Table of Contents

1. I. Introduction 442

2. II. 1917–1919: The Revolution Claims 444

3. III. 1920–1921: Trade and Recognition Takes Priority 448

4. IV. 1922: Multilateral Diplomacy Fails 450

5. V. 1923–1929: Bilateral Diplomacy Fails 453

6. VI. 1929–1940: Relations Resume, Focus Shifts to Soviet Assets in UK 456

7. VII. 1945–1957: New Claims and Counterclaims 459

8. VIII. 1953–1968: A 0–0 Baltic Draw? 464

9. IX. 1969–1984: Revolution Claims Revisited 470

10. X. 1984–1986: Settling the Imperial Debts – at Last 475

11. XI. Baltic Coda 479

12. XII. Conclusion 479

II. 1917–1919: The Revolution Claims

Most of Russia's debt to Britain took the form of government-to-government war loans totaling £500–600 million. In addition, Russia repudiated private external debts and confiscated some £200 million worth of British industrial and private property, resulting in 38,000 private claims against the Soviet government registered by a new Russian Claims Department set up in the Foreign Office (later transferred to the Board of Trade). British investors and bondholders were fully dependent on their government to resolve their claims. Whereas private bondholder groups had been very influential in sovereign debt disputes during the nineteenth century due to London's importance for the international sovereign bond markets and Britain's broader hegemonic trade and economic status, this bargaining power waned after World War I and the groups had no leverage over the Bolsheviks.Footnote ¹⁴ Ultimately, it was for the UK government to respond.

The government had to balance a series of competing economic and political objectives. The economic calculus favored pragmatism. With millions unemployed at home, British manufactures pushed for a clean break and to reestablish trade and investment links with the Soviet economy.Footnote ¹⁵ While private creditors holding Russian securities tried to organize through a panoply of organizations,Footnote ¹⁶ Lloyd George reminded his Cabinet that “the pressure from the Midlands is all the other way.”Footnote ¹⁷ Moreover, the Russian market was not of major importance for the British private capital market. Although Shell and its shareholders were badly affected,Footnote ¹⁸ Russian private debt was mostly held by a small number of banks—typically to fund retail investors—and small-time investors (private claimants included servants, barbers, and tailors).Footnote ¹⁹ They were dwarfed by capital interests within the British Empire, and many times smaller even than British investments in Latin America.Footnote ²⁰ The government had an option of bailing out the private investors, of course, but that was regarded as a dangerous precedent.

The political calculus, by contrast, dictated a robust response. Churchill and UK Foreign Secretary Lord Curzon—both senior members of the Liberal Prime Minister David Lloyd George's cabinet—were deeply concerned about communism at home and abroad, and as a matter of principle had little time for Soviet economic and legal arguments. They did not buy Lloyd George's argument that “the ‘moment trade was established with Russia,’ ‘Communism would go.’”Footnote ²¹ Curzon even refused to shake hands with the Russian Commissar for Foreign Trade; a man Churchill referred to as “the hairy baboon.”Footnote ²² The UK was also under considerable pressure from France—its close ally—to take a hard line. France had become the principal creditor of the Russian Imperial government before the war with about 4.5 percent of the total French national wealth lent to the Russian Empire.Footnote ²³ Private French investors were particularly enmeshed in the Russian economy and Paris was the largest market for Russian securities, resulting in 1.6 million individual debt claims registered with the French government after the war; totaling more than eleven billion francs, nine billion of which was directly owed by the Russian government.Footnote ²⁴ Keen to lend to an ally against Germany, the French government had actively encouraged small savers all over France to make these investments. French papers were initially banned from discussing rumors of their repudiationFootnote ²⁵ and the French government allowed French security holders to partially exchange their Russian Bonds for French ones bearing 4 percent. British bondholders, by contrast, had few expectations that their government would bail them out.Footnote ²⁶ Still, a commitment to the UK-France alliance would require London taking a tough stance against the Soviets, at least on private property claims.Footnote ²⁷ And indeed, the UK joined the French government in March of 1918 to declare that:

The Soviet government had its own set of competing objectives. Nationalization and repudiation of the Imperial debt were central economic pillars of the Revolution and to bolster its moral position, Moscow freed Persia, Turkey, China, Finland, Poland, and the Baltic States from claims to property and loans of the former empire.Footnote ²⁹ Yet Lenin faced a devastating economic crisis with agricultural and industrial assets demolished and millions threatened by drought, famine, and starvation. He was therefore keen to export agriculture and raw materials to the Allied Powers in exchange for medicine, clothing, machinery, and infrastructure.Footnote ³⁰ Russian exports had dropped dramatically during the war and throughout the 1920s, Russia's share in world trade was less than a third of what it had been in 1914.Footnote ³¹ Moscow therefore signaled a willingness to recognize some of its pre-war debt with Western states if this could re-establish commercial links and achieve diplomatic recognition.Footnote ³²

The Allied Powers acknowledged the Bolshevik government was in no position to actually repay much of its debt for decades.Footnote ³³ Some suspected that despite invitations to negotiate, the Soviets did not have “the slightest intention of observing such undertaking or carrying out such agreements. This attitude of disregard of obligations voluntarily entered into they base upon the theory that no compact or agreement made with a non-Bolshevist government can have any moral force for them.”Footnote ³⁴ Moscow, however, had counterclaims that would reduce, remove, or even reverse the repayment burden. The first involved the large Russian gold reserves held abroad, including in the United Kingdom. Following the 1918 Treaty of Brest-Litovsk, ending Russia's participation in World War I, the Russian government shipped 121 million gold rubles to Germany as part of a six-billion-mark payment to cover Germany's pre-war claims against Russia. Those payments were interrupted when Germany capitulated later that year and the gold was ultimately transferred to the Allied Powers as part of German reparations under the Treaty of Versailles. Moscow argued this gold had to return to Russia.Footnote ³⁵ In addition, Moscow demanded that the Allied Powers return the considerable gold reserves they had held for safekeeping for the Russian Imperial government during the war (by 1914, the Imperial government held the world's largest gold reserves).

On its part, the UK received about £8 million of the Brest-Litovsk gold (transferred from the Bank of France in 1921) and £60 million of the Imperial gold.Footnote ³⁶ Suggesting that this belonged to Russia, however, required Moscow to argue that while the Soviet government was not a successor to the Imperial government as far as Russian debt obligations were concerned, it was a successor government as regards external state assets. While a departure from customary international law,Footnote ³⁷ the justification appears to have been that the Soviet government was a successor to the Tsarist government when it benefitted the Russian people so it had no obligation to pay (odious) Imperial debts but did have a claim to external Imperial assets not connected with exploitation.Footnote ³⁸ This argument was however never presented in any detail to the UK, or even in those terms, by the Soviets.

The second, and more substantial, claim concerned the foreign military intervention in Russia. Allied intervention was first justified as an effort to try to keep Russia as an ally in the war against Germany. France, Japan, Greece as well as the United States contributed actively to support this objective. Yet, military activities by the Allies continued after the end of the war against Germany, without any evidence of either individual or collective reappraisal. The United Kingdom sent some 40,000 troops to support the White Russian army—second only to Japan—and Lloyd George told the House of Commons in 1919:

The Civil War resulted in upward of ten million casualties and in the destruction of Russian industrial capacity and agriculture. The Emmott Committee reported to the British government that “We doubt . . . whether so much human misery as has existed in Russia during the last three years has ever been the lot of any people within so short a time in the history of the modern world.”Footnote ⁴⁰ Although most of the blame was put on the Soviet government itself, the Committee acknowledged that the blockade, civil war, and intervention were responsible as well. The Soviets claimed to hold extensive records of damage inflicted by unjustified intervention and their counterclaim against the UK was expected to be double the amount of the British claim.

III. 1920–1921: Trade and Recognition Takes Priority

The initial UK-France alignment did not last long. Dire economic circumstances in the UK meant even Liberal Foreign Secretary Lord Curzon eventually had to put his personal loathing of the Bolsheviks aside: “For the sake of Russia herself and of employment in England during the winter, everyone of us would be glad to see commercial relations established.”Footnote ⁴¹ The British Union of Russian Bondholders also supported the resumption of trade relations as an enticement for the Soviet government to recognize its debt.Footnote ⁴²

In order to initiate trade negotiations with the Soviet state capitalist economy, the Liberal government led by Lloyd George recognized the Soviet government de facto in 1921. Governments today generally do not issue formal statements of recognition but instead leave recognition to be inferred from dealings—usually the establishment of diplomatic relations—and the distinction between recognition de facto and recognition de jure is now rarely employed. In the 1920s, however, the distinction was often used for the recognition of both states and governments which had assumed control through unconstitutional change. De facto recognition implied either that the change was not fully established or that the recognizing state did not approve of it and so might withdraw recognition in the future. Further legal distinctions were unclear at the time, but for the UK, de facto recognition conferred the capacity to conclude or terminate international agreements, to establish diplomatic relations, to assume the benefits and responsibilities of membership of international organizations, and to enact internal legislation which would be accepted or enforced elsewhere. This was established by the 1921 case of Luther v. Sagor, which upheld a 1919 Soviet decree expropriating a timber factory—giving retroactive effect to the de facto recognition.Footnote ⁴³

The de facto recognition thereby paved the way for the two governments to conclude a 1921 Trade Agreement. The agreement did not deal with the Revolution claims except for loans held in Barings Bank raised on European markets on behalf of the Tsarist regime—referred to as the “Tsarist assets” and “Baring Balances.” With the Imperial gold shipped abroad in exchange for bondsFootnote ⁴⁴ and the Brest-Litovsk gold having been remelted, the Baring Balances were the main Russian government assets held in the UK. The largest portion resulted from advances made by the UK government to assist Imperial Russia while it was prosecuting the war against Germany as one of the Allies. As early as 1918, Litvinov had tried to withdraw the balances himself when sent to London as a potential ambassador. At that time the Soviet government had yet to be recognized, so Barings contacted the UK government for advice, which demanded that the deposits be handed over to the UK government. Barings objected. Internally, the Treasury later agreed with Barings and noted that although other UK banks had handed over their Imperial deposits it “had no right to take the money and any recognised succession of the Imperial Government would be entitled to claim it.”Footnote ⁴⁵ Because of the law on banking confidentiality, the detail of the accounts was not fully known to the UK government (this uncertainty remained up until 1986), but the outcome of the negotiations in 1921 was to freeze the balances. The Soviet government agreed not to claim the Tsarist assets, and in return the UK agreed not to use them as compensation to private claimants. The hope was this would encourage Moscow to enter into a comprehensive settlement at a later date.

Overall, the 1921 agreement was a major achievement for the Bolsheviks: it ended the British blockade of the Soviet economy while Moscow only had to acknowledge liability for certain trade debts—a fraction of the tsar's pre-war and wartime debts.Footnote ⁴⁶ Recognition of the other private debts was left on the table for future negotiations, however, if the UK could provide sufficient inducements. And indeed, the Trade Agreement was explicitly framed as a stepping-stone to a future peace treaty settling all claims. Support for such a treaty was growing among the Allied Powers (except France) and in late summer of 1921, the Bolsheviks indicated they would be willing to discuss the debt provided they could receive loans to help with the economic crisis and the Volga famine along with de jure recognition.Footnote ⁴⁷ The latter was important for the fledgling Communist government, as de facto recognition was seen as conferring only limited benefits.

Chicherin, People's Commissar for Foreign Affairs, set out the Russian position to the UK, France, Italy, Japan, and the United States. His memorandum claimed that the Soviet government had sought close economic cooperation with the Allied Powers, but that the Powers’ demand for the recognition of the Tsarist debts had prevented such cooperation. And while the Soviets acknowledged no legal obligation to recognize the Tsarist debts, they were nevertheless willing to recognize some of them “under certain conditions” even if it meant giving up on a core principle:

Parts of the Soviet government began to backtrack soon after, however, and implied war debts should not be included in the talks. This was unacceptable to the French, who wanted all the debts recognized by Moscow.Footnote ⁴⁹ The UK Foreign Office responded along the same lines: “The accepted rule among civilized states is that contracts made by and debts incurred by a government are to be regarded as the obligations of the nation it represented and not as the personal engagements of the ruler. Although the form of government may change the people remain bound.”Footnote ⁵⁰ The UK and France were not alone in attacking the “uncivilized” Bolshevik behavior. Although Alexander Sack's notion of “odious debts” is the starting point for most modern discussions of debt repudiation in the context of succession, Sack himself regarded the Bolshevik default as an attack on the capitalist system by a lawless government.Footnote ⁵¹ At the same time, however, the UK did not want to insist on the debt question if doing so would prevent pragmatic negotiations to restore Europe's paralyzed economic relations. Ultimately, the UK won the argument among the Allied Powers and preparations for an international conference began.

IV. 1922: Multilateral Diplomacy Fails

The Genoa Conference in the spring of 1922 was dominated, and ultimately undermined, by the Tsarist debts.Footnote ⁵² The Soviets refused to recognize the debts, yet also noted willingness to pay some of them, such as contracts of public utility companies guaranteed by the Imperial government. The special correspondent sent to Genoa for the Manchester Guardian, John Maynard Keynes, noted how Moscow's position revealed how “Bolshevik doctrine is cheap”Footnote ⁵³—recognition of the debts was on the table if sufficient economic inducements could be made. This was arguably inconsistent with the decree of January 28, 1918, though possibly consistent with the idea that only Imperial debts with public benefits could be recognized.Footnote ⁵⁴ Seemingly uninterested in bolstering a robust legal argument, however, the Soviet delegation was unclear whether its refusal to acknowledge the debts relied on discontinuity or—more traditionally—changing circumstances:Footnote ⁵⁵

Irrespective of the justification, the Allied Powers objected in strong terms—led by France—saying that the Bolsheviks must acknowledge all its debts before formal recognition or loans for famine relief. The Soviet government argued that full recognition would have to come first and even if it acknowledged some of the debts, they would be outweighed by its own demand for damages for the Allied intervention. Here, the Soviets reminded the Allied Powers that they too had sought compensation for similar acts in the past:

As noted by the Chief Editor in the first issue of Foreign Affairs,

The damages presented by Litvinov, First Deputy People's Commissar of Foreign Affairs, were indeed colossal: “The Allies claim 65,000,000,000 gold francs from us. We claim 125,000,000,000 gold francs. We cannot make peace and go back with less than 20,000,000,000 gold francs.” Footnote ⁵⁹

The Soviet attempt to compare its claim with the award made by the Arbitral Tribunal in respect of the extensive damage caused by the Alabama to United States shipping was not justified. Early in the American Civil War, on May 13, 1861, Britain had made a formal proclamation of neutrality. The Arbitral Tribunal found that the failure to prevent the original sailing of the Alabama or to arrest it when subsequently it entered British ports implied a lack of due diligence in the performance of its neutrality obligations.Footnote ⁶⁰ By contrast, the British government's intervention in the Russian Civil War was made in support of the imperial regime with which it was an ally and ended before recognition de facto in 1921 of the Communist government. There was never any formal position of neutrality in this conflict. The Allies, including the UK, were responsible for violating a norm of customary international law prohibiting intervention in foreign conflicts—but the rule was less precise than that resulting from a formal declaration of neutrality.

While not engaging on the Soviets’ flawed parallels to the Alabama arbitration, the British government and the other Allied Powers rejected the Soviet counterclaims out of hand, particularly the notion that they could be balanced against private claims. But because there was no expectation that the Tsarist debts could actually be paid, Lloyd George was open to a compromise. In exchange for partial cancellation of the war debts (a significant concession for the UK), the Soviets would enter into lump-sum settlements with the Allied governments and pay compensation for expropriated property and its pre-war debts with a ten-year delay. Disagreements about amounts in the intergovernmental claims would be subject to arbitration, taking into account Russia's ability to pay as well as Russian losses during the War and Civil War (the UK stressed this did not imply legal recognition of actual liability for damage caused during the Civil War). As long as the Russian government acknowledged its debts, Lloyd George expected that the British business community would accept future dealings with the Bolsheviks—irrespective of whether they actually paid the debt in the foreseeable future.Footnote ⁶¹

The Soviets rejected the proposal. Arbitration was unacceptable for claims that were ultimately about the conflict between two types of property right regimes and the Soviets instead suggested giving former owners preferential treatment when issuing new concessions. This followed Lenin's 1921 decision to reintroduce concession agreements, which he acknowledged required a restoration of private rights.Footnote ⁶² Yet an unspecified promise of future concession rights from a leader who saw state capitalism as a temporary stage on the path to socialism was unacceptable for the Allied Powers. France also rejected the British proposal and considered pulling out of the conference altogether fearing that the bartering over debt obligations was undermining the principle of international creditor protection.

The five-week conference ended in failure. The parties agreed only to resume negotiations among “experts” in The Hague a few months later. Here, the allies sent mainly representatives of private creditors—the UK delegation included the president of the Association of British Creditors of Russia, Leslie Urquhart, who had also been an advisor to the British delegation in Genoa.Footnote ⁶³ Talks continued on private debts and property but there was no compromise in sight and attempt at a multilateral settlement was abandoned. For the bondholders and nationalized industrialists, this proved to be the last real chance to receive compensation for more than half a century.Footnote ⁶⁴ And while the Conferences did result in other European states recognizing the Soviet Republic de facto—a diplomatic success for the Bolsheviks—the Soviet economy would remain for many years largely shut off from international capital markets and loans.Footnote ⁶⁵

V. 1923–1929: Bilateral Diplomacy Fails

With a multilateral solution off the table, the UK considered bilateral alternatives as major British manufacturing firms and their bankers were concerned about what a new rupture in relations could mean for export contracts in the context of skyrocketing unemployment. Some London banks still denounced the 1921 Trade Agreement as “an agreement which legalized the robbery of British nationals,”Footnote ⁶⁶ but before long even the City and the London Chamber of Commerce came around to supporting de jure recognition of the Soviet government in the hope this could help sustain and deepen trade links. This was granted in 1924 by the Labour government led by Prime Minister Ramsay Macdonald.Footnote ⁶⁷ The specific legal relevance of moving from de facto to de jure recognition remained unclear at the time. Some later commentators regarded the distinction as purely diplomatic with no legal consequences.Footnote ⁶⁸ It soon emerged, however, that one crucial implication in the UK was that the Bolshevik regime was now legally entitled to Russian government assets held in the UK. This was confirmed by the English High Court the same year when ruling that de jure recognition implied that the Soviet government had the right to archives and other properties held by the former Consul-General in London appointed by the Russian Provisional Government (Kerensky).Footnote ⁶⁹ The rule was upheld in later English Court decisions and relied upon by Lauterpacht and the British government when setting out the legal implications of de jure recognition. It is unclear why the Soviet authorities did not then or subsequently take active steps to claim their assets, but the result of its inactivity was that the assets remained, accruing contractual interest, until they were gathered in and used in the final settlement.

Even with the Soviet government having achieved de jure recognition, the prospects of a broader settlement involving all claims remained unlikely. One option could have been to refer the disputes an international tribunal. In 1923, the UK had compelled Costa Rica, another government in default, to agree to international arbitration—in part by sending a gunboat to its shoresFootnote ⁷⁰—but the Soviets would agree to no such thing. Ironically, this may have turned out to be a blessing for the UK. On May 5, 1924, the Soviet government thus set out the broad outline of their claims for war damages against the UK.

In communications with the Foreign Office, the Treasury rejected the premise that the UK had responsibility for those damages:

This assessment was not shared by Sir Cecil Hurst, then Foreign Office Legal Adviser.Footnote ⁷³ On May 9, he advised that Britain's prolonged intervention in the Russian Civil War was probably illegal and could be condemned as such if considered by an international tribunal:

This position was never made public, and the legality of the Soviet counterclaim was not seriously assessed again until 1972.Footnote ⁷⁵ The international law rules regarding intervention in foreign civil wars were more limited than they were to become following developments during the 1920s and 1930s and the entry into force of the United Nations Charter. But the rules of customary international law constraining intervention did exist in the early 1920s, as the Soviets themselves said in their Genoa memorandum. Yet, to our knowledge discussions of the international law of the extensive intervention in the Russian Civil War has been omitted from academic literature, even that which deal extensively with interventions in the pre-Charter era.Footnote ⁷⁶

Shortly after having set out their counterclaims against the UK, the Soviets returned to options for partial repayment in exchange for government loans.Footnote ⁷⁷ But while both sides now favored concrete and pragmatic negotiations, Moscow's offer remained too vague and limited for the UK. As the deadlock remained, the Prime Minister therefore left the government claims to one side when bilateral discussions over renewed trade links began in London. In August 1924, the two parties signed a Treaty of Commerce and Navigation and a General Treaty—both subject to ratification. The treaties left all governmental claims for later discussions while the UK government would extend credits to the Soviet government once some progress was made on the settlement of private claims.Footnote ⁷⁸ The Soviets undertook to continue direct negotiations with expropriated British investors and bondholders. Compensation for expropriation claims were to be examined by a mixed advisory commission—composed of six members appointed by the two governments—and negotiations with bondholders would be based on acknowledgment by the UK government that they could not be fully compensated due to the economic conditions in the Soviet Union. The Soviet counterclaim regarding the UK intervention was reserved for discussions at a later date.Footnote ⁷⁹ On this basis, a further treaty was envisaged which would include Soviet promises of payment and settlement of outstanding private claims in exchange for a UK government loan.

For supporters, this showed that the Soviets had accepted the principle of compensation, but with no clear admission of liability or any actual settlement Conservatives denounced the Treaty as a farce. Soon afterward, publication of the infamous Zinoviev letter led to widespread fear of Russian Communist infiltration in Britain and to the fall of the Labour government.Footnote ⁸⁰ The successor Conservative government led by Stanley Baldwin refused to ratify the 1924 treaties, terminated the 1921 Trade Agreement, and suspended diplomatic relations with the Soviet Union. Churchill announced that “We have proclaimed them treacherous, incorrigible and unfit for civilized intercourse,” and Stalin expected the UK was about to go to war with the Soviet Union.Footnote ⁸¹

VI. 1929–1940: Relations Resume, Focus Shifts to Soviet Assets in UK

When Labour returned to power in 1929, bilateral relations were reset yet again. A temporary trade agreement was concluded, and an Anglo-Soviet Committee was established in 1930 to consider the claims and counterclaims across six subcommittees. In preparation, the UK government had to develop a strategy to deal with the Soviet intervention claim. The Treasury noted internally that the UK could not rule out the counterclaims and expected the Soviets would argue that liability was “admitted in 1924 by our proposal to reserve both War Debt and counter-claims ‘to a later date.’”Footnote ⁸² To this, the British reply should be that the “[i]ntervention was only a subsidiary factor in what was primarily a civil war in Russia” and that attributing specific damages would be impossible. Moreover, since UK was in any event willing to cancel most of the Russian War Debt—some £540 million—this would more than cover “any loss or damage for which British intervention could be regarded as directly responsible.”Footnote ⁸³

Talks about the intervention claim never materialized, however, because negotiations stymied when the Soviets insisted on detail about each individual British claim. This took British negotiators by surprise, who had expected a broad-based discussion toward an equitable and pragmatic settlement. It prompted senior lawyers to draft a legal opinion confirming that the government had made no undertaking to put forward claims by British citizens registered with the Russian Claims Department. Equally, disclosure of information did not imply that claimants had a right to money from a settlement under UK lawFootnote ⁸⁴ and discussing the claims with the Soviets did not convert them into diplomatic claims. Support for this position was based on two decisions of the Permanent Court of International Justice Mavrommatis (1924)Footnote ⁸⁵ and Chorzów Factory (1928).Footnote ⁸⁶

In the end, only the subcommittee charged with the Tsarist debts held substantive discussions, but the Soviets again insisted on specific information about each individual claim. This was not to assess the odious nature of the debts, however, but because the Soviets knew full well that few of the thousands of claimants were able to provide documentation.Footnote ⁸⁸ Moreover, Soviet negotiators refused to list claims they were prepared to consider. The Soviet delegation reiterated that the Decrees of 1918 annulled all Tsarist debts so the committee could not engage in discussion about recognition of obligations but should rather consider possible exceptions that could justify settlement conditional on loans or credits.Footnote ⁸⁹ This was, in essence, the position taken by Moscow up through the twentieth century and it contrasted with the position on property claims, where Russia asserted legality of expropriation but at least did not categorically deny liability to compensate.Footnote ⁹⁰ The UK delegation found it difficult to engage in settlement discussions without clear acknowledgment of the bonds, and saw the Soviets as trying “to establish the exceptions to a rule before the rule itself is laid down.”Footnote ⁹¹ British negotiators were also not authorized to offer loans or credits and so the talks reached deadlock.

Not only did debt negotiations disappoint, the UK also soon realized it had agreed to a raw deal in the 1930 trade agreement, as Moscow's trade monopoly allowed the Soviets to manage their trade more or less the way they saw fit without breaching the agreement's most-favored-nation clause. The UK terminated the agreement in 1932 and negotiated a new agreement in 1934 in an attempt to correct its growing bilateral trade deficit. During these negotiations, the UK government stressed to the Soviets—and repeated in the House of Commons—that a permanent trade agreement would require “a satisfactory settlement” of the debts and claims and the Soviets should “therefore regard any commercial agreement which may be negotiated meanwhile as being of a temporary and transitional character pending a final disposal of this question.”Footnote ⁹²

Subsequent attempts to negotiate a long-term loan which together with the Baring Balances could be used to settle the British claims,Footnote ⁹³ were opposed by the Association of British Creditors of Russia on the ground that Russia's oil and gold riches and favorable trade balance “makes Soviet Russia not an impoverished debtor but a deliberate defaulter.”Footnote ⁹⁴ Attempts to settle through bilateral negotiations ultimately came to an end. The exception was a 1935 settlement between the Soviet government and the Lena Goldfields Corporation, involving £3 million to be paid over twenty years—a fraction of the £13 million (plus interest) arbitration award rendered in 1930 by British courts based on the 1925 concession agreement.Footnote ⁹⁵ But the Soviets later defaulted upon this too.

Bilateral negotiations having failed, the UK government considered taking Soviet assets within UK jurisdiction on a unilateral basis. A 1934 proposal would have expropriated the Tsarist assets in Barings Bank either for the benefit of the UK taxpayer or for the benefit of the private claimants against Russia. UK ministers discussed ways to confiscate these assets over several years, but the principal deterrent to unilateral action was the fear of the damage that action without Soviet agreement would cause to the reputation of London as an international financial center.Footnote ⁹⁶ The Soviet government regarded Russian assets in the UK as property of the Soviet state, and—as explained—de jure recognition granted by the UK in 1924 implied the right of the Soviet government to such property. Barings had, however, agreed not to part with the balances without giving the UK government the opportunity to intervene, possibly through legislation.Footnote ⁹⁷

In March 1939, Robert Hudson, UK Secretary for Overseas Trade, visited Moscow to negotiate a revised Trade Agreement. He proposed to Litvinov, by then the Soviet Foreign Minister, that the claims and counterclaims should be settled by a mutual cancellation, together with acceptance by the Soviet Union that the Baring balances would be used to compensate British claimants. The Soviet Union had agreed a similar arrangement with U.S. President Roosevelt under the so-called Litvinov Assignment of 1933, which foresaw but never achieved a settlement of U.S. claims.Footnote ⁹⁸ But although Litvinov was broadly in favor of such an arrangement with the UK, he resisted the suggestion by Hudson that the Soviet Union should provide additional funds. After the outbreak of World War II, the UK decided to leave the question of claims for the time being, but the 1939 proposal was basically what the UK and the Soviets ultimately agreed almost fifty years later, except that the 1986 deal included it a minor payment to the Soviets rather than the other way round.

VII. 1945–1957: New Claims and Counterclaims

The 1940 Soviet annexation of the Baltic States further complicated the claims and counterclaims (see Table 1).Footnote ⁹⁹ The property and debts of many UK nationals was expropriated in the months before and after the Baltic States became part of the Soviet Union. British assets had also been expropriated in territories ceded to the Soviet Union by Romania, Czechoslovakia, Poland, and Finland. The UK government reserved the right to claim compensation for these assets in 1940, but the Soviets refused to admit liability. Back in London, the Bank of England held substantial gold reserves transferred to it by the Central Banks of the Baltic States for safekeeping. But in retaliation for the British government's refusal to hand over the gold, the Soviets defaulted on the Lena Goldfields settlement along with bonds of the Tetiuhe mining concession in Siberia. The Central Bank of the Soviet Union claimed to have purchased the gold from the Baltic Central Banks just prior to the annexation and Moscow made clear they would persist in their position until the Baltic gold was released.

Table 1.

UK and Soviet Claims as of 1949, £mn

Source: Compiled from T 236-4799. Very few claims had been scrutinized and verified and a number of estimates were adjusted as more information was gathered (and the pound was revaluated). The issue of interest was also left for future assessment. Minor further claims left out of table.

The added complexity increased the pressure on the UK government, for whom the Tsarist and Baltic debts henceforth became a bundle of private British claims against the Soviet Union. On the one hand, the new claims increased the number of voices calling for action, including those of members of Parliament.Footnote ¹⁰⁰ Yet interests among private claimants were divided. Post-Revolution claimants complained that their debts were long overdue and asked for special attention as they were now aging and had suffered hardship having lost most of their personal possessions.Footnote ¹⁰¹ The Lena and Tetiuhe bondholders saw their interests as separate from Revolution claims and argued that they could therefore be dealt with independently,Footnote ¹⁰² while claimants of post-1939 debt expected to be a priority over Lena and Tetiuhe bondholders, as the latter had already been partially compensated. Each of the three groups saw their claims as unique and requiring preferential treatment.

With little Soviet interest in negotiations, the Foreign Office returned to the option of seizing Soviet assets. Once again, however, recognition was a barrier. In 1941, when the UK desperately needed Russia as part of the war effort, Eden had assured Stalin that the Baltic countries formed part of the USSR.Footnote ¹⁰³ By 1945, however, the Foreign Office stated that the Baltic States were not part of Soviet territory. In 1946, the UK recognized the Baltic annexation de facto through the certificate of the foreign secretary in the Tallinna case relating to the sunk vessel Vapper,Footnote ¹⁰⁴ but it still did not recognize the annexation de jure. As explained above, this implied that the UK continued to regard the gold held in the UK as the property of the former Baltic States rather than an asset of the Soviet Union.

Eric Beckett, the Foreign Office Legal Adviser, wrote for advice from the Attorney-General, Sir Hartley Shawcross, in May of 1948. Beckett cited Lauterpacht in Oppenheim's International Law,Footnote ¹⁰⁵ and the 1939 English decision Haile Selassie v. Cables and Wireless.Footnote ¹⁰⁶ The case took place after the invasion of Abyssinia (later Ethiopia) by Italy and required a Chancery court to determine entitlement to money contractually owed to Ethiopia when the conquest by Italy had been recognized de facto but not de jure by the UK. By the time an appeal was heard, the UK government had recognized the king of Italy as the de jure emperor of Ethiopia, the recognition was held to have retroactive effect, and the money awarded to Italy. Beckett noted that this case was “the only actual authority” on this point at the time and justified the result

By extension, this implied that HMG could not include the Baltic assets in negotiations with the Soviets without suggesting that the Baltics were Soviet territory de jure. It did not, however, exclude the possibility that Baltic assets in the UK could be unilaterally confiscated and distributed as compensation for British properties nationalized in the Baltic States.

The argument appears to have been that even though the expropriation of British assets had been done by the de facto Soviet authorities, the Baltic States remained at least partially responsible and had enjoyed unjust enrichment by receiving some of the benefits of the assets.Footnote ¹⁰⁹ How the Baltic states enjoyed the proceeds of British assets was left unclear.

In the ensuing meeting in July 1948, Shawcross and the Solicitor-General advised that legislation could be drawn up to confiscate the Tsarist assets in Barings Bank to compensate holders of Tsarist debts and the same could be done for the Baltic gold in the Bank of England without recognizing the annexation de jure as long as “no claim was made to the Soviet Government on behalf of those with claims in respect of the Baltic States.”Footnote ¹¹⁰ Only Baltic claimants could be compensated with Baltic assets so they should not be used to compensate the Lena and Tetiuhe bondholders. A moral case could be made, according to the Foreign Office, as the Soviet default on the Lena settlement had explicitly been linked to the Baltic gold, but legally it could imply the Baltic assets were in fact Soviet assets that could be used to settle Soviet debts, which in turn could be interpreted to imply de jure recognition. Here, the Law Officers took the view that:

Upon insistence of the Soviets, however, the Foreign Office still preferred to incorporate the Lena and Tetiuhe bondholders into the Baltic pool, so looked for new arguments that doing so would not mean a de jure recognition of the Russian annexation of the Baltic states. Those new arguments, by Fitzmaurice of the Foreign Office Legal Advisers, were twofold. First, the Baltic assets could be taken as an exercise of a right of self-help or retaliation because British nationals had suffered damage and all other means of recourse had failed the UK government. Second, following the Mavrommatis case,Footnote ¹¹² the claims against the Baltic states belonged to the UK as a state not individual British subjects and following the Chorzów Factory Case as well as Rustomjee v. the Queen and The Civilian War Claimants Association v. the King,Footnote ¹¹³ a distinction could be made between the grounds on which a seizure of foreign assets was effected and the use of such assets after they had been taken. How assets were dealt with was solely the concern of the UK government, not the Soviet government or the Baltic States.Footnote ¹¹⁴ On this basis, Shawcross was asked to reconsider the issue:

Shawcross agreed. Provided, the government had exhausted other means of obtaining satisfaction—such as a claim before the International Court of Justice—the government could proceed.

The Foreign Office was pleased. Everyone knew that the Soviet government would resist settlement by the International Court of Justice. As long as the legislation was drafted carefully to avoid implications of recognition the Foreign Office concluded that “the fact that Baltic assets were used to satisfy certain non-Baltic claims would have no legal implications of any kind as regards sovereignty over the Baltic States.”Footnote ¹¹⁷

On this basis, a Foreign Claims and Assets Bill was drafted in 1949, including a Claims Commission to adjudicate private claims. But while the legal justifications behind this initiative were important for the settlement emerging twenty years later—which, in turn, was revisited in 1991—the plan was soon shelved. The UK Embassy in Moscow warned that the Soviets might respond by defaulting on a 1941 Civil Supplies Agreement involving UK supplies to the Soviet Union of capital equipment then worth approximately £40 million for power stations and other infrastructure.Footnote ¹¹⁸ It was unclear whether the Russians were aware of this source of leverage while the UK was still holding on to the Baltic gold, so it was not communicated publicly.Footnote ¹¹⁹ Yet, a Foreign Office memorandum concluded that:

When members of Parliament inquired about the delay, questions were either evaded or answered in the strictest confidence.Footnote ¹²¹ When questions were asked in Parliament, ministers were instructed to say “as little as possible,”Footnote ¹²² and private claimants became increasingly frustrated—in one case writing: “For 30 years the Kremlin has been laughing up its sleeve at our bourgeois scruples in refusing to distribute the Funds to the claimants.”Footnote ¹²³

VIII. 1953–1968: A 0–0 Baltic Draw?

With Stalin's death in March of 1953, prospects of meaningful negotiations improved. As part of his reset of relations with the West, the Soviet Prime Minister Nikita Khrushchev suggested a trade agreement with the UK, a move welcomed by the British government concerned about persistent bilateral trade deficits.Footnote ¹²⁴ The hope was that the Soviets would consider something along the lines of what had been agreed by the Cabinet in 1939, where both sides would waive their government Revolution claims while British private revolution claimants would receive compensation of £7 million through the Baring balances and an additional £5 million from the Soviet government.Footnote ¹²⁵ This would provide a symbolic gesture for claimants at a time when the UK government and claimants themselves had largely given up on the revolution claims. It would not come close to the £390 million owed by the Soviets according to the UK, however, so would preferably have to be in exchange for a more favorable settlement of the post-1939 claims by using the Baltic assets in the UK and the Soviets agreeing to resume payments on the Lena and Tetiuhe bonds. In return, UK would not pursue further public and private post-1939 claims.

In June 1955, UK Prime Minister Eden instructed his ambassador in Moscow to approach the Soviets about a possible settlement along those lines provided the settlement would not constitute de jure recognition of the Soviet annexation.Footnote ¹²⁶ With no UK leverage, the initiative went nowhere: although closer Anglo-Soviet trade links were of interest to both governments, Eden's approach about a settlement was explicitly excluded from the prospect of trade negotiations,Footnote ¹²⁷ and unilateral self-help remained off the table because of the Civil Supplies Agreement. Equally, the Soviets had no reason to compromise—safe in the knowledge that the outstanding debts were not sufficiently important for UK's strategic interests to block Khrushchev's new opening to the West, with core discussions about to start on the Soviet nuclear program, German reunification, and Soviet involvement in the Middle East.Footnote ¹²⁸ As a result, the Soviets still refused to acknowledge liability for the Tsarist debts, maintained their counterclaim over intervention in the Civil War,Footnote ¹²⁹ and ruled out any Soviet payments as this could trigger similar demands from other countries as well as most-favored-nation provisions in Soviet agreements with Germany, Denmark, and Japan where the parties had waived their mutual claims on the condition that the Soviets did not satisfy similar claims from third parties.Footnote ¹³⁰ Instead of accepting further bilateral engagement, the Soviets leaked the talks to the press in January 1956 to put pressure on the UK to release the Baltic gold to settle the Lena and Tetiuhe claims.Footnote ¹³¹ Talks were initiated a few months later, but were soon put on ice again when the Suez intervention led Khrushchev to threaten the UK, France, and Israel with nuclear war if they did not withdraw their forces.Footnote ¹³²

When relations began to thaw again in 1958, Prime Minister Macmillan went to Moscow to finalize a five-year Trade Agreement. It included a commitment to negotiate a permanent trade agreement and thereby ignored the UK's decision in 1934 not to do so without first resolving the revolution claims.Footnote ¹³³ On this basis, Moscow agreed to fresh negotiations to consider the post-1939 claims.Footnote ¹³⁴ This was welcome news for the UK, where the debts remained an irritant “if only because of the sustained pressure by the numerous British claimants for further action on their behalf.”Footnote ¹³⁵ But it was also delicate territory. The Baltic claimants kept pushing for the UK to use the Baltic gold in the Bank of England for compensation, whereas the legations of the former Baltic States objected fiercely to such an arrangement and the Foreign Office remained suspicious that Moscow's main interest in getting the UK to hand over the Baltic gold was indeed to secure de jure recognition of the annexation.Footnote ¹³⁶

The concern went to the heart of East-West tensions in Europe: in 1962, the year after the Berlin crisis, Khrushchev had implied he was seeking two separate German states, so any weakening of UK opposition to Soviet annexation would prompt the Allies “with some justification [to] contend that we had bartered a valuable principle for, at most, a few million pounds.”Footnote ¹³⁷ Already a decade before, the Foreign Office had warned that even rumors of de jure recognition would “stultify our propaganda to Eastern Europe and lead to serious difficulties with the Americans, who have not even given de facto recognition.”Footnote ¹³⁸ The Foreign Office Legal Adviser suggested that the UK line should be that:

The issue was ultimately referred to the Law Officers, who confirmed that it should be possible to enter into negotiations. The criteria for implied recognition were seen as “few and narrowly drawn,”Footnote ¹⁴⁰ but the general position was that:

This was also the view of Lauterpacht.Footnote ¹⁴² However, the UK had to avoid an international agreement that recognized Soviet title to the external Baltic State assets, as this would imply recognition of the annexation de jure. On the rights to claim external state assets of a de jure, but not de facto government, the Law Officers again relied on Haille Selassie and Lauterpacht's position described above,Footnote ¹⁴³ along with Brierly,Footnote ¹⁴⁴ O'Connell,Footnote ¹⁴⁵ and the 1925 English High Court decision in U.S.S.R. v. Onou. Even separate waivers of claims might be taken to imply de jure recognition,Footnote ¹⁴⁶ so instead the Law Officers suggested the aim should be for a settlement in the form of an Exchange of Notes in which each side would undertake not to pursue its claims against the other side.

The first step, then, was for both sides to gather information about their claims but gathering and scrutinizing more than 1,000 claims totaling more than £10 million took much longer than expected. Claimants became increasingly frustrated with the lack of progressFootnote ¹⁴⁷ and the prices on Baltic bonds dropped.Footnote ¹⁴⁸ The claimants did not know that the Civil Supplies Agreement was about to expire so that if negotiations failed the UK would be in a position to expropriate the Soviet assets as a fallback option.Footnote ¹⁴⁹ By 1964, it seemed that this would not be necessary, as Russia agreed to compensate Danish firms which had held properties in the Baltic States and other ceded territories seemingly without Denmark recognizing the annexation de jure.Footnote ¹⁵⁰ One month after the Soviet-Denmark Agreement, a UK delegation went to Moscow to hold initial clarifying talks and prospects of negotiations improved further in October with the election of a Labour government under Prime Minister Harold Wilson who was eager to improve relations with the Soviet Union.

As talks began in earnest in 1965, the Soviets refrained from pushing for de jure recognition of the Baltic annexation and did not hint, as the Soviet Embassy had done previously, that the Baltic missions in London would have to close in the event of an agreement. Still, the Soviet side repeatedly used the words “recognition” and “succession,” which raised alarm bells with the UK delegation.Footnote ¹⁵¹ The Soviets also tried to get the UK to agree to the formulation in the agreement with Denmark, making reference to “property rights and other assets, passing to the Soviet Union as a result of nationalization, at present on Danish territory.” That language was seen by the UK as possibly implying de jure recognition.Footnote ¹⁵² Aware of how the agreement might be perceived, UK negotiators suggested that the Soviets should acknowledge a UK side note to the agreement that

Such a note could be used publicly, according to the UK delegation, “in order to meet criticisms to the effect that their position had been prejudiced in some way by the Agreement.” In addition, the UK signatory could include this language under his signature to make it more formal. The Soviets balked—it would be “unprecedented in Anglo-Soviet relations”—and said the Soviet signatory in that case would replace the page with a clean one for signature. The idea was dropped.Footnote ¹⁵⁴

On bonded debt, the Soviets reiterated that they were not under an obligation to settle. To protect their position on the outstanding Tsarist debts, “they made it quite clear that their acceptance of responsibility was ex gratia and that they did not accept that successor states automatically succeeded to the obligations of the former states.”Footnote ¹⁵⁵ Moscow was prepared to reach an agreement on the loans, but only if the UK could provide the originals that established the nationality and title of every holder. This was impossible as many of the bonds had been bought and sold on the British Stock Exchange since 1940.

In general, the negotiations proved far more painful than the UK had expected. Most of the UK's claims were small private claims often less than one thousand pounds, which evolved amid the destruction and confusion in Eastern Europe during the war. These were difficult to back up with documentary records as many claimants had fled when the German and later Soviet armies invaded, which the Soviets exploited in full during thirty-seven acrimonious meetings.Footnote ¹⁵⁶ By contrast, almost 60 percent of the Soviet claims related to the Baltic Gold. The Soviets changed their position on their claim to the gold, now arguing they had purchased it on the same day from the three Baltic Central Banks shortly before the annexation. No documentation could support this, but at least the gold was a known entity.

The compromise reached in 1966 authorized the UK to expropriate the Baltic gold and use it to compensate claimants whose losses derived from the 1940 annexation and consequent seizures of property as well as certain UK government claims for shipping services. One fifth of the gold was ultimately used to compensate the Lena and Tetiuhe bondholders; i.e. claims from outside the Baltic area. And although the UK had initially suggested a £1/2 million payment by the Soviets as part of the settlement, the agreement ended up the other way round with the UK paying that amount to the Soviet Union to be used for purchase of UK footwear, apparel, fabrics, and other manufactured goods.Footnote ¹⁵⁷ Compared with other post-war lump-sum agreements, it ended up with a relatively favorable payoff for UK claimants of 43 percent.Footnote ¹⁵⁸ According to the Foreign Office, the agreement also allowed the UK to resolve the matter without giving de jure recognition to the annexation of the Baltic States and presented it as a “0–0 draw.”Footnote ¹⁵⁹

Few others saw it this way. Baltic refugees and organizations went on the BBC's “Money Programme” to air their complaintsFootnote ¹⁶⁰ and addressed a letter to all members of Parliament about what they saw as a betrayal of the Baltic states.Footnote ¹⁶¹ In the House of Commons, the opposition took up the cause of the Baltic States and railed against the agreement, seen mainly as an attempt to serve Wilson's aim of ingratiating his Labour government with the Soviets.Footnote ¹⁶² Jo Grimond (Liberal) called the agreement “one of the most squalid minor embezzlements ever perpetrated by a British Government”Footnote ¹⁶³ and in the House of Lords, Lord Lansdowne protested that “the banks of the Baltic States . . . have had their gold stolen from the Bank of England, the theft having been perpetrated by Her Majesty's Government.”Footnote ¹⁶⁴ Moreover, the payment to the Soviets was described as a humiliating “bribe” even if another Anglo-Soviet trade agreement was reached (which eventually happened in 1969).Footnote ¹⁶⁵ “I can hardly conceive of a more humiliating end to a negotiation,” said Rawlinson who became Attorney General under the Conservative government in 1970.Footnote ¹⁶⁶

Concerns with recognition were flagged as well. Richard Wood (Conservative) suggested the agreement appeared to confer “de jure recognition in accepting that the Soviet Union is able to give an undertaking not to support claims made by the Baltic States.”Footnote ¹⁶⁷ The government denied this,Footnote ¹⁶⁸ but once the agreement was completed the concern was raised again. Sir Tufton Beamish (Conservative):

Not just opposition politicians, but also leading lawyers questioned whether the fine distinctions between de facto and de jure recognition relied upon by the Law Officers and the Foreign Office would be seen the same way by the international community.Footnote ¹⁷⁰ Irrespective of which view is correct, Tikhonravov accurately notes that the 1968 agreement revealed how “despite its obvious importance, the British policy of granting only de facto recognition to the Baltic annexation lost a significant part of its value over time.”Footnote ¹⁷¹

The decision by the Labour government remained controversial. The United States and France did not appropriate Baltic assets kept there and in its Baltic settlements with Denmark and Norway the Soviet Union itself made payments. In other agreements—such as the ones with the Netherlands and Sweden—claims were mutually set off. Only in the Agreement with the UK did the claimant state use blocked Baltic assets as part of the settlement and The Guardian newspaper speculated about “the complications which would arise if the Baltic States ever regained independence and demanded repayment of the gold they deposited in good faith. . . .” Footnote ¹⁷² That was exactly what the Baltic states did following their reemergence as independent states after the disintegration of the Soviet Union, as we return to below.

IX. 1969–1984: Revolution Claims Revisited

Although the Baltic settlement was controversial, there was hope it could lead the way for other outstanding Russian debts. Announcing the deal, the Daily Mail wrote that “a lot of people will be taking a fresh look at their lampshades today.”Footnote ¹⁷³ This referred to the Tsarist bonds which by then were widely used as interior decoration due to their fine stiff parchment covered with seals and eagles. Internally, the Foreign Office had hoped that a resolution of the post-1939 claims would provide a stepping stone to engage on Revolution claims, whether through “one last desperate effort”Footnote ¹⁷⁴ to get some compensation, or a mutual waiver leaving the UK free to distribute the Tsarist assets. Alternatively, the UK might be able to conclude a tacit understanding without a formal waiver that the Soviets would allow UK to seize and distribute the Tsarist assets in return for the UK dropping its old claims. Some compensation would stop the constant flow of correspondence from Revolution claimants, which had kept trickling in during the previous decade.Footnote ¹⁷⁵ While it would not amount to much for the claimants, it would at least mark a departure from UK's policy as articulated in 1951, under which even if the Baring Balances were expropriated the proceeds would have gone to the Exchequer.

As the Soviets seemed reluctant to engage on the Tsarist claims—a request for negotiations from October 1968 was left unansweredFootnote ¹⁷⁶—the possibility of taking over the Tsarists assets was revisited. The main risk of retaliation had now passed as the payments under the Civil Supplies Agreement had been completed. In addition, the Baring Balances had appreciated to what the government believed to be about £14 million, and recent examination of the largely unsubstantiated private claims suggested they were less than initially estimated—in part because many claimants had died without leaving traceable heirs or successors. This left space for a slightly higher repayment rate. It would also be easier to distribute the funds now that the Baltic claims had been settled. 1969 therefore seemed an opportune moment to appropriate the Tsarist assets and the Treasury saw it as preferable to negotiations that could require extensive scrutiny of thousands of fifty-year old claims and would inevitably raise the Soviet intervention claim.Footnote ¹⁷⁷

Advice was sought from the Law Officers. Among its arguments, the Foreign Office recalled that while the Soviets had traditionally claimed it was only a successor to Tsarist assets, not liabilities, the Soviet Union had “never actively sought to obtain possession of the Tsarist assets either through diplomatic channels or in the Courts and it is unlikely that they would do so, whatever the position in domestic or international law, since this would imply that they accepted the liabilities of their predecessors.”Footnote ¹⁷⁸ The Law Officers responded that while private Russian assets should preferably be left untouched, as their seizure could be difficult to justify when enforcing an international obligation of the Soviet government, the appropriation of the Tsarist assets could be justified as an act of self-help or retaliation under international law as long as the Soviets were notified of what was intended and given a reasonable period to react before legislation was introduced.Footnote ¹⁷⁹ The UK could also invite the claims to be submitted to the International Court of Justice or an ad hoc tribunal—as also suggested by Shawcross in 1949—but this would only add further delays and was unlikely to be accepted by the Soviet Union. Moreover, if Moscow were to accept such as an offer it might raise its own intervention claim against the UK, the merits of which had not been considered by the Law Officers.Footnote ¹⁸⁰

Interdepartmental wrangling and concerns about timing delayed notificationFootnote ¹⁸¹ and the Soviet response to the UK Aide-Memoire of September 8, 1971, came in January 1972 in the following terms:

This was the first time the Soviet government had put an exact value on its intervention claim against the UK—amounting to £2.05 billion—and the strong response led to prolonged argument within the UK government. When consulted again, the Law Officers advised that the decision whether to proceed with the proposed legislation was a political rather than a legal one, but the Legal Adviser to the Foreign Office, Sir Vincent Evans, maintained that the reference to negotiations could not be ignored—not least as the UK had sought a negotiated settlement for fifty years. Proceeding unilaterally could violate international law and would send an awkward signal at a time when foreign property was being extensively expropriated by recently independent states.Footnote ¹⁸³ Even if the Soviet's invitation to negotiate was a bluff, it had to be called out.

Accepting the invitation to negotiate would also involve an element of bluff for the UK, however, because it was reluctant to open the Pandora's box of the Soviet intervention claim. Just as the UK had considered hardly any of the private claims since 1931, the intervention claim had also been left unassessed. The size of the counterclaim left London's position “far more dangerous” if it was to be taken seriously,Footnote ¹⁸⁴ and even if it ended up with only a small payout to the Soviets no one wanted a repeat of the political storm over the Baltic settlement. An additional complication was that in its 1972 examination of the intervention claim—the first for many years—the Foreign Office Legal Advisers concluded that there was in fact:

This conclusion was in line with Sir Cecil Hurst's conclusion from the 1924 minute—later uncovered by the Public Record Office (now the National Archives). The analysis was written by Denza, then a junior legal counsellor in the Foreign Office. It considered three possible lines of defense for the UK.Footnote ¹⁸⁶ The first was that the intervention took place at the invitation of a government then recognized de facto by the UK. This would cover the intervention in Estonia which the UK helped establish its independence, but not other conduct by UK forces. The recognition given by the UK in March 1917 to the Provisional Government of Russia led by Kerensky did not survive its overthrow in November that year by the Bolsheviks. Consular and other practical relations were being maintained with the Bolshevik authorities even before their de facto recognition as the government of Russia. When Kerensky visited London he was received as a refugee and not as leader of a government continuing to be recognized de jure.

The second possible line of defense was that intervention took place to protect British lives and property. This had no merit, since there was no significant British community in Russia and the result of intervention was to push the new regime into extreme measures against foreign property and into their position that “no compensation would ever be paid to the Allies in respect of their expropriated property, since it was the necessity caused by external pressures and Allied intervention which had made it necessary to seize foreign property on such a scale.”Footnote ¹⁸⁷

The third possible argument—and the one most frequently deployed at the time—was that intervention was directly related to the conduct of the war and to preventing supplies and materiel from reaching the German forces. But the evidence showed that action by UK forces was not limited to preventing supplies from reaching the Germans or even to supporting factions which had stated that they would bring Russia back into collaboration with the Allies. It continued, moreover, well after the end of the war in November 1918 and appeared to an ever greater extent to have the main objective of opposing the new Socialist regime.Footnote ¹⁸⁸

This legal appraisal of the merits of the Soviet claim in respect of Britain's role in the intervention was never openly admitted by the UK, but it was another reason that the Soviet invitation for negotiations entailed considerable risks:

Political developments at home and abroad broke the deadlock. After taking office in 1969, Nixon became frustrated with the UK government and by the summer of 1973 he agreed with Kissinger that there was “no more special relations[hip].”Footnote ¹⁹⁰ Meanwhile, London was concerned that the bilateral U.S.-Soviet engagement was sidelining UK interests and after his reelection as Prime Minister in 1974, Harold Wilson initiated a range of cooperation agreements to reshape the UK's relationship with Moscow (the UK had expelled 105 Soviet diplomats involved in espionage in 1971).Footnote ¹⁹¹ This set the stage for revisiting the debt claims.

The UK presented the Russians with a draft Agreement in 1976 that provided for a mutual waiver of claims and counterclaims. The Soviet Union agreed to preliminary talks the following year and the Foreign Office sent Denza on an exploratory visit to Moscow. Here, Denza told the Soviets that the benefit of UK's proposed waiver was that:

The Russians acknowledged that the UK's willingness to consider the intervention claims was a departure from previous discussions and suggested that the dispute could be settled, perhaps in as little as six months.Footnote ¹⁹³ But in a meeting in London in February 1978, the Soviets were no longer ready to accept the mutual waiver but instead preferred a detailed examination of the claims and counterclaims. Negotiations were put on hold.

The Foreign Office next had to assess a new claim introduced by the Soviets relating to the so-called Omsk gold, which was originally part of the state reserves of Russia. During the chaotic fighting in the Russian Civil War it come under the control of a faction based in Omsk that exercised control over much of the eastern part of Russia stretching to Vladivostok on the Pacific coast.Footnote ¹⁹⁴ The Omsk government sent the gold—worth approximately £200 million—to Hong Kong as security for a large international loan intended to assist its military forces in the civil war. The Omsk government defaulted and the creditors realized their security in full, but there was no record of whether any surplus remained or, if so, what happened to it. According to the analysis by Denza, UK de facto recognition of the Soviet government in 1921 may have had some retroactive effect, but it did not have the effect of making the gold an asset of the Soviet government.Footnote ¹⁹⁵ The Omsk gold should therefore be excluded from negotiations with the Soviet Union; a position later accepted by the Soviets, and there was eventually no mention of the Omsk gold in the 1986 Agreement.

With the Soviet invasion of Afghanistan in late 1979, UK-Soviet relations froze again, and unilateral action was reconsidered. Politically, bilateral relations were at a low, Prime Minister Margaret Thatcher had ousted the Labour government, and confiscating Soviet assets could prove popular given the political climate. Economically, the Soviets were expected to have an interest in returning to normal relations after Afghanistan and thus little appetite for retaliation in trade relations or against UK companies in the Soviet Union. The case for self-help was on more solid legal ground, as the UK had attempted negotiations. Yet the Foreign Office remained concerned about the signal taking over the assets would send to other governments and the plans were put on hold—first in 1982 and then again in 1984.Footnote ¹⁹⁶

X. 1984–1986: Settling the Imperial Debts – At Last

Prime Minister Thatcher initiated a shift in UK policy toward the Soviet Bloc in 1983, which was cemented after her successful meeting with Gorbachev in December of 1984 and his election as General Secretary of the Soviet Politburo three months later.Footnote ¹⁹⁷ His economic reforms opened the doors not just to No. 10, but also international financial markets which were becoming as important for the global economy as they had been before the Russian Revolution. Prompted by a decline in the price of its oil exports, the Soviets increasingly sought loans from Western banks and wanted to issue international bonds as well.Footnote ¹⁹⁸ London was the global center for international bonds, but the Treasury and the Bank of England rejected the Soviet request based on their long-standing position that sterling bonds could only be raised after a resolution of the Tsarist debts. The Bank of England noted,

With the rise of international finance and the Soviet appetite for a clean credit rating London had new-found leverage and the Soviets suggested new talks in August of 1984.Footnote ²⁰⁰ With the Omsk gold issue resolved, UK-Soviet relations warming, and Soviet interest in entering the London bond market the expectation was that the Soviets were, finally, ready to settle. The contours of an agreement had been there for almost a decade—in fact it had been there since 1939—but merely presenting the 1976 UK offer of a mutual waiver was unlikely to succeed without an additional sweetener.Footnote ²⁰¹

Talks between the two delegations resumed early in 1986. Unlike the taxing negotiations leading to the Baltic settlement, relations between negotiators were friendly—working lunches in Moscow involved copious toasts of vodka—and discussions quickly centered on the precise amount of the sweetener. The UK negotiators implied if an agreement was not reached quickly, the UK claim might be increased to include massive damage done to UK trees, crops, and livestock from the Chernobyl catastrophe. At the final meeting in London on June 6, Denza had authority to offer £5 million but thought it unnecessary to offer this amount. It had been agreed internally that the offer could be distinguished from the Baltic states payment as reflecting the fact that the Baring Balances—in addition to the war loans already mentioned—contained working diplomatic accounts which could be said to enjoy diplomatic inviolability. The accounts were real, though the exact sums they contained were not known to the UK delegation. In the end, Denza suggested an offer of £2.65 million to her team, which the representative from the Bank of England agreed had “a certain spurious authenticity.” When presented to the Soviets, they accepted the offer and the deal was done.Footnote ²⁰²

The final Agreement included four main articles, less than 600 words in total. In summary:

The Soviet Foreign Minister Edward Shevardnadze and the UK Foreign Secretary Sir Geoffrey Howe signed the Agreement in the splendid surroundings of Lancaster House, London on July 15, 1986. The draft Agreement had been kept secret until then to avoid speculation or transfer of foreign-owned bonds into UK hands and trading in Russian bonds had been suspended in London at the start of business that day.Footnote ²⁰³ Barings Bank had earlier agreed that the Russian diplomatic and official accounts would be adjusted so as contain exactly £2.65 million.

The Law Officers confirmed that distributing the Baring Balances did not require further primary legislation,Footnote ²⁰⁴ and the Foreign Compensation (Union of Soviet Socialist Republics) (Registration and Determination of Claims) Order 1986 was accordingly made on December 16, 1986.Footnote ²⁰⁵ A full-page advertisement was published in the Financial Times inviting eligible claimants to submit claims to the Foreign Compensation Commission.Footnote ²⁰⁶ More than 10,000 requested application forms, but only 4,589 were submitted—probably because of the nationality and evidence requirements—and 3,677 claims were successful.Footnote ²⁰⁷ Valuations were based on the face value of the bonds and assets—i.e., not accounting for inflation or accrued interest—and in many cases the Commission could rely on estimates made by the Foreign Office and Board of Trade between 1918 and 1939.Footnote ²⁰⁸ Price Waterhouse was engaged to assist with the substantial task of distribution. As the first deadline of March 31, 1987 approached, they had already received about 315,000 bonds,Footnote ²⁰⁹ and the team leader reported that: “On top of that we have a lorry load of 144 boxes from a City finance house, 30 black dustbin bags packed full and another car load, so I expect we will be up to the 500,000 level when counting finishes.”Footnote ²¹⁰ On the day of the deadline, the Wall Street Journal reported that holders were lining up to file by midnight carrying “files, suitcases, cardboard cartons and shopping bags stuffed with old Russian bonds, hoping at last to receive a small fraction of the bonds’ face value.”Footnote ²¹¹

Interim payments were made in 1987 and further payments were made up through 1993 mounting to a total of £62.4 million.Footnote ²¹² This was more than expected at the time of the first advertisement, as substantial sums had emerged from dormant Russian accounts other than those with Barings Bank. It meant successful claimants received 55 percent of the face value of their £114 million in bonds and assets but taking inflation since 1917 into account UK creditor losses were of course far greater: the Soviet Union only ended up paying about 2 percent of Tsarist Russia's debt to UK investors. On its part, however, the United Kingdom achieved settlement of claims for billions of damages resulting from its illegal intervention in the Russian Civil War. After catering for inflation since the UK left the Russian Civil War in 1920, the £2.05 billion in losses claimed by Moscow would have amounted to some £26 billion at the time of the 1986 Agreement. UK ministers never disclosed that the Soviet claim for the intervention had been taken seriously, as acknowledgment of legal liability would have set a dangerous precedent for the UK and caused difficulties for former Allies who had intervened in the Civil War as well.Footnote ²¹³

Unlike the Baltic settlement, the 1986 agreement attracted very little political attention or hostility.Footnote ²¹⁴ In the UK and abroad, the Agreement was presented as a symbolic step for Anglo-Soviet relations that might give Moscow better access to Eurobond markets.Footnote ²¹⁵ A Bank of England official told the Wall Street Journal that the agreement “removed an obstacle” to new Soviet bonds in the sterling market and the London director of First Chicago Ltd. Said: “If anybody in the capital markets has not yet presented the Soviets with any interesting ideas, they will now.”Footnote ²¹⁶ The Agreement also led the way for the 1987 settlement of China's (much smaller) pre-Revolution debts, which in turn allowed Beijing to raise Sterling bonds as well.Footnote ²¹⁷ Moreover, and critically, it opened the door for Soviet negotiations with France—the largest creditor for the Russian Imperial government. These were delayed further by the collapse of the Soviet Union, and only in 1996 did Russia admit liability for Tsarist debts and agreed to pay $400 million to French bondholders the year after. When payments were complete in 2000, the French Treasury allowed French investors to buy Russian state bonds for the first time since 1918.Footnote ²¹⁸

XI. Baltic Coda

The £2.65 million payment to the Soviet Union used from the Baring Balances was justified publicly as embassy diplomatic and miscellaneous official accounts which enjoyed a special status under international law.Footnote ²¹⁹ This explanation was intended to distinguish the earlier Baltic settlement, when the UK had arguably violated international legal obligations in using Baltic assets to settle claims against the Soviet Union. And indeed, when the Baltic states reemerged from Soviet servitude five years after the 1986 settlement, they demanded restitution of their assets which they had entrusted to British safekeeping. The Foreign Office accepted that the UK did in fact owe compensation under international law. The matter could have been settled through arbitration, but the UK might lose and even if it did not arbitration would “look mean-minded and unhelpful toward the Baltic States.”Footnote ²²⁰ In the end, UK Prime Minister John Major ultimately repaid the Baltic states for the expropriation of their gold “to correct that smear of dishonor” created by Labour's 1968 settlement,Footnote ²²¹ thus indirectly using government funds to pay for British investors’ losses following the Soviet annexation.Footnote ²²²