CONSEQUENCES IN IRAN OF A FAILURE TO ACHIEVE AN EARLY OIL SETTLEMENT

Created: 3/29/1954

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HrXORAHDUM FOR THE EXECUTIVE SECRETARX

THE NATIONAL SECURITT CODTCI1

SUBJECT i Conaecjuonces is Iranailure to Achieve an Early Oil Settlement

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PROBABLE CONSEQUENCES IN IRAN OF FAILURE TO ACHIEVE AN EARLT OIL SETTLEMENT *

1. In the long run, satisfactory so Intion of that oil problemrerequisite for continuing stability la Iran. Untiloil revenuos are restored, tbe Iranian Government will be dependent on foreign subsidies not only for dovelopmsntal outlays to meet growing popular demands for ooonoadc betterment but evenubstantial portion of regular eoTernraent operating expenses. Iran'* present Moderate leadership baa clearly recognised tbe overriding necesalty of an oil settlement and baa In affect staked its future on the hope thatottleraant will be In turn, popular and business confidence In the goTentr.ent is In large measure based on the expectation that the moderates can succeed where Koswdco, failed in deriving adequate benefits froa Iran's oil resources.

* Thin is an catlaats prepared by tbe BOARD OF NATIONAL ESTIMATES of the CENTRAL INTELLIGENCE AGENCY. Tbe estimate has not bsen coordinated with any member of tbe UC.

2. Thus far the situation has developed favorably for the present leedership. With the aidillion in OS energeney grants, Iran's treasury has been restored for the tins being to

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reasonable order. Ultranationalipt end tudoh elements, the chief opposition to the government and its present policies, ronain uoak and divided, and the general public is at least passively aligned with the government. The new Majlis just elected is almost com-plately made up of goverrausnt-eupported candidates and under present circumstances can probably be prevailed on to ratify any oil settlement acceptable to the governnsnt and within theof the existing oil nationalisation lav.

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However, thebility to maintain this favorable position dependsonsiderable measure on its ability to obtain an early solution of the oil problem. The government nowegree of control over internal affairs which it will find difficult to Tbe Majlis, despite Its hand-picked character,tew men who can be fully rolled on to stand by tbeIn event of difficulties, and the forcee of latent nationalism renin strong.

iu Consequences of Delay in Achieving an Oil Settlement. Even in the brief period remaining before present OS emergency aid is exhausted in June, any unduo delay in movingettlement, by providing opportunities for irrsaponolbla discussion of the oil question by the Majlis, night leadeakening of tbe government's will and ability toealistic settlement*

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In tha light of present Iranian expectations of anelay would also encourage the ultranationalist and tudeh opposition.

5. If US emergency aid were allowed to run outettlement had been reached or was isiw-diately in prospect, Irca'a present moderate leadership would be In serloue trouble. The budgetary deficit now covered by US aid could be met only by deficit financing techniques which tbe Kajlis would be reluctant to authorize and which if long continued would probably leadrogressive weakening of Iran'a financial stability. Theof US financial support would also seriously damage tha government's morale and prestige, would lead to widespread popular diecouragement about Iran's future, and would be likely to resultesurgence of extremist pressures. Indeed, the failure to continue US budgetary aid to Iran would be looked on as indicating lack of US confidence In the Zahedi government. Zahedi would almost certainly have to resign, and while the Shah would probably bo able to retain relatively moderatein power for several months or more be would probably find it increasingly difficult to do so. In the ond it is likely that there wouldeturn to the chaotic conditions which prevailed under Mossadeq.

ven if US emergency aid were continued, prolonged delay in achieving an oil settlement would probably leadradual

but prcgreeoiro narrowing of tbe government's freedom of action In dealing with the oil question. Opposition elements would hero further opportunities to criticise the settlement terms underattack the UK and US, and ridicule the govornaant'e expectefcion that it could do business with them. Although the government would at first ssek to avoid friction with the UK and US, it would become Increasingly discouraged about the prospectettlement and would tend to become more and more bitter over the failure of AICC and the other oil companies tolan satisfactory to Iran and over US failure to compel them to do so. Eventually, the declining morale end prestige of the Iranian Government and the rising strength and vigor of the opposition mightituation In which conclusion of any kindettlement would be Impossible.

If it became apparent,esult eitherlear-cut breakdown of negotiations or of cumulative delays and die appolntc ants, that there was little or no real hopeatisfactory settlement, the position of the moderate elements in Iran would be seriously weakened. If US emergency aid wore continued, it would most likely enable tha moderates to retain control at least initially, but Zahedi himself might have to be droppedcapegoat, and the ability of tbe moderates to retain oom degree of popular support would be lessened. Moreover, without additional US economic assistance, the moderates would be unablo to finanoo the economic

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development activities with which they had planned to counter growing popular dissatisfaction with the nvtus quo. Finally, failure to resolve the oil problem would rerult in'trowing uneosinons snout Iran's future, particularly in the business cone unity. Continuationonth-toHnonth dole from the US would probably be increasingly ineffeotive in overcasting this uneasiness. Under these circumstances, there would be increased likelihoodeturn to extreme nationalist governments in Iran.

80 Consequenceseparate Oil Arrargeaent with the US. If convinced that there waa little chance ofatiafactory settlement with the British, the Iranian Government would welcome and probably actively seek US assistance) In marketing Iranian oil without British participation. Even assuming that saoh an arrangement could actually be made, its consequenens would depend priiaarily on the extent to which Iranian oil revenues were actually restored,,* Should this arrangement result in only limitedof Iranian oil revenues, tbe Iranians would probably tend increasingly to blame tbe US for having failed to put sufficient pressure on the British toore adequate settlement.

A US decision to assist Iran in aarketlng its oil without reference to the British would also have major repercussions on US-UK relations which are not considered in this paper.

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Original document.

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