sir,

I refer to my telegram No. 222 of October 21st and my despatch No. 1200 of October 17th on the subject of our difficulties with the U.S.S.R. over terms of credit, and over contracts for industrial equipment which was to have been provided under Mutual Aid but which the U.S.S.R. undertook to pay for if delivery took place after the cessation of Mutual Aid.

Our early difficulties arose because the U.S.S.R. refused to pay the full contract price of approximately $25,000,000 for the industrial equipment delivered, or to be delivered, after the cessation of Mutual Aid. This difficulty was finally overcome through an arrangement whereunder we sold to the U.S.S.R. at a substantial reduction other equipment, chiefly flat cars, requested as Mutual Aid prior to the end of the war for which equipment the U.S.S.R. had no obligation to pay. This equipment cost $7,500,000 and was sold for $2,000,000. Considering the two transactions-one for indus­trial equipment and the other for flat cars-as one, the result was that the U.S.S.R. agreed to pay approximately $27,000,000 for goods which cost the Canadian Government about $32,500,000. The Russians considered that the reduction applied on industrial equipment. We applied the reduction against the flat cars, which was reasonable since the cars had been made to U.S.S.R. specifications and were only of scrap value to us. The Russians, in addition, agreed that they would forego any benefits that might be obtained through the re-negotiation of the contracts for industrial equip­ment. such benefits, probably substantial, will accrue to the Canadian Government.

We considered the settlement a generous one and made it in the hope that it would ease our other difficulties. Unfortunately, we have been unable to reach agreement with the U.S.S.R. on the terms of the credit which they wish to receive and out of which they would pay for the industrial equipment. The U.S.S.R. authorities continue to seek a lower interest rate than that we have granted all other countries receiving export credit. Cabinet has confirmed the position of the Mutual Aid Board that we will not extend better terms to the U.S.S.R. than to others.

The Mutual Aid Board found itself in an extremely awkward position. The industrial equipment was being produced for U.S.S.R. account and to U.S.S.R. specifications but the customer was neither willing to pay cash nor would agree on terms of the credit to be extended.

The Board accordingly advised the U.S.S.R. that in the absence of definite arrangements for payment by February 1st the Board would con­sider arrangements in respect of the equipment as ended, would issue instructions to cease production to U.S.S.R. specifications and arrange for such modifications in the equipment as would make the equipment saleable to other purchasers. I attach a copy of the letter of January 19th from the secretary of the Board to the Commercial Counselor of the U.S.S.R. Embassy. The U.S.S.R. authorities have not yet replied.

I have etc.
s. D. PIERCE
for the secretary of state
for External Affairs

[PIÈCE JOINTE/ENCLOSURE]

Le secrétaire, la Commission d'aide mutuelle, au conseiller commercial,
l'ambassade de l'Union soviétique
Secretary, Mutual Aid Board, to Commercial Secretary,
Embassy of Soviet Union

CONFIDENTIAL

Ottawa, January 19, 1946

Dear Mr. Krotov,

I have been instructed by the Mutual Aid Board to write you concerning the decision taken by the Board at its meeting on January 17, 1946 with regard to the disposition of the industrial equipment ordered by your government, in the light of the negotiations on the proposed credit arrangements between the government of the U.S.S.R. and the government of Canada.

In the absence of definite arrangements for payment by your government for the industrial equipment, the Board is faced with serious problems: manufacturers are pressing for payment and are requesting, on the most urgent basis, the removal from their plants of equipment already completed. storage facilities will have to be arranged forthwith, and the costs of handling and storing the equipment represent a not inconsiderable sum of money.

The Appropriation from which the funds have been made available to pay for the production of this equipment will lapse at the end of the current fiscal year, and the Board does not consider that it would be possible to ask Parlia­ment for further funds without making clear the difficulties encountered in reaching an agreement with your government on the payment for this equip­ment. The Board could not undertake to recommend such a further appropri­ation to Parliament if the arrangements with your government continue on the present indefinite basis.

In view of this position in which it is placed, the Board has felt obliged to inform you that unless your government can agree, by February 1, 1946, to pay for this equipment, and the additional supplies specified in your letter to Mr. Karl C. Fraser of November 29, 1945, either in cash or on terms of credit which have been offered to your government by the Minister of Finance, the Board will consider that our mutual arrangements in respect of this equip­ment have ended, and will issue instructions to cease production of the indus­trial equipment to your specifications and to arrange for such modifications in the equipment as will make it saleable to other purchasers.

I am therefore instructed to inform you that in the absence of notification by February 1, 1946, of acceptance by your government of one of the alterna­tive proposals already offered to you, the Board will regretfully be obliged to make new arrangements along the lines indicated above.

Yours very truly,
M. G. GLASSCO