German–Soviet Economic Relations (1934–1941)

After the Nazis rose to power in Germany in 1933, relations between Nazi Germany and the Soviet Union began to deteriorate rapidly. Trade between the two sides decreased. Following several years of high tension and rivalry, the two governments began to improve relations in 1939. In August of that year, the countries expanded their economic relationship by entering into a Trade and Credit agreement whereby the Soviet Union sent critical raw materials to Germany in exchange for weapons, military technology and civilian machinery. That deal accompanied the Molotov–Ribbentrop Pact, which contained secret protocols dividing central Europe between them, after which both Nazi forces and Soviet forces invaded territories listed within their "spheres of influence".

The countries later further expanded their economic relationship with a larger commercial agreement in February 1940. Thereafter, Germany received significant amounts of critical raw materials necessary for its future war efforts, such as petroleum, grain, rubber and manganese, while sending weapons, technology and manufacturing machinery to the Soviet Union. After unresolved negotiations regarding a potential Soviet entry into the Axis Pact, the two governments settled several disputes and further expanded their economic dealings with the January 1941 German–Soviet Border and Commercial Agreement.

Economic relations between the two countries were abruptly terminated when Germany invaded the Soviet Union in June 1941, in violation of the Molotov–Ribbentrop Pact.

Background

Traditional commerce, World War I and Russian Revolution

Germany did not lack natural resources, including the key raw materials needed for economic and military operations.

Before World War I, Germany had annually imported 1.5 billion Reichsmarks of raw materials and other goods from Russia. However, the economies of the two countries differed greatly before World War I. Germany had grown into the second-largest trading economy in the world, with a highly skilled workforce largely dominated by the private sector. While Imperial Russia had rapidly modernized by tenfold in the fifty years before the war, its economy still relied heavily upon state orders and its industry was closely regulated by the Tsarist state.

Russian exports to Germany fell sharply after World War I. In addition, after the Russian Revolution of 1917, the young communist state assumed ownership of all heavy industry, banking and railways, while the 1921 New Economic Policy left almost all small-scale production and farming in the private sector. The war-ravaged German economy struggled to return to pre-war levels, with inflation also taking its toll in 1923.

In the Soviet Union, only by 1927 had industrial output achieved approximately the 1913 levels under the Tsarist regime, but Soviet exports to Germany increased to 433 million Reichsmarks annually by 1927 after trade agreements were signed between the two countries in the mid-1920s.

Economist Nikolai Kondratiev was asked to study the Soviet economy, and he advocated slow prudent growth that kept the residual market economy of the New Economic Policy. In the late 1920s, Joseph Stalin took the economy in the opposite direction, beginning a successful period of full-scale socialist industrialization in his first five-year plan for a Soviet economy that was still over 80% composed by the private sector, with plans to shed all vestiges of the free market. Kondratiev was accused of espousing a "counter-revolutionary" equilibrium theory, after which he was fired and jailed for being a "kulak-professor." Towards the end of his 8 year sentence he was put on trial again and executed at the Kommunarka shooting ground by firing squad on the same day his death sentence was issued.

Early 1930s

In the early 1930s, Soviet imports decreased as the Communist model achieved greater self sufficiency. The Soviet economic planning body, improved greatly in spite of hostile foreign powers. What followed was a system which included the most adequate review of national accounts and economic measurements. The subsequent changes to Gosplan improved its operation.

Though Soviet industrial output had significantly increased over its prior levels, Soviet exports to Germany fell to 223 million Reichsmarks in 1934 due to the Soviets distrust of the German regime. Although the Soviet Union possessed almost double the population of Germany, its industrial output still lagged behind because of the backward nature of the former Tsarist regime and invasions of the Soviet Union by the Western powers and others that followed its inception. Its steel production almost caught up with Germany's in 1933 during the German economic collapse in the Great Depression. Following are German imports from Imperial Russia and the Soviet Union from 1912 to 1933:

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While Soviet exports into Germany were a small percentage of Germany's imports due to the large amount of trade the Nazi regime carried out with the USA and the UK. At the time, the Soviets had little of interest to foreign buyers in general.

Nazi era and relations deterioration

Nazis rise to power

The rise to power of the Nazi Party increased tensions between Germany and the Soviet Union, with Nazi racial ideology casting the Soviet Union as populated by ethnic Slav "untermenschen" ruled by their "Jewish Bolshevik" masters. In 1934, Hitler spoke of an inescapable battle against "pan-Slav ideals", the victory in which would lead to "permanent mastery of the world", though he stated that they would "walk part of the road with the Russians, if that will help us." The sentiment roughly echoed Hitler's 1925 ''Mein Kampf'' writings, in which he stated that Germany's destiny was to turn "to the East" as it did "six hundred years ago" and "the end of the Jewish domination in Russia will also be the end of Russia as a State."

According to Joseph Stalin’s interpreter, Valentin Berezhkov, Stalin spoke highly of the Night of the Long Knives in 1934 and viewed Hitler as a “great man!” who had demonstrated “the way to deal with your political opponents”. Berezhkov also suggested parallels between Hitler’s inner party purge and Stalin's mass repressions of Old Bolsheviks, military commanders and intellectuals.

Nazi ideology focused on a racial struggle, rather than the class struggle at the center of Marxist ideology. While Nazi ideology opposed both the communism of the Soviet Union and capitalism, associating Jews with both systems, Nazi criticism of capitalism shared similarities with that of Marxists in that they both focused upon excessive financial concentration, declining exports, shrinking markets and overproduction. Hitler later boasted that the best means to beat inflation "was to be sought for in our concentration camps." While Marxists saw revolution as the solution, Hitler saw the only solution as conquest—expropriating the resources, such as Lebensraum, through war that could not be won through failing capitalist systems. However, survival of the private sector was not incompatible with extensive Nazi state economic planning.

Both the Soviet and German economies had grown coming out of dire economic slumps in the late 1920s following World War I and the Russian Revolution. The German economy experienced real growth of over 70% between 1933 and 1938, while the Soviet economy experienced roughly the same growth between 1928 and 1938. However, with heavy state intervention, both economies also became more isolated and expanded under conditions of exceptional autarky. Outside trade and outside capital investment declined considerably for both economies during the 1930s.

In the mid-1930s, the Soviet Union made repeated efforts to reestablish closer contacts with Germany. The Soviets chiefly sought to repay debts from earlier trade with raw materials, while Germany sought to rearm, and the countries signed a credit agreement in 1935. In 1936, the Soviets attempted to seek closer political ties to Germany along with an additional credit agreement, which were rebuffed by Hitler, who wished to steer clear of such political ties. In response to Stalin's hopes to complete an economic deal with Hitler, the foreign section of the NKVD warned him that "all Soviet attempts to appease and conciliate Hitler are doomed. The main obstacle to an understanding with Moscow is Hitler himself." Stalin did not agree, responding to the NKVD "Well, now, how can Hitler make war on us when he has granted such loans? It's impossible. The business circles in Germany are too powerful, and they are in the saddle."

Mid-1930s deterioration of relations

In 1936, Germany and Fascist Italy supported the Spanish Nationalists in the Spanish Civil War, while the Soviets supported the partially socialist-led Spanish Republic opposition. That same year, Germany and Japan entered the Anti-Comintern Pact, and were joined a year later by Italy.

That year, Germany also faced a large food and raw material crisis that had developed out of the increasing difficulties state bodies experienced attempting to control prices and commodity supplies in the face of resistant market forces. Much like Soviet economist Nikolai Kondratiev, lead German economist Hjalmar Schacht was fired and castigated. The crisis resulted in Hitler writing one of the few documents of any length that he drafted in his 12 years as Reich leader—a six-page memorandum that focused upon building a military larger than all possible enemy combinations and forcing upon the economy its racial duty of eschewing all inessential tasks in favor of large-scale war making. From this came Hitler's Four Year Plan for rearmament "without regard to costs", transforming the economy into a ''Wehrwirtschaft'' (defense-based economy). His advisers had suggested a Five Year Plan, but Hitler declined in favor of the less Marxist sounding Four Year Plan.

Soviet industrialization of the early 1930s required massive debt expansions. To attempt to decrease this debt, grain was sold in large quantities in world markets. German debt also soared with increased state spending. Both countries turned more to economic isolation and autarky. Germany brazenly refused to pay interest on its bonds, and then secretly directed third parties working for it to buy back those subsequently devalued bonds at rock bottom prices. As a result, only 15% of German debt was held by foreign sources in the late 1930s.

The Soviet great purges in 1937 and 1938 made striking an agreement with Germany even less likely by disrupting the already confused Soviet administrative structure necessary for negotiations. In the portion of the purges involving the military in 1936 and 1937, over 34,000 officers were purged in a campaign against a "fascist-Trotskyite conspiracy", including 45% of the most senior officers. While many officers were later reinstated, those that were convicted were shot and political officers, 73 per cent of whom had no military experience, were introduced into the Red Army. The purges led Hitler to believe that the Soviets were militarily weak. Castigated former lead economist Kondratiev was one of those executed in the purges. His harangued German economist counterpart, Schacht, would face similar treatment many years later, being sent to a Nazi concentration camp after being accused of being part of the July 20 Plot to assassinate Hitler.

Economic reconciliation was hampered even further by political tension after the Anschluss in mid-1938 and Hitler's increasing reluctance to deal with the Soviet Union. Soviet exports to Germany fell to 47.4 million Reichsmarks in 1937 (approximately one fifth of the 1934 total) and 52.8 million Reichsmarks in 1938. In short, the important trading relationship between the countries that existed in the 1920s essentially collapsed with Hitler's rise to power. German northeastern European imports from 1934 to 1939 were as follows:

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Even with vastly decreased trade between the countries, Germany was still among the top three importer nations for the Soviet Union and supplied between one third and two thirds of Soviet machine tool imports vital for industrialization. Trade continued on the basis of short term clearing agreements. Germany had supplied 54% of Soviet imports of machine tools from 1929 to 1933, and 53% of such imports even when relations became more tense from 1933 to 1937.

Four and Five Year Plans

Both the German Four Year Plan and Soviet Second and Third Five Year Plans emphasized the construction of military installations, factories, canals, roads and cities that produced accumulating crises of over-investment and supply failures in other non-emphasized economic areas. Monopsony compromised both systems, with the Soviet state the principal purchaser for all goods in its economy, while the German state was the largest purchaser in its economy. German cost-plus contract

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