182. Telegram From the Department of State to the Embassy in the United Kingdom1

4849. Embtel 3960.2

Our assessment of Nasser’s short-term or immediate objective in financial talks with UK and France is that they are coincident with Egypt’s short-term economic requirements. Nasser desires alleviate acute foreign exchange shortage through release blocked sterling. Additionally he desires through negotiations with UK and France resume fruitful trade relationships with those countries as outlet for Egyptian cotton and as, in case of France, supplier of flour and wheat. Resumption of traditional trade patterns with UK and France would serve to ease Egyptian economic situation and would relieve anxiety and pressures growing up in Egyptian political and business circles over increasing economic dependence on Soviet bloc.
Department’s views on pros and cons of agreement with Nasser remain generally as stated in Department’s comments on FonOff assessment on “Present Position of Col. Nasser’s Government" (Deptel 3873 to London, 1428 to Cairo).3 We do not believe Soviet economic aid offer to Egypt has materially altered our assessment since there is evidence that Egypt’s concern over Western apparent indifference toward Soviet offer has had moderating effect on Egyptian enthusiasm. We still believe that Nasser would like to restore balance to his “positive neutrality” policy but that he has not yet reached point where he is prepared to make necessary political decisions, including substantial [Page 402]concessions, required to resume positive and fruitful relationship with West. Thus, we still hold view that unless UK agreement with Egypt can be made on basis substantial concessions from Nasser, it might be better that no agreement be concluded at this time. As stated in Department’s comments, we believe “that fruitful and advantageous relationship with Egypt is not possible for us as long as Nasser maintains his current attitude toward relations with USSR and his policy of undermining sovereignty of Middle Eastern states which do not choose to follow his lead. We would be prepared to entertain more normal relations with Egyptian Government should it move to truly neutral position. Meanwhile we believe concessions to Egypt in specific issues should only be made when Egypt makes concessions in return. Effect of moves toward Egypt upon friendly Arab states must be kept very much in mind.”
With regard to unblocking of GOE assets now held in US, position which Secretary took with Lloyd in October to effect that we would unblock dollars when agreement or substantial progress toward agreement reached between Egypt and Canal Company and which was subsequently confirmed to British Embassy (Depreftel) still remains US policy. At same time Embassy will recall that we have stressed to UK on several occasions problem which US would face regarding Egyptian blocked dollars if UK released most of Egyptian blocked sterling as result Anglo-Egyptian agreement. Pressures would certainly build up for our immediate unblocking of dollars since it could be argued that with Anglo-Egyptian agreement involving release of sterling, no particular reason served by continued US blocking. Our understanding has been that it was UK intention not to release any sterling as result of Rome negotiations until “satisfactory progress” toward settlement problem of compensation to Suez Canal Company had been made. We should be interested to know whether this understanding of UK position is still correct.
Releases which have been made from blocked dollars since July 1956 have been solely from those funds earmarked before blocking for maintenance of Egyptian diplomatic establishments, and for settlement various Egyptian obligations to USG and private interests contracted prior to August 1956. Such releases believed similar sterling releases approved by UK.
In principle Department would have no objection to loan for improvement of Canal. However, we do not believe question is of immediate nature since our understanding is that present short range Egyptian plans for canal improvements do not call for foreign financing and that in any event Western financing either through individual countries or through IBRD would not be considered until such time as satisfactory progress had been made on compensation to former Canal Company. Once such progress toward compensation had been made, [Page 403]we believe it of importance that West should be source for financing of canal improvement. We do not think that Western loan to improve canal would necessarily have serious adverse effects on development alternatives which in any event are now in state suspended animation.4
  1. Source: Department of State, Central Files, 874.10/1–1058. Top Secret. Drafted by Stabler on January 9; cleared with BNA, E, and FN; and approved and signed for Dulles by Rountree. Repeated to Cairo, Paris, and Rome.
  2. Telegram 3960, January 6, reported on a conversation with Adam Watson, British representative at the Rome financial talks with Egypt, who speculated that Nasser wanted to improve his relations with the West in order to improve his bargaining position with the Soviet Union and to obtain monetary assistance from the West. (Ibid., 974.7301/1–658)
  3. Foreign Relations, 1955–1957, vol. XVII, p. 826.
  4. On January 14, the Embassy in London reported that Watson had been provided with these views and had stated that the United Kingdom agreed with the U.S. position. (Department of State, Central Files, 874.10/1–1458)