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

888.2553/10–2452: Telegram

No. 232
The Ambassador in the United Kingdom (Gifford) to the Department of State¹

top secret
priority

London, October 24, 1952—7 p.m.

2422. Eyes only Bruce and Byroade. Subsequent to despatch Embtel 2388, Oct 23,² British yesterday requested meeting with us which took place this morning.³ Participants were same as second paragraph Embtel 2281, Oct 19,⁴ with exception Rowan, company officials and Levy who were not present.

Strang expressed appreciation for exchange of views earlier in week which had been most helpful and given British much to think about. UK had examined problem more closely in light those discussions and was now in position give us its further views. Broad position is that US and UK have gone hand in hand to Mossadeq with joint proposals which we had both agreed were fair, but were not well received by him. He had responded with totally unacceptable counterproposals and we had then tried to remove the misunderstandings under which he appeared to be laboring. His response to this sincere effort on our part has been to deliver two slaps: (1) he rejected the proposals; and (2) when it was apparent he could not get what he wanted, he broke relations. As general conception, UK feels there is some unwisdom in moving so quickly from joint proposals. To go back to Mossadeq now and hint that new ones involving different concepts might be forthcoming would weaken UK and perhaps US position in ME, at same time encouraging Iran and other states to indulge in same kind blackmail tactics.

Strang said foregoing is not intended to indicate UK’s mind is closed to alternative approaches to problem, but simply to indicate that it does not believe it should move towards them now. An alternative is to examine joint proposals again and to see whether it might not be possible to exploit essential elements in them in order to enhance their acceptability to Iran. At beginning exchange of views earlier in week, Nitze had asked whether UK had any suggestions as to how we might proceed. As result recent study, UK able advance following ideas for consideration.

British then proceeded to separate problem of settlement into two phases:

1. First phase would be Iranian agreement to submit question of compensation to impartial arbitration.

2. Immediately Iranians agree to arbitration, problem wld enter phase 2 which wld consist of making arrangements to move Iran oil. In studying this phase of problem, UK has accepted US view that there must be quick resumption of flow of Iran oil on large scale if we are to strengthen Iran against communism and avoid political consequences which continued stalemate might involve. Her Majesty’s Government feels that once Iranians agree to arbitration, company would also have strong interest in cooperating to get Iranian economy back on its feet by buying oil. They thought company would recognize that unless oil moved, there was little prospect of its obtaining compensation which arbitral body might award. Even if AIOC did not see problem that way, Her Majesty’s Government could not allow company to adopt dog-in-manger attitude toward getting Iranian oil back in world picture. There are different means of doing this. AIOC might undertake task alone, or international consortium consisting of AIOC and American interests could be formed to do job. UK recognize that this might pose difficulties from point of view US anti-trust laws. If neither of these practicable, company, with which matter not yet discussed, might agree relinquish its interest and open field for American companies to take over task. With goodwill of AIOC and Her Majesty’s Government, British thought it wld be possible to allay criticisms that American interests were taking advantage of Iranian situation to British detriment. They thought Her Majesty’s Government would go out of its way to deny that this was case and to affirm that action was being taken in greater world interests. It would be essential for UK and US to work together in making this clear. Further possibility, which British considered least desirable, would be for Iran to dispose of its own oil as best it could without outside help.

Reverting to phase 1, British emphasized that Iran acceptance of arbitration would be “open sesame” to phase 2. UK recognized that Iran apprehensive regarding placing fate of oil controversy in hands of arbitral tribunal. UK recognized that there were widespread fear in Iran that arbitral award might be so large as to cripple Iran economy. For UK’s part, it could not even hint that it would not put forward its maximum claims. Nevertheless, British felt arbitral body would, in determining award, be bound to take into consideration Iran’s ability to pay. There were three possible bases on which award might be determined.

(1) Bare physical value of assets;

(2) Market value; and

(3) Loss sustained by company by virtue of nationalization. British could not predict, of course, what Court might award, but they thought it likely it would be somewhere between 1 and 3, which should not constitute award of such magnitude as to cripple Iran. UK had no fixed ideas re form arbitration might take. It preferred ICJ, but did not rule out possibility of setting up other arbitral body. It felt it essential, however, to cling to principle of arbitration, which is both reasonable and honorable means of disposing of controversial problem of this kind.

In ensuing discussion, Nitze said we had thoroughly appreciated why UK considered it important to stand on arbitration as principle. We too saw great advantages in it. We had, however, been worried by time element involved. In case of Mexico, if he remembered correctly, it took seven years before body could be set up to determine value of properties. We had foreseen difficulty in persuading Iran accept arbitration all claims and counter-claims, not only because of Mosadeq himself, but because of pressure Iranian public opinion on Mosadeq. British said in reply that all Mosadeq had to do was to agree to an arbitral procedure and that immediately this was done, we cld then pass on to phase two. British saw advantage in working out immediately kind of offer which might be made to Iran in phase two on theory that this wld act as inducement to Iran agree to phase one. They despaired of reaching agreement with Mosadeq if compensation determined by negotiation combining phases one and two. In such eventuality, there wld undoubtedly be all kinds of haggling re lump sum compensation which wld exacerbate prospects for negotiations re price, quantities, etc.

Nitze said that we had understood that it wld be difficult for UK to suggest lump sum settlement to Mosadeq. There were also disadvantages in UK taking initiative and it had therefore occurred to him that “suitable person” such as Gutt might be used at this phase of problem with less danger of prejudicing UK position. He said that, in view time factor involved, this might be worthy of exploration. British maintained that one difficulty with lump sum settlement is that in order to commend itself to Mosadeq, some initial figure must be set as basis for negotiation. Mosadeq wld haggle and attempt whittle this down and there was great danger that it wld wind up by being very small sum. Once principle had been established, it wld be hard break away from lump sum determination. “Suitable person” might, however, be useful in phase two of British suggestions as medium for passing on ideas re price and quantity.

Summing up, Nitze said he wanted be quite sure he understood British suggestions. He understood that in phase one, Iranians wld agree submit question of compensation to arbitration. Immediate agreement reached on this point, problem wld move into phase two. At this point, discussion wld be opened with Iranians by AIOC, international consortium, American Company, or any other group. They wld offer to buy X amount of oil at X price for X years. Nitze then asked if these terms not satisfactory to Iran, wld Iran be free to accept better offer from, say German firm.

British confirmed Iran wld be free to take best offer which it cld get. They added that phase two shld, however, be broken down in two parts: first wld be period while arbitration was going on. During this time portion of proceeds from sale of oil shld be placed in escrow to be paid to AIOC as compensation when award determined. British noted this already provided for in nationalization act. Once amount of arbitration determined, then there might be different arrangement. In any event, negotiations re sale of oil in both parts of phase two wld be transactions on strictly commercial lines.

Throughout discussion British emphasized that most promising new element in whole picture was possibility of US using DMPA funds to further a settlement. They thought this opened up number of prospects which wld promote settlement. In response their question, Nitze said he saw no reason why DMPA funds cld not be used under various alternatives to help get Iranian settlement.

On timing, British indicated they wld not want to rush to Mosadeq with new proposals. They thought some time shld be allowed to pass to assess effect of break in relations on Iranian political picture. Also they wld want consult Middleton upon his return in about ten days.

Nitze said he found foregoing suggestions and clarification most helpful and most interesting. He thought they required careful consideration. In discussion which ensued, it was decided that best forward timing wld be for Nitze to return to US tonight and to discuss these ideas in Washington. Meanwhile, British wld attempt make suggestions more precise and discuss them with company. It might be possible within about two weeks time to clarify US and UK thinking, at which time mtgs might be resumed to see what further course was indicated.⁵

Foregoing shld not be looked on as firm proposals or ideas but rather in nature thoughts advanced for discussion. We are sure Dept and Tehran will appreciate any leak of these discussions might be fatal.

Gifford

1. Repeated to Tehran eyes only for Henderson.
2. In telegram 2388 the Embassy in London reported that the British were continuing their consideration of the problems involved in reaching an oil settlement before carrying their conversations forward with Nitze, and that Eden was pursuing the matter with his colleagues. (888.2553/10–2352)
3. The minutes of this meeting are in GTI files, lot 57 D 155, “Oil—1952”.
4. Not printed. (888.2553/10–1952)
5. On Oct. 28 the Embassy in London reported that it had informed the Foreign Office, as requested by Nitze prior to his departure for Washington, that it was ready to explore further with the British the problems surrounding phase two of a possible oil settlement. The Foreign Office responded that this was a useful procedure, but it first had to discuss the matter further with officials of the Anglo-Iranian Oil Company. The Embassy further reported that on Oct. 28, Victor Butler of the Ministry for Fuel and Power called to say that he was experiencing difficulty in discussions with AIOC representatives regarding phase two, as the company was concerned about the extent of the commitments which it would have to assume. (Telegram 2471; 888.2553/10–2852)