Russian-American Economic Relations, 1763-1999

By James K. Libbey

Chapter 1

From time immemorial philosophers of the human condition have been engaged in a fascinating and, likely, unending debate over whether life is governed by Chaos or Design. This history of Russian-American economic relations studiously avoids the controversy. It certainly reflects the ideas of those thinkers who argue that every human event is unique; yet it also acknowledges the existence of patterns in these relations. Such patterns, naturally, should not be confused with the Great Plan of an Aurelius Augustinus or a Karl Marx. Thus the reader will be led neither for a ride on Marx's "locomotive of history" nor for a trip to Augustine's City of God. Rather, the points discussed below serve in the more prosaic role of guideposts in understanding incidents that otherwise might seem contradictory. The emergent patterns illustrate the presence of an almost comfortable tradition in economic relations, features that transcend even the most cataclysmic changes whether the Russian Revolution of 1917 or the equally revolutionary events of 1991. These patterns flow from the (1) marriage of politics and commerce, (2) impact of third-party nations, (3) balance of trade, (4) comparative advantages in technology, (5) trade in minimally processed goods, and (6) one-sided, in-country investment.

The oldest pattern in Russian-American economic relations is the merger of commerce with politics. This tradition relegates to the status of myth the free trade notions first expressed in 1776 by Adam Smith in his Wealth of Nations. Russia and the United States often have used their commerce for political ends; hence, economic diplomacy frequently overshadowed economic necessity as a prime feature of their experiences. The interplay of politics and economics led to diplomatic recognition in 1809 (Chapter 2) and to the first treaty in 1824 (Chapter 3). Since trade shaped diplomacy it should come as no surprise that each country employed commerce to influence the other. Occasionally, as in the Lend-Lease era (Chapter 10) and the 1990s (Chapter 14), the carrot or reward approach prevailed. More often, trade has been recast into a stick or weapon to express displeas-ure or force political change. The Soviet Union reduced its purchases in the American market to punish the US for its nonrecognition policy in 1932 (Chapter 9), and American censure of Russian treatment of Jews resulted in economic penalties in 1911 and 1974 (Chapters 4 and 12). And, certainly, the classic example of this theme emerged during the Cold War when the superpowers wielded commerce like a sword, striking blows and counterblows that left economic relations in tatters (Chapter 11).

Although commerce led to diplomacy in 1809, this does not explain the feelings of cordiality at that time shared by Russians and Americans. These can be understood, in part, by exploring their mutual distrust of the British (Chapter 2). Great Britain served as a catalyst in Russian-American economic relations. Its role highlights the fact that third-party nations always have played a major part in determining the structure, content, and even the amount of commerce exchanged by the two countries. Great Britain remained a factor in Russian-American ties for much of the nineteenth century and occasionally beyond (Chapters 2-4, 6, and 8). Over time it surrendered this position to Germany. The oscillation between friendship and enmity that distinguished Russo-German links from the 1880s to the 1940s had a direct bearing on the quantities and types of products exchanged by the US and Russia (Chapters 5-10). Third-party nations continued to be significant to trade after World War II, although in groups or blocks of nations rather than individual countries. Regardless, Russian-American economic relations can be examined only within an international framework.

One way third-party nations influenced trade is use of their currency by Russia to pay for US products. There are exceptions including the mid-1990s, but since the 1860s Russia generally has bought more goods than it sold in the American market. There are many implications in this unfavorable balance of trade. Prominent among them historically must be answers to questions of how this imbalance might be redressed or how to finance Russian purchases. This problem has been an obstacle to the expansion of economic relations. In the tsarist era the St. Petersburg government pursued a rigorous program of cereal exports to pay for imports. Moreover, stringent fiscal policies led to the adoption of the gold standard for the ruble (Chapter 4). The export program and convertible currency solved Russia's minor shortfalls in American trade until 1914 (Chapter 4). Then after the Russian Revolution the Soviet regime eventually introduced an internal, nonconvertible currency (Chapter 7). As a result the subsequent level of commerce maintained by the two countries was shaped by five financial factors: the Russian ability to use in America surplus hard currency earnings from other markets, to conclude barter agreements, to negotiate countertrade contracts, to raise capital from Western sources, and to secure US trade credits and loans (Chapters 7-14).

A further implication of this imbalance of trade is that the US has been more important to the economic development of Russia than the reverse. America's relative advantage primarily has stemmed from technology. Whether the cotton gin in the 1790s, the sewing machine in the 1890s, or the computer in the 1990s, America has produced goods of potential consequence to Russia's material progress. US entrepreneurs in tsarist times relished the chance to take advantage of this superiority to sell Russians such goods as farm equipment and office machines (Chapters 4 and 5). As early as the 1930s the US government recognized the importance of technology and employed it as an element of economic diplomacy when it withheld aircraft and aviation fuel processes during the 1939­1941 "moral embargo" (Chapter 10). Thereafter political considerations, more than economic need, became the essential condition for technology trade. It was used as an expression of American favor with the Soviet ally during World War II (Chapter 10) and of American disfavor with the Soviet opponent during the Cold War (Chapter 11). Indeed, technology transfer turned into the premier issue in Russian-American economic relations during the presidential administrations of Jimmy Carter and Ronald Reagan (Chapters 12 and 13).

While commerce in advanced products often was the high profile anchor of Russian-American ties, commerce in general was characterized by trade in minimally processed items. In short, the bulk of commerce has been in raw or semi-finished materials, not in sophisticated equipment or methodologies. That this pattern began in 1783, when the first ship flying the US flag dropped anchor in Russian waters, is hardly shocking news (Chapter 2). But one hundred years later tsarist Russia exchanged hides, wool, fur, and flax for US cotton (Chapter 4), and two hundred years later Soviet Russia traded palladium, ammonia, gold, and fur for American grain (Chapter 13). To be sure, exceptions to this trend appeared during both world wars as well as during the initial phases of the Soviet Union's Five Year Plans. It is extraordinary, nonetheless, that these resource-rich, industrialized giants continued to exchange baser goods for so long. This point symbolizes a number of interesting sub-features in their relations, ranging from economic needs to politicized tariffs and trade.

The final pattern emerges from the fact that more Americans have invested or engaged in economic activity in Russia than the reverse. This pattern is in evidence since the eighteenth century despite the fact that Russia offered more impediments to such activity than the US. For example, during the years 1917 to 1933 American society remained so open that several small Soviet firms could function and even incorporate within the US at a time when Washington did not recognize officially the existence of the government in Moscow (Chapter 7). By contrast, when US investment peaked in Russia in the decade before World War I and the decade after the collapse of the Soviet Union, American entrepreneurs still encountered many problems with Russian laws and customs (Chapters 5 and 14). Through a centrally planned economy and a government-held foreign trade monopoly the Soviets imposed formidable obstacles to American participation in Russia's economic life (Chapter 7). The end of the Soviet period in 1991 witnessed a tremendous transformation in the economy. Nevertheless, American businesses have been frustrated by the costly rise in crime, government regulations that are ambiguous, a judicial system that is inefficient in resolving disputes, and Russian attitudes toward contracts that only vaguely resemble the authority Americans usually assign to such documents (Chapter 14). These shortcomings and hindrances aside, the US emerged at the end of the twentieth century as the single most important investor of private capital in the Russian Federation.

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