The general issue since this program began has been its effect on the
Iranian economy. So far it has proved financially manageable, but Iran’s
future financial soundness is still fragile, depending as it still does
on the continued flow of oil revenues at a high level. The Shah annually
squeezes the American oil companies as hard as he can to maximize those
revenues, and if he squeezes to the breaking point or overprograms his
income, repayments on these military sales credits would become a
serious burden. For this year, this problem still seems under
control.
We cannot ask you to make a judgment on the precise division between
private and Government credit or about the interest rates. However, it
is probably desirable in relaying your decision on this memo to note
these problems in order to stiffen the spines of our negotiators. A mere
suggestion that you are aware of the budgetary implications will keep
them as alert to our financial interests as they will be to Iran’s.
Tab B
Memorandum From Secretary of State Rogers to President
Nixon
Washington, April 18, 1969
Subject:
-
FY 1969 Military Credit Sales
Program for Iran
Recommendation:
With the concurrence of the Secretary of Defense, I recommend that
you approve, subject to the satisfactory conclusion of Congressional
consultations, the extension to the Government of Iran in FY 1969 of $100 million in credits under
the Foreign Military Sales Act, to finance 32 F–4E aircraft and
other items on terms to be negotiated.
Approve: ______________ Disapprove: ______________
Discussion:
Beginning in 1964 we have been shifting our military assistance to
Iran from a grant to a credit basis. FY 1969 is the last fiscal year in which we will supply
military materiel to Iran on a grant basis, although we will
continue to provide military training and support for our Military
Assistance Advisory Group under the grant program. Since 1964 we
have extended $400 million in direct and guaranteed military credits
to assist the modernization of Iran’s military forces. The principal
equipment items financed under this program have been 32 F–4D
aircraft, now being delivered, 26 F–5 aircraft, 460 M–60 tanks, 22
C–130 aircraft and 16 Sheridan tanks.
[Page 4]
After approval by President Johnson and satisfactory Congressional consultations
we informed the Shah in May, 1968 that the Executive Branch would
undertake annually for the next five years to seek Congressional
authority and appropriations for such credit sales as both
governments would agree were indicated to carry out a military
modernization program for Iran. The amount of credit to be extended
each year, as well as the amount of sales to be made for cash, would
be subject to an annual military and economic review with the
Government of Iran. The Shah was informed that the actual amount and
the terms of each annual credit would depend on the amount of credit
authorization and appropriations approved by the Congress, on
prevailing credit market factors and on other United States
requirements worldwide. We subsequently agreed with the Government
of Iran on a tentative figure, strictly for planning purposes, of
$100 million in annual credits.
Our military credit sales program is the touchstone of our close
relationship with Iran. This relationship provides us with ready
means for influencing Iran on international matters, particularly
the promotion of peace and stability in the Persian Gulf area, and
for limiting pressures to divert Iran’s resources unnecessarily to
military purposes. Our relationship also provides us with other
benefits, including overflight privileges and communications and
intelligence facilities. The importance of our ties with Iran has
increased as a result of the announced withdrawal of British forces
from the Gulf in 1971, the growing Soviet threat to the Middle East,
the continuing instability of the Arab world and recent events
affecting the maintenance of our facilities in neighboring
countries.
The Shah’s military modernization program is based in large part on
his belief that threats to Iran are most likely to materialize in
ways which would not justify direct United States involvement on
Iran’s side. He is particularly interested in protecting Iran’s
vital Persian Gulf lifeline
[Page 5]
after the British depart. While having demonstrated a desire to
cooperate with the other Gulf powers and to work for solutions of
outstanding problems between them, the Shah wishes to have the
military power to defend, if necessary, Iran’s lifeline against
radical Arab, possibly Soviet-inspired, penetration of the Gulf and
to deter sneak attacks on Iran’s oil installations in the Gulf area.
His program attaches highest priority to the Iranian Air Force.
Following British withdrawal from the Gulf Iran will be the dominant
military power there. This could create concern among Iran’s
neighbors in the Gulf. However, for our part, we find Iran’s present
policy in the Gulf essentially reassuring and our ability to
encourage constructive Iranian policies there enhanced by our close
military relationship.
Iran’s economy is booming, with its real GNP having increased at an average annual rate of about
10% over the last four years. Some of the strains which such a
growth rate can be expected to cause have become evident,
particularly in declining foreign exchange reserves and a growing
debt service ratio. Overall military expenditures, in large part
related to our credit sales program, have been rising rapidly. These
factors will be kept under review in connection with possible future
military credits to Iran. A key question is whether Iran’s oil
income will keep pace with the Shah’s demands and Iran’s
expenditures. A breakdown in the relationship between the oil
Consortium and Iran would endanger Iran’s economic development and
military programs. In this light, the current negotiation between
Iran and the Consortium is a matter for concern.
We believe that the proposed FY 1969
program would not cause a significant slowing in Iran’s rate of
economic growth and that Iran’s debt servicing burden would continue
to be manageable. Section 35(a) of the Foreign Military Sales Act
prohibits sales to any economically less developed country when the
President finds that such country “is
[Page 6]
diverting its resources to unnecessary
military expenditures to a degree which materially interferes with
its development.” It is our opinion that Iran is not in violation of
Section 35(a) at the present time.
In sum, we believe that our proposed program for FY 1969 will assist the maintenance of
our close ties with Iran, promote our important interests in the
area and meet the Shah’s desires.
The Proposed FY
1969 Program
The proposed program, as approved by the NSC Interdepartmental Group for the Near East and South
Asia, contains the following elements:
- 1.
- Extension of $100 million in credits, at least $20 million of
which would be USG guaranteed
private bank credit, if arrangements can be worked out with the
banks, with the remainder (or the entire $100 million in the
event arrangements for private credit cannot be worked out with
the banks) being direct USG
credit. Funds for direct USG
credit and for the USG guarantee
of private credits have been authorized and appropriated by the
Congress and are available for this program.
- 2.
- At least $80 million of the credit would be used to finance
two squadrons of 16 aircraft each of F–4E aircraft. The total
cost of these aircraft is estimated at $130 million, and the
Government of Iran would sign a dependable undertaking to
finance the remaining cost estimated at about $50 million. If we
decide to provide additional military credits to Iran in FY 1970, such credits could be used
to finance this remaining cost. This “split financing” is
desirable in order to permit ordering of all 32 aircraft prior
to June 1, when substantial price increases are anticipated, and
to permit financing this year of up to $20 million of other
items, while at the same time keeping within our $100 million
annual planning ceiling.
- 3.
- Up to $20 million of the $100 million in credits would cover
the cost of other equipment to be agreed. Iran has indicated a
desire to purchase additional electronic equipment for its
Persian Gulf defense, logistics ships for its navy and
additional Sheridan tanks to add mobility to its ground
forces.
- 4.
- We would seek Iran’s acceptance of an interest rate of no less
than 6.25 percent (cost of money to the Treasury) for the direct
USG credit and of the
current market rate (not to exceed 8 percent) for the USG-guaranteed private credit. It
is likely, however, that the Iranian negotiators will strongly
object to these terms and will insist on a lower interest rate.
In order not to dilute the political benefits we hope to obtain
from this program, our negotiators would be authorized, if
necessary to complete the negotiation, to agree to reducing the
interest rate for direct USG
credit to a level needed to bring the overall average rate for
the total $100 million credit down to no less than 6.25 percent.
This could involve a total loss of interest receipts to the
Treasury of up to $3 million during the course of the credit.
This procedure is consonant with State-Defense-Treasury
guidelines on financial standards and criteria for foreign
military sales. (The Treasury Department has indicated that it
would prefer the interest differential, if any, to be subsidized
by an addition to military grant aid rather than by a
concessionary interest rate on the direct credit, but this does
not appear feasible, at least in this fiscal year.)
- 5.
- The provision for the possible inclusion of guaranteed private
credits in the $100 million credit package has been made in an
effort to save USG budgeted
funds, because we have to set aside only 25 percent of such
credits in a guarantee reserve, and these are not expended
unless there is a default. However, arrangements to this end
have not yet been worked out with the banks.
- 6.
- In presenting the program to the Shah, our Ambassador would be
instructed to note that it is a token
[Page 8]
of our confidence in the Shah and in
Iran’s desire to contribute to the stability of the area and to
urge that Iran’s economic progress not be adversely affected by
her military expenditures. He would make clear that we cannot
guarantee the availability of future credits in advance of
Congressional authorization and appropriations or of our annual
economic review and that to the extent we cannot extend such
credits, Iran will have to finance the remaining cost of the
F–4’s being partially financed under this program or cancel the
contract.
