Created: 11/20/1981

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htin3 through -rttAtp /Ptfai ppaaphe -Iraqi, seem eager to -out their

il tLdetermined toregime in Baghdad to eollap*:

and to occupy their military far from Tehran. Both tides are. receiving supplies sufficient to support atht preset level of fighting for the foreseeable future.

rVrU.dnli the. current manifestation onPetiti"ndaminonoe' hBne9antwill be a

Peaee-bablyIA Af itUr and t'tent onsituation at the first

A*exclusion of the war probably uilldecisive in the-deoelopmenfof future VS relatione Iraq's fundamental

attitudes about Arab-Israeli issueo nor i, it likely to substantially litigate the anti-US attitudes of the Iranian


preoccupation^of bothwIran'mand Iraq oitK'-theV'i'. war precludes-either/from establishing ite/leadership in the ulf .regionhe freedom of action of the moderate Arab-.etatee, particularly/Saudi.Arabia. ore aeeertxve Saudi Arabia, aa evidenced in .the.Pahd peace plan, may complicate, aa well at serve,.the pursuit of US interests. The greatest-danger for US and.Arab' interests in the Gulf, however, would be an Iranian attack on another Gulf state tn an effort to-dramatize, the vulnerability^of the region's oil facilities and. to exact revenge, for Arab, suppprf ofv.


. Both Iran- and Iraq- wouldlike .to increase their oil'but the. wcr and probably the weak world otleignificant change at this time The oil market absorb moderate increases in oil production by bothand. with offsetting Saudi production euts,current, oil prices. An end to the war and aprewar,roduction levels.,by both^ountrieB create strong downward pressuresoylignificant decline from the currentevel, other Arab states would have to producecapacity for an extended period and Iraq might havein full production slowly. The necessary stepsup oil priaes probably would be taken bybut success would be dependent on aupturn in the Western economies, leading toin demand-for OPEC

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prospects seem remote for an early settlement oreasefire in the Iran-Iraq war. Although Iraq has Indicated an apparent willingness to make major concessions to end the war, Iran remains unresponsive. .Iraq's position is influenced by Iran's recent battlefield successes, low Iraqi troop morale, the continued vulnerability of important Iraqi economic sites, and the low level of its oil exports. Iran seems willing to endure the financial drain of the war, serious economic problems, and the frustration of International isolation in the hope that its codest successes on the battlefield, magnified by Iraq's lack of initiative, will undermine the Iraqi, military position and even cause the collapse of tho regime in Baghdad. It also still suspects the loyalty of its military and wishes to keep the amy preoccupied with the external threat.

Recent tentative exploration by both sides, at Iraq's initiative, of possibilitieseasefire end negotiation of disputed issues has produced nothing. Iraq hasillingness to acceptS border'accord with Iranasis


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for negotiation in an apparent concession to Iranian demands. Baghdad may not be-wllllng to5 agreement, but it nay be' flexibleeveh'-brisovereignty over therab.Although some Iranian leaders also have suggested thatS accord could be open to negotiation, the KboMini regine sees little'-advantage- for* Iran in negotiations at this timo. Moreover, the coat of the war is unlikely to push Iran towardran has'been able to make barter-and other arrangements for sufficient equipment and materiel to supportleast the present level of fighting.

The embarrassment or continued Iraqi occupation of Iranian territory, along with rising frustrations and heavier casualties, could move Iran to again attack port orcll itiea In'another Gulf state, such as Kuwait, in en effort to pressure the Arabs into forcing Iraq'sat least ending Gulf assistance to Iraq. Such an attack would dramatize the vulnerability of all the region's oil facilities and enable the Iranians to exact revenge (or Arab support of'Iraq's war effort.

Despite its war losses and reduced military strength, Iran still has sufficicnt^air end-naval forces to attack major,' military and economlc'targets In any country on the Persian Gulf. Iran's chances for successful strikes are enhanced by the generally poor air defense and naval capabilities of the Gulf states. Likely actions by the Western powers probably would not be the critical factor in Iran's calculations.

The Military Situation and Supply Relationships

Neither Iraq or Iran now appears capable of achievingary victory over the other orilitary breakthrough. Barring political upheaval In either Tehran or Baghdad, therefore, the war io likely to grind on with Iran nibbling away at Iraq's positions. The Iraqis continue toignificant advantage in most categories of ailitary equipment, bat Baghdad's conservative military tactics and tbe low morale of its forces seem toajor Iraqi ground offensive. The Iraqis appear content to remain in defensive positions and mount air and missile attacks on Iranian cities and economic installations in an effort to force Iran to the bargaining table.

esult of Iraq's tactics, the military Initiative on the ground has shifted to Iran. The morale and determination of the Iranians appear superior to theut Tehran lacka tbe military equipment and the offensive power to push them out quickly. Since mid-Hay, however, the Iranians have been slowly pushing the Iraqie back around Susangerd. Ia late September the Iranians forced them to withdraw from their positions east of Abadan, winning their biggest victory of the war.


The defeat at Abadan lowered Iraqi morale and Baghdad's current tactics premtise more-defeats and even lower morale. Iraqi troops have been stuck in fixed positions for months.

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pounded by Iranian artillery. They already are reluctant to die fighting for territory which Baghdad has made clear will be returned to Iran during peace negotiations. If this situation worsens, the Iragi line could begin to crumble, affording theramatic breakthrough.

Iran and Iraq are receiving supplies sufficient to enable them to continue the fighting at current levels.

Iran, relying on an infantry-heavy "people'ss receiving small arms, artillery, and ammunition from Northits largesttanks and artillery from Libya. The USSR likely will increase the pace of shipments of its0 million sale of ground equipment, and probably allow the East Europeans to selectively provide soae items in short supply. Israel, Taiwan, and sources in the European black market are supplying ammunition and spare parts for Iran's Western equipment.

Iraq's cesupply position improved markedly after April when the USSR modified its embargo. The Soviets and the Warsaw Pact, under earlier contracts, will continue to provide major hardware, munitions, spare parts, and support equipment. West European suppliers, particularly Prance, have signed contracts for over S3 billion in new arms, and China hasillion dollars in new arms contracts, mostly for spare parts and artillery ammunition, but also possibly includinganks. Iraq receives financial and logistical support from the moderate Arabs; these sources have loanodillion since the war began.

The war is altering the military supply relationshipsIrag and Iran, perhaps in permanent ways. Theover the Soviet arms embargo, have purchased almostin arms from non-Communist suppliers since thenearly equal to total Soviet sales since


share ot tne Iraqi arms market for the foreseeable future because of their ability to supply large quantities of modern equipment quickly and Iraq's difficulty in soon changingoviet-suppliedestern-supplied military, if Saddam Hussein survives tho war, however, the Soviets probably will continue to lose leverage over the Iraqi armed forces.

Iran, on the other hand, is turning increasingly to Soviet-model equipment as the war drags on and Western nations refose to sell major combat items, if the war continues for many more months, the Iranians likely will have to depend on

model tanks and artillery and possibly aircraft as well. whether this trend would be reversed when the war ended is unclear; it certainly would-be.slowed-if Western arms-become available.

ettlement.on world Oil-Markets-

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Iraq-and Iraa^ in..oil exports to make alternative arrangements for the purchase of military equipmentother-essential, goods. Iraq, unable to export oil through tbe Persian Gulf, has obtained loans from other Arab states to compensate lor-lost; oil_-revenuoa. ocs export is carried in, two-pipelines.through.Syria and Turkey to the Mediterranean Sea.lean's revenueue as much to the revolution and the current weak-ol1-market as tho war, have, forced-it into barter arrangements with other countries.

end to the Iran-Iraq war could resultroduction Increasen,each of theae two countries within year of the end of the conflict. Both countries will have the economic incentive to at least attempt to boost exports rapidly

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Assuming no additional critical damage to its

installations, Iraq, currently producing, probably could restore exports to its prewarofonths to one rear.

Iran still has the physical capacity to.raise expertsr more rrom its current level of. An increase tn crude exports to that level, however, is unlikely under the present regime.

An increasey Iraq and Iran would create strong downward price pressures In the oil market for tbeears and,inimum, cause-an extended decline in real oil prices. ignificant decline in nominal oil prices from theenchmark level would depend on the willingness of Saudi Arabia, Kuwait, and the UAE to produce well below capacity for an extended period, and Iraq might have to phase in production more slowly than capacity would allow. On balance, we think this group would be willing to take the bard measures necessary to underpin nominal oil prices.

The oil market; likely will stabilise early next year with ample but not excessive surplus capacity remaining in the OPEC countries even with, tbe war in progress. Current OPEC output is, and excess oil company stocks are being reduced by- oderate economic upturn in the Western economies and jd end to do stacking, demand for OPEC oil will rise to around2 and remain at that level the following year. Ibis would eccoaumodate modest increases by Iraq and Iran and permit the other OPEC members to return to prewar production patterns and still sustain current price levels, with Saudi Arabia balancing tbe market and producing.

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If Western economic recovery falters, increased production frcei Iran and Iraq would result in greater pressures on the other producing states.The Saudis probably would be unwilling to cut their output much,ecline in the nominal oil price would become increasingly likely.

OS Interests and the War ..

Iraq wants better relations with the us, butmorehange in its perception of US support (oron an end to tbe war with Iran. Saddam Hussein ispublicity about Iraqi-OS contacts and, fearing criticismArabs, is unlikely to move unilaterally, bilateral contacts satisfy most Iraqi economicneeds. Iraq, however, is seeking to acquireequipment and probably will approach Washingtonthe war - -

The war has further.moderated.est and the moderate Arab states. This tempering Is unlikely to be reversed, even if the war were to end. The war and Iraq's estrangement tcom the USSR have forced Baghdad to develop closer ties with pro-Western Arab neighbors who have long urged Iraq to reduce its dependence on tho Soviets. These states, led by Saudi Arabia, Jordan, and Kuwait have provldud.Iraq essential financial, Logistical, and political support. Iraq haa responded by nuting its traditional hardline views on Mideast issues of importance to its benefactors.


Ho matter bow tbe war ends, Iraq still will face an Iranian threat to its trade lifeline through the Persian Gulf and the Strait of Hornuz. Baghdad remains concerned about this vulnerability and is trying to speed work on alternativeroad, rail, and pipeline. Although those efforts may reduce its vulnerability to Iranian attacks, completion and operation of the routes are dependent on other Arabs, and this will leavo Iraq beholden to tbe moderate Gulf states, particularly Saudi Arabia.

Iranian attitudes toward tbc US and the West show little sign of changing appreciably, even if tho war were to end. Iran's need for military equipment because of the war has forced it to turn to the USSR and its allies. Tehran's continuing political and economic turmoil have enhanced the power of those most oppouod to the US specifically and tho West in genoral.oreover, declining oil revenues have forced Iran to Increase its use of barter in trade relations and such arrangements have been received more favorably In thean in the West. The durability of these relationships is uncertain, but if the war were to end Iran aught perceive tbe need to balance them with at least looso lies to Western Europe.

A clear Iranian victory would be unsettling to theroleounterbalance to Iran woulderoded making the other states of the,-Iranian t

The war has served other US Interests in the Gulf region.

The belief has been heightened among the moderate Arab

regimes that their security ultimately lies both

with strengthening ties among themselves and with the

Iraqi dependence on moderate Arabevenbeen established,rend toward

ore cooperative attitude in Baghdad on' issues.

J^r. Jhe war has deflected Iran's efforts to export Its

Islamic.-revolution to neighboring countries, and Iraq's

Oce; military performance has damaged Its pretensions to Arab leadership in the Gulf.

Tho other Arab- states of the "Gulf have been able to ormalize their enhanced power by establishing the Gulf Cooperation Council, which excludes both Iran and Iraq, something long desired but always avoided for fear of angering either country.

Iraq's declining statureesult of the military stalemate with Iran has allowed Saudi Arabia toider leadership role, as evidenced by the Pahd peace proposal; this may complicate as well as serve the pursuit of OS policy interests.

Coincidental with OS interests, the Gulf Arabs, particularly Saudi Arabia, probably view their interests as best served by the continuation of the stalemated war at its present low level of fighting. These states Likely fear that its end would gradually permit the reemergence of either Iraq or Iran, or both, as more aggressive actors In the Golf region.

More far reaching, the war between Iran and Iraq has clearly widened the margin of Israel's military superiority over its

_The,Arab forces that could be arrayed against Israel will be sharply reduced as long as tensions remain high around the Persian Gulf.

Original document.

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