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

203. Telegram From the Embassy in Iran to the Department of State¹

Tehran, May 23, 1967, 0955Z.

4655. Annual Review. Ref: State 198765.²

1. Noting conversations we have had with PriMin, as well as GOI financial officials, General Jablonsky and I in discussion with Shah 22nd expressed conviction Annual Review indeed a useful process for all concerned. Projections which been developed, I noted, unusually realistic and valuable in providing statistical indicators of Iran’s present and future economic progress.

2. Shah said Central Bank projections were very much on conservative side. They did not take adequately into account revenues which bound to accrue from budding projects, e.g. in petrochemical and agricultural fields. Basic problem, Shah said, is not so much Iran’s economic wherewithal as it is trained human resources. I concurred that Iran’s absorptive capacity is limiting factor to both economic development and military modernization.

3. After commending Iran’s current and projected growth rate, I noted that perhaps Iran’s greatest problem is its success. Burgeoning economic development, accompanied by budgetary and foreign exchange deficits, can cause inflationary pressures. Shah noted prices been relatively stable and GOI intends to keep them that way, e.g. by foreign borrowing. We both agreed it is important to keep watchful eye on this problem.

4. Noting that plan organization expenditures this year due to increase by record 34 percent, I emphasized importance of economic development to Iran’s stability and security. At same time, noted that military budget increased each of past two years by over 20 percent and while rate is due to decline it will still be 12.9 percent at conclusion coming five-year period. Said PriMin and we had gone into this matter thoroughly and had ascertained that increased military expenditures are due to such reasons as fact that Iran now must buy its spares instead of obtaining them via grant aid. Nevertheless, this too is matter which requires constant control. Shah said problem is to keep military budget down but present developments in Mideast underscore need for Iran’s maintaining adequate defense capability. He recalled Senator Fulbright some years ago lecturing him to effect that scarcely any countries except USSR and USA need have military establishments. He said he had asked Fulbright whether USG would guarantee existence via US armed forces support of every nation whose independence comes under threat. Shah said same question is even more pertinent today. Shah’s view is that it is in Iran’s and USG’s interest that Iran have capability of deterring or coping with regional threats.

5. Shah said factor which had impressed him in economic projections was that at present Iran’s debt servicing is only around half of what its debt servicing capacity can be. It was noted that present figure is 8.5 percent of foreign exchange receipts and that foreign repayments will not rise to 12 percent level before end of next five year plan.

6. While reiterating points of concern, i.e. rising military budget and inflationary pressures, I reported our conclusion that Iran’s economic progress is noteworthy and our conviction that GOI officials will keep it healthy. Accordingly, President has approved FY68 $50,000,000 credit tranche for military purchasing in US. Added that virtually all this amount will go for second F–4 squadron.

7. Shah expressed appreciation. At same time, he called attention to serious and rather urgent need for five additional F–5B’s. Need arises from fact that because of Vietnam demands USG not providing extent of training previously provided. He said he has 20 pilots training in Pakistan through T–38 level, but additional F–5B’s are necessary to train new pilots in gunnery and formation flying. General Jablonsky indicated there may be small amount of money left in FY68 tranche after F–4 squadron financed but it would not finance more than one or two F–5B’s. Shah said if USG not prepared to provide additional $3 to $5 million via credit arrangements, need is such that he would be prepared to pay cash for those not fundable under FY67 tranche.

8. Looking to future, Shah said by 1972 Iran would need replacement equipment. He reiterated his determination to preserve his American military orientation, particularly Air Force. He discussed possibility of post-Vietnam rehab F–4 aircraft or F–5 follow-on aircraft which Nor-throp now considering. I noted this was for future. Shah agreed but pointed out that because of three to four year time lags Iran must get in line. Main question was whether USG is willing, as he hopes, to remain Iran’s chief supplier. He noted in this connection that he has more trouble assuring answer to this question now when he is paying for equipment than previously when USG supplied it via grant aid. There was brief discussion few other military matters but they minor in nature. They being reported via General Jablonsky’s usual channels.

9. Shah said he would appreciate my advice whether he should discuss his military needs extensively while in Washington or whether they could be handled adequately either via ARMISH/MAAG here or via Ambassador Ansary. Acknowledging that Shah undoubtedly would be explaining his general thesis as to Iran’s need for adequate defense capability, I urged Shah not to get into discussion of specific requirements.

10. During course of discussion, I recalled President Johnson’s letter of last July³ and the concern therein expressed re Iran’s dealing with Soviets in arms. This subject, I noted, is very much in minds of many key Washington officials. This launched Shah into lengthy rehearsal of rationale for relatively small amount of Soviet military purchasing. He said Soviet Ambassador was in previous day expressing hope that current arms deliveries would be fore-runners of others. Shah gave us clear indication he does not intend to get into any relationship of dependence on Soviets, noting specifically how easily they could undermine him by cutting off supplies.

11. Shah outlined his familiar thesis that Soviets have leapfrogged over southern tier and for all intents and purposes have established base in Egypt. That accomplished, Soviets, according to Shah, are now maneuvering vis-a-vis Iran and Turkey. While it would be “odd,” Shah said, to rebuff “smiles and friendship” entirely, he made clear he knows Soviet game is to get Persian Gulf, i.e., Russia’s “historic dream.” This prompted inquiry from me why he is planning to let Soviets explore for oil in Kermanshah and Shiraz areas. Shah reiterated what he had told U.K. Ambassador Wright (Tehran 4574),⁴ i.e., dividing Iran into spheres of influence along lines of the 1907 treaty is unthinkable. I said steel mill project is already in central Iran which should disabuse those who might postulate spheres of influence theory. Shah noted Isfahan in 1907 treaty was considered in Soviet sphere of influence. In any case, he said he does not expect substantial oil deposits to be found in Shiraz area. Shah categorically said he would never let Soviets work in coastal or offshore areas of Gulf where they would serve as “scouts” for Nasser.

12. Re negotiations for FY68 tranche, Shah agreed arrangements should be worked out with Central Bank Governor Samii for either Washington or Tehran. He expressed hope that negotiations could be concluded expeditiously.

13. Comment: Shah was in entirely different mood from that when I saw him week ago re the Fulbright affair. He was buoyant and seemed be looking forward with eagerness to telling Iran’s story to Washington officialdom. Of more direct importance, Shah had obviously done his homework re economic projections which Central Bank had produced. He was conversant with various economic indicators. This in itself is in our view direct evidence that purpose intended by Annual Review has been served.

Meyer

1. Source: Department of State, Central Files, DEF 19–8 US–IRAN. Secret; Priority. Repeated to Moscow and CINCSTRIKE/USCINCMEAFSA.
2. Document 201.
3. Document 158.
4. Dated May 18. (Department of State, Central Files, PET 17 U.S.S.R.-IRAN)