861.50/928
The Ambassador in the Soviet Union (Steinhardt) to the Secretary of State
[Received December 6.]
Sir: Since the aggressive action undertaken thus far by the Soviet Union apparently gives rise abroad to the conjecture whether that country is not in a position to extend still further its territorial and strategic position at the expense of neighboring countries, the following observations on the present internal economic situation in the Soviet Union to which that country’s foreign policy is, of necessity, closely attuned, may be helpful to the Department at this time.
The mobilization of the reserve forces of the Red Army and Navy on the 9th of September created immediately a feeling of panic among the population since it was carried out in a manner so abrupt as to arouse fear of conflict with Germany. The sudden withdrawal of approximately a million workers from the national economy threw transport and industry into considerable confusion. A run took place immediately on savings banks and the endeavor to hoard foodstuffs caused queues to be even longer than was usually the case. The Soviet authorities resorted at once to coercive measures against hoarding and continued to place the usual amount of staple articles on sale with the result that the feeling of panic subsided after a few days, particularly in view of the fact that it soon became clear to the population that Soviet forces had not invaded Poland for the purpose of combating Germany.
Immediately upon mobilization the Soviet press started a drive for the purpose of rallying housewives to fill the ranks of labor lost to the armed forces that resulted in the enlistment of many thousands of untrained women in practically every branch of the national economy. At the same time the Stakhanov system was speeded up principally by obliging workers to operate wherever possible at least one or two more machines than heretofore. The full effect of adding a large number of untrained workers to industry and endeavoring to speed up production remains to be observed but it should be noted that even prior to September most branches of industry had been suffering for a number of years from a shortage of qualified workers, as well as from forced production methods, a deficiency which caused a large percentage of defective output and rapid deterioration of machinery.
The development of the national economy during the second quarter of the present year (Embassy’s despatch no. 8 of August 14, 193996) [Page 792] showed no signs of improvement during the succeeding quarter. Judging by the statistics for the period January 1 to September 8, the latest period for which data are available, the output of steel declined by 4 percent and that of rolled metal by 3 percent as compared with the corresponding period last year. Passenger car and truck production fell off considerably during the same period; the number of freight cars manufactured from July 1 to September 8 amounted to 2,094, a decline of 36 percent as compared with the corresponding period last year. Moreover, the petroleum industry has failed thus far to improve drilling operations; new development work has lagged as usual and accordingly it is doubtful whether the production of crude will be appreciably larger than in 1938. Consumption of petroleum undoubtedly will be considerably larger this year than during 1938, particularly in view of the movement of mechanized army units in Poland and the Baltic States. Emergency stock-piling also is likely to increase. Moreover, the transport system, both marine and railway, is greatly overburdened and consequently it is doubtful whether the Soviet Union will be in a position, even with the newly organized Polish fields, annually to furnish Germany during the next few years, without considerable injury to its agriculture and industry, petroleum products in an appreciably larger quantity than was exported to the entire world in 1938, namely, approximately 1,500,000 metric tons. An American railway expert who has resided in the Soviet Union for about twenty years holds the opinion that the Soviet railway system is incapable of hauling annually more than 500,000 metric tons of petroleum. This situation, according to this observer, will hardly improve to an appreciable degree during the next few years.
Largely because of the failure properly to exploit local resources the Soviet Union has been suffering seriously during the past three years from a shortage of many important raw materials, including even those of which it enjoys the greatest resources, such as iron, coal, petroleum and practically all non-ferrous metals. Deficit of materials is felt to an alarming degree in the construction industries, cement, bricks and fuel lacking the most. Even manganese, the only important metal of which there is a large surplus output, has to be shipped by an already greatly overburdened railway system from the Caucasus to the Urals because of the failure to exploit successfully local resources of this metal. The failure to exploit new mineral deposits, particularly iron, is alarming the Soviet authorities. Development work at the Krivoi Rog mines, the only high grade iron ore now produced in the Soviet Union, is lagging seriously behind the plan. Current blast furnace requirements during the past three years have been and will probably continue for some time to be in excess of ore production, and accordingly it is not likely that the Soviet Union will be [Page 793] able during the next few years to furnish Germany an appreciable amount of even low-grade iron ore. (Planovoe Khozyaistvo [Planned Economy], No. 8, 1939).
In his speech delivered on November 6 on the occasion of the celebration of the twenty-second anniversary of the Revolution, Molotov reiterated the policy announced by Stalin on March 10 of this year that the principal economic task of the Soviet Union is “to catch up with and surpass the leading capitalist countries” during the next 10 or 15 years. He expressed regret that because of this policy the relative production of non-durable goods could not be increased and added that “now we well know that we must still give unconditional preference to the requirements of the defense of the country and to its industrial might.” Consequently, it may be safely assumed that no serious attempt will be made by the Soviet authorities at least in the near future to overcome the lack of equilibrium in the national economy arising from the relative neglect of the consumers’ goods and housing industries, and that one of the greatest weaknesses of the Soviet industrial system, namely, extremely high labor turn-over resulting mainly from poor living conditions, will continue unabatedly to fetter the development of the national economy. This plague, as has been pointed out a number of times by the Embassy, is particularly rampant in the new industrial regions in the East where housing is even worse than in European Russia.
Judging by the foregoing there is reason for believing that the internal situation in the Soviet Union viewed from an economic point of view is still so fundamentally weak as to cause the Kremlin to proceed with extreme caution in the execution of its present foreign policies.
Respectfully yours,
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