148. Backchannel Message From the Ambassador to Iran (Helms) to Secretary of Defense-Designate Rumsfeld1

228. Refs: (A) Embassy Tehran 10758; (B) Embassy Tehran 10899; DefRepIran 091300Z Nov 75.2

1. Realize that you have not got your feet under the desk at the Pentagon yet3 and that the issue I am identifying is not the highest priority matter you will face, but I did feel it might be helpful if I wrapped up the problem in this fashion, so that you would not be missing any of the essential elements when you give it consideration.

2. The affair has to do with the Shah’s concern re prices of Defense goods and services, especially Spruance ships. Anticipate that papers are now working their way up through the bureaucracy and that you will find them on your desk when you move to the Pentagon.

3. Shah is reacting to $1 billion in unexpected charges which we have passed to him since September. These include:

A. $138 million increase in F–14 procurement costs (50 aircraft).

B. $197 million unexpected F–14 support costs.

C. $200 million I–Hawk additional costs.

D. $600 million increase in price for 5 Spruance ships.

4. Shah is particularly troubled by increase in Spruance costs. He states that original price quoted to GOI in December 1973 was $100–$120 million for each DD–963. Owing to special Iranian requirements for equipment and some price escalation, cost had risen to $238 million each when GOI took final decision to purchase ships. Recently, we notified him that price had escalated to $338 million each. This is a particularly sharp blow when GOI budgets are being squeezed by oil revenue shortfall. Shah has indicated that he may be forced to cancel purchases if the higher prices are maintained. He feels that Iran’s acquisition of Spruance ships was geared to joint US-Iranian collaboration on Indian Ocean security. If Spruances are to be priced out of Iran’s reach, Shah feels he will be unable to render meaningful naval assistance to U.S. in Indian Ocean.

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5. Despite Shah’s serious reaction, believe that we have some flexibility in this situation. It is my impression from a conversation with the Shah and from remarks of his subordinates that he wishes to acquire these ships and might be willing to meet us half way. There are two things I think are required from us.

6. First, we owe him a clear and detailed explanation as to why cost of the Spruance ships was escalated to such an extent. Thus far we have received only rather bare bones justification for the increase. We need to be frank with the Shah on this matter and should not pull any punches.

7. Secondly, the Shah’s overriding concern is that increases which we have passed to him to date may be only the beginning. He feels that Iranian efforts to plan their defense buildup are being seriously damaged by our inability to manage and forecast price changes. He fears that Iran will commit itself to major purchases on basis of one set of price and availability information and find later—when it is too late to back off—that changes are far more than were budgeted. We need to develop a better system for monitoring more closely the cost of major programs for Iran and keeping the Iranian Government as fully and rapidly informed as possible. The Shah is obviously aware that we cannot absolutely control inflation in defense costs, but he would like to see us make a better effort to develop early information on major changes in scope of his commitments with us. Otherwise he sees Iran’s defense planning and budgetting reduced to a shambles by unpredictable escalation in financing requirements. And, as I know you are aware, the same basic problem faces you in forecasting our own defense costs.

8. I have taken several opportunities recently to reassure the Shah that the change in DOD leadership is a positive development and will not affect our defense relationship with Iran. I believe he is now relaxed on that point. It might be a useful gesture, however, if you could send him a short message after you take office in order to reinforce his feeling that our mutually beneficial ties remain firm.4

  1. Source: Ford Library, National Security Adviser, Presidential Country Files for Middle East and South Asia, Box 13, Iran (6). Secret; Sensitive; Priority; Eyes Only.
  2. For telegram 10758, see Document 147 and footnote 6 thereto. Telegram 10899 from Tehran, November 9, conveyed the Shah’s concern with the high cost of Spruance-class ships. (National Archives, RG 59, Central Foreign Policy Files, P850004–1846) The telegram from the Defense Representative in Iran was not found.
  3. Rumsfeld was sworn in as Secretary of Defense on November 20.
  4. Rumsfeld replied in backchannel message WH52295 to Tehran, November 26, that these questions were receiving top-priority attention and that he would review any means of reducing price increases and explaining more fully to Iran why these unforeseen problems had arisen. (Ford Library, National Security Adviser, Backchannel Messages, Box 4, Mideast/Africa, Outgoing 11/75)