157. Memorandum From the President’s Special Assistant (Rostow) to President Johnson1

We are down to the wire in our arms negotiations with the Shah. He still feels that the $200 million package we offered does not include all the air defense he needs; and he has approached the U.S.S.R. for surface-to-air missiles and anti-aircraft guns. We included both our Hawk missile and some AA guns in our package, but Soviet prices are lower.

Part of the Shah’s move is traditional Persian bargaining. But there are other elements:

  • —He feels neglected and taken for granted; and he rightly sees these negotiations as a way to gain attention.
  • —He genuinely fears that the UAR and Iraq have designs on his oil-producing southern provinces. Our cutting off Ayub’s military aid last fall left him suspicious that we would do the same to him in a fight with local non-Communist enemies.
  • —He sees short-run domestic political advantage in showing he is not a U.S. puppet.

We are trying through both formal and informal channels to dissuade him from buying Soviet equipment. If he wishes to diversify his sources of hardware, Western Europe would make more sense and be acceptable to us.

Defense says security would prevent our selling advanced equipment if Soviet technicians come to Iran.

Congress would also give us a hard time if another ally turns to Communist arms supply, although the problem arises in good part because military aid funds are too low.

Most important, while the Shah’s reform program is going well, Iran is far from out of the woods politically. We wish to avoid his inviting the Soviets into Iran to meddle in what may still be a turbulent process of evolution.

On balance, we would rather not see the Shah buy equipment on the scale he contemplates. Though oil revenues are good, we fear he is overreaching his ability to repay in the years ahead without cutting into development. We have set up an annual joint review to keep the military-economic balance firmly before the Shah.

But the fact is that he believes the Arab threat is urgent; and he believes security comes first. With the British pulling out of South Arabia [Page 286] and retrenching in the Persian Gulf, I’m not sure he isn’t right. He is dead earnest when he says he will buy this hardware somewhere if we refuse to sell it. Soviet equipment is the cheapest, though Soviet missiles are poor in quality, at least when manned by North Vietnamese.

Our choices now are to:

  • —Tell him that we have gone the limit and that if he buys Soviet hardware he will jeopardize our continued military aid. Chances are that he would go ahead anyway if only to underline his independence, and we would have to make up our minds to adjust to an increasingly neutralist Iran.
  • —Offer one more concession in substituting 32 rehabilitated F–4C aircraft for the 12 new F–4D’s in our initial offer. Secretary McNamara could take these out of our inventory in late 1968 and pass them on at second-hand prices, so the cost to us would be the difference between that price and our cost of replacing those planes with newer models for our own inventory.

I share the judgment of Secretaries Rusk and McNamara that we should make this final offer.

We would still try to keep the Shah within the total credit ceiling you approved, but we would have to absorb about $30 million in additional costs to the USAF via our FY 1967 supplemental. This would round out our effort to meet his most legitimate air defense and other needs at good prices.

Secretary Rusk also recommends you send the Shah a letter.

I have thus far resisted involving you directly in the bargaining which has been going on. But now that we are about to make our final move, I think a letter is a good idea. Part of our trouble is the Shah’s familiar feeling that he is cut off from you. This letter would show that you fully understand his real worries and have personally tried—within the limits of your problems—to accommodate him.

Attached is for your signature, if you approve.2

Walt
  1. Source: Johnson Library, National Security File, Special Head of State Correspondence File, Iran, Shah Correspondence, Vol. II. Secret. A handwritten “L” on the memorandum indicates that it was seen by the President.
  2. Document 158.