Foreign Relations of the United States, 1952–1954, Iran, 1951–1954, Volume X

888.10/8–1352: Telegram

No. 199
The Acting Secretary of State to the Embassy in the United Kingdom¹

top secret

Washington, August 13, 1952—11:05 a.m.

1019. Under Sec last night gave Brit Ambas foll msg and memo for Mr. Eden:

“Msg to Mr. Eden from Mr. Acheson. I have given the most careful thought to your msg on the Iranian situation drafted Aug 9, and am attaching a memo of analysis and comment on particular parts of it. This analysis points out the areas of agreement and the areas of disagreement between your msg and our msg of July 31.² This leads me to the foll conclusions:

(1) I do not believe that for the reasons given in the memo your proposals cld be accepted either by Mossadegh or any government that we can expect as a successor to him.

(2) I think that his communication to you,³ needlessly provocative as it is, is an invitation to negots which I am glad you do not propose to reject. I understand from your msg that you are now considering your reply and that you will give me your thoughts as soon as you can.

(3) I think these negots ought to be considered from two points of view: (a) as to what can be done toward getting out of him some improvement of the existing situation and (b) the position in which HMG and the Iranian Govt wld be in the event that the negots failed. From both of these points of view, it seems to me most important that HMG go as far as it possibly can in any proposal which it puts forward.

(4) If the negots fail, the situation, already serious, will be even more serious and we may both have to be in a position on a crash basis to make some sort of temporary assistance available to prevent the loss of Iran.”

“Memo analyzing the msg from Mr. Eden to Mr. Acheson dated Aug 9, 1952. Paras 3 and 4 of the memo discuss the position of Mossadegh, his effectiveness as a bulwark against Communism and the possibility of his remaining in power. They conclude that he is a weak reed against Communism, that his continuance in office against possible action by the Army is open to more doubt than we thought after the fall of Qavam and that ‘we shld not be hasty in coming to Mossadegh’s aid because we think we shall never have a better Govt to deal with.’

(Comment: We interpret not being hasty, etc., to mean not that no proposal shld be made to Mossadegh but that whatever proposals are made shld be very cautiously designed to see that we get as much as we give and that he is not put in a position to receive aid and then refuse to perform on his own undertakings. We agree that Mossadegh’s position does not seem as sure today as it did after Qavam’s fall. We also believe that the entire situation in Iran now appears more confused and unstable than it appeared after Qavam. We further believe that no change which may occur, by coup or otherwise, wld produce a govt which wld be able to accept proposals as stringent as those contained in the Brit memo of Aug 9.)

Para 6 amplified by the additional paper presented by the Brit Amb⁴ contains the terms of reference for arbitration. Substantially, there are two principal factors in these terms:

(a) the amt of compensation and

(b) the method of paying the compensation, including arrangements for the the future conduct of the oil industry pending full payment.

These are discussed separately:

(a) The amount of compensation.

Under this heading the Brit wld agree to arbitration only if the terms of reference were sufficiently wide to permit arbitration of the question of the validity of the Persian nationalization law, and its compatibility with the Anglo-Iranian Oil Company’s concession. The msg itself is not insistent that the question of validity be stated as such, but in the illustrative draft terms this matter is brought in fully to indicate that all of these matters must be considered in order to value goodwill, future earnings, etc.

(Comment: It seems that simple terms of reference providing for the determination on the one hand of all Brit claims of whatever nature arising out of the nationalization of the oil industry in Iran and on the other hand all Iranian claims arising out of the operations of the Anglo-Iranian Oil Company wld provide for all legal arguments and all proof of value which either side might wish to adduce. On the other hand, to insist that the arbitral terms specifically recognize certain elements of claim wld be almost certain to induce rejection on the Iranian side. The draft terms of reference seem to make it clear that the reference in the note to the validity question is not inserted with the idea that the arbitrator shld be empowered to set aside the nationalization, but merely to consider the question of validity as it may bear on the prospects reasonably held of future earnings. In view of this, it seems to us unnecessary to insert it and fatal to agreement if it is inserted.)

(b) The terms of payment, including the future conduct of the oil industry pending final payment.

(Comment: The rationale of this proposal is clearly that the fixing of the amt of compensation due the Company is only one part of giving just compensation. The other and vitally important part is to make the payment. Since it is clear that the payment can only be made out of the operations of the oil industry, just compensation is not given by merely fixing an amount without satisfactory arrangements for payment. Thus the argument runs and it is undoubtedly logical. However, the inescapable fact seems to be that the Iranian Govt wld not and cld not place in the hands of an umpire the right to determine over a long period of years how the oil industry in Iran shld be operated. Mossadegh has never been willing to make the concession in this regard which the Brit deem necessary, and it is impossible to believe that he wld do so now or that any successor to Mossadegh cld take this step. Since, therefore, the determination of how the award shld be paid, including the operation of the oil industry, cannot in our judgment be in the arbitration procedure, it wld be necessary that in addition to that procedure, which wld result in the fixing of an amount for compensation, there be a second negot for the purpose of assuring, within the limits of Iran’s right to control the operations within Iran, that the award wld be paid. If it is thought that this presents an uncertain future and prospects of no assured value, the answer is that it is better than the present situation which offers nothing.)

Para 7 says that once satisfactory arrangements for arbitration are worked out, arrangements cld be made with the Persians to move oil. However the Company wld not be asked to abandon their right to take legal action against other purchasers of Persian oil before a final settlement of the oil dispute had been reached.

(Comment: It shld be noted that the Dept’s proposal provided that all the oil presently in the tanks be bought by the AIOC. Thus no question wld be raised regarding action against any other purchaser of this oil. It is in regard to this oil in the tanks that the AIOC wld appear to have the best legal position as against any other purchaser. It was also the Dept’s idea that before any new oil had been extracted from the ground and refined, a beginning at least wld have been made upon satisfactory arrangements with the AIOC for its distribution. If this were not the case, then the question arises: Is the Company’s right to proceed against other purchasers a valuable one? In the absence of careful legal analysis, it seems at least doubtful whether the Company cld successfully assert title to oil which is now in the ground in Iran and which the Company wld not have produced. The chief purpose of retaining a right to proceed against purchasers of this oil wld be to decrease the chances of finding such a purchaser. This does not seem to us to be a useful method of solving the present problems provided they can be advanced to a point where arbitration wld be in process and discussions of future purchases by the AIOC wld be under way. Such purchases as might be made by others wld not appear under these circumstances to be so material as to impair the course of the proceedings.)

Points of Similarity in the U.S. and U.K. Proposals

We had proposed that when Mossadegh agreed to arbitrate the amt of compensation (and by that we meant agreed to a suitable document creating the arbitral group, stating the terms of reference and appointing the arbitrators) two things wld happen:

(1) The US wld make available some budgetary assistance and (2) the UK wld proceed as soon as possible through the AIOC to lift the oil in the tanks upon some satisfactory financial basis. So far the Brit msg seems to agree. However, as is indicated above, it seems to go further in the foll respects:

Points of Difference Between the US and UK Proposals

While the US proposal was one for a temporary alleviation of the situation, which it was hoped wld open the way for more far-reaching agreements, the Brit proposals seeks at the outset to set up machinery for a final settlement. It does this by adding to the arbitration terms the authority in the arbitrators to fix the time and the methods of payment, including the operation of the oil industry. This, we believe, will not work. Secondly, it provides that the right to take legal procedure against any other purchasers shall continue until final settlement, which may either mean until the whole award of the arbitrators, including the management of the industry, is accomplished and put into effect, or it may mean until final payment has been made. In either case, we believe that this will produce a fatal stumbling block.

Another possible addition to the Dept’s proposals grows out of the possible position of the AIOC contemplated in the Brit memo. Para 9 of the Brit msg appears to consider that the two Govts cld not enter into agreements affecting the interests of the Company until the matter had been considered by the Board of the Company. The relations between the Brit Govt and the AIOC are purely for the determination of the Brit Govt, but the Dept of course cannot agree, in a matter affecting the fate of Iran, that its agreements with the Brit Govt are subj to the consideration of the Board of Directors of the AIOC.”

Bruce

1. Also sent to Tehran. Drafted by the Secretary and approved by Jernegan.
2. See Document 194.
3. See footnote 2, Document 197.
4. Reference is to the suggested terms of reference attached to Document 197.