After the November Revolution, the Bolsheviks were diplomatically isolated. Russian Ambassador to China N.A. Kudashev, who had held the post since 1916, broke off relations with his government. On the one hand, this was a source of anxiety for Beijing: A separate peace between Russia and the Central Powers would trigger a quarrel with the Allies, jeopardise China’s hope of a favourable postwar settlement, and heighten Japan’s presence in Russia’s Northeast Asian territories.
On the other hand, the Beijing government was not blind to the possibilities. Already in December 1917, it was exploring how China might halt its onerous Boxer Indemnity payments to Russia on the grounds that the Bolsheviks lacked legitimacy.
Regarding a delay in the [indemnity] payments, a previous message from Your Ministry enclosed a memorandum which stated that the suspension of a portion of Russia’s Boxer Indemnity should be effected according the seven-country joint ministerial memorandum of 8 September.
Since internal conflict in Russia is now flaring up, the Russian Ambassador in Beijing has broken off relations with the Lenin government, and our country also has not recognised that government, we would like to enquire of Your Ministry if the entire Boxer Indemnity payment should be suspended, or if a portion should still be paid. It would be best to raise this promptly with the Russian Ambassador and seek his response before coming up with a joint solution.Letter from the Finance Ministry, 21 December 1917. Zhong-e guanxi shiliao, Minguo jiunian zhi banian (1917-1919). E zhengbian yu yiban jiaoshe (1), pp. 192-193.
The 1901 Indemnity was levied on China following the Rebellion of the previous year, which had been suppressed by the Eight-Nation Alliance of Britain, France, the United States, Russia, Japan, Germany, Austria-Hungary and Italy. It punished the Qing court for supporting the Boxers, holding it responsible for the “outrages” of the Rebellion to the tune of 450 million taels of silver – equivalent to $330 million at the contemporary rate of exchange – at an annual interest rate of 4%. The Indemnity was over four times the annual revenue of the Beijing government and payments would have absorbed a fifth of the national budget, crippling China financially.
As Russia’s Chinese Eastern Railway concession had been one of the Boxers’ main targets, Russia received the lion’s share of the indemnity: 28.97%. Payments were channelled through a joint banking committee in Shanghai. The Russians were represented by the Russo-Chinese Bank – also known as the Russo-Asiatic Bank from 1910, or Daosheng Bank in Chinese – itself one of the main sources of finance for the CER.
Unsurprisingly, China’s new Republican government was keen to evade Indemnity payments. It successfully suspended the German and Austro-Hungarian shares – totalling 20.91% – after joining the Allies in August 1917. Fellow Allied countries also agreed to postpone payments completely for five years. However, in the “joint ministerial memorandum of 8 September” mentioned in the letter above, Russia would only defer one-third of its share.
The prospect of a complete suspension was therefore too tempting to resist. Acting on the Finance Ministry’s advice, Deputy Foreign Minister Gao tackled the subject head-on with Kudashev.
Gao: On the matter of the Indemnity payment, it is my opinion that due to the coup and instability in Your Country, it is uncertain if Your Country’s new government can hold power for long. It may be best to temporarily suspend the payments.
Kudashev: The Indemnity is paid to the Russo-Asiatic Bank in Shanghai. That Bank is also opposed to the new government and there is no fear that these funds will fall into the hands of the Bolsheviks. Even if the Bolshevik government were to maintain itself, it would come down to a conflict between the Bank and that government. The Bank would bear responsibility and the Chinese government would not be involved.
Gao: I have nothing else in mind but the worry that, if the new government were to assert its rights, the Russo-Asiatic Bank would also defy Your Excellency and transfer the funds directly to the new government, there being no alternative. In that case, the Indemnity may cause problems in future. Moreover, I fear that other Allied countries may not know the full situation and say that the Chinese government is assisting the new Russian government, causing more conflict.
Kudashev: I will discuss this with the Allied doyen, he must acknowledge the solution I have proposed. The Deputy Minister may also enquire with the doyen, all the more to assuage any doubts. As an ambassador recognised by Your Country, for the time being Your Government should be advised only by me. Furthermore, without these funds, the expenses of this Embassy and the various Russian consulates in Your Country, as well as of the embassies and consulates in other countries, will be unmet.
Gao: For now, let us discuss this with the Allies before deciding.Dialogue with the Russian Embassy, 26 December 1917. Ibid., p. 197.
The Foreign Ministry did not wait to consult with the diplomatic corps. On 28 December, it made enquiries with British ambassador Sir John Jordan on the Indemnity, but also sent secret instructions to the customs department to withhold the £50,000 December installment. Kudashev promptly requested a meeting with Foreign Minister Lu Zhengxiang to complain about the delay.
Kudashev: I have come to meet you specifically regarding the Indemnity issue. Previously, I told Deputy Minister Gao that the funds due from Your Country to mine could be suspended by one-third. The remaining two-thirds should still be paid to the Russo-Chinese Bank in Shanghai, as security for expenses which are drawn from that Bank by this Embassy and the various embassies and consulates in the Far East. I also asked Deputy Miniser Gao to probe the opinions of the Allied diplomats on this solution at his convenience. But last Friday, at a meeting of the Allied diplomaic corps where I was present, this matter was officially discussed. This was not consistent with my original intentions when I asked Deputy Minister Gao to make enquiries at his convenience, which is regrettable. I have also heard from Shanghai that the funds which I have requested to be transferred to the Russo-Chinese Bank are now being detained by the chief of customs. It seems that Your Country is not adhering to the original agreement and has no intention of paying the funds. This is even more surprising. The one-third suspension, two-thirds payment that was discussed between myself and Your Country was signed off by myself, and the Russo-Chinese bank was instructed accordingly. But this same agreement signed off by myself is both acknowledged and not acknowledged by Your Country, which has suddenly detained the funds which were agreed should be paid. This is incomprehensible. If Your Country recognises me as my country’s representative, it should not act thus. If Your Country recognises the current Bolshevik government as legitimate, Your Country is free to do so and I can leave Beijing immediately.
Lu: When the Cabinet last met, the Finance Minister held that these funds could only be paid from my government to other governments. Currently, an official government has not yet been formed in Your Country, and payments made arbitrarily could fall into the hands of the Bolsheviks, aiding the enemy’s strength. It would be better to act conscientiously and temporarily hold on to them. This has nothing to do with Your Excellency personally.
Kudashev: Once these funds are received by the Russo-Chinese Bank, they furnish the expenses of my country’s embassies and consulates in the Far East. If Your Country does not transfer the funds to that Bank, it will have no security. The embassies and consulates will be unable to make withdrawals and cannot maintain themselves. This is certainly not the desire of Your Country or the Allies. There is certainly no need for Your Country to seek out the Allies over this matter. In future, whatever government is formed in my country, I will bear full responsibility for settling the accounts with the government. This will not involve Your Country and has even less implications for the Allies. Now the Allies have not yet made any indication, but Your Country has gone ahead in detaining the funds; this is all the more awkward for myself. If the Minister could speak strongly with the Finance Minister to wire Shanghai to pay the funds, I would be extremely grateful.
Lu: I will telephone the Finance Minister immediately. If this can be settled, I will do my utmost.Dialogue with the Russian Embassy, 31 December 1917. Ibid., pp. 204-205.
Considering that the order to withhold the payment came directly from the Foreign Ministry, Lu’s response was somewhat duplicitous. This deadlock could only be broken by the Allies: On 9 January, Sir Jordan informed the Ministry that the British and Japanese governments wished China to continue with the Indemnity payments if Kudashev could provide written guarantees that they would not reach the Bolsheviks. The Ministry received such a guarantee on 24 January and, on the same day, instructed that the funds be released.
China learnt two lessons from this setback. First, Indemnity payments could indeed be suspended if the Allies no longer backed Kudashev. Second, these funds allowed pre-revolutionary consulates to maintain an independent existence. Some of it could have entered the coffers of the White movement in Harbin, especially given the links between Kudashev, Horvath and Kolchak. Were China to cease tolerating pre-revolutionary Russian diplomats, cessation of the Indemnity payments could become a powerful weapon. Both conditions were not yet met in December 1917, but Beijing could bide its time.