Office of the Historian

201. Telegram From the Department of State to the Embassy in Iran1

Washington, May 19, 1967, 9:26 p.m.

198765. 1. President has approved second $50 million increment of military sales credit for Iran under the $200 million planning figure he approved for FY 67–70 in May 1966. You should so inform Shah in your audience May 22.

2. In informing Shah of this approval, you should also:

a.
Inform him that major item being financed in this increment is second squadron of 16 F–4’s. Details on the cost, configuration, etc. of this squadron will be contained in the letter of offer which will be prepared for submission to GOI through ARMISH/MAAG.
b.
Invite him to suggest time and place for credit negotiation which we hope can be completed prior his arrival Washington June 12. DOD prepared receive Iranian negotiator in Washington or send negotiating team to Tehran.
c.
State we consider annual review once again to have been useful process. FYI. Among other advantages, it provides bulwark against telescoping of annual tranches. End FYI. State that in our review of Iran’s economic situation, we have been greatly impressed at progress Iran has been making. Her economic growth and programs of social reform are impressive evidence of Shah’s determination to have his nation modernized. We do, however, remain concerned about number of trends and [Page 372] this concern should be conveyed to Shah: (1) steadily increasing demands of military on Iran’s resources, both domestic and foreign, as evidenced by projected 12.9 percent annual rate of increase in military expenditures over next five years and by 6 percent in 1966 to 9 percent in 1972 proportion of GNP to be devoted to military expenditures; and (2) while we are confident GOI capable of handling, we note from projections that inflationary trends with possible effects on balance of payments are likely increase in years ahead. We believe economic improvement and social betterment are best assurance of security in long run against threats to Iran and hope Iran’s economic progress will not be adversely affected by her military expenditures.
d.
Believe it useful to remind Shah of our continuing concern over Iran’s arms deal with USSR on grounds stated in President’s letter of July 20, 1966.2

3. Our negotiators will be authorized initially propose 5–1/2 percent interest, 8-year repayment credit terms but to go to 5 percent. These terms should not be revealed to Shah but should be reserved for disclosure to Iranians during credit negotiations.

Rusk
  1. Source: Department of State, Central Files, DEF 19–8 US–IRAN. Secret; Priority. Drafted by Eliot on May 15; cleared in draft by ISA Regional Director for Near East and South Asia Colonel Amos A. Jordan, Jr., Funari, Wolf, and Saunders; and approved by Battle. Repeated to CINCSTRIKE/CINCMEAFSA.↩
  2. Document 158.↩