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

1124. Joint State/Defense/AID message. Embassy A–590;2 Embtels 1311,3 1346,4 1359,5 14026 and DEF 2212.7 Concur your analysis US policy objectives and evaluation Shah’s position outlined A–590. While we share CT’s concern about Shah’s long-term military spending plans, we agree that so long as he convinced Iran’s economic prospects will allow both meeting these plans and financing ambitious development program, there is probably little we can do directly at this time to curtail his military spending without risking impression we reacting completely negatively his desires purchase additional US military equipment and thereby jeopardize what influence we have. We have therefore worked out approach outlined below, which we believe sufficiently responsive to Shah without posing present threat Iran’s economic welfare. We trust that you will find further opportunity to impress on Shah that factors affecting control and growth of the economy demand action as urgently as do military requirements. Believe presentation to Shah should be designed: (1) avoid any suggestion advance commitment specific military equipment; (2) exploit opportunity offered by annual review procedure to interest Shah further in administrative improvements required minimize inflationary dangers and threat to development effort inherent proposed military expenditure increases.

Specific points for discussion with Shah follow:

Second Tranche. Approve second tranche in range $85–$90 million covering items as proposed Enclosure 2, A–590. This decision may be communicated to Shah in general terms, including our willingness help Iran secure 60-day war reserve ammunition by combination various means now being explored (including credit), as proposed Embtel 1402. Re other items in tranche, they may be catalogued, but details implementation [Page 157] must await clarifications discussed paras 7 and 8 below. Details second tranche items should be developed by MAAG with GOI and submitted Military Departments info OSD for preparation Letters of Offer and disbursement schedule. Based on disbursement schedule, instructions for negotiation second tranche credit will be provided by DOD.

Five-Year Credit Ceiling. Do not perceive any utility broaching at this time change in over-all credit ceiling ($200 million for five-year period) as specified July 4, 1964 Memo of Understanding. Since approved new items second tranche consistent 1964 illustrative list and since sum first and second tranches does not approach over-all five-year figure, we believe it premature raise issue now. Consideration ceiling change would also cause time-consuming procedural hurdles (new 1550 determination, etc.) which unnecessary face at this time. We would hope Shah would be satisfied this year with second tranche as proposed and our undertakings re other problems as outlined below and would not question five-year total. If he should question, you may refer at your discretion to above points.

FYI. Believe we will be in better position to address problem at later date, giving us more time to urge Shah in direction higher priority for economic development and take advantage later reading Iran’s economic situation. In any event, you should be aware that, owing present and prospective tightness MAP funds and especially in view Iran’s improved financial condition, it unlikely we could modify agreement in any way requiring more MAP resources for Iran than originally foreseen. Sales additional to $200 million in five-year period could, of course, be accommodated without more MAP resources if they were for cash or if unguaranteed commercial credit could be provided. End FYI.

Aircraft. Argumentation against F–111 as previously provided: no present or future military requirement for Iran to have an aircraft of this capability, too sophisticated, costly, still in R&D stage. In your discussions with Shah you may note that we recognize that Iran may need at some point aircraft of greater capabilities than F–5. We would be prepared discuss GOI aircraft requirements at greater length with IIAF during course of year if Shah so desires. FYI. DOD plans undertake unilateral study of Iran’s aircraft requirements and U.S. aircraft availabilities. End FYI.
Second Hawk Battalion. On both Hawk and Sheridan we believe offer “sympathetic consideration” at time next annual review is too strong. On Hawk, we do not wish to convey to Shah idea that we will say “yes” next year only to find that none are available. (See DEF 2212 re problem availability.) Conversely, we do not wish to tell Shah outright that we will not have any available and risk his turning elsewhere at this early stage. Recommend you place chief stress on absorption difficulties, [Page 158] but also refer possible improvements we contemplating to Hawk, and suggest further discussions during coming year.
Sheridan Tanks. Principal arguments already known to you: Sheridan still in R&D, none are available, problem of absorption, and—as in case of all other items—problem of cost. We suggest GOI be informed of problems, that it is premature for commitments, that we recognize their requirement for improved armor capabilities and that we should also watch this over course of year and see where we stand at time next annual review.
Bullpup. FYI. While agree your position, we willing consider sale Bullpups at some future time provided they are available and releasable to Iran from security standpoint; and if in your judgment this will help dampen Shah’s desires for more sophisticated aircraft. At present time there are none available from U.S. production, although may be available from European consortium. We have not looked into this in great depth, and will not do so unless you so recommend after your discussions with GOI. End FYI.
Other Items. Other items recommended for financing under 2nd tranche approved, subject to availability. ARMISH/MAAG should define requirements for Military Depts. so that Letters of Offer can be prepared. DOD now taking steps authorize Military Depts. proceed in advance of funding with supply actions for second 4 C–130s, radio test equipment, 163 APCs and 1610 LMGs.
Price and Availability. Prices and delivery schedules cannot be determined in detail at this time. MAAG must first define requirements more precisely for Military Depts. before deliveries can be projected and prices as stated A–590 confirmed. In any case, there would appear to be no obligation determine this type detail in connection with annual review.
Force Level. We recognize additional units called for in 1964 Memorandum of Understanding will require some additional personnel; nevertheless, principle that economic development Iran’s first need and that military establishment must be forced sort out priorities within reasonably economic ceiling remains key consideration. Ceiling 160 thousand was accepted by Shah only after President Kennedy personally pressed principle during Shah’s 1962 visit and ceiling was finally reached only recently. Accordingly, prior to any decision re breaching personnel ceiling which subject high level decision, wish your views on how Iranians might meet modernization needs through reshuffling within 160 thousand ceiling perhaps through cutback non-essential units. We are prepared if GOI considers desirable to assist in personnel survey, to include availability of personnel with requisite skills. In any case, we doubt it necessary broach this subject in connection annual review 1964 Memo of Understanding (which limited by terms of agreement [Page 159] essentially to questions financing and training readiness for equipment purchases) and we gather from Embtel 1402 that you do not expect Shah raise issue June 19 audience. If he should inquire, you may refer in general terms to our concerns as expressed above.
Allocation of Economic Resources. We wish stress importance your continued emphasis on value careful economic projections and allocation resources as set forth Embtels 1346 and 1359. Appreciate we must take care not to nip in bud dialogue begun between Shah and economic planners this subject or create suspicion in his mind that economists are “sabotaging” military program, but we will need to reiterate at appropriate opportunities necessity facing hard questions if Iran is to carry out effective development program and attain satisfactory growth rate. Certainly US will have gained important advantage from annual review procedure if continuing dialogue can be established with Shah concerning application competent economic analysis to problem military purchases. You might consider introducing your top economic advisers into high-level discussions military/economic problem, as supplement to ongoing discussions technical military matters between Shah and MAAG chief.

We realize discussion this subject with Shah must proceed slowly and carefully. Although projections on which Shah bases optimistic plans for development and military programs probably unrealistic many critical respects, we recognize little advantage debating merits these projections with Shah. Trouble could well ensue if Iran accelerates volume public expenditures at rates foreseen without commensurate increases public savings, but fact remains development program not now competing against military for resources due slowness preparation sound development projects. Since qualitative discussions economic projections apt appear academic to Shah, suggest you strive focus his attention for time being on fact that projections appear indicate that a bright future attainable, but this will not come about automatically merely because resources available, but will require continued and accelerated actions to upgrade economic administration (along lines represented by initial steps toward modern budgeting system) in order to achieve maximum growth rate under conditions minimal inflation.

  1. Source: Department of State, Central Files, DEF 19–3 US–IRAN. Confidential; Priority. Drafted by Tiger, Mulligan, R. Murray (DOD/ISA), and Henrietta Towsley (AID/NESA); cleared in substance by Solbert and Captain Cain of SAMAA, and in draft by Komer, Arrill, Bunte, and Chief of AID’s Military Assistance Division Robert B. Black; Charles Mann of the Bureau of the Budget was informed; and approved by Jernegan. Repeated to CINCMEAFSA.
  2. Airgram A–590 from Tehran, May 15, transmitted the Embassy’s first annual review of the July 4, 1964, Memorandum of Understanding. (Ibid.)
  3. Dated May 24. (Ibid.)
  4. Dated June 1. (Ibid., E 2–2 IRAN)
  5. Dated June 3. (Ibid., E 8 IRAN)
  6. Dated June 10. (Ibid., DEF 19–3 U.S.-IRAN)
  7. Not found.