'S chI - r To rommnu 'Aismms expat-mam ONLY CIMIHIHATIOH AND SXTRACTION OF 1HFORMATIOR - at$52de new FUTURE 03 131157Summart QUU HEUU UE - v93 iran i3 iikety to remain stable under the Shah's leadership over the next several years and committed to its relationship with the US as long as the Shah rules The prospects are good that Iran will have relatively clear sailing unt-il at least the mid- 13805 when oil produc tion will probably slow and when the Shah says he will step aside in favor of the Crown Prince --Iran's patterns of leadership and decision making its policies on key issues and its tactics in pursuing its objectives probably will continue in the familiar mold -vThe Shah who has beCOme increasingly self- confident ovef the past decade will become less amenable to advice from the US or from his domestic counselors --Economically Iran's development program is getting back on track after the slump in oil liftings that began a year ago but port congestion tranSportation inadequacies low agricultural production shortages of skilled manpower etc w '11 continue to hamper economic development Certain Iranian policies and various aspects of the development process may pose problems for US policymakers r Those who are worried about human rights may propose making a change in Iranian practices an issue in the US- -Iran relationship Those who are concerned about arms sales may pnint to the amounts Iran is spending 2 WARNING NOTICE Report 'qrio um oLUrEr - January 2 8 3'9 77 I 5tl - qua m- - 00 I I CIID lu'vl on arms and t-o the ceficiencies in ehrer s management o its co omic develogme nt The can be expected to argue that the US should restrict its arms sales in order to prevent a diversion of funds from economic develoPment in a way tnet wouid cause economic social and political instability --Those who are anxious about stability in the Mi dle East may argue that Iran's power escabilizing in the long run These concerns give rise to the following questions H--Against the possibility of-a deterioration in the US- Iran relationship what range of foreign policy options does Iran have --How susceptible to US influence will Iran be in coming years tff EASABLE TO FOREIGN DEPARTE 1ENTS RELEASABLE TO OR CONTRACTOR- CCNSULE AND EXTRACTION OF INFORMATION OLLED BY ORIGINATOR a I 1001 thus 1 The Stability of the Regime The undercurrent of terrorist violence notwithstanding the Shah rules Iran free from serious domestic threat At age S7 in fine health and protected by an elaborate secur - ity apparatus the Shah has an excellent chance to rule for a dozen or more years at which time he has indicated that the Crown Prince would assume the throne His military estab- lishment and internal security apparatus SAVAKJ continue to operate effectively under his close personal supervision vNeither seems likely to challenge him although the Shah's intimates who have-held key positions in these organiza tions for 30 years are likely to depart for reasons of health age and fatigue by the early 19805 Military Support The Shah personally selects and rewards tFe higher-ranking officers giving the armed forces privileges designed to keep them content and to maintain their loyalty --Military salaries since 1975 have been 20 percent higher than comparable civil service rates --Top military of ieers continue to profit from their official positions and only the most extreme cases of corruption are singled out for punishment --All service grades enjoy perquisites housing clubs discount stores that cushion them against the infla- tionary pinch In addition the Shah keeps the military content by ensuring that they have large quantities or late-model equipment Furthermore the military establishment is subjected to political indoctrination and close attention from the security organizations As a result the officer corps is only minimally involved in politics and has little sympathy with subversive groups Despite these measures the loyalty of the armed forces may become questionable if discontent among the RELEASABLE TO FOREIGN RELEASPBLE TG AND INFORMATION CONTROLLED BY ORIGINATOR I I I lliil 0 elite should rise oecause of econcnic setbacks and political frustrations attitudes are pit insane to pressure generated in the civilitn rld Moreover in recent veers the military has erected recruits fron the mi Md -le and lo over middle classes which tend to be ns er vative and dubions about the ezrn on traditional values of the Shah 5 drive toward modernizaticn n addit ion most junior officers are nationalistic and prone to resent the privileged position of foreign advisers Iranian ofzicers are also the victims of a slow promotion system because of inflation in the senior ranks and the Shah s need to see how officers perform over an extended period before he oromotes th As a result it often takes 20 years to become a major On balance however there is little chance of a military move as long as the Shah remai 'ns at the helm The senior commanders are in close control of their less predict able juniors and the risks of plotting are very high In no small measure the reluctance of officers to step out of line reflects the effectiveness of the-securit apparatn s but it also re fleets the enormous stake of the senior commanders in the present system from which their perquisites derive The Bars and Eyes of the Shah SAVAK has very broad po er and monitors all elements of Persian society including the military and the royal family Its present leader General Nasiri is a highly effective manager loyal to the Shah Reliable sources indicate that Nasiri's desire to retire is growing but the Shah has persuaded him to stay on_for the present Should Nasiri depart royal control over SAVAK may be less certain Even under Nasiri lations with the Shah have reflected occasional strains II DEPARTMENTS RELEASADLE TO OR NATION AND EXTRACTION OF INPORMATICEE OLLED BY ORIGINATOR I h v Ill Opponents of tr e Regime SAVAK has driven political opposition inderg round The urban terrorist movement remains more an irritant than a serious challenge to th Shah its organizers purportedly believe that only a holding action is possible given the passivity of he masses and the loyalty of senior ozricials to the Shah SAVAK reports that some guerrillas have decided to relocate to Europe because it is too costly for them to operate at home netheless some small extremist groups in Iran are likely to continue their attacks on the Shah' regime To this end they will persist in assassination efforts against America 5 who were described as the Shah's masters in one document discovered in the aftermath of the assassination of the three Rockwell Company employees last August The killing of eme ican civilians and their dependents could have a major impact on iran' 5 economic and military develOp- ment if it convinces many US technicians to leave and others not to come to Iran Despite successes against them in recent months the two principal terrprist groups remain knit 2 determined and capable of isolated strikes upon individuals or small groups The Iranian security forces however are improving with time and it is not likely that the terrorists _will be able to mount operations that seriously threaten the regime Beyond the terrorist fringe there is other opposition as well Among the intelligentsia the professional middle class and the religious conservatives dissatisfaction is felt over the Shah's arms purchases and over the effects of a top-down'i program of modernization on traditiOnal values and on what many think are Iran 5 most pressing needs A substantial proportion tacitly withholds ultimate allegiance to the regime following the age old Shi' a doctrine of dis- simulation in the face of superior force In this tradition Iranians as a whole feel that violenc should be used only as a last resort and that it is better to tolerate unsatis- factory conditions in the belief that this too will pass Thus opposition to the regime is more a state of mi 'nd than a readi1ess to set i Human Rights and Internal Secu'ity The Shah s regime frequently is accused abroad of violating human p t RELEASABLE T0 FORE IGR DEPARTMENTS CONTRACTORS OR AND EXTRACTION OF INFORMATION CONTROLLED BY ORIGINATOR - no i Q lal I i Co 0 U - 0 00 Iconrights There is some evidence that these criticisms are valid but the Shah who considers the subject nobody's business but his admits only those practices common to Western nations and justifies his attitude by asking Do the-people getting killed by terrorists have no rights Are we not protecting human rights by preventing innocent people from getting killed Moreover Persians have experienced authoritarian rule for millennia and the Shah's tactics have not exceeded traditional bounds Faced with the choice of introducing an alien and potentially unstable democratic system or of holding the line against political liberalization the Shah has been convinced for a decade that a strong monarchy is the only guarantee of stability and of rapid economic development Of course the Shah's future dilemma is that as living standards improve and as increasing numbers of Iranians go abroad for work or study more pres- sure will be generated on the regime to share power with the newly educated and-recently affluent Since the Shah's firm approach has worked thus farrto stabilize the monarchy it would be difficult to persuade him to change his practices In fact the Shah would regard US pressure to ease up on the opposition as a thinly veiled attack on his throne Inasmuch as the Shah has an abiding belief in the efficacy of his security techniques and worries considerably about his ability to guarantee the succession of his 16-year-old son he is not likely to be amenable to suggestions that he restrain his security services A'Successor Regime Because Iran's political structure is in effect the projection of one man the provision for a smooth transfer of power is Iran's crucial long-range problem In the past year the Shah has tackled the succession question by hastening the grooming of the Crown Prince he was sent on well-publicized visits to Egypt and the -expressing publicly on several occasions his confidence in the_intelligence of the Crown Brince saunas to RELEASABLE To FOREIGN DEPARTMENTS RELEASABLE TO CONTRACTORS 0R AND er ORIGINATOR QII you In -- - - I I I I I oontinuing steps to bequeath to his son a nationwide political organization and a network of stable smoothly functioning institutions with a strong chain fdcommand that could survive the transfer of power an - - having the Queen who would be Regent until the Crown Prince is 20 undertake an active role in public affairs Several years ago the Shah spoke of fixing things so that at least the Crown Prince will do no harm and in February 1975 he replaced the existing political parties with the Rastakhiz a national party which probably will -serve as a mechanism to communicate policy guidance from the central government to the public and to mobilize the populace in support of the regime This effort however is viewed somewhat cynically by Iranians who doubt that the Shah intends to give the new party any significant authority and who see it largely as a means for the politically ambitious to come to the Shah's attention There is a widespread belief in Iran that the Shah's autocratic style cannot survive his death or abdicatibn His personality probably will not allow him to transfer any real authority to his son while he is still on the scene Thus it will be difficult for the Crown Prince to gain the stature and experience necessary to maintain the present system of rule - - u u This pessimism reflects their judgment that pressure -r political modernization can be expected to mount as the Shah prepares to relinquish power in their View when he departs prosperity may not compensate for the absence of institutions that would per- mit the participation of larger numbers of the elite in the decisionmakinj process This erosion of the authority of the regime according to the Old Guard would constitute a serious degradation of their privileged position and usher in a period of increasing instability sacnsr nom Tn CONTRACTORS on AND EXTRACTION or CONTROLLED BY carcinaroa I i CIli I Prosperity Holds the Key The St ah is depe d nt on oil re-xenues to modernize and in trialize iran 5 traditional economy Economic development and a rising standard or living are his prin cipal means of assuring continued stahi lity and ulti mately the me' survival Since 1073-74 Iran has had at its di osal $20 22 billion yearly in oil income sufficient proper management for the ah' ambitious pror ass for economic development and military modernization Revenues of at least this mag itude in real terms are likely to continue until the late 1930's before declining with the drawing down of I tan' 5 oil reserves unless there are increases in oil prices suf- ficient to offset future drops in production Estimates of Iran' oil wea 1th however admittedlys are shaky sinoe Iranian oil reserves are among the world' most structurallv complex and the per-barrel price of oil in coming years has yet to be de etermined In any case extensive seismic work has uncovered no new fields or promising structures since the nid 1960' s H Iran s economy is developing impressively EVen before the 1973 oil price hike the GNP was growing at an average rate of ll'percent bil has been the mainstay of this growth But oil aside the outlook is favorable though not good enough to meet the expectations generated by current levels of revenue Iran has --considerable agricultural potential --good prosyects for developing ompe and other mineral resour ces s immense reserves of natural gas and base for heavy industry that has the potential for rapid expansion notwithstanding the sho ortage of skilled labor In the past two years however the rate of growth of Iran's economy has slowed signi icantly because of the rapid expansion of imports the failure of-oil revenues to keep pace with the cost of imported goods EELEASABLE TC FOREIGN 3 RELEASABL-E TC CONTRACTORS 0R AND EXTRACTION OF INFORLLATION CONTROLLED BY ORIGINATOR lit tvtl- until 2d infrastructure bottlenec s port congestion shortages of skilled labor Last year the nonwoil sector grew at a rate of l3 percent ebC s the level of the previous two years On the other hand the oil sector in 1975 still about 60 percent of GNP experienced a nega- tive rate of growth- dcwn ll percent over the level of the previous year As a result the overall rise in real GNP was only about 3 percent a drastic decline from the 42 percent increase recorded in 1974 Shortfalls in anticipated oil revenues are creating budgetary difficulties for the Iranian Government The budget for the current fiscal year March 1976 77 calls for $45 billion in expenditures As revenues for the year are falling considerably under this figure borrowing on the order of at least $2 billion will be required to keep programs on schedule The government has already had to scale down its plans somewhat in order to keep the level of debt manageable Prime Minister Hoveyda has rationalized this process by describing the economy as entering a croising speed era phasing down from its previous uncon- trolled acceleration In disciplining the economy the regime has introduced measures which if actually carried out suggest better control over long term spending It has - approved a budget that relies on higher tax rates and more rigorous collection tax revenues in 1975 were only 9 percent of the budget -continued the campaign against inflation profiteering and corruption strung out payments under previous contracts and cut aback its aid proqrams to other countries On the other hand the slowing of the rate of economic growth- blamed by Iranians on Western oil companies- has also encouraged Iran's proclivity to make Western nations the scapegoats for its failures The Iranian Government has - become more sensitive to exploitation by foreign suppliers saying that it is through being hustled by economic carpetbaggers II o n- Strung HQ rh sons'1en owner nor erraasasta 'm OR AND EXTRACTION or INFORMATION CONTROLLED-BY ORIGINATOR 1 I --stepped up its demands on France one 233 and other trade partners to accept greater amounts of non-oil nports from Iran and egreed to co sponsor Pakistan's pr Third World summit on economic coo '1 way of indicating its disenchantment wit industrialized world The Us in particular has been sincled out by the regime for having ignored the lessons of the energy crisis and for blocking progress at the Paris conference on the New-International Economic Order Economic Problems Despite its rapid rate of growth and vast oil revenues ran faces potentially serious economic problems widening disparity in urban and rural incomes with farmers earning on the average less than $200 in annual per capita income little more than one tenth of the average income of city dwellers -lagging agricultural produCtion with the gap between the demand for food and its production widening at the rate of 6 percent annually floundering educational programs with the illiteracy rate about 66 percent and a critical shortage of teachers Iran trains only about 1 000 teachers per year far short of the number needed for a popula tion of 34 000 000 which already has a massive shortage of skilled manpower r and --rampant corruption and profiteering The recent anti-corruption campaign has left most of the new rich untouched but has driven several billions of capital out of the country and reduced the already low propensity of the wealthy to invest in Iran the new prosperity furthermore has resulted in RELEASABLE TO FOREIGN DEPARTMENTS RELEASABLE TO CONTRACTORS OR AND INFORMATION CONTROLLFDIBY ORIGINATOR I ll Qt ll - o I 00 I a 9 conspicuous consumption hy the wealthier classes thereby increasing the gap between the urban rich and the 2 million poor who live in slums on the - I south side of Tehran I The present regime does not seem capable of effective planning The highly cen ralized decisionmahing process works well in implementing programs of action in fast- moving situations but it perforns less well when dealing with complex programs which make conflicting demands on increasingly limited resources or which necessitate long range planning The weakness in the planning process is illustrated by the government's failure to anticipate that enormously increased imports would lead to port congestion As a result goods pile up and deteriorate or are lost in transit surcharges and cargo demurrage cost Iran an estimated $1 billion in 1975 There seems scant likelihood that planning will i improve since I 1 I Iranian officials avoid taking initiatives in the expectation that the Shah will provide all policy guidance The concentration of authority and responsibility at the top means_that the bureaucracy takes action only when royal attention is focussed on a particular subje t The spotlight effect results in frantic efforts on matters which are important to the Shah at the moment while yesterday's priority languishes - The Shah Operates with a very small group of trusted decisionmakers such as Finance Minister Ansary and Rastakhiz Party head Amouzegar who are overburdened and forced to make decisions on many economic matters without adequate'study --Very few officials consistently can give the Shah bad news and maintain their influence As a result shortcomings tend to be concealed RELEASABLE TO FOREIGN DEPARTMENTS RELEASABLE TO CONTRACTORS OR AND EXTRAQTFUNECE ORIGINATOR another p oblen is the general absence of dedic tion or a dork ethic among the Ir Easy oil money has created the impression t a is inevitable Lack of government self- -disc' corollary The regime tends to use its mone for of development projects that promise a quick return rather than building the inatitutions that over the longer term would increase the sense of participation nd thus permit a lessening of the cynicism bred by centur es of auto cratic rule While the Shah is aware of ese problems i and often addresses them in his speeches his exhor at one seem to have fallen on deaf ears Implications for the Political Process Despite its undeniable benefits economic development will over time create political problems for the regime The regime cannot afford an appreciable slowing of the rate at whith the standard of living is rising Yet the gap between promise and fulfillment already is widening And it will be almost impossible for the regime to meet the rising expectations of the political elite Competition for scarce resources between two favored groups--the military establishment and the technocrats both of whom have been favored by the regime and whose loyalty is reinforced by costly privileges- will become more acute Military hardware prices are rising faster than Iran's oil income The security forces as well have an interest in the allocation of resources and are not likely to remain outside this competition - The growing numbers of educated Iranians produced by development programs will add to pressures within the system for a broader sharing of political power Student unrest is endemin-and growing Unlike the reformers of the MosSadeq era who were satisfied merely to participate in the process of economic development the newer genera- tion ofaspiringedite is not likely to accept permanent exclusion from the decisionmaking process As a master political strategist the Shah will seek new ways to head off these dangers Indeed as long as he is in charge his regime is likely to stay ahead of demands TO FOREIGN OR COETRACTV - -CONSULTR AND EXTRACTION OF INFORMATION CONTROLLED BY ORIGINATOR I I 0 for political participation his successors however undoubtedly will be harder pressed to meet the mounting pressures within the system rosperity will not' necessarily guarantee a smooth transition to new rulers Foreign Affairs i Iranian foreign policy is the Shah's special pre- serve in this field he makes every major and many minor decisions generally on his own This means that the royal prestige is on the line in every important issue and that the Shahfs personality traits have imum scope for expression - Despite his increasing self-assurance the Shah worries about threats to the sovereignty of his nation which he regards as an extension of himself He also is concerned about the will and resolve of the US his major foreign Supporter He is frustrated by Iran's continuing dependence on'outside support for his programs and by criticism in the US of his regime Simultaneously he stresses the need for greater selfureliance and self discipline Thus on August 11 1976 Tehran s con 3 trolled newspapers carried both these headlines Arms Cut Won't Hurt Iran and Eras World Cannot Afford To Lose Iran i Regional Aspirations The Shah over the past several years and especially since the British 'ithdrawal from the Gulf has been trying to use his growing military power to assert Iran's interests in the region He is - boldly seeking to establish Iran as a dynamic force willing to arbitrate disputes and guarantee regional borders In the last two years the Shah has - - - e-settled his major problems with Iraq- the Kurds and the Shatt al Arab dispute--in March 1975 and maintained a conciliatory stance and correct rela tions thereafter despite continuing ideological differences secessihoeinsransnsis'id sonirss'nigihNALS NFIB ashrasnani T01aosTRACTORs on AND EXTRACTION or INFORMATION CONTROLLED BY ORIGINATOR ullu Ii I ahored behind the scenes to rei e 3L 3ta Afghanistan friction and -gursued init iatives or 5 Gulf Security Feet against the Eootdragg ng of the rab Gulf states n region 1 matter 3 the Shah has demonstrated a tolerance for seLoaCks and frustrations while nersisting in his basic aim of assuring regional stability through Iranian military strength an' workable relations with his neighbors ineluding the USSR Despite Iran' 5 intenti 3 to play a leadershig role in the Ge if and secure the oil lanes it confronts many restraints on its ability to apply power in the Gulf These include for example -the Arab na-ure of the southern shores of the G'Jlf which means that Iranian s ilitarv action tnere in pursuit of Iran's own objectives ould incur the enmity of the entire Arab world and invite violent opgosi tion from Iraq and conceivablv from Satd Arabia as well --Iranian vulnerability to response following a unilateral Iranian move against one of its Gulf neighbors --recognition that seizing oil wells and storage com plexes is not an easy task and that Iran's own netroleum industry would be highly vulnerable to counterattack -the stability of the Gulf states and enuncertainty about the battle-worthiness of its untested army Global Decisions Mindful of history the Shah sees the Soviet Union as his prinoinal enemy But he regards it as presenting a danger only in the context of a general East West confrontation or of a general US retrenchment overseas To sharpen his understanding of the US commit ment and to learn the extent to which the Soviets will tolerate his arms buildup and his regional anti-Communist RELJ7 TO FOFEIGN PEGEAS TQ IZOPTRACTORS OR WPIION AND EXTRACTION OF INFORMATION CONTROLLED BY I I loo-1 1 - - leaders hip Shah employ a strategy of constantly testing both the US and the USSR sf ter a series of probes of US steadfastness in 1975 the Shah has become more consident about the US althour his concern about the US Congress has risen sharply In interviews in 1976 the Shah expressed the conviction that substantial military support would be forthcoming from the US if Iran were invaded In l976 the focus of the Shah' 5 testing appears- to have shifted to the USSR 4-He strongly rejected Soviet complaints about Zran' 5 arms buildup and the presence of so many Americans in Iran saying that a sovereign power has everY right to arm and defend itseli --He broke relations with Cuba to signal his displeasure with Communist support of insurgencies in Africa and Oman -He ordered a propaganda campaign condemning Communist designs in the Gul f and Soviet support of terrori sm Nonetheless we anticipate that the Shah's concern is likely to center increasingly on his relations with the US in coming years rather than on th ose with the Soviet Union because the US is so heavily involved in his military and economic programs US Iranian Relations A Look Ahead Heretofore a mutual concern over Communism and instability in the Middle East has fostered an extended period of close relations between the US and Iran On his own the Shah is not'likely soon to make a fundamental or drastic alteration in the relationship given our personal relationship with him his measured regional behavior and his willingness to buy American Over the longer run however some facets of the relationship may prove troublesome RELEASABL-B TO DEPART MENTS ONT TO- CONTRACTORS OR TION AND EXTRACTION OF INFORMATION CONTROLLED BY ORIGINATOR I I I It t l 0 CiOnclj uenc1_1ed Ji_ SAVAK which is his main instrument - best it will take time to establish ticnship with a royal successor and at we may not b possible at all if Ute nature of changes Hence rhen the Shah leaves tn nev-manv years from now in the normal course of g a or earlier if he should meet assa assinaticn - US mav lcse access to the Iranian governi el'te--If Iran's actions involve intervention in Arab Gulf states and if such action were to embroil Iran in a quarrel with Saudi Arabia the US ceuld-he left stretched between allies - Purchases of next generation arms would require enormous sums and would jeopardize Iran's develop- ment program Yet the failure of this program to meet national expectations would undercut a basic pillarcof the regime and lead to political unrest increase the threat of subversion and call into question the loyalty of the security forces and ultimately the va lue of Iran as an ally The Shah may become irritated at the questioning in the US of his motives and back away from cooperation in various intelligence cooperation regional security arrangements CENTO exercises sup port in international forums for US positions etc -- as a means of bringing the US to its senses A continuing source of- fficult is the Shah s con- viction that he is the best judge of Iranian interests and that Iran must not be prevented from playing its right- ful role on the larger world stage Stemming from this attitude is his increasing resistance to guidance from his friends including the U3 His concern that Iran eventually may have to go it alone makes him even less responsive to outside influence In t ese circumstances the question of oil pricing will remain a perennial cause of friction The Shah can be expected to continue to press for higher oil prices RELEASABLE TO our hon ntiracasic ro CONTRACTORS on IRATION AND or LED BY ORIGINATOR ICC Icldt I 1- vi - - despite 35 responsiv we ess to h ecu representations that price zcrea as are den aging to and the non Communis world The Shah is ully aware the value the US places on his embargo croof oil and on his willingness to assume regional securitx responsibilities As a result he can be expected to drive a hard bargain 5 1 2V requirement 5 I especiaJ ly as his or '1 reserves decline The Shah's willing ness to push his arguments to the hil t his personal diplomatic skill and the advantages of entralized monarchy in pursuing a foreign policy of brinksmanship combine to give him lever age in the oil question though he will still have to take a back seat to Saudi Arabia r Nevertheless despite his public claims that he can shop elsewhere the Shah is most anxious to have continued access to US military equipment because only the US can supply what he wants in the quantities he needs and because US arms are competitive in price quality and durabi ty --pose the least problems for his technically short- handed armed forces --involve the US more directly in the future security of Iran particularly in the sense that US technicians will probably be needed to ensure their proper opera- - tion The Shah's mili Mary modernization program is itself a potential source of friction in the US Iranian relationship particularly since the prOgram may run into increasing difficulties in coming years as a result of shortages of skilled manpower and rapidly increasing costs Indeed the expenses of acquiring the next generation of military equipment are likely to face the Shah with serious problems of allocating resources -Iran will have to contend with pressure in the 05 - already considerablevvto limit arms sales to Iran --The Shah's desire for regional hegemony especially -if it arouses the suspicions of Saudi Arabia could bring him into conflict with the US WEE EASABLS- TC POREIGU RLLEASABLE TO CONTRACTOPS OR AND EXTRACTION OF INFORMATION CONTROLLED BY ORIGINATOR I I 0 IICIU I - W '1 I J If nah incr easing impatience with the - development program -will make his 1255 tively with these various sets of proble He is for example means convince question is the need for more rational a resources between the military and develo and he Pould resent Us advice on this sec Regardless of the strong US Iranian relations hip the Shah int ends to ft lfill Iran' national goals on h own terms Thus it is unlikely that a reduction of arms sales by the us would give Iran more money to pend on internal development Instead the Shah would seek to buy arms elsewhere One of the by products of this process would be a lessening of US ties to the Iranian military If the Shah felt that the US was imposing unjusti- ried restrictions on the flow of arms to Iran he might demand higher oil prices in an effort to fund more expensive a ms systems from France and elsewhere - taking his cue from Spain and Turk ey ask for reim- bursement for- facilities in Iran which the US now can use free sound the alarm about Soviet pressure on Iran m-threaten to turn neutralist In sum coming years will probably see a semewhat cooled relationship between Iran and the US But the Shah recognizes that the USSR is his only long-term external threat and he is aware that the West European powers can not guarantee his state and his oil lanes Therefore a fundamental shift by Iran away from the US is not anticipated but dealings with Tehran w_ll probably become difficult Internally the Shah is likely to have to scale down some of his more ambitious development plans in the face of entrepreneurial failures Attacks on the regime by political dissidents will persist monetheless Iran's people will be better off economically and the country will RELEASABLE T0 FOREIGN DEPARTMEIIT 3 TO CONTRACTORS 3R AND EXTRACTIOK OF INFQREATION CONTROLLED BY ORIGINATOR I 0 I Il I sacaso' 17 - continue to make Steady progress toward industrialization though it will not soon reach the level of even the poorest Western states Externally Iran should be able to achieve a more selE reliant position vis-a-vis its neighbors including the USSR But the Shah's own sense of mission and inflexi- bility on many issues are certain to grow and to contribute to periodic friction with a number of countries especially among the Gulf states Prepared by Franklin P Huddle EEHPT FROM DECLASSIFICATICH x28575 SCHEDULE 3 0 11652 SE 1 Classified by M Packman Approved by P H Stoddard - x2839 SECRETZHOT RELEASAELE TO FOREIGN DEPAEEMENTS RELEKSAPLE TO CONTRACTORS AND EXTRACTION OF INFOREBTION BY ORIGINATGR I icnvl 2 This document is from the holdings of The National Security Archive Suite 701 Gelman Library The George Washington University 2130 H Street NW Washington D C 20037 Phone 202 994-7000 Fax 202 994-7005 nsarchiv@gwu edu