Foreign Relations of the United States, 1969–1976, Volume XXVII, Iran; Iraq, 1973–1976

59. Paper Prepared by an Interdepartmental Working Group¹

Washington, April 25, 1974.

STUDY REPORT JOINT U.S.-IRANIAN COOPERATION

Why Iran Is Important to Us

Our interests in Iran are substantial and are growing steadily:

—Iran is the most powerful, politically most stable, and economically most developed state on the Persian Gulf. It shares with us an interest in promoting moderate elements in the area and in limiting the influence of the Soviet Union and radical forces. Prospects are good for Iran’s long-term stability and a continuation of its present international orientation, even if its present leadership leaves the scene.

—Iran is relying on its new economic and military power in pursuing a more assertive foreign policy, particularly in the Persian Gulf but also in the Middle East generally and in South Asia. This is reflected in proposals for a regional common market, offers of low-interest oil loans to selected countries, and increased interest in the Indian Ocean.

—Acting as a responsible regional power, Iran can help stabilize the area politically, encourage regional cooperation in defense and economic development, and assist less developed states. Cooperation or a modus vivendi between Iran and Saudi Arabia is essential to stability in the Gulf and adjacent region; however, to date there has been no active cooperation, and their relationship has been little more than correct.

—Iran is a major source of oil for Western Europe and Japan, and normally supplies about seven percent of our own oil imports. Iran’s refusal to join Arab oil embargoes has in the past been essential to Western ability to mitigate the effects of those embargoes. Iran also plays a leading role in OPEC, exerting special influence on oil pricing policies. Its future influence on international petroleum policies, while not as great as that of Saudi Arabia, will nonetheless be substantial, and its actions will affect the major consuming nations as well as LDC’s.

Objectives

Our objectives in taking the initiative to broaden and intensify our relationship with Iran are:

—to reinforce the close and harmonious cooperation that has generally marked our relations, having in mind the Shah’s feeling that not all elements of the U.S. Government fully appreciate Iran’s importance or his own leadership potential in the region.

—to engage the Iranians so intimately as to assure an enduring relationship under this or successor regimes, a relationship in which we can encourage Iran to play a moderating and stabilizing role, particularly in the Persian Gulf region (in cooperation with Saudi Arabia) but also in the Near East generally, South Asia, and the Indian Ocean area.

—within the context of our basic oil strategy, to influence Iran on oil supply, oil pricing, and financial management of oil revenues to the benefit of broader world interests.

—to encourage Iran to use its growing oil wealth to assist LDC’s and to support international lending agencies.

—to maintain and even expand the important share of the Iranian market and economy which American industry and technology now hold, in this process offering Iran a viable alternative to bilateral barter arrangements with other countries.

—to ensure continued access to Iranian airspace and ports as well as Iranian cooperation in various intelligence operations.

Strategy

With Iran we already have close political ties and a long-standing security interest. Our association with Iran with regard to military supply arrangements is excellent, although we need to preserve our competitive edge over others. The area which has the greatest potential for enhanced cooperation is economic. It is there that we should concentrate our efforts.

We should accompany new initiatives in the economic field with efforts to increase the intimacy of our consultations on political and security issues so as to consolidate a close overall relationship. Prudent orchestration is important. By careful timing and management of our initiatives in one field, we may be able to reinforce our actions in another. Credible efforts in some areas of economic cooperation could yield new incentives for the Iranians to cooperate more closely with us in the other, more controversial fields in which our views differ, e.g., oil pricing. As we seek a meeting of minds on energy problems, however, we must recognize that our interests now collide in some respects and that a more satisfactory Iranian oil pricing stance may ultimately emerge not so much from a dialogue with Iran as from the results of actions we may be taking elsewhere, e.g., with Saudi Arabia.

The keynote of our intensified relationship must be partnership, stressing the mutual benefits and avoiding the faint paternalism that at times has been apparent in our discussions with the Iranians. We should invite Iran to raise with us any subject of concern or interest. The Iranians should be given reason to feel confident that their views will be weighed seriously. We will have to make it clear that we have no master plan of our own for cooperation with them. We want their contributions.

The Iranians probably will be seeking in this expanded relationship things that it may be difficult—perhaps impossible—for us to provide, particularly in the economic field. We will need to be innovative and flexible in devising mutually satisfactory solutions to the problems that may arise, recognizing that we are giving special attention to this new relationship with Iran.

The dominating role of the Shah on the Iranian scene must be fully borne in mind. An affirmative attitude on his part is essential if the relationship is to be dynamic and fruitful. He has warmly welcomed our proposals for this new relationship and wants to get down to specifics as soon as possible.

The Elements of the New Relationship

A. Political and Security Consultations: The range of topics we should be prepared to discuss—in greater detail than in the past—would reflect our recognition of Iran’s growing importance to the region and in the world. Examples are:

—Iran’s security concerns; the need to strengthen moderate elements in the Arab world; the contributions that interested parties could make towards achieving and maintaining an Arab-Israeli peace settlement; the means and tactics of cooperation between like-minded regional states (in particular between Iran and Saudi Arabia) to assure the stability, freedom from outside interference, and security of the Arabian Peninsula and the Persian Gulf region.

—problems affecting the stability of the Indo-Pakistani subcontinent; the strategic importance of and the need to assure access through the Indian Ocean; the role of CENTO; Soviet intentions, capabilities, and activities in the Middle East-South Asian regions.

—the significance for Iran of major trends and developments in SALT, East-West détente, U.S.-European relations, and international monetary reform.

For their part, the Iranians will be interested in our understanding and appreciating their problems with their neighbors, particularly Iraq, their concerns over radical Arab leaders such as Qadhafi, and their fears regarding Soviet efforts at subversion and infiltration throughout the region, as well as their perceived requirements for defensive preparedness. They may seek some sort of enhanced security relationship with us going beyond the CENTO tie.

B. Military Cooperation: The Shah intends to add to Iran’s defensive capabilities. Consultations in this field might therefore center not only on what the United States might usefully make available in the future in weapons systems and training, but also on ways of making the present supply and support arrangements more effective. The Iranians are interested in manufacturing selected military items and in developing greater repair and rehabilitation facilities for their existing defense inventory. The Shah himself has urged us to assist Iran to manufacture certain military missiles. Recently, an initial, informal DOD survey determined that complete Iranian manufacture of such missiles would be very difficult for Iran at this time. Our blanket encouragement of such activity would be a disservice to them. We should, however, be able to identify suitable military equipment which could be manufactured or coproduced in Iran. Such ventures will still require careful assessment: on the one hand, we do not wish to encourage unrealistic Iranian expectations; on the other, we must recognize that there may be advantages in building a defense industry capacity as an integral part of Iran’s general industrial development.

C. Economic Cooperation: Both countries want still closer economic relations. Since the end of the AID program in Iran in 1967,² U.S.-Iranian economic and commercial relations have largely been left in private hands, although the Export-Import Bank has played a substantial role. Iran has become a steadily more attractive target for American business, even leaving aside the sizable military sales program. Our economic involvement should thus grow in any event, but it could be effectively broadened and intensified under an officially sponsored program of cooperation. Under such a program, we would work for a better mutual understanding on world oil issues and for the recycling of Iranian oil revenues into the U.S. and world economies and into assistance for the LDC’s. At the same time, we would be promoting an efficient transfer of American technological and industrial capabilities to Iran, paying highest priority to the Shah’s desire for development of nuclear energy and a petrochemical industry. Our efforts might therefore center on the following:

1. Energy: Nuclear Power. The Shah is anxious to start a major nuclear power industry in order to prepare the country for the time when its oil reserves begin to run out (at the end of the century, according to current estimates). While phasing nuclear energy into a country-wide grid, Iran would progressively have its oil available for more profitable, non-fuel uses (i.e., petrochemicals). An Iranian-French understanding has already been reached whereby the French are supposed to help establish a 5000 megawatt nuclear energy capacity as the first major step in this direction. The Shah, however, has told us he would prefer the U.S. as a contributor, and hopes we will in time help develop a 10,000 megawatt capacity for Iran. In any event, the Iranians will need and will seek from the U.S. advice on organization and technical processes, as well as training of Iranians and technical assistance. We can provide much of what is needed. Beyond that, we hope to ensure that the U.S. becomes a major source of the equipment as well as the technology used in this industry. Finally, Iran is interested in participating—mainly financially—in the research and development of advanced nuclear power and possible uranium enrichment systems. We are prepared to welcome Iranian investment to the legally feasible extent.

2. Energy: Petroleum. We do not want a bilateral oil arrangement. We will, however, be seeking:

—a better mutual understanding on world oil issues, especially as regards the implications of different levels of oil prices on world production and consumption over the longer term. Given Iran’s present position favoring high oil prices, discussions on oil are bound to be sensitive and will require careful orchestration of our efforts with other major oil producers and within the multilateral groups dealing with energy problems; however, the detailed estimates of the costs of alternative energy sources we will be developing should be of major interest to the Iranians and could gradually help persuade them of the necessity of modifying their present stance on oil prices.

—acceptance of, or accommodation to, our views regarding other possible conflicts in our respective energy policies, e.g., the basic Iranian oil supply position in the future American market, the location of refineries supplying the American market, the implications of “Project Independence”.³

For their part the Iranians will want:

—better U.S. understanding, if not approval, of their oil pricing policy.

—U.S. cooperation in their plans to build export refineries in Iran, and to acquire equity and a major management role in downstream activities in the U.S.

—access to the American market on favorable terms and at reduced tariffs for their oil products and by-products.

3. Promoting Iranian Industrial Development. The Iranians want more joint ventures that will bring higher technology industry to their country, thereby providing more industrial items for domestic use while enhancing Iran’s export potential. The Shah is particularly interested in using Iran’s oil and natural gas to produce petrochemicals and fertilizers. We have already informed the Shah that we are prepared to field a team of experts or to explore here with his own representatives concrete ways in which the U.S. and Iran might collaborate in bringing his desires to realization. The Shah was pleased. Another example is steel manufacturing. The Shah hopes to increase Iranian steel production to 15 million tons a year by 1983.

We are prepared to lend active encouragement to suitable investment, licensing, and technology transferring ventures in the industrial field, using such tools as Export-Import Bank financing, the Commerce Department’s Major Export Projects Division, and consultations with American business leaders, bankers, and industry and trade associations. We may also have to devise new mechanisms in cooperation with American business that will allow the U.S. Government to become in effect a trusted catalyst in negotiations between Iranians and U.S. firms. We meanwhile should explore with the Iranians ways of improving and simplifying procedures for American private investment in Iran. We will wish to conclude a tax treaty, now in the initial negotiation phase, which can remove some of the problems that have faced American business in Iran. We will encourage the Iranians to improve their copyright protection and to offer incentives for American firms to bid for turnkey jobs in key industrial projects.

4. Science and Technology. We should be prepared to send teams of experts to Iran, or to receive Iranian teams here, to explore ways of transferring other American technological skills and know-how to Iran. Fields in which the Shah or other Iranians have expressed an interest include water desalination, solar energy, electronic engineering, and advanced radar and communications including satellite and ground systems. We will, however, have to work out with the Iranians what is realistic and feasible, what would be marginal, and what would contribute most to Iran’s economic development in light of the state of the art, Iranian capabilities, and market forecasts.

The Shah has informed us that he is most anxious to take advantage of American know-how in agriculture on the widest possible scale.

Cooperation in technology transfers might include development of suitable joint research projects and indigenous manufacturing capabilities. It will require the involvement of American industry and private research and engineering companies, although U.S. Government can make a contribution in some areas. We should consider negotiating with the Iranians an umbrella agreement under which reimbursable technical services could be supplied through AID. We could also consider breathing new life into the 1968 U.S.-Iranian Agreement on Scientific Cooperation.

5. Trade. We will seek arrangements with the Iranians to lower barriers to American exports. The Iranians will want our cooperation and help in guaranteeing or allocating an adequate, regular supply of key American raw materials at uninflated—ideally at controlled—prices. They may seek preferential access to the American market for exports in addition to oil products and by-products. These will be difficult issues for us. In some case, they may be virtually impossible to resolve to Iranian satisfaction. We should, however, be ready to discuss them and explore what can be done.

6. Iranian Investment and External Assistance. We would examine with the Iranians the effect of their growing foreign exchange reserves on the global economy and on monetary stability, as well as the role Iran could play in making investment capital and assistance available to LDC’s. We would want to work with the Iranians in developing or identifying third-world investment opportunities which are consistent with our own interest. Even if the Iranians proceed with their own or an OPEC-sponsored institution for channeling developmental aid to other countries, we would encourage them to continue making transfers also through existing international financial institutions.

We would work with the Iranians in identifying and developing attractive, direct investment opportunities in the United States. We would assist the Iranians in the development of joint ventures and the identification of turnkey purchase arrangements with American firms. In response to specific Iranian desires, we would seek out places where the Iranians could invest in research on, for example, new energy sources. In whatever we do, we will take into account Congressional attitudes and domestic sensitivities about foreign investment and potential foreign control in certain fields.

Mechanisms for Cooperation

Other than for economic cooperation, where we believe a Joint Commission and Working Groups should operate, we do not see the need for formal, new mechanisms.

A. Political and Security Cooperation: The Shah has welcomed our proposals to continue and expand the political and security consultations and close ties that already mark our relations. He has proposed in turn that the Secretary of State and the Iranian Foreign Minister meet two times yearly, once in Tehran and once in Washington. He wants such meetings to be separate from regular meetings of the CENTO Foreign Ministers. We want to continue and perhaps intensify the two-way flow of senior civilian and military officials between Iran and the United States to discuss issues of common interest, and would be prepared to do so in a more structured way; while agreeing in principle, the Shah prefers that most such visits be to Tehran because, as he puts it, in Iran, “I take the decisions . . .”

B. Military Cooperation: In response to our questions as to how military cooperation might be improved, the Shah has specifically proposed semi-annual meetings between the Chairman of our JCS and his Iranian equivalent. The meetings, in the Shah’s view, should also be separate from regular CENTO military conferences. Although the Chairman of the JCS may not be able to meet such a schedule, we should be able to devise and carry out a program of suitable, high-level DOD consultations that would satisfy Iranian desires in this area.

C. Economic Cooperation: We believe that establishment of a Joint Economic Commission at Cabinet level would provide the needed focus in this area, while providing a tangible public demonstration of our determination to intensify our cooperation. Its creation would tend to stimulate the interest of American firms in doing business with Iran. The Shah has accepted with enthusiasm our proposal for such a commission.

The Shah has said he will designate his Minister of Economy to head the Commission on the Iranian side. The logical U.S. Chairman would be the Secretary of the Treasury. The Secretary of Commerce would be a member and serve also as alternate U.S. Chairman. Other possible U.S. members include: the Under (or Assistant) Secretary of State for Economic Affairs; the Assistant (or Deputy Assistant) Secretary of State for Near Eastern and South Asian Affairs; Director of the National Science Foundation, and/or the Assistant Secretary of State for Ocean, International Environment and Scientific Affairs; the Chairman of the Atomic Energy Commission (or the Administrator of the Energy Resources and Development Agency when it comes into being); the Deputy Assistant to the President for International Economic Affairs; and a representative of the Defense Department. But such a large membership could prove cumbersome, and we will wish to consider this further.

We believe that the Joint Economic Commission should meet once a year, and more frequently if necessary, alternating between Tehran and Washington. (The Shah has suggested semi-annual meetings.)

Working Groups should be set up to deal with specific topics, perhaps beginning with the six major areas identified above in the “Elements” of economic cooperation. Other groups could be established for specific industrial or technology-transferring projects. Provision may have to be made for hiring consultants. We will also be exploring whether a businessmen’s advisory group would be helpful in advancing the aims of our program.

U.S. Government Coordination

Overall policy direction should come from the Secretary of State, to assure the proper orchestration and content of our multifaceted relationship with Iran. We believe he in turn should designate the Under Secretary of State for Political Affairs to provide day-to-day political guidance and to take the lead in interagency coordination, using the State Department’s Bureau of Near Eastern and South Asian Affairs as his principal instrument. Secretariat-style support for the activities of the Joint Economic Commission and its Working Groups would be provided by the agency of the Commission’s U.S. Chairman.

Scenario

Ambassador Helms has shared with the Shah our current thinking, and the Shah responded positively and enthusiastically. He apparently believes that all our proposals for intensified cooperation can be handled within the spirit of our existing bilateral understandings, and has no firm views—pro or con—regarding publicity for this new program. Although we will have to explore this question at greater length with the Shah, we believe that a joint announcement of the new relationship could be issued during the projected early visit by the Secretary of State to Tehran.

It has been agreed that the first meeting of a joint Working Group on nuclear power should take place soon in Tehran, possibly immediately after the projected visit by the Secretary of State. The Chairman of the Atomic Energy Commission will lead the U.S. team. This meeting will demonstrate our interest in going ahead with the program in a determined way.

The first session of the Joint Economic Commission might take place in the Fall of 1974. U.S. preparatory work should begin promptly in each of the areas of cooperation we envisage so as to identify issues, collect or initiate studies, and plan for the initial U.S. presentations.

In advance of any public announcement, we should explain our new cooperative relationship with Iran to our European allies, Japan, Saudi Arabia and certain other Near Eastern countries, as well as to Iran’s CENTO partners, Turkey and Pakistan. In addition, we should notify key members of the Congress and assure them of our intention to keep them informed as our new relationship with Iran progresses. We should emphasize that our new cooperation will be built on the long-standing friendship and close relationships we have had. We would point out that this is not a bilateral oil-for-industrialization-or-arms deal. We should inform the Congress that we have no security commitment in mind and that we will not be seeking any assistance funds for our expanded relationship.

1. Source: National Archives, Nixon Presidential Materials, NSC Files, Box 1338, NSC Secretariat, NSC Unfiled Material, Folder 6. Secret; Exdis. Sisco sent this paper to Kissinger under an April 27 covering memorandum that reads: “Although there is no separate NSSM on Iran, I am submitting this report to you in the same way as our similar initial study on Saudi Arabia (forwarded with my memorandum of April 10 under NSSM 198). The attached report represents the views of the Interdepartmental Working Group which I chair under NSSM 198. Representatives of the Department of Commerce, Atomic Energy Commission, and the Federal Energy Office have taken part in our discussions and concur in this report together with the agencies to which NSSM 198 was addressed.” NSSM 198, March 12, is entitled “Joint U.S.-Saudi Economic, Military and Technological Cooperation.”
2. The U.S. AID program in Iran was terminated on November 30, 1967.
3. Project Independence was President Nixon’s program for responding to the 1973 energy crisis.