81. Paper Prepared in the Central Intelligence Agency1

The Iranian Crisis: International Economic Fallout [portion marking not declassified]

The US decision to block official Iranian monetary assets in US banks here and abroad coupled with Iran’s technical default on several loans and its threat to blacklist the use of the US dollar have sent shock waves reverberating throughout the international community.2 These measures have: (a) created confusion in the international banking system in its dealings with Iran, impeding Tehran’s ability to import; (b) drawn the West Europeans, Japanese, and other allies reluctantly into the financial dispute and sent a few of them scurrying to capitalize on the situation; (c) raised concern among OPEC members over the security of their foreign assets; (d) led Iran and Libya to demand that OPEC unsheathe the oil weapon; and (e) raised questions about the future role of the dollar as an international reserve currency. [portion marking not declassified]

While much of the confusion in international economic circles would abate quickly once the crisis between Iran and the United States were resolved, the dispute has longer term implications for all parties involved. For Iran, the protracted hiatus in its international economic affairs will mean a downturn in coming months from an already depressed level of economic activity. Hence, while the crisis will not change the Ayatollah’s mind set in the short run, over time it will have substantial political repercussions. Although OPEC members recognize the special circumstances of the US actions, the United States will find that OPEC members will intensify their efforts to diversify their foreign investment portfolios; if other countries block Iranian assets before the dispute is resolved, OPEC members will feel even more strongly that keeping their oil in the ground is the most prudent policy. As for the Japanese and the West Germans, they will have to deal with growing pressures to internationalize their currencies. A reduced role for the [Page 205] US dollar as a reserve currency would cause difficult adjustments in the near term, but could prove beneficial over the long haul to the United States. [portion marking not declassified]

Monetary and Trade Problems

Theoretically, the US order blocking Iranian monetary assets should not impede international economic transactions with Iran. In practice, however, confusion on the part of the Iranian banks and general uncertainty over the present situation among Western traders and bankers—largely inspired by intemperate and ill-chosen remarks made by high Iranian officials—are creating problems for all parties concerned. As a result, oil revenues continue to flow into blocked accounts, and some foreign companies and banks are unwilling to accept letters of credit (L/C) for exports to Iran. [portion marking not declassified]

The reluctance of international bankers to open new lines of credit with Iran stem from fears of not being paid. In particular, the banks do not wish to comply with the Iranian requirement that L/Cs be drawn on Iranian banks. They are afraid that possible massive loan defaults by Iran would trigger blocking orders by West European governments, tying up almost all of Iran’s official assets. Some of the L/Cs that are being opened apparently carry risk premiums. [portion marking not declassified]

Chaos in the Iranian banking system has made it difficult for Tehran to sort out trade financing problems; inadequate—sometimes conflicting—instructions are being sent to customers, branch banks, and correspondent banks. Lack of management and direction as a result of the flight of key personnel are largely responsible for the chaos. Indeed with careful management, the solution to the US asset block would be relatively simple: the Iranian government need only maintain deposits exclusively in non-US banks and cancel outstanding letters of credit that would channel money into blocked accounts. However, given the erratic behavior and uncoordinated efforts of Iran’s government and banks, the process of establishing new, orderly relations with non-US banks is taking considerable time and depends heavily on assistance from foreign bankers and traders. [portion marking not declassified]

Iran-US Financial Dispute Spreads

Because of their dependence on OPEC oil, US allies are trying to remain neutral in the US-Iranian financial hassle while generally voicing support for release of the hostages.

[1 paragraph (9 lines) not declassified]

Western Europe and Japan

West European central banks and governments are attempting to maintain positions of strict neutrality on financial issues in the face of mounting difficulties. [9 lines not declassified]

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A US bank may have beaten Bonn to the punch by obtaining a court order to seize Iranian government shares in the Krupp conglomerate. Fearing hostile reaction from Tehran, Bonn issued a strong disclaimer of any government involvement in the court order. The Ministers of Finance and Economics have publicly “deplored” what they view as the US bank’s interference in West German foreign policy. [portion marking not declassified]

While the French have voiced support for the US position on the hostages, they have attempted to keep commercial dealings with Iran outside the dispute. [2½ lines not declassified] Recent publicity surrounding a French move against Iranian assets taken a month ago may, however, draw Paris more directly into the financial tangle with Iran. At that time, French courts issued an order freezing Iran’s $1 billion stake in the European uranium enrichment group, EURODIF. The French move stems from Iran’s failure to fulfill its financial obligations as a 10-percent shareholder in the Tricastin uranium enrichment plant in France. [portion marking not declassified]

[2 paragraphs (17½ lines) not declassified]

Other Non-OPEC

[1 paragraph (9 lines) not declassified]

Oil Producer Reactions

Although the major oil exporting countries recognize the special circumstances of recent US actions, the blocking of Iranian assets has raised a few apprehensions. These countries are especially concerned over the precedent being set by the blocking action since the US measure was tied to Iran’s attempt to withdraw its funds rather than to the seizure of the American Embassy, which most OPEC countries have at least privately condemned. [portion marking not declassified]

UAE officials feel that the US move was misguided and will force a reevaluation of UAE foreign investment policies as well as those of other oil producers. [3½ lines not declassified]

Kuwait has publicly commented favorably that the US move is a case of “extreme action, provoking extreme measures.” [2 lines not declassified]

• Although some Saudis are upset about the precedent set by the US action, [1½ lines not declassified] SAMA’s investment operations and policies remain unchanged.

Iraq, because of its own confrontation with the Khomeini regime, has intentionally avoided criticism of US actions. In any event, Iraq has almost no assets in the United States; its foreign holdings are widely dispersed throughout the West and Communist countries. [2½ lines not declassified]

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Venezuela, the only non-Arab OPEC member with large foreign holdings, has expressed concern that the flare-up might create a rift in OPEC. [portion marking not declassified]

Only a few oil producers, notably the radical states of Algeria and Libya, sharpened their public anti-US stance in response to the US financial action. The Libyan delegation to the Arab Foreign Ministers meeting in Tunis called for joint Arab reprisals against the United States. The Libyan initiative received only mild support from Syria and was soundly rejected by the conference. [8 lines not declassified]

Little OPEC Support for Iranian Initiatives

[1 paragraph (10½ lines) not declassified]

The Iranians have received no support for their request that OPEC discontinue the use of the dollar as the means of payment for oil exports. Acting in their self interest, the oil exporting countries seem unlikely to reject the dollar as a vehicle currency as long as it remains a principal currency for transactions by the rest of the world; they will need dollars to pay for their imports. Some would be especially reluctant to take actions that might be thought to have a long-term, adverse effect on the dollar, because more than half of their assets are dollar-denominated. [portion marking not declassified]

Longer-Term Implications of the Iranian-US Flareup

The following is our preliminary reaction to the longer-term impact of the Iranian crisis.

Impact on Iran

The financial and governmental confusion generated by the US-blocking of Iranian assets and by the threats of the Iranians to default on their external debts is having a seriously adverse effect on trade and other external relationships that will be felt for many months to come. In addition, skepticism about the government’s ability and willingness to ensure personal security will slow the return of foreign contractors and technicians who are leaving the country. Overall, spinoff from the current crisis is undermining Iran’s ability to supply itself while making imports more difficult. Hence, worsening economic conditions—including spot shortages of critical commodities such as food—are certainly in the cards. The worst of these problems, however, are a few months off. [portion marking not declassified]

While the economic downturn being brewed by the current crisis is not apt to change the Ayatollah’s mind set in the short run, its political impact will be felt in the longer term. Most Iranians are willing to pay some price to ensure the success of the revolution, and for the time being many find the United States a handy scapegoat for most of Iran’s problems. Nevertheless, before the current flareup in US-[Page 208]Iranian relations, signs of discontent with the quality of economic management were apparent, especially among some of the staunchest backers of the revolution such as the Bazaaris and urban workers. These tensions are likely to grow in the next several months as a result of commodity shortages, accelerated inflation, and persistent unemployment. [portion marking not declassified]

Whether or not the strains generated by a deteriorating economic situation will crystallize into resistance against the Ayatollah’s leadership will depend on several factors. Once the crisis with the United States is resolved the Ayatollah will have to find another focus of blame for his policy blunders. He will also have to select his future policy options gingerly, taking care to avoid extremist measures such as widespread wage and price freezes or forced return to the countryside, which would provide a focus for protest. Failure to follow an economic course that holds the promise of a better future for most Iranians would provide opportunities for the left and others to exploit. [portion marking not declassified]

Impact on Oil Producers

Over the long term, the US blockage of Iranian assets will cause other oil producing countries to reassess their asset portfolios. Oil producing governments are likely to try to continue diversifying their new investment as well as their existing assets away from the dollar and from US institutions, more closely matching their asset holdings with trade patterns. [2½ lines not declassified]

If other countries join in the blockage of Iranian assets, the trend toward reduced oil production in countries currently accumulating excess oil revenues will likely accelerate. Given the tight world oil supply-demand balance, even a small shift in production policies induced by the financial aspect of the US-Iranian crisis could have a significant influence on the oil market. At this juncture we have no indication that production policies have been changed. [portion marking not declassified]

It is important to note that a number of countries were already considering production cuts prior to the US-Iranian flareup, and that moves in this direction in coming months should not be construed as support for the Ayatollah Khomeini.

• [3 lines not declassified]

• [7 lines not declassified]

• [8 lines not declassified]

Implications for the US Dollar

The US blockage of Iranian assets has added to already existing concerns about the suitability of the US dollar as the major international currency. Yet, there is no other currency capable of assuming this role. [Page 209] In addition, Swiss, Japanese, and West German banking officials fear the increased use of their currencies as reserve assets and settlement currencies. The Japanese, for example, strongly resisted US pressure in the early 1970s to further internationalize the yen. Wider use of the Swiss franc, yen, and Deutsche mark, would lessen the control of domestic monetary authorities, making money management more difficult. Unregulated Euro-markets in these currencies—now limited—would undoubtedly grow, as happened with the US dollar in the 1960s. If other developed countries continue to resist pressures for greater international use of their currencies, support for a broader role for the SDR in international transactions would likely grow. [portion marking not declassified]

Although other oil exporters have rejected Iranian demands that oil be priced and sold in other currencies, the issue is not a new one. Indeed, OPEC as a whole has been discussing for some time now the possibility of pricing its oil in a currency—or a basket of currencies—stronger than the dollar. If only Iran shifted away from using the dollar, the result would probably be a brief flurry in exchange markets. If all oil were suddenly priced and sold in other currencies, however, the one-time drop in demand for dollars would be dramatic and adjustment problems could be severe. World oil trade at current prices is now running at the tremendous level of something more than $250 billion a year. If the value of the dollar takes a plunge, however, so does the value of OPEC assets worldwide. [portion marking not declassified]

Over the longer term, the strength of the US dollar will essentially be determined by fundamental economic factors, such as the US inflation rate, current account balance, and the general health of the economy. Thus, any erosion in the status of the US dollar as a reserve currency would not cause serious long-term damage, provided it occurs on a gradual basis—a process that OPEC countries have a strong interest in assuring because of their large dollar holdings. Providing the change in the international currency regime is a gradual one, the dollar over the longer run might benefit. Such a move would give the United States greater control over monetary policy and an enhanced competitive position. [portion marking not declassified]

  1. Source: Carter Library, National Security Affairs, Brzezinski Material, Country File, Box 30, Iran 12/5/79–12/9/79. Top Secret; [handling restriction not declassified]. Sent to Carter, Mondale, Vance, Brzezinski, Brown, Miller, and Duncan under a December 5 covering memorandum from Turner.
  2. The New York Times reported from London on November 16 that Bani-Sadr was quoted in Le Monde as saying that Iran would no longer accept payment for its oil in dollars but would insist that payments be made in a basket of currencies consisting of the German mark, Swiss franc, and French franc. (Robert D. Hershey, Jr., “Reports on Freeze and Oil Hurt Dollar,” New York Times, November 17, 1979, p. 6)