280. Memorandum From Secretary of State Rusk to President Johnson1
SUBJECT
- Approval of a Program of Military Credit Sales to Iran
Recommendation:
With the concurrence of the Secretary of Defense, I recommend that you approve, subject to the satisfactory conclusion of Congressional consultations:
- 1.
- An offer to Iran of a military 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 is to be dependent on funding arrangements and global availability of funds.)
- 2.
- Informing the Shah that we recognize his desire to work toward a program of military modernization for the next five years and that we engage to cooperate with him in his attaining this goal on the following basis:
The United States Executive Branch declares its intention each year to seek Congressional authority and appropriations for such credit sales as both governments would agree were indicated to move toward accomplishment of the program mentioned above. On the part of the United States the amount of authority and funds sought, and the amount of sales made for cash, would be subject to the results of a yearly review, with the Government of Iran, including reviews of Iran’s economic development and military programs, as well as an assessment of the effect of military purchases on the Iranian balance of payments and budgetary situation. The actual amount of credit made available to Iran in each year will of course depend on the amount of credit authorization and appropriations approved by the Congress and on other U.S. requirements worldwide. If the amount of credit authorization and appropriations approved by the Congress proves in future years to be insufficient for the mutually agreed needs of Iran, the Executive Branch declares its intention to do what it can to help Iran obtain credits from non-Governmental banking sources.
Discussion:
Since military credit sales were introduced in 1964 as a way to shift Iran from grant aid to self-financed procurement, U.S. equipment costing [Page 506] some $300 million has been sold to Iran. Two credit tranches of $50 million each remain to be released under the 1964 U.S.-Iranian Memorandum of Understanding; recommendation 1 (above) proposes to combine them for release in FY 1968 as the first increment of a $600 million, six-year procurement program developed by Iran to provide for Iranian military needs after U.S. grant aid terminates in FY 1969.
There are no political, economic or military reasons not to proceed with a $75–100 million credit in FY 1968, and we recommend offering it to Iran at terms of 5–1/2 percent interest, with seven years to repay. Several possible funding alternatives are enclosed.2 Equipment to be purchased is designed to modernize the Iranian military forces and is planned to include F–5 aircraft, M60 and Sheridan tanks, armored personnel carriers, a surface-to-air missile unit for Iran’s destroyer and self-propelled artillery.
Since last summer, the Shah has been pressing us for a new commitment on credit sales in the 1970’s. The comprehensive program he has developed in conjunction with his U.S. advisers is a logical follow-on to our grant aid program, and we believe it essential, in order to protect our important interests in Iran and to assist the maintenance of stability in the Middle East, that we be forthcoming in response to his requests for military credits to support it. Our arms supply relationship is of decisive importance to our overall ties with Iran. These ties bring us important benefits, including collaboration on military and intelligence operations, and the intangibles of friendly cooperation with an ally on the international scene. Moreover, the importance of our ties with Iran has increased as a result of the announced British withdrawal from the Persian Gulf, the growing Soviet threat in the Middle East, the continuing instability of the Arab world, and real doubts about long term continuance of U.S. facilities at Peshawar.
Nevertheless, I cannot recommend that the United States undertake at this time a firm commitment for the full $500 million additional credit program (FY 1969–73). Uncertainties about Congressional authorization of future arms credits and the level of appropriations, about the effect of future defense spending on the Iranian economy and about the development of Iranian-Arab relations make it prudent to base the program after FY 1968 on the outcome of thorough annual political, military and economic reviews.
Some form of multi-year understanding for future years is, however, essential to meet our objectives in Iran, and we believe that recommendation 2 (above) should achieve this purpose while at the same time maintaining a requisite degree of flexibility. We are fully aware that, by [Page 507] adopting this cautious policy, we run the very real risk that the Shah may consider the proposed arrangement too indefinite and therefore insufficient. This could trigger another round of bargaining or, alternatively, might cause him to turn to other arms sources, including the USSR and Eastern European countries. Should the Shah react in this manner, we believe your June 12 luncheon with him could be critical, and we would, if it proves necessary, propose additional course of action for your consideration prior to that date.
The foregoing recommendation has been submitted by the Interdepartmental Regional Group for the Near East and South Asian Affairs under Assistant Secretary Lucius D. Battle’s chairmanship after a careful review of the factors involved and of our interest. The record of the IRG/NEA meetings on the subject is enclosed.3
After satisfactory informal Congressional consultations, we will send a letter formally advising the Congress of your decision to increase the program for FY 1968 and the major reasons for doing so.
- Source: Johnson Library, National Security File, Country File, Iran. Secret.↩
- Attached but not printed.↩
- See Document 277.↩
- Katzenbach signed for Rusk.↩