, starting in the mid-1920s, the Russian oil industry succeeded, with the broad participation of foreign capital, in realizing a policy of replacing imports and instead supplying the industry with well-drilling and operating equipment that was domestically produced according to American models.

As for marketing and sales, again taking American experience into account, Aleksandr Serebrovsky spoke out against the situation that had developed in the domestic industry, where all produced petroleum products came under the complete control of Neftesindikat, which sold them on the domestic and foreign markets. “The basis of business is production, and production must be the master of trade. Neftesindikat’s position will only be correct if it becomes merely an office for selling the trusts’ marketable output, and if the People’s Commissariat for Finance and the authorities do not consider it to be a separate enterprise.”³⁸ He considered overcoming the divorce of trade and production, which contradicted all world practice, to be the most important precondition for introducing true cost accounting and for checking the trust’s performance empirically.

Incidentally, similar proposals were made by other oil specialists, including Ivan Strizhov and Mikhail Barinov. However, the Soviet political leadership disregarded their recommendations, and during the NEP years oil enterprises never actually switched to true cost accounting. Here, the decision regarding the organizational form of trade in petroleum products was made primarily on the basis not of economic considerations, but of ideological and political ones caused by an internal Party struggle and a striving not to allow the restoration of capitalism.

As for the specific effects of Aleksandr Serebrovsky’s trip on the development of export oil trading, it laid the foundation for large-scale cooperation with American companies concerning deliveries of Russian oil on the foreign market. The first major Soviet export contracts with American oil companies were signed in 1924 and 1925, which had great significance for strengthening both Soviet and American positions in world trade in petroleum products. By early 1928, the oil industry had become the USSR’s largest export industry, and by the late 1920s, income from international trade in petroleum products was able to compensate somewhat for the sharp decline in grain export revenue.

Understanding the pressing need to master advanced technology, Aleksandr Serebrovsky made arrangements with the management of a number of American oil companies to schedule trips abroad for Soviet engineers and workers to study American technology in the oil industry.

The first group of oil workers sent to America for periods ranging from six months to two years consisted of 20 workers and 15 engineers. They were well-received in America, since the companies manufacturing the equipment and striving to deliver it to the USSR in greater and greater volumes were interested in training the personnel that might be handling their machines. With the help of these companies, Soviet specialists were sent around to factories, drilling sites, and fields to learn production practices. According to Serebrovsky’s plan, the specialists were sent to various American companies to study specific technical processes: pumping, gas recovery, cracking, etc.

Social questions did not escape his close attention and during his trip, the “Red director” Serebrovsky paid special attention to the living arrangements and daily life of American oil workers. In particular, he paid attention to the buildings in which American oil workers lived. These cottages had a well designed, convenient layout and an attractive exterior. Also important was the fact that these buildings were simple to build.

Striving to solve the extremely acute housing problem at the Baku fields, Aleksandr Serebrovsky ordered a whole small town of these cottages from American manufacturers. This measure not only succeeded at improving the housing conditions of oil workers, but also served to adorn the suburbs and several residential neighborhoods of Baku with very original buildings of constructivist-style architecture, thus transforming the city and giving it a unique flavor.

Along with the structural parts and equipment for the cottages that had been ordered, other objects also arrived in Baku that were strange for those times: mobile clinics, gas kitchen stoves, washing machines, vacuum cleaners, and even soccer balls. It is interesting that upon returning from America, Serebrovsky took the initiative to organize soccer teams at the fields and arrange the first soccer match in Baku. The Azneft team, which was later called Neftchi, became one of the most popular teams in the country. Thus, an unexpected outcome of Serebrovsky’s trip to America was the development of soccer on the Absheron Peninsula.

From today’s perspective it is easy to see that the impressive results of Aleksandr Serebrovsky’s trip to the US in 1924 laid a very productive foundation for successful and mutually beneficial Russian-American cooperation in the area of oil.

In the context of the ongoing energy dialog between Russia and the US, the experience of the 1920s cannot, of course, provide ready answers to the numerous questions now facing the management of Russian and American oil companies. Nevertheless, it provides modern managers rich factual material for analysis in making administrative decisions for the development of mutually beneficial cooperative efforts with foreign companies and attraction of foreign capital into the business as a whole.

Developing Success in the Export Direction

On May 9, 1924, the Labor and Defense Council approved a new version of the Neftesindikat Charter, confirming a commitment at the highest level to strengthen and develop the export direction of the Soviet oil industry.

During the 1920s, all the new Western companies began trading oil with the USSR. As of the 1923–24 fiscal year, Neftesindikat had business contacts with 28 trading companies in 20 countries. Crude oil and petroleum products exports continued to grow steadily, reaching 5.2 million barrels in fiscal 1923–24. By fiscal 1921–22, Soviet crude oil exports were double their 1913 levels, and by fiscal 1923–24 they were over 100 times the prewar levels. Likewise, 1.2 million barrels of petroleum products were exported in fiscal 1921–22, a total of 2.4 million barrels was shipped abroad in 1922–23, followed by the export of 5.5 million barrels of petroleum products from Baku and Grozny in fiscal 1923–24.

With Soviet oil exports almost doubling each year, the national oil industry became more and more oriented towards exports. While the share of overall Soviet oil production exported amounted to 6.1% in fiscal 1922–23, this figure increased to 11.8% in 1923–24. Moreover, crude oil and petroleum products accounted for 23.6% of total industrial exports and 7.2% of all USSR exports by value.

At the end of this two-year period, Neftesindikat Chairman Georgy Lomov (Oppokov) (1888–1938) stated: “In the current 1924–25 [fiscal year], our oil exports will be worth approximately 56–60 million rubles, accounting for about three-quarters of all the country’s industrial exports in terms of value.”³⁹

As Doctor of History Yury Zhukov noted in his report “The Oil Factor in the Policy of the Soviet Ruling Elite (1921–1929)” in the collection Soviet Union’s Oil [Neft strany Sovetov], the USSR political leadership constantly focused on the issue of increasing oil exports and was faced with a difficult question: What Soviet petroleum products should be offered to the Western market to maximize profit? Specialists from the State Planning Committee and Neftesindikat believed gasoline exports would be the most preferable option. In less than a decade, for example, from 1911 to 1920, the gasoline share of US petroleum product output grew from 13% to 30%, while kerosene’s share fell from 34% to 12%. Demand for gasoline was also growing rapidly in Europe, and although overall kerosene imports by European countries fell 30% from 1913 to 1924 as people stopped using kerosene lamps as a source of lighting, there was still a market for kerosene in less developed countries; Egypt, Syria, Turkey, Persia, Bulgaria and Greece accounted for 67% of total Soviet kerosene exports in fiscal 1924–25. At the time, demand for gasoline in the USSR was extremely low, while the export profits for gasoline were very high due to Western Europe’s need for large amounts of gasoline. Consequently, the export-oriented Soviet oil industry required immediate modernization, a feat that ultimately proved impossible to accomplish in a timely manner.

Following a lengthy government debate, a decision nevertheless was made to proceed with exports of residual oil, which was in great demand on the global market. The State Planning Committee noted in 1922 that residual oil was becoming more popular in the global refining industry, and that residual oil had accounted for 48% of all petroleum products produced in the US in 1919. In early 1922, a ton of residual oil was worth 6–10 times more than a ton of coal on the world market.

Exports of residual oil, which began de facto in fiscal 1923–24, increased by an order of magnitude in the following 1924–25 fiscal year and exceeded the prewar level by several times. Thus, a clear shift can be noted in the trajectory of petroleum products exports: whereas Russian oil exports consisted more of kerosene and oil prior to World War I, this trend had clearly transitioned to residual oil and gasoline by 1924–25. For example, in 1913, kerosene and oil accounted for 77% of total Russian oil exports, but only 23.5% in 1924–25.

In fiscal 1924–25, oil and petroleum products exports from the USSR once again almost doubled compared to the previous year, to 9.8 million barrels. During Alexander Serebrovsky’s time in the US in the second half of 1924, the Standard Oil Company purchased Soviet petroleum products for the first time. The British-Dutch company Royal Dutch Shell also purchased Soviet petroleum products for resale in the Middle and Far Eastern markets. Neftesindikat did not have its own sales network in these markets and was unable to cooperate with firms independent of Standard Oil or Royal Dutch Shell since such companies did not exist. These transnational oil giants organized the wholesale and retail sale of petroleum products in Middle and Far Eastern countries and prevented anyone else from entering this market.

Consequently, 44% of all Soviet kerosene was sold via Standard Oil and Royal Dutch Shell in 1924–25, while 33% was sold via these companies in 1926–27. These corporations managed all Soviet exports to India and Egypt, while a regional branch of Neftesindikat was able to sell kerosene to Turkey independently, from its own storage facilities, since an agreement on specific standards for the import of Soviet petroleum products was in effect in this area.

Neftesindikat was able to use a different marketing strategy in Western European markets that generated more profits than in the markets of colonial countries. It did so by selling small consignments of petroleum products to medium and small-sized European companies that were operating independently of the global giants and were extremely interested in such supplies. As a result, foreign partners emerged who were interested in developing business contacts without fear or favor. In addition, state-run organizations of several Western European nations such as Italy, Spain, Portugal, France and Germany started purchasing Soviet petroleum products. Italy and France were the main buyers of Soviet residual oil in the mid-1920s; Italy purchased residual oil for its navy and to sell on the free market, while France bought the product solely for its navy. Neftesindikat thus managed to set up a rather extensive sales network in Western Europe for Soviet petroleum products.

In the mid-1920s, Neftesindikat employed Soviet capital to create several specialized sales companies to sell petroleum products abroad, which operated in accordance with local laws. On August 23, 1924, representatives of Neftesindikat registered a company called Russian Oil Products, Ltd. (ROP) in London with charter capital of £100,000, with an address at London, Moorgate, E.C.2. By the next year (1925), entire trains of railroad cars were being used to ship ROP brand petroleum products, principally gasoline and kerosene, throughout the country. The company had as many as 100 of its own tankers with capacities ranging from 500 to 1,000 gallons. A truck fleet purchased from Messrs. Leyland Motors Ltd. was also quite impressive. Trucks and gasoline tankers of automobile brands well-known at the time—such as Albion, Vulcan and Morris—were unable to cope with the shipments. During its first years of operation, ROP placed orders for the construction of sea terminals in Avonmouth and Grangemouth, as well as storage facilities throughout the United Kingdom. The company’s popularity was growing rapidly in the country.

During the same year, the German-Russian Oil Company (Deutsche-Russische Naphta Kompanie) was set up in Germany. In addition, another Soviet oil trader called Derop was operating on the territory of the Weimar Republic. Subsequently, companies such as the French Petroleum Products Company and Petrolea in Italy were created, in addition to similar firms in Scandinavian and Baltic countries.

On February 10, 1925, the USSR Supreme Council for the National Economy issued a decree, signed by its chairman, Feliks Dzerzhinsky, increasing the number of Neftesindikat employees abroad by three employees in France, six in Turkey, two in Sweden and Norway and two in Austria and Czechoslovakia. In addition, Neftesindikat opened new branches in Greece (six employees) and Finland (four employees).

Neftesindikat set up a joint company in Spain with Argus Bank of Barcelona, which had the exclusive rights to sell Soviet petroleum products in Spain, Portugal, and their colonies.

Trade with Persia also increased, and the export company Persazneft was created in July 1924. Persazneft was founded by the Russian-Persian joint venture Sharkom (which owned 34% of the company’s capital), Azneft (51%) and the USSR Trade Delegation in Persia (15%). Kerosene exports from Baku to Persia were already much higher in fiscal 1924–25 than the levels of 1913, and Persia soon became the USSR’s main trading partner in the East, accounting for roughly half of all Soviet foreign trade with Eastern and Asian countries.

In 1925, Soviet petroleum products enjoyed a roughly 8% share of the European market, and it seemed there would be a steady trend towards further growth. Starting in spring 1925, however, trade relations between the Soviet Union and transnational oil companies began to deteriorate significantly. Purchases of Soviet petroleum products by global oil monopolies, particularly of the most expensive commodities like gasoline, began to decline rapidly, while the role of independent companies and state-controlled Western European entities continued to grow. Soviet gasoline quickly reached a 10% share of the British petrol market, and it was sold without the involvement of the oil giants, which viewed Soviet gasoline as a threat to their monopolies and began actively using unfair methods of competition.

An extensive campaign was launched against Soviet petroleum products on the British market in late 1925 and early 1926 under the auspices of the British Association of Creditors of the Russian Empire, although the actual initiator of the campaign was the Royal Dutch Shell group. Articles on “predatory Bolshevik nationalization” and “oil stolen by the Soviets” reappeared in British newspapers. The Standard Oil Company, also wanting to prevent Soviet petroleum products from entering Western European markets, supported the anti-Soviet rhetoric of the British business leaders.

As a result of this campaign, exports of Soviet residual oil to Great Britain fell from 162,800 tons in fiscal 1924–25 to 50,800 tons in 1925–26. In 1926–27, Neftesindikat did not export a single ton of residual oil to Great Britain. Total residual oil exports from the USSR fell by approximately 10% in fiscal 1925–26. In the same fiscal year, however, Soviet petroleum products exports grew 7.8% in volume and 14.1% in value due to an increase in global prices.

However, the joint and coordinated efforts of Soviet diplomats and trade representatives in various European countries soon managed to calm the outburst of anti-Soviet rhetoric and the USSR’s position in world markets began to improve markedly. In December 1926, Neftesindikat signed a concession agreement with the Standard Oil Company of New York for the construction of a modern refinery on the Black Sea coast. Under the concession agreement, the Rockefeller-led company built a refinery in Batumi to produce kerosene and export it to Asian markets in India, Indochina, Indonesia, and other Asian and Far Eastern countries. The refinery opened on August 1, 1927 and produced 179,000 tons of kerosene during the first eleven months of operation, or 13,000 tons more than its designed annual production capacity.

Exports of petroleum products from the USSR surpassed 2.2 million tons in fiscal 1926–27, up by more than 25% from the previous year. Total residual oil exports increased by 45% immediately. The USSR exported 14.3% of its residual oil and crude in 1926–27, while the share of gasoline exported was much higher, at 87.8%. Gasoline exports continued to grow consistently, and Soviet gasoline accounted for 6.8% of European imports in 1925, 8.3% in 1926, and 11.5% in 1927.

As of October 1, 1926, the capacity of oil storage reservoirs in European countries set up with the participation of the USSR was 33,000 tons. Meanwhile, the USSR share of global petroleum products exports amounted to 4.5% in 1926–27.

Hailing the active marketing of ROP, the British journal The Petroleum Times noted in October 1926 that “the entrance of the Soviet Oil Syndicate [Neftesindikat], which controlled up to 40% of the known crude oil reserves at the time, into the market is a positive factor and is bound to have a significant targeted impact on the state of the British fuel business.” The journal added, “The English public believes in healthy competition.” It is no coincidence that standard gasoline prices fell by 3.5 pence per gallon in the country as soon as ROP was registered, which proved advantageous to hundreds of companies and millions of Britons. Moreover, The Petroleum Times noted that ROP automobile gasoline was of higher quality than other types, and it was also sold for a penny less than similar gas from other sources. Multiplying these savings by the 880,000 tons of petroleum products imported into the British Isles by Neftesindikat made the benefits of such imports even more apparent. By fall 1926, British consumers had already saved £800,000 using this gasoline.

In 1927, Soviet gasoline accounted for 10% of total gasoline imports to England, 18% to France, 15% to Germany, 30% to Spain, and 17% to Italy. Almost all the gasoline produced in the USSR was exported. Demand within the country was still very low in 1927 as the Soviet automobile industry was just starting to develop.

Not surprisingly, the battle between global oil monopolies and Neftesindikat entities took another turn for the worse in 1927, with Great Britain once again serving as the main battleground.

In the first half of 1927, the United Kingdom had imported 50 million gallons of petroleum products from the USSR, including 19.667 million gallons via ROP. Of the latter amount, automotive fuel accounted for 14.189 million gallons, kerosene for 3.414 million gallons, and gas oil for 2.062 million gallons. The remaining petroleum products were imported via British oil traders, including Lubricating and Fuel Oils Ltd., Harris & Dixon Ltd., Newcastle Benzol Company, Messrs. Cory Bros. & Co. Ltd., and others.

On May 11, 1927, England’s Westminster Bank provided the Soviet Union with a large loan that was to be used, among other things, to finance operations needed to develop the Soviet oil industry. The next day, however, London police seized the building of the Soviet company ARCOS (All-Russian Cooperative Society Ltd.), an event that received wide international publicity. This company had been operating legally in the UK since June 1920 as a representative of cooperative organizations conducting business inside and outside Russia.

The ARCOS affair had very serious repercussions for relations between the USSR and Great Britain, and even led to the temporary severance of diplomatic relations between the two countries. Analyzing the causes of this international conflict, French researcher Francis Delaisi concluded that the “police invasion” of the ARCOS business premises was “inspired by big oil interests.”

Meanwhile, across the globe, Neftesindikat had just wrapped up lengthy negotiations with Standard Oil of New York in June 1927. The US company had agreed to purchase a quarter of all petroleum products exported by Neftesindikat. This move did not go unnoticed by Royal Dutch Shell, the second key player on the global oil market, and on July 19, 1927, Sir Henri Deterding wrote: “Standard Oil of New York is transferring its sales organization in British India to the Soviet government in order to sell stolen oil there.” He continued: “Since this affects our direct interests, we shall retaliate and the retaliation will be fierce.” Deterding made it clear that his corporation would fight any attempt by the Standard Oil Company to sell Soviet oil in India.

When Royal Dutch Shell reduced its kerosene prices in India on September 23, 1927, the Standard Oil Company, which was buying cheap Soviet kerosene, did the same. A kerosene price war broke out and quickly spread from India to other regions. Kerosene prices declined by more than 30% by the end of 1927 and the two oil monopolies incurred total losses of roughly $17 million.

In an effort to end the price war, the three leading oil corporations— the Standard Oil Company, Royal Dutch Shell and Anglo-Persian Oil Company—signed the “Red Line Agreement” under which an international oil cartel was created. The price war between the oil giants came to an end.

At the same time, the so-called “Sakhalin oil concession” occupied a special place in the Soviet leadership’s oil strategy, vividly demonstrating the priority political interests held over purely economic interests in the economic policy of the USSR in the 1920s.

The story of the Sakhalin oil concession began back in 1921, when the Far Eastern Republic, an ally of Soviet Russia, began holding talks with the American company Sinclair on the development of oil-bearing land in North Sakhalin.⁴⁰ With regard to the draft concession, the Bolshevik government thought: “A clash of interests between Japan and America in the Far East would be extremely beneficial politically.”

After the Far Eastern Republic joined Soviet Russia, the agreement with the Americans was endorsed in Moscow on January 26, 1923. Sinclair, however, was unable to begin developing the field as Japanese troops still remained in North Sakhalin. Moreover, the Japanese were extracting Sakhalin oil without permission from the Soviet government and without paying for it; in 1924 they extracted 13,300 tons of oil at the rich Okha fields. During negotiations later that year, Japan agreed to withdraw its troops from North Sakhalin but demanded concessions for the development of Sakhalin oil in exchange.

The USSR and Japan signed a convention establishing diplomatic relations in Beijing on January 20, 1925. Among other issues, the agreement offered Japanese entrepreneurs oil and coal concessions in North Sakhalin. An agreement was signed on December 14, 1925, providing oil concessions to a specially created Japanese company that became known as the North Sakhalin Oil Joint-Stock Company in 1927. The company’s stockholders included some of Japan’s largest companies: Mitsui, Mitsubishi, Sumitomo as well as Okura Kochyo, Nihon Sekyo and Kuhara.

The concessions for the use of the open fields were granted for 45 years, while concessions for prospecting new fields were granted for 11 years. The Japanese concessioners were required to pay annual rent amounting to 4% of production. In addition, royalties of 5% of the initial 33,000 tons produced were paid to the treasury. This share increased by a quarter percent for every additional 11,000 tons produced. Once production reached 253,000 tons, the Soviet government was paid a flat royalty of 15%. Royalties were negotiated separately for flowing oil (from 15% to 45% depending on the volume produced) and for gas production (from 10% to 35% depending on gas content). The Japanese also paid a land tax amounting to 3.84% of total production. The payment obligations in the agreement were consistent with standard international practice in those years.

The first chief executive of the Japanese concession company was Admiral Nakasato, who represented the interests of the Japanese Navy, the main consumer of Sakhalin oil at the time. Later, throughout the 1930s, North Sakhalin Oil maintained a close relationship with the Naval Ministry, with the Japanese selecting the company’s management and some of its staff from among its naval personnel.

North Sakhalin Oil produced 33,000 tons of oil in North Sakhalin in 1926, 77,000 tons in 1927, 146,000 tons in 1928 and 165,000 tons in 1929. The North Sakhalin concession accounted for approximately 13% of Japanese oil consumption in 1929, but above all the oil was of great importance to the Japanese Navy.

In late 1928, the USSR Labor and Defense Council passed a resolution on capital investments in the export industries of the economy. In drawing up the capital construction plan for the 1928–29 fiscal year, the State Planning Committee was instructed to pay special attention to the issue of financing for industrial sectors connected with exports, including oil exports. In order to increase USSR oil exports in the mid-1920s, the government decided that it was necessary not only to increase oil production, but also to provide proper conditions for its transportation (above all, to Black Sea ports), to adjust the structure of refining to the changing demand in European countries, to build oil storage facilities abroad, and to establish a viable sales network.

In this vein, the second most important domestic refinery, after Standard Oil’s Batumi refinery, was built in Tuapse with considerable assistance from America’s Graver Corporation to refine Grozny oil. Foster Wheeler Corporation (New York), Badger and Sons (Boston) and Winkler-Koch Corporation (Wichita, Kansas) performed the design and engineering for the new Soviet oil refineries, while General Electric handled most of the electrical equipment supplies (pumps, compressors, control devices, etc.).

Leading Soviet engineers traveled to America regularly to gain the experience necessary to operate the foreign equipment. Ivan Strizhov (1872–1953), senior director of the oil industry at the Supreme Council for the National Economy, left for America on October 1, 1927 to study the latest achievements in refining. Strizhov visited 23 refineries in 10 US states during his six-month trip. Later he remarked: “I never received a refusal for the inspection of any refinery or part of a refinery. I was welcomed with open arms. They showed me everything I wanted to see.”⁴¹ Upon returning to the USSR, Strizhov published a book titled American Refineries [Amerikanskiye nefteperegonnyye zavody], in which he gave a detailed description of all the newest refining systems of the time.

With the use of foreign technologies and efficient equipment, Soviet refineries began producing several products that were new at the time, including cracked gasoline and a special sort of lubricant called “bright stock.” The share of the most valuable light petroleum products in overall oil production grew to 10.1% in 1927–1928 and then to 15.1% in 1932 because of the significant contribution of these products.

The growth in the volume of high-quality petroleum products quickly justified the capital investments in the industry. Almost one-third (31.85%) of all petroleum products produced in the USSR were exported in fiscal 1928–29, including 88% of all gasoline manufactured.