Foreign Relations of the United States, 1964–1968, Volume XXII, Iran

133. Telegram From the Department of State to the Embassy in Iran¹

Washington, May 3, 1966, 4:21 p.m.

1094. Joint State-Defense message. Embtel 1481.²

1. Sanitized version Peterson Report³ pouched to you by separate means for delivery to General Aryana and Shah. Total package recommended by report is estimated to cost approximately $308 million. While it is possible that cost may be reduced by such factors as greater equipment austerity, lower usage rates, lower maintenance requirements, reduced volume of supporting equipment, greater in-country maintenance and overhaul, and later delivery dates, these factors have already been partially applied to original cost-out which was substantially higher than $308 million. Therefore major further reductions may be difficult to achieve.

2. An additional factor is requirement for about $80 million to fund remaining items in Annex B to 1964 Memorandum of Understanding (Hawk battalion, M–60 tanks, and electronics gear) as against a remaining $60 million of uncommitted credit. Therefore to fund both these agreed items and total Peterson package would require new credit of about $328 million. This in turn would require raising Iranian credit ceiling from present $200 million to $528 million.

3. State, AID and Defense agree that Iran’s total credit should be held within a $400 million ceiling, given Iran’s foreign exchange position, estimated future revenues, and economic development needs. Also, MAP funds required to guarantee loans by other institutions are expected to be relatively stringent. Therefore, even if Team report is considered to reflect legitimate military requirements, it will be necessary inform Shah that credit limitations will force a deferment of substantial elements of package beyond 1971. We concur in proposed priority items for deferments as set forth in sanitized version of report, but would expect give Shah wide discretion in determining mix of US-approved items. They would reduce new credit requirement by about $144 million or down to approximately $184 million. When added to present credit of $200 million, this would hold total credit within desired $400 million ceiling. At same time, we believe these particular deferments would not adversely affect planned improvement of Iran’s air defense and naval capability which we understand is Shah’s primary concern.

4. While firm USG position not yet established, it probable that all items recommended in Peterson Report will be approved for sale except US destroyer. DOD likely take negative position on either US reserve fleet DD or new construction DD. In that event, there would probably be no USG objection if Shah wished turn to UK for destroyer type vessel (either new or used), but USG would have to be satisfied that aggregate of US and UK purchases were sustainable by Iranian economy.

5. Economic review now underway here should shed additional light on capability of Iranian economy. We are certain however that USG will be unable to support an add-on package exceeding $150–$200 million over next five years.

6. In handing Shah Peterson Report it important you make clear that it does not now represent USG position, that its proposals appear to involve in aggregate a cost which exceeds feasible credit limits, and that deferment of some items beyond 1971 is unavoidable and subject review at that time. Suggest you do not raise matter of a probable negative US position on destroyer sale, and give noncommittal answer if pressed.

7. Firm USG position on all issues will be established in time for annual review on May 19.

Rusk

1. Source: Department of State, Central Files, DEF 12–5 IRAN. Secret; Immediate; Limdis. Drafted by Hoopes; cleared by Director of the AID Office of Greece-Turkey-Iran-Cyprus-CENTO Affairs John H Funari, Deputy Assistant Administrator for Programs in AID’s Office of Program Coordination Gordon Chase, Warren, and Bracken; and approved by Davies. Also sent to ARMISH MAAG, IRAN and repeated to CINCSTRIKE.
2. Dated May 3. (Ibid.)
3. A copy of the Report of the U.S. Military Survey Team to Iran, March 22, is in the Johnson Library, National Security File, Robert W. Komer Files, Iran—Report of U.S. Military Survey Team (Peterson Report), February 16–March 3, 1966.