Foreign Relations of the United States, 1961–1963, Volume V, Soviet Union

366. Memorandum of Conversation⁰

Washington, October 23, 1963.

SUBJECT

• U.S. Wheat Sales to U.S.S.R.

PARTICIPANTS

• (See attached list)

Following a brief exchange of pleasantries with Mr. Borisov, Under Secretary Ball suggested that this be considered a working luncheon in order to discuss questions of mutual interest to both sides. He stated that the President had approved licensing of wheat exports to the Soviet Union provided that certain conditions were met. In a press release, four main aspects of the wheat export deal were mentioned: (1) price, (2) terms of payment, (3) shipment, and (4) allocation as between private grain dealers. The matter of use was also of concern to the United States. Secretary Ball stated that Secretary of Agriculture Freeman would be able to discuss questions of price and Secretary of Commerce Hodges questions of shipment with the Soviet Delegation.

Mr. Borisov stated that in the Soviet Union there were really two foreign trade organizations, first, the Ministry of Foreign Trade and secondly, the State Committee of the Council of Foreign Ministers on Foreign Economic Relations. (At this point Mr. Manjulo interjected to the effect that there was a saying that while the Ministry made money, the Committee gave it away.) Mr. Ball said we did not have in this country an organization similar to theirs. We do not have a Ministry of Foreign Trade; matters pertaining to export of agricultural commodities are subject to the Department of Agriculture, questions of shipping to the Department of Commerce.

Mr. Borisov stated there were certain general and specific questions that arose. In a recent wheat deal with Canada similar questions were raised and were resolved very quickly and Mr. Borisov wanted to ask whether they could reach agreement on a basis similar to the Canadian deal. The “technology” of the Canadian deal was worked out by Mr. Sharp of the Canadian Ministry of Trade by means of an exchange of letters between Canadian and Soviet Ministries through the Wheat Board of Canada. The deal concerned not only wheat but also flour. On the basis of this exchange of letters the Soviet trade organization “Exportkhleb” concluded a general agreement with the Canadian Wheat Board. This general agreement covered the main points as to period of delivery, quantity, quality and also contained other provisions along the lines of the London contract or Winnipeg contract depending upon ports of shipment. The terms of payment that were worked out with the Canadians were F.O.B. Canadian ports, 25% cash down and then 25% every 6 months for a total period of 18 months, with a provision, however, that the total indebtedness at any time was not to exceed $200,000,000. Mr. Borisov stated that they had not used the privilege given them as to terms of payment because they considered the rates of interest charged them for the credit to be excessive. He said, “we are not poor but as good businessmen we simply did not want to pay additional expense of interest.” (Secretary Freeman interjected that this was a very sound capitalist attitude to the problem.) Following the conclusion of the agreement with the Canadian Wheat Board, Exportkhleb then entered into specific contracts with companies such as Dreyfus, Bunge, Continental and others.

The first general question then which arises is whether the Soviets could work out a similar technology of the deal with the United States. Mr. Ball thereupon stated that the U.S. considered it to be more practical to follow their usual procedures of trade, government participation in it being limited to the granting of export licenses while the actual agreements were to be worked out with individual grain dealers. The U.S. conducts an annual export trade of 800,000,000 bushels on that basis and would prefer to follow this method rather than develop a new procedure. Mr. Borisov asked whether the granting of licenses represented a guarantee of delivery of the quantities contracted for. The answer to that was given by Secretary Freeman who stated, no, the export licenses were not guarantees in any form, that contracts would have to be concluded with private companies, who would obligate themselves in accordance with normal international trade practice to deliver at a certain time at a certain price to a specific port. Mr. Borisov then said that here, then, was a problem which came up on their very first day in Washington. They did not have any normal international trade practice with the U.S.; Secretary Freeman said this might be the beginning of setting up such a practice.

Mr. Borisov then stated that a second general problem came up with reference to the question of price. In the case of the Canadian wheat deal the matter of price had already been negotiated with the Wheat Board of Canada and did not have to be negotiated with each individual supplier. The only thing that was negotiated with such suppliers was the amount of their commissions. Could such an arrangement be worked out here? Secretary Freeman said that this would not be possible in accordance with normal trade practice in the U.S.; that we did not have any organization similar to the Canadian Wheat Board and that we would prefer not to enter upon any government-to-government deals on matters of price and other terms of the wheat deal.

A discussion followed on the question of whether the very existence of the sizable Soviet demand would affect the world price of wheat. Mr. Borisov thought that speculators would take advantage of this situation and in his view, therefore, the most desirable thing would be in a fixing of the price. At Ambassador Thompsonʼs suggestion, Secretary Freeman pointed out that at the present time there were more than 1,100,000,000 bushels of wheat in storage in warehouses of the Commodity Credit Corporation, a government agency, and that such a speculation could not really take place since the government would make available to the grain market an amount of wheat corresponding to the quantity sold to the Soviets. Mr. Freeman also pointed out that by dealing directly with American grain dealers the Soviets would have the advantage of competition among the dealers and thereby would be able to obtain the best possible price in relation to the world price of wheat. Mr. Borisov said there was really no such thing as a world price of wheat, that there were only prices in a given market and therefore the Soviets, in addition to their other difficulties, would be faced with the choice of markets to buy in. Mr. Freeman added to Ambassador Thompsonʼs remarks by pointing out that the large quantity of wheat held by the Commodity Credit Corporation in itself represented, first, a guarantee of an adequate supply of wheat, far in excess of any quantity that had so far been mentioned and second, that, in a way, it represented a guarantee against upward fluctuation in the price of wheat. Mr. Borisov temporarily ended the discussion of the matter of price by saying that this was a question that certainly called for additional discussion, that this matter should not be permitted to “drift.” By that he did not necessarily have in mind a written agreement, rather something in the nature of a gentlemenʼs agreement.

Mr. Borisov next brought up the question of freight rates. Secretary Hodges said that one of the conditions of the Presidentʼs approval of the wheat deal was the provision that the wheat be carried on American ships to the extent that such ships were available at the time. Mr. Hodges further said that undoubtedly the Soviet Government knew that freight rates for U.S. shipping to Black Sea ports were some 3 to 4 dollars per ton higher than competitive freight rates in ships of foreign registry. He pointed out, however, that the Department of Commerce had set a ceiling on the freight rates to be charged for shipping wheat to the Soviet Union, that the setting of such ceiling had not as yet been publicly announced, but that the ceiling was still several dollars per ton higher than competitive freight rates of foreign carriers. In recent months foreign rates too had been gradually rising. He said the Soviets would have to deal with two types of U.S. carriers in this matter: first, small companies subsidized by the U.S. Government; to a much larger extent however with large U.S. carriers who were not subsidized, whose freight rates were still above competitive foreign freight rates.

Mr. Borisov said that the Soviets were not at all against American ships being used for the purpose of carrying the wheat but that they had no intention to pay anyone for “their blue eyes”. (Secretary Freeman pointed out that his eyes were brown.) Mr. Borisov further pointed out that his Ministry had recently purchased 9-1/2 million tons of wheat and that he had fully covered himself with provision for the tonnage necessary to carry this amount. Even prior to concluding the deal with Canada he had contracted for 60 vessels on a time charter basis, vessels of a capacity of 10 to 32,000 tons. In addition, Soviet ships were standing by to provide additional carrying capacity. Therefore, while the freight rates may be high, actually there was no business conducted on the basis of such rates. He suggested that the U.S. sell wheat to the Soviet Union on a F.O.B. basis; in such a case he would then ask for the right of Soviet vessels to call at American ports. This way any difficulty could be overcome. He also pointed out that just during the last 4 days freight rates from St. Lawrence ports to the Black Sea had dropped by 3 to 4 dollars per ton and were in the neighborhood of $9 a ton. This, then, too, was a general question which required further discussion and solution. Mr. Borisov brought up the matter of American ships sailing under so-called flags of convenience, for example, under the flags of Panama and Liberia. He said everyone knew this to be an extensive practice of American ship owners. Could such ships, not subject to high American freight rates, be used to carry the wheat to Soviet Baltic and Black Sea ports? Secretary Hodges answered that this was a possibility which would certainly have to be looked into.

Mr. Ball asked that the total quantity of wheat the Soviets were interested in be clarified. He said that initially a figure of 4,000,000 tons had been mentioned, that later that figure had been reduced to 2-1/2 million tons. Was he right in assuming that the negotiations at this time were concerned with 2-1/2 million tons? Mr. Borisov said he was certain that there would not be any need for future purchases of wheat since the present requirement had been brought about by a disastrous harvest in the Soviet Union which would not be repeated. Mr. Borisov said that the first figure had included the requirements of other socialist countries; however, since the President of the U.S. had declared that there would be no difficulty in supplying wheat to these other socialist countries directly, the figure was therefore revised to 2-1/2 million tons which represented the requirements of the Soviet Union. Mr. Borisov thought that trade representatives of Hungary, Poland and Czechoslovakia were already in the U.S. for the purpose of negotiating such purchases. Under Secretary Murphy asked whether this figure would include grain and flour or whether it was to be restricted to grain only. Mr. Borisov answered that the requirement was for grain only unless of course the U.S. were willing to sell flour to the Soviets for delivery to Cuba. Secretary Freeman and Under Secretary Ball answered this question in the negative.

Secretary Freeman, in summing up the discussion so far, gave his opinion that when Mr. Borisov opened direct negotiations with private grain dealers, the practical problems he had raised as to price, quantity and shipping might very well resolve themselves, that such private grain traders, driven by competition among themselves, would be far more efficient in negotiating and handling wheat deliveries than the government could hope to be. Mr. Borisov answered that he would not participate in any direct negotiations with private American grain dealers, that that was the function of Exportkhleb. Their negotiators, now in Canada, were headed by a Mr. Matveyev, that he would call them to Washington while he was still here, and that he would appreciate the State Departmentʼs instructing its Embassy in Ottawa to issue the necessary visas to that Delegation. He mentioned that one of the members of the delegation, “the most important member”, was a lawyer without whose say-so nothing could be accomplished.

This led to a few caustic remarks about lawyers in general on the part of Mr. Borisov, and to an anecdote concerning Peter the Great and lawyers by Mr. Ball.

With reference to the financial problems arising as a result of such large sales to the Soviet Union, Mr. Ball stated that he thought American private dealers might be faced with some difficulty in attempting to negotiate temporary financing or in attempting to discount papers with commercial banks, unless it was implied that the U.S. Government would guarantee payment to such commercial banks. The Export-Import Bank, a U.S. Government agency, would best be able to render such guarantees if, in its turn, it could have the guarantee of the Soviet Government in some form that payment would be made as agreed. Mr. Borisov stated that the Soviet Government could not guarantee such payments, that this would be handled by Soviet banking organizations; he was careful to make a distinction between the government-owned Soviet banks and the Soviet Government itself. It was pointed out again, however, that such matters would best be negotiated directly between the Soviet banks and the Export-Import Bank.

Replying to Mr. Ballʼs question as to the use of the wheat, Mr. Borisov stated that all of the wheat would be used in the Soviet Union.

Under Secretary Ball said that the American press had evidenced a great deal of interest in the wheat negotiations and he wondered whether he and the Soviet Delegation could agree as to what was to be said to the press at this point. Of course, the Soviets could say anything they wished. As for himself, he would merely say that a useful initial meeting had taken place, reviewing the questions to be discussed in detailed negotiations during the next 2 or 3 days, without, however, going into details. Mr. Borisov agreed.

Secretary Freeman, in conclusion, said that the next step would seem to be for Mr. Borisovʼs designees to begin negotiating the individual contracts with private concerns, and, as any problems arose which the U.S. Government could help resolve, then to turn to his Department and to Secretary Hodgesʼ Department for that purpose.

Secretary Hodges also stated that in negotiating for freight Mr. Borisov might find the problem to be less than it appeared at present. Mr. Borisov asked whether an export license would cover the entire period of grain shipments. Secretary Hodges replied that the license would cover the entire period provided that the criteria initially set up by the President had been met. He mentioned in passing that just this morning an export license had been granted for the shipment of corn to Hungary. Mr. Ball confirmed that the State Department would act as a coordinator directing the Soviet negotiators to the competent persons with whom specific problems were to be discussed.¹

LIST OF PARTICIPANTS

• United States
  • George W. Ball, Under Secretary of State
  • Orville L. Freeman, Secretary of Agriculture
  • Luther H. Hodges, Secretary of Commerce
  • Charles S. Murphy, Under Secretary of Agriculture
  • John Bullitt, Assistant Secretary of the Treasury
  • Jack N. Behrman, Assistant Secretary of Commerce
  • Llewellyn E. Thompson, Ambassador at Large
  • G. Griffith Johnson, Assistant Secretary of State for Economic Affairs
• U.S.S.R.
  • Anatoliy F. Dobrynin, Ambassador of the Union of Soviet Socialist Republics
  • Sergey A. Borisov, First Deputy Minister of Trade
  • Aleksey N. Manjulo, Chief, Administration for Trade with Western Countries, Ministry of Foreign Trade
  • Viktor M. Ivanov, Deputy Chief, Foreign Exchange Administration, Ministry of Foreign Trade
  • Nikolay I. Kuzminski, Chief, Interpretersʼ Section, Ministry of Foreign Trade
  • Eugeni S. Shershnev, Commercial Counselor, Embassy of the Union of Soviet Socialist Republics

0. Source: Department of State, Central Files, INCO-WHEAT US. Confidential; Limit Distribution. Drafted by the interpreter, William Krimer, and approved in U on October 30. The luncheon meeting was held in the James Madison Room at the Department of State.
1. At a second meeting on October 30 Borisov reported that his discussions with major U.S. grain traders had not produced any offers as the question of ocean freight could not be resolved and the dealers had been reluctant to commit themselves to specific prices without definite assurances that the sale would be made. (Memorandum of conversation; ibid.) At the third meeting on November 1 the two sides discussed further the higher cost of shipping grain in U.S. bottoms, and the Soviet delegation undertook to consider shipping 50 percent of the grain in them. (Memorandum of conversation; ibid.)