199. Memorandum From the President’s Special Assistant (Rostow) to President Johnson1
SUBJECT
- This Year’s Military Sales to Iran
Secretaries Rusk and McNamara recommend that you approve the second $50 million slice of the $200 million military sales credit for Iran [Page 369] that you approved in May 1966. They would like to get word to the Shah before he leaves on 22 May for a series of State visits that will bring him here 12 June. This credit will finance the second squadron of F–4’s that you approved last August.
When you approved the $200 million planning figure a year ago, we were concerned that this might be more than Iran’s economy could safely take on. We therefore insisted that each slice be subject to your review and instructed Ambassador Meyer that he and the Iranians should thoroughly review Iran’s economic situation before recommending release of further installments.
One of our motives was simply to force the Iranian economists and politicians themselves to look hard at their allocation of resources between defense and development. We think this device has paid off. The Iranians have improved their management of foreign exchange reserves, and their economic homework for this year’s review was much better than last year.
Meyer concludes that Iran can handle this additional purchase safely. He does not believe it will cut into the capital investment necessary to keep the growth rate up to at least 7%. The World Bank and Ex-Im have done their own studies and independently reach the same conclusion.
We do not want to be over-optimistic. Therefore, Secretary Rusk recommends that, in informing the Shah of your decision, Meyer reiterate our continuing concern that the Shah keep military expenditures within bounds and keep his military purchases from the Soviet Union to a bare minimum.
Secretary Rusk for political reasons recommends a slightly concessional 5% rate with 8-year repayment (compared with the normal Ex-Im rate of 5.5% over 8 years). Treasury has gone along. The only cost to us is that Defense must set aside an additional $3.7 million in its sales fund. This will be freed again as Iran repays, so the only “real” cost is about $1–1.5 million in lost interest. In view of our extensive intelligence facilities in Iran and the relationship we are trying to maintain with the Shah, I think this is justified.
We are concerned, of course, about increased arms levels in the Middle East. However, we recognize that the Shah has genuine worries about an eventual threat from radical Arab forces in the Persian Gulf area as the British presence diminishes. This will be very much on his mind when he talks with you in June. While we would hate to see him go overboard, we have already argued him down from much higher levels of purchases and believe we have struck the best balance we can. We would rather have him buying from us under some control than buying wildly elsewhere.
[Page 370]Treasury, AID and Budget have participated in the coordination of this recommendation. I recommend you approve.
- Source: Johnson Library, National Security File, Country File, Iran, Memos & Miscellaneous, Vol. II, 1/66–1/69. Secret. A handwritten note on the source text indicates that the Department of State cleared the memorandum on May 18 at 10:35 a.m.; another handwritten note indicates it was seen by the President.↩
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