The Soviet Union argued that it was the only rightful government for all of Finland that was capable of ending the Winter War and restoring peace; however, before the end of the war, the Soviets gave up this interpretation to make peace with the preexisting government of Finland, which was still recognized by the rest of the world.
The regime was also known by the colloquial name the Terijoki Government (Finnish: Terijoen hallitus, Swedish: Terijokiregeringen), as Terijoki was the first town to be captured by the Soviet Red Army. In Finnish historiography, the government is also occasionally called the Kuusinen Government (Finnish: Kuusisen hallitus Swedish: Kuusinenregeringen). Officially, the government had the name the Finnish People's Government (Finnish: Suomen kansanhallitus Swedish: Finlands folkregering).
The Finnish Democratic Republic was established on 1 December 1939 in the Finnish border town of Terijoki (now Zelenogorsk, Russia). During its tenure Otto Ville Kuusinen was prime minister and head of government. The cabinet was made up of Soviet citizens and leftist Finns who had fled to Soviet Russia after the Finnish Civil War. A declaration delivered via TASS on behalf of the Finnish Democratic Republic stated, "The People's Government in its present composition regards itself as a provisional government. Immediately upon arrival in Helsinki, capital of the country, it will be reorganised and its composition enlarged by the inclusion of representatives of the various parties and groups participating in the people's front of toilers. The final composition of the People's Government, its powers and actions, are to be sanctioned by a Diet elected on the basis of universal equal direct suffrage by secret ballot." Soviet foreign minister Vyacheslav Molotov spoke to the German ambassador to the Soviet Union on November 30—a day before the proclamation of the Finnish Democratic Republic—saying, "This government will not be Soviet but a democratic republic. Nobody will set up soviets there, but we hope that it will be a government that we can reach agreement with on safeguarding the security of Leningrad."
The Soviet government entered into diplomatic relations with the "people's government". On the first day of its existence, the new regime agreed to lease the Hanko Peninsula; to cede a slice of territory on the Karelian Isthmus; and to sell an island in the Gulf of Finland, along with sections of the Kalastajasaarento near the Arctic Ocean to the Soviet Union.
Kuusinen and Molotov signed a mutual assistance agreement and a secret protocol on 2 December 1939 in Moscow. The content of the agreement was very similar to what the Soviet foreign ministry had planned earlier in October 1939, though it never was presented to the Finnish government. According to the new agreement, the Soviet Union would cede a much larger area, Eastern Karelia, except for the Murmansk railroad, in exchange for the same territories that the Soviets had demanded in earlier negotiations from the Republic of Finland.