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

277. Record of Meetings of the Interdepartmental Regional Group for Near East and South Asia¹

IRG/NEA 68–16

Washington, April 5, 1968.

Record of IRG Meetings—March 21 and April 3, 1968

The IRG devoted both meetings to a consideration of proposed arms credit sales to Iran.

The IRG reviewed the analysis and recommendations of the various interested agencies as well as of Embassy Tehran, directed primarily to a proposal for a $600 million, six-year (FY 1968–FY 1973), credit sales package. (See attachments to IRG/NEA 68–13 and 68–14 for pertinent papers.)²

Political Factors. The IRG agreed that our arms supply relationship has a vital importance in our overall ties with Iran, and that—given the Shah’s great concern over Iran’s security problems—our response to the Shah’s current request for arms sales in the years immediately ahead will have a decisive influence on the pattern of our overall relationship with Iran for the next several years. The benefits of our relationship with Iran run the gamut from valuable collaboration with our own military and intelligence endeavors based in Iran, to the intangibles of friendly cooperation of an ally on the international scene. Although the Shah has desired to evince a greater degree of “independence” in his foreign policy and has taken steps to improve Iran’s relationship with the U.S.S.R., Iran remains a loyal supporter of CENTO, retains a realistic awareness of long-range Soviet intentions, and has made it clear it wishes to keep its close ties with the United States. It was noted that our relationship with Iran assumes added importance in light of the increased Soviet threat in the Middle East and the continuing instability in the Arab world. The Shah is concerned over the implications of strong Soviet support for the radical Arab states, with whom he sees Iran potentially in conflict. It was noted that the forthcoming British withdrawal east of Suez will enhance Iran’s importance in future developments in the Persian Gulf area, in which the United States has key strategic and economic interests.

Military Factors. The CIA member cited various recent developments which have affected the Shah’s view of Iranian security problems and which have impelled him to modernize and strengthen Iran’s security forces. These developments include the USSR’s supply of the radical Arab states with modern weapons; the UK’s announced withdrawal from the Persian Gulf by 1971; increased Soviet naval activity in the Mediterranean, and the assumption that the Soviets will seek to extend their influence as broadly as possible east of Suez; the pressure on existing US military forces in connection with the situation in Southeast Asia and the Shah’s probable concern as to our ability and willingness to provide rapid support to Iran in the event of an external aggression.

The JCS member noted that Iran must orient a large portion of its military defense against the potential Soviet threat, although no Soviet military action against Iran is foreseen in the years immediately ahead. The Shah’s major external security concern is for the threat posed by the UAR and other radical Arab nationalists to the oil-rich Khuzistan area. The Shah is anxious to procure sufficient air defense aircraft, antiaircraft and naval equipment to counter a potential UAR or UAR/Iraqi air and naval threat to southeast Iran and the Persian Gulf. His reorganization of the Iranian Ground Forces, with greater emphasis on armor and mobility, stems from the size of his country and the diversity of the current threat in general—in particular the tank threat posed by a potentially hostile Iraq.

The IRG agreed that it was impossible to relate any projected level of arms supply precisely to any given threat or combination of threats. It is uncertain, for example, to what extent radical Arab forces constitute a real military threat; what combination of radical Arab forces might threaten Iran; and just what military capability Iran would require, at a given time, to counter such a threat. These questions involve both quantitative and qualitative issues. Recognizing these uncertainties, the JCS member concluded nevertheless that Iran needs solid US support, in the form of modern arms and equipment and appropriate military training and advice, in order effectively to deter or defend against potential military action by radical Arab forces.

The JCS member noted that the currently proposed program for modernizing and building up Iran’s military establishment over the next half-decade has been developed in close consultation by the Chief of the U.S. Military Assistance Advisory Group and Iranian authorities. Iran’s ability to absorb the equipment in question was implicit in the development of the program. In summary, the JCS member stated, the program made sense from a military viewpoint.

Economic Factors. The IRG devoted considerable attention to the question of Iran’s economic situation and its ability to finance a major program of military reinforcement. It noted Iran’s impressive record of an 8–9% annual economic growth in real terms in the last three years in a climate of price stability. Rising oil revenues have permitted a steady increase in expenditure for economic development as well as for defense. It noted that Iran’s new Five Year Development Plan, which went into operation on March 21, 1968, aims at increasing GNP at an average annual rate of 9.3%. This Plan foresees a rise in the proportion of fixed public and private investment to GNP from 21% in 1967 to 25.3% over the 5-year period.

The members agreed, however, that many uncertainties and intangibles make it impossible to predict with assurance the precise course of Iran’s economy over the next several years. A major uncertainty is the GOI’s projection of oil revenues, which depends on the outcome of discussions now under way with the Oil Consortium. It was agreed that the GOI projection of a 17% average annual increase is too high, but that there would nevertheless be an appreciable rise in Iran’s oil revenue, perhaps at a 12% annual rate. Doubts were also expressed as to whether Iran’s non-petroleum exports will rise as fast as projected by the GOI, and whether the GOI could hold down its defense expenditures as planned. The AID member expressed particular concern that a shortfall of oil revenue could force a cutback in proposed development expenditure by Iran’s Plan Organization; such a cutback could have internal political repercussions as well as economic implications, since it could reduce government investment for the next few years below the rate estimated for 1966 and 1967.

The IRG agreed that, although there was cause for optimism as a result of Iran’s past record and that, although there was no cause for concern as to the $100 million military sales program proposed for FY68, it is most important that the GOI arms program not interfere unnecessarily with Iran’s economic development and progress. The actual course of Iran’s economic expansion will have to be kept under careful review, particularly regarding Iran’s ability to finance an arms buildup such as it proposes. The balance between economic progress and defense outlay will continue to be a prime factor in our consideration of Iran’s specific request for arms each year.

Congressional Factors. The IRG noted recent Congressional concern over arms races and over possible excessive expenditure on defense by foreign countries with which we have an aid or supply relationship. It also took note of the fact that our ability to supply arms on credit to a country such as Iran after the end of this fiscal year will depend upon passage of new military sales legislation now before the Congress, and also on the availability of appropriated funds to support annual credit sales programs. It was agreed that these factors tended to militate against our seeking to enter into any more or less firm “commitment,” however hedged, involving precise credit sales levels for several years beyond the current fiscal year. The Chairman noted that any type of multi-year proposal would probably have to be discussed with Congressional leaders.

The AID member raised a question as to the need for a Presidential determination in the event of an increase in the military credit sales program for Iran in FY 1968, above the illustrative $50 million presented to the Congress last year, under the final proviso in the military assistance item of the Foreign Assistance and Related Agencies Appropriation Act, 1968. There is a difference of view among legal experts in State, Defense, and AID on this question. It was agreed that this issue should be clarified, but that it was not substantively critical to the larger question before the IRG inasmuch as any recommendation on the FY 1968 credit sales tranche would require Presidential approval.

Annual Review. The members attached crucial importance to the annual review of political, military, and economic factors to be considered prior to a decision on each annual tranche of military sales to Iran. It will be necessary, for example, to have in mind the development of relations between Iran and Saudi Arabia and the other Persian Gulf entities; the development of the threat from the radical Arab states; the economic situation in Iran, and particularly the effect of defense outlay on Iran’s economic development program; and our own military requirements, financial situation and credit availabilities. The Chairman emphasized that the annual review will be a key part of any multi-year arrangement with Iran. The precise level and composition of each annual sales program would be decided upon the basis of the annual review.

Conclusions and Recommendation. The IRG considered a proposal for a six-year (FY 1968–FY 1973), $600 million military credit sales proposal for Iran, as well as various alternatives, in the light of the above factors. It was agreed that we have an overriding political interest in offering to the Shah an arms supply proposal that would be adequate to bolster the Shah’s confidence in our desire to retain our intimate military relationship with Iran; to keep him from feeling that he had no choice but to turn to the Soviets for sophisticated arms; and to support continuance of our present close and constructive overall ties with Iran. It was agreed that some form of multi-year understanding is essential for this purpose. It was also agreed that it would be desirable, if possible, to conclude such an arrangement with Iran before the Shah’s expected visit to Washington on June 12, 1968.

The IRG agreed to recommend to higher authority a proposal as follows:

To protect our important interests in Iran, to assist the maintenance of stability in the Middle East, and to ensure the continuation of the valuable U.S.-Iranian relationship in the military field, while at the same time maintaining a requisite degree of flexibility, the U.S. should before June 1:

1. Offer Iran a credit sales program for FY 1968 on concessional terms for a minimum of $75 million and, subject to the availability of necessary additional funds, a maximum of $100 million. (This to be depend-ent on funding arrangements and global availability of funds.)

2. Tell the Shah that we recognize his desire to work for the five-year plan he developed with the Chief of our MAAG as Iran’s program for modernization for the next five years, and engage to cooperate with him in his attaining this goal on the following basis:

Governed by an annual review by each government of the political, military, and economic factors bearing upon the size, nature, and funding of each annual program, the U.S. declares its intention each year to seek Congressional authority and appropriations for such cash and credit sales as both governments would agree were indicated to move toward accomplishment of the Shah’s program.

The IRG also agreed that it would be necessary for the U.S. to undertake intensive annual internal studies on the political, economic, and military implications of the Shah’s military program, commencing with timely preparation for the FY 1969 tranche.

MEMBERS PRESENT

• Executive Chairman: Mr. Battle
• AID: Mr. Williams
• CIA: Mr. Critchfield (3/21); [name deleted] (4/3)
• DOD: Mr. Schwartz
• JCS: Brig. Gen. Doyle
• NSC: Mr. Saunders
• USIA: Mr. Carter
• ACDA: Mr. Van Doren
• BOB: Mr. Clark
• Eximbank: Mr. Middleton (3/21); Mr. Carlisle (4/3)
• Treasury: Mr. Albright
• State: Mr. Rockwell; Mr. J. Wolf; Mr. Eliot; Mr. J. Campbell (4/3)
• DOD: Mr. Reed; Mr. Olney (3/21); Mr. Ligon (4/3)
• SIG: Mr. Ruser
• Staff Director: Mr. Sober

SS
Staff Director

1. Source: Johnson Library, National Security File, NSC Files of Harold Saunders, Iran, 1/1/68–1/20/69. Secret; Limdis. Drafted by Sidney Sober.
2. IRG/NEA 68–13, “Proposed Arms Sales to Iran,” March 21, and IRG/NEA 68–14, with the same title, April 3, are in Department of State, NEA/RA Files: Lot 71 D 218, IRG/NEA Basic File, 1966–68 (Final).