US-IRANIAN RELATIONS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79T00826A000600010057-7
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 7
• Document Creation Date: December 14, 2016
• Document Release Date: January 10, 2003
• Sequence Number: 57
• Publication Date: May 6, 1966
• Content Type: IM

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No, 0813/66
CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
* OSD & DOS REVIEWS COMPLETED * 6 May 1966
1. US-Iranian relations may reach a critical
point this month over the issues of Iranian mili-
tary purchases and the Iranian drive to increase
oil revenues. An, annual joint survey of the Iranian
economy is under way now, and the report of the US
Military Survey Team to Iran (Peterson. Report) has
been completed and was submitted to the Shah on 4
May. Analysis of these two reports in Washington
will determine the extent to which large Iranian
military expenditures in the US are economically
feasible. In addition, the Oil Consortium will
determine this month how much to increase its oil
offtake (exports) from Iran. The Shah considers a
large increase essential to finance his military
and economic programs.
2. The Shah is determined 'to make major mili-
tary purchases in the near future to bolster de-
fenses in. oil-rich southern Iran and in the Persian
Gulf, which he believes are endangered by the am-
bitions of Egyptian President Nasir. The Iranian
parliament in November approved additional military
expenditures of up to $200 million. The Shah would
prefer to make these purchases in the US, but has
made it clear that he will turn elsewhere if this
proves too difficult.
3. The US takes the position that these pur-
chases can, be approved only in the context of an
annual joint review of the Iranian economy. The
annual review grows out of a US-Iranian Memo of
*Prepared by the Office of Current Intelligence
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Understanding in. 1964. In essence, the review pro-
vides economic information. which Washington will
analyze to determine whether Iran. can afford in-
creased military expenditures and still maintain
rapid economic development. The Shah finds such
limitations irritating and insulting, particularly
in the light of his new "independent" foreign. policy.
4. The arms issue is complicated by the comple-
tion. of the Peterson Report. This report appears to
be more in line with the Shah's thinking--it acknowl-
edges the Arab threat to Iranian. security and recom-
mends.. stronger defenses in the southern, provinces
and the Persian. Gulf. The additional recommended
armaments would require a credit of $328 million over
the $200 million credit extended under the 1964 agree-
ment.
5. However, the State Department has tentatively
determined (pending completion. of 'the annual review)
that the new credit must not exceed $184 million.,
thus requiring that the Shah postpone a substantial
portion of the arms purchases until after 1971. In
addition, the US Embassy in Teheran has expressed
its concern over the magnitude of the prices listed
in the Peterson Report, and fears that the Shah will
be disturbed also. Thus, although all the Shah's
wished-for purchases except a prestigious destroyer
apparently will be approved in principle, the Shah
may well find the delay on some items, and the
prices, unacceptable. Completion. Of the annual re-
view probably will not substantially alter the 'US
position. It is quite conceivable that the Shah
will use the Peterson Report to counter State De-
partment arguments against immediate heavy expendi-
tures.
6. The oil issue is locked in closely with the
foregoing. Members of the Oil Consortium may reach
a decision, this month on the rate at which they will
increase oil offtake. As of late April, the member
companies were thinking in terms of a 10.5-percent,
or at most 12-percent, increase over 1965 production.
The Shah insists, however, that the rate must be at
least 17 percent if Iran is to carry out its economic
and military programs without "reorienting" its trade
pattern. Both the US and British companies in the
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consortium argue that they are producing as fast as
possible, and each group accuses the other of hold-
ing back production. A final meeting was scheduled
for 10 May, but apparently has been temporarily post-
poned because the Shah has invited some company heads
to Teheran for discussions later in May. The US
fears the consequences of a major confrontation be-
tween Iran. and the consortium, and has been, encourag-
ing US companies to raise their production as much
as possible.
7. The Shah, bolstered by his rapprochement .
with the Soviets and by political stability and eco-
nomic growth at home, has exhibited an increasingly
independent spirit in the past year. He is de-
termined to obtain new military equipment soon., and
there is little doubt that he will turn elsewhere if
the US does not sell quickly and on favorable terms.
He has felt for some time that the US takes Iranian
friendship for granted, and he regards the arms
question, as a crucial test of US support and sin-
cerity. He is equally determined to increase oil
revenues,, and may well be serious in his threat to
shift at least part of Iran's trade to the East,
where export prices are lower and terms are easier.
This could, in turn, put a brake on 'the growing US
private investment in Iran, as well as affect our
general politico-military relationship with the
country.
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 Approved For Release 2003/04/24: CIA-RDP79T00826A000600010057=7(/t ' -
7 May 1966
In view of the current high interest
regarding US Iranian relations, I hope
that you will find the attached memorandum
on this subject timely and useful. It
summarizes in brief compass the issues
which are uppermost in the US-Iranian
relationship at the present time.
R. J. SMITH
Deputy Director for Intelligence
6,
"US-Iranian Relations"
Also sent to:
The Honorable Bill Moyers
:special Assistant to the President
The Honorable Walt Rostow
Special Assistant to the President
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