Foreign Relations of the United States, 1964–1968, Volume XXII, Iran

185. Telegram From the Embassy in Iran to the Department of State ¹

Tehran, January 24, 1967, 1330Z.

2985. Iranian Purchase of Soviet Arms.

1. Hoveyda and I had one hour discussion morning 24th re Iran military program, arms deal with Soviets² and impact military expenditures on Iranian economy. I opened discussion by expressing uneasiness, referring specifically to effects of these subjects on USG military credit sales program here.

2. Hoveyda described at some length present favorable economic situation. Country is stable and calm, he noted, two factors without which present economic strides would be impossible. SAVAK Chief only two days ago complained that his work has few challenges. Remnants of old National Front group, Hoveyda said, are dickering with him personally with view to cooperating with “movement” which country is experiencing and which they attribute to relief that present GOI policies are what they been recommending in past.

3. Hoveyda said although Shah tends toward wishing progress more rapid than is realistic, he (Hoveyda) is determined to maintain a realistic “cruising speed.” Third plan he said has not attained all its goals because it was too ambitious; unrealized objectives will be incorporated in first year of new fourth plan. Re latter, private sector industrial development is flourishing so well that major portion of fourth plan will be concentrated on agriculture. Hoveyda noted Iran’s growth rate has been excellent. Cost of living been held in line and PriMin has recently appointed standing committee to keep an eye on it. As index of strength of Iranian economy, Hoveyda said black market rate for U.S. dollars is now below official bank rate. He said new tax law will be passed in Majlis within week and it will mean more revenues. In addition, GOI planning measures for mobilizing “savings,” including a national loan to cover increased defense costs. Behind all this, Hoveyda said, is his determination to govern by persuasion rather than coercion and to rely heavily on private enterprise.

4. Referring to apparent increasing military budget, I reminded Hoveyda this continues be matter of great concern to USG. Hoveyda said Iran with help of U.S. advisors determined to have effective modernized armed forces. Increased budgetary costs primarily due to building of “infra-structure.” One of the difficulties of having thriving economy with burgeoning middle class, he said, is that military personnel, particularly lower ranks, require more amenities in face of soaring salaries of workers in private sector. To train and keep adequate maintenance and operating staff for modern equipment, therefore, requires such things as relatively decent housing, etc.

5. Discussion turned to Iranian arms deal with Soviets and I expressed concern at magnitude of reported transaction and my impression that prices higher than necessary. Hoveyda said it important keep in mind that except for small component of Iranian-produced refrigerators, etc. repayment will be made entirely in natural gas. Soviets wanted at least 30 percent foreign exchange, but Iranians flatly rejected. While noting that delivery schedule for proposed vehicles remains to be worked out, Hoveyda sketched out repayment schedule extending to 1978. He said Soviets are charging 2–1/2 percent interest. First payments minimal and not significant before natural gas pipeline completed in 1970. Problem, Hoveyda said, is what can Iran safely obtain from Russians in return for natural gas. He solidly against Soviet prestige projects. Steel mill is more than enough. Soviets been pressing hard to build Tehran subway but he steadfastly opposed. Not all of natural gas credit, even in first years after 1970, will go for repaying steel mill. Thus repayment for trucks, APC’s and anti-aircraft equipment can be made via natural gas with no strain. He noted that no Soviet advisors will come with equipment.

6. Hoveyda indicated that magnitude of deal with Russians was heavily conditioned not only by ease of repayment but also by Shah’s determination not to be at Soviets’ mercy if crisis develops. Iran wants to have adequate quantity of spare vehicles and spare parts should Soviet policy toward Iran change. He noted in this connection that there are no illusions anywhere in GOI that Soviet ultimate motivations have changed from what they have always been.

7. Hoveyda expressed view that USG should recognize that this deal with Soviets undercuts Soviet propaganda branding USG villain for supplying arms to Iran. Hoveyda also has hope that deal will throw some sticks in wheels of Soviet cooperation with UAR and Syria.

8. Throughout discussion I made clear that there bound to be repercussions on US opinion. While we might understand Iran’s rationale there will be some on Capitol Hill who will wonder about Iran’s intentions and this could have adverse effect on our military programs which involve MAP funds. More important, however, is the impact on Iran’s economy. I reiterated our stipulation of last summer that each tranche of our future annual military sales credit will be reviewed in light of economic picture here and that President himself must give approval. I recalled specifically our having made clear that purchases from other countries would be taken into account. GOI would be well-advised, I said, to keep these factors in mind. In any case, both of us will be going into the total situation thoroughly during our annual economic review.

9. Hoveyda was greatly interested in observations which I brought along re cost comparisons and re what USG has done over past years in supplying trucks and other military items on large-scale grant basis. Noting how GOI has kept us informed re negotiations with Soviets, Hoveyda agreed that Jablonsky and Toufanian continue their dialogue particularly with a view to assuring that military spending in all fields be kept at minimum compatible with efficient military program. He also agreed it will be useful for me to discuss this whole subject with Shah upon his return.

Meyer

1. Source: Department of State, Central Files, DEF 19–6 USSR-IRAN. Secret; Limdis. Repeated to Moscow, CINCSTRIKE/USCINCMEAFSA, and Ankara.
2. Telegram 2820 from Tehran, January 10, reported that Iran had agreed to purchase military equipment including armored personnel carriers, anti-aircraft guns, jeeps, and trucks from the Soviet Union. (Ibid.)