Created: 6/1/1967

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Intelligence Memorandum

Growing Soviet and Eastern European Involvement in Iran's Economic Development

cia historical review program release as sanitized

Con HO.ip '



Directorate of7


Growing Soviet and Eastern European Involvement ln Iran's Economic Development


hen Soviet tactictoward Iran shifted from emphasis on propaganda and subversion to offers of economic aid, Iran's economic relations with the Communist countries* have expanded rapidly. 3 to7 the USSR and Eastern European countries extended economic aid credits to Iran totaling0 million, compared with less thanillion prior3 (see Nearlyercent of the total was extended by the USSR. In addition, Iran concluded Its first militaryommunist country in

NOTE: This memorandum was produced by CIA-It waa prepared by the Office of Research and Reports and coordinated with the Office of Current Intelligence and the Office of National Estimates; the estimates and conclusions represent the best judgment of the Directorate of Intelligence as of

* For convenience, the USSR and the countries of Eastern Europe (Bulgaria, Czcchoalovakia, Eaat Germany, Hungary, Poland, and Rumania) arereferred to collectively in thia memorandum as the Communist countries. Iranian economic relations with Yugoslavia, Albania, Cuba, and the Far Eastern Communist countries remain comparatively unimportant.










when it0 million credit from the Soviet Union. Economic aid extensions will enable thecountries toignificant role in Iran's economic development, but Iran's economic relations with the Communist countries will still occupymall place in Iran's overall economic relations and are unlikely to threaten seriously Iran's predominantly Western orientation.

The recent and prospective expansion of Soviet -Iranian relationsolid basis of mutual economic interest. Beyond this, Moscow's new policy toward Iran has the familiar objectives of strengthening Soviet influence at the expense of the West and of promoting Soviet-type institutions. The Shah has been influenced by his declining fear of thc Soviet Union, hia desire toore independent posture, and his exaggerated fear of an expansion of Nasser'sin the Persian Gulf area.

The largest Communist aid commitmentoviet credit9 million, which includes an0 millionteel mill andillion0 million natural gas pipeline from southern Iran to the Soviet Union. The pipeline is scheduled An agreement for gas deliveries to thc USSRill provide Iran with nearlyillion in purchasing power, about one-half of which is to be used for payments on credits.

Trade agreements with Communist countriesrowing level of payments for Communist aid pointubstantial increase in Iran's trade with these countries in thc next few years even if trade quotas are not met fully. By the endran will have paid an5 million in principal and interest on Communist economic and military credits extended The share represented by commodities5 million) will accountarge part of the anticipated growth of Iranian exports. It is estimated that such payments will rise fromillion8eakillion



Spurt in CommuniHt Aid

1. After years of unsuccessful efforts to weaken Iran's ties with the West through propaganda,and subversion, the USSR late2 shifted ita tactics and began wooing Iran with offers of substantial economic assistance. he USSR hadalmost no aid to Iran. Since that time, however, thc Soviet Union has provided Iran with economic aid credits6 million (see In addition, Eaatern European countries have committed aid1 million, compared with onlyillion prior In7 the Soviet Union0 million military aid credit. In view of Iran's need for increasing amounts of funds to finance its extensive economic and military requiremcnta and thc probability that Western sources will not meet these demands fully, additional credits from Communist countries are likely during the next few years.

2. Large-scale Soviet offers of aid to Iran are not new, but earlier offers usually were conditioned on Iran's repudiation of its military ties with the West. In thc paat the USSR had rejected Iranian pledges not to permit tbe establishment of foreign missile bases on Iranian territory, which were offered in an attempt to end thc Soviet propaganda campaign against the Shah. The USSR had insisted insteadonaggression pact that would preclude thc stationing of foreign troops in either country. Tho current pattern of Iranian-Soviet relations dates fromhen the USSRnilateral Iranian pledge concerning foreign missile bases. Latenstruments of ratification for transit and border agreements were exchanged between the USSR and Iran. Both agreements originally were signed7 but never were brought into force. In addition, Radio Moscow ceased its hostile broadcasts and even praised the Shah's land reform program. Clandestine broadcasts of the National Voice of Iran and Radioran emanating from Eastern Europe, however, continued lo attack the Shah and hia policies.

Table 1

Soviet and Eaatern European Economic Aid Extended to Iran7

Million U8 $







extensions ahovn In thle table for Poland3 and Rumania5illion Included ln the total for the USSR6 did not appearAid arid Trade Activities ofIn Less Developeddditions reflect the

receipt of more recent Inforaatlon. Tbe figures shown for extension* by the USSR56 also differ froa those ln EICecause of the transfer of9 Billion credit to Iran5 (when accords were initialed)6ormal agreement vas concluded).

3. 3 the Soviet goodwill campaign proceeded unabated, with numerous exchange visits by cultural and economic delegations. In3 the USSR and Iranillion economic aid The following year Polandillion economic aid credit, and Iran and thc USSRhree-year trade and payments agreement and their flrat civil air agreement. Communist aid extensionsduring tho next few years, notably with the Rumanian extension0 million economic credit5 and the Soviet extension9 million economic credit for induatrial projects6 and the large military credit early

Soviet Motivations

For thc most part, Soviet policy toward Iran has been motivated by Ihe same objectives which form thc basis for Soviot policy toward all leas developed countries. Thus the immediate objectives have been to diminish Western political and economic influence and to accelerate developments favorable to Soviet interests. The recent prospect of obtaining supplies of Iranian natural gas to meet the USSR's growing requirements for this commodity has added an important economic motivation to Moscow's political reasons for expanding relations with Iran.

The long-run Soviet objective in Iran is toWestern with Communist influence and to promote the eventual emergenceoviet type of political,and social system. The Soviot leaders believeradual cxpanalon of Soviet influence over aperiod will be needed to convince Iran of the superiority of socialist techniques. As Soviet officials put it in defending Soviet aid to Iran before members of the Iranian Communist Party;


It is (he Soviet plan to cultivate thc underdeveloped areas with foreign Soviet aid will accelerate economic and socialhanges in the social structure will require much time.

Since industrialization will create thc necessary conditions for socialism. Iran must be industrialised. This trend has already accelerated in Iran, cannot now be stopped, and must be encouraged by Soviet aid for the sake of the Communist movement,of who is in power in Iran at the time aid is given. All of these changes will hasten the establishment of socialism in Iran.

Iranian Motivations

6. Iran's initial willingness to expand relations with the Communist world stemmed, in large part, from thc recent improvement in East-West relations. ente which followed thc Cuban crisis of2 seemed to the Iranians to decrease thc value to the United States of such < .nnn as CENTO, and it appearedto Iran that itigid posture toward the USSR while Western-Soviet relations were improving. The detente also decreased the Shah's fear of Soviet military action against Iran and heightened his desire to refute charges that heestern "stooge." Moreover, thc Shah had become obsessed with thc fearossible expansion of Nasser's influence in the Persian Gulf area. He apparently had come to believe that the West would not come to his aid in any Iranian-Egyptian confrontation and that the development of close tioa with the USSR would at least insure Soviet neutrality inonflict. Another, although less important, factor has been thc declining trend of US economic and military assistance and the


imminent cessation of the US economic and military grant-aid programs.

7. Iran's economic agreements with Communist countries during the past two years reflect economic interests as well as political considerations. The major agreement concluded with the Soviet Union in particular offers significant economic benefits to Iran. Natural gas now destined for the USSR currently is being flared. This gas will be used by Iran to repay9 million Soviet credit that will help Iran toteeleavy machinery plant,as pipeline as well as to repay0 million Soviet credit for military equipment.

8. The Shah has become disturbed over Iran's almost complete dependence on the United States for military equipment and his inability to obtain the type and amount of cquipmant he desirea. He therefore has sought to diversify, to some extent, his sources of military equipment. Inran purchased military equipment from the United Kingdomillionillion, and in7 it signed0 million military aid agreement with the Soviet Union.

9. More recently the Shah has come to believe that thc best defense against any Communist threat to his regime is rapid economic development and anin the standard of living. Consequently, he isto accept assistance from almost any country if it contributes to these objectives. Moreover, his acceptance of Soviet aid has enabled him to undercut past domestic criticism that he continually gave priority to histo the West and neglected the economic needs of Iran.


id for Iran's Economic Development

the bulk of financing for Iran'swill continue to come from Westerncredits of0 million will enablecountries toignificant role indevelopment, particularly in the publicthese credits are equivalent to leesf total planned investment under0 Marchrepresent aboutercent of planned investmentpublic sector. Moreover, Communist creditsaboutercent of all foreign aidercent2 million ofhas been allocated for industrial undertakings.

The remainder is largely for multipurpose and agricultural projects and the constructionatural gas pipeline (see

* Oil revenues will continue to represent the chief source of revenue for the development program. 5 these revenues2 million, three-fourths of which were channeled into the development program.he bulk of Communist aid will be used during the development plan which beginsut no figure for planned investment during that plan is available for

Soviet Union has moved rapidly toite aid program in Irani partly in response toneed for Iranian natural'gas. ew monthssigning of9 million aid agreement inSoviet technicians arrived to undertake theof the sites for thc steel mill and theplant, the proposed route of thc pipeline,iron ore and coal resources which will be used bymill. During thc next few years, sizable groupstechnicians will be employed on these andin Iran.

12. The largest Communist aid undertaking in Iran is an integrated steel mill to be constructed near Isfahan under thc Soviet credit9 million. Although the amount to be used for thc mill ia not known, it has been estimated to be at0 million. 0 thc mill is to have an initial capacityons, which will meet much of the country's domestic steel requirements and will save Iran up0ear in foreign exchange. Thc plant's capacity eventually is to be doubled.

training centers are to be built at thethe mill. The first will be used to trainand the second to train,ix-yearmorengineers and technicians whothe completed project. Some personnel willto the USSR for long periods of training,expects most of its technical personnel sentreceive their training in the West.

Plants in Tabriz

significant aspect of Communistin Iran is the planned role of thein the industrial expansion of Tabriz. once the moat important commercial andin Iran, hasarge degree ofdecay during this century. The governmentrevitalize thc city's economy and apparentlydepend heavily on Communist assistance. call for Czechoslovak, Rumanian, and Sovietaid for Tabriz totaling atillion.

15. The city's industrialization program centerslanned industrial park inzechoslovak machine tool plantumanian tractor assembly plant are to be built. The electric power for the park will be suppliedkw electric


powerplantizable addition to the current electric power capacity in Tabriz of aboutw. Long-range plans call for the establishmentariety of secondary industries ia the park which will service these installations and use their production.

The construction of the machine tool plant is being financedzechoslovak creditillion. The plant, expected to be completedill have an annual capacity0 tons. ast iron foundry and vocational training centerrainees are included in the project. Czechoslovakia reportedly has offered some Tabrizillion credit tb finance theof secondary industries around the machine tool plant.

The tractor assembly plant will be constructed under the Rumanian credit0 million extended The first stage is planned for completionhen the plant will be capable ofractors annually. Aboutercent of the plant's input then will consist of parts imported from Rumania. hen the second stage of construction is to bethe plant will be manufacturing almost all the parts required for the tractors. Moreover, its capacity is to be raised0 tractors annually.

Other Industrial Projects

18. Anillion of the Soviet credit9 million will be used toeavy machinery plant at Arak. The first stage is expected to be completed inhen the plant willapacity00 tons annually. Within the followingoonths, ita capacity is expected to be raised0 tons and toarge part of Iran's requirements for heavy machinery.

19- Bulgaria and Hungary have eachillion credits to Iran for unspecified industrial equipment. Part of the large Rumanian credit is being uaed to import industrial machinery and Polandreditillion lo Iran largely for the construction of four sugar refineries* Two refineries are to be constructed at Khoy and Munich in Azerbaijan province and one possibly at Meshed.. Poland extended creditsillion for the construction of two refineries at Fariman and Bijan. The refinery at Fariman subsequently was expanded3 credit. 8 million ofillion credit reportedly has been allocated for thc expansion of the Bijan refinery.

Thc Natural Gas Pipeline

Soviet Union has9 million credit to cover aboutercentcostile natural gas pipelinethcTrunk Line (IGAT)rom the Agha-Jarioil and gas fields in thc south to theAstara on the Iranian-Soviet border. The totalthe pipeline has been estimated atational Iranian Oil Company (NIOC) isfor the overall engineering surveys,financing of the pipeline and for supplying about

etric tonsinch-diameter pipe (to cost an0 million) that are required for the project. The Soviet credit will be used to cover the cost of the engineering and technical services for the northern section of the pipeline (from Saveh to Astara) and the compressors for the entire system.

IGAT is scheduled tond toillion cubic meters of gasUSSR in its first year. As additional compressors

are added and the gas-gathering system is expanded.

deliveries will rise until they reachillion cubic meters annually4 and will then remain constant.

The Soviet Union has agreed to import natural gasriceer thousand cubic meters, but this price is subject to change. Of thisixed portionariable portion which will changewith increases or decreases of betweenndercent in the average posted price for bunker fuel oil at Aba-dan. No change will take place if the variation in the posted price is less thanercent. If the posted price varies more thanercent, then the entire price0 will be subject to renegotiation.

the large capital expendituresof the pipeline will require of Iran,has substantial economic benefits The gas to be exported is essentiallyas it would otherwise continue to be At the beginning7 the amount ofwasted each day exceeded the daily rate planned Iran will receive aprice for the gas. Sales to the USSR shouldgross income for Iran rising gradually0illion4 and leveling offfigure. By the endran willillion in purchasing power in the USSR aa

a result of these sales of natural gas. About one-half of this sum will be used to repay Soviet credits for the pipeline, steel plant, and heavy machinery plant as well as for0 million worth of Sovietequipment to be received, and the other half will be available for additional purchases of Soviet goods.

agreement (alongimilarwith Afghanistan) also has substantialfor thc Soviet Union. Imports of naturalIran will enable the USSR to supplementgas supplies in the Azerbaydzhan SSR, toelsewhere in the Soviet Union (providedconnections and capacities are developed

in thc pipelinend possibly to permit an increase in gas export* to Eastern European oviet domestic requirements for natural gas have been increasing more rapidly than additions to reserves, preventing theof any sizable surplus for export. Although Soviet exports of gas to Eastern Europe are expected to increase substantially during tbe next decade, thc imports from Iran will be even greater.

24. During the1man economic mission headed by the Minister of the State Planning Committee (Gosplan). Nikolai Baybakov, visited Iran to discuss an expansion of economic relations between the two countriesparticularly further Soviet participation in Iran's development plan which begins inumber of Soviet proposals were discussed. One of the moat important was for an acceleration in the projected volume of natural gas deliveries to the Soviet Union. Baybakov suggested that thc delivery of gas at the rate ofillion cubic meters now planned4 be moved0 and that the deliveries eventually be raised toillion cubic meters. Iran reportedlyillingness to consider the proposal only if the Soviet Union would bear the total costecond pipelineresumably meaning if the Soviet Union wouldredit sufficient to cover all foreign exchange costs. In view of Moscow's unwillingness to finance all foreign exchange costs of the presently planned pipeline, it is unlikely that the USSR, would agree.

Petroleum Exploration

he Soviet Union also has been providing technical assistance for petroleum development by NIOC. primarily for prospecting offshore


in the Caspian Sea.* Actingontractor for NIOC. the USSR is conducting seismographic tests in thc area. If these tests (which probably will continue untilndicate that exploratory drilling is justified. NIOC presumably would negotiate an agreement with the USSR for such drilling and. if oil were found, an agreement for exploitation and marketing by the USSR. Caspian oil is remote from Western markets. This oil could most logically be marketed in or through the USSR, augmenting the amounts available for Soviet export to Eastern Europe and, possibly, to Western Europe. As ofIOC wanted the USSR to bear all exploration costs, which would be credited against oil discoveries. This arrangement was acceptable to the USSR If oil were found, butit wanted to be reimbursed for all exploration costs.

*estern oil consortium, consisting largely of US and UK companies, accounts for aboutercent of the oil produced in Iran.

Z6. Soviet participation in this activity probablyterns from Iranian-Soviet discussions held4 visit to Moscow by NIOC Managing Director Eqbal. Within three months after theseoviet oil delegation visited Iran, offered aid for Iran's petrochemical industry, and reportedly requested (but was refused) an oilin Iran. echnical assistance agreement of some kind apparently waa concluded, however, because three Soviet technicians arrived in5 to serve as advisers in the Qom oil fields. In6 the USSR signed an agreement tooffshore prospecting in Iran's portion of the Caspian Sea. Several monthsroup of more thanoviet technicians initiated these activities.

27. Various reports have suggested that any offshore oil discovered would be sold in Eastern Europe through an Eastern European consortiumoint Iranian-Soviet marketing organization. Access to Iranian oil supplies probably ia of interest to the Eastern European countries. They apparently arc interested in finding cheaper oil than thatby tho USSR and probably are concerned over the possibility that the USSR may not be able all ol their future requirements. They also arc motivated by the need to find additional outlets for their industrial products and already have signed trade agreements to barter machinery andfor oil made available to NIOC by the Western Consortium.

of Natural Rcsour

Other Communist assistance for the develop' merit of Iran's mineral resources is minimal and ia connected largely with other industrial projects. Soviet technicians arc employed in developing the Yard iron ore mines and Kcrman coal mines to supply the furnaces of the projected Isfahan steel mill. This assistance also is being provided under9 million Soviet credit. Aboutoviet technical personnel were expected to be at Herman by the end Soviet technicians also have been noted at thc lead mines near Meshed-

Multipurpose Projects and Agricultural Development

29- Moreillion in Communist aid has been obligated for multipurpose and agricultural projects in Iran. The Soviet Union iaydroelectric power station and dam on the Aras River, which forms much of the boundary between Iran and Soviet Azerbaydzhan. The projectoint undertaking, for which the Soviet Unionreditillion to Iran under the

economic and technical assistance agreement of3 to cover the latter's share of the foreign exchange costs. The projectam andkw powerplants near thc Soviet town of Nakhichevanoncrete diversion dam near Qaradiz (USSR) and Aslandux (Iran). Both dams are scheduled to The generating station located in Iran eventually will hook uprid network in Iranian Azerbaijan. Inillion of the Soviet credit was allocated for construction equipment, railroad diversion, and the construction of warehouses and repair shops.

waters collected behind the dams willto irrigatecres in Iran'swhich will be devoted largely to thecotton, wheat, and livestock. Current plansdistribution of the land to thotribesmen who inhabit the area. imilar program was0 acres eventually were distributed

to the Shasavan.

* On7 the Iranians announced that the Soviet Union had extended an unspecified credit for the expansion of grain silo capacity built with Soviet assistance from theonsons.

Soviet Union also Is providingfor Iran's agriculturalthe agreement ofechnicalis being provided for thc conatruction ofsilosotal capacityons*the replenishment of fish supplies in theof the Caspian Sea. including construction of a

illion sturgeon hatchery. Inhc USSRillion credit to Iran to cover theof Soviet agricultural equipment.

32. ortion of the Rumanian credit0 million is being used to purchaseractors0 tractor-drawn plows. This agricultural equipment will be deliverederiod of five years. The price to Iran of the tractors is not known, but they reportedly will be sold to Iranian farmersrice0 each, including freight, insurance, and spare parts. In addition, Rumania willractornetwork (including mobile units) to service these tractors us well as those to be produced by the Rumanian-financed tractor assembly plant. Rumanian technicians also have been employed to assist in thc developmentcres toons of sunflower seed oil annually and to develop fruit orchards and livestock farms.

Transportation Development

33. Soviet efforts to expand trade with Iran, to enable more rapid and efficient deliveries of Soviet aid goods, and to increase Iranian use of transit routes across the USSR have led to offers to improve transportation facilities in northern Iran. Thc largest proposed undertakings are connected with the improvement of the Caspian Sea ports of Bandar Pahlavi and Naushahr. The Soviet agreement of3 provides for the dredging of Bandar Pahlavi. Current Iranian plans call0 percent expansion of the port's unloading capacity. An agreement signed with the USSR in6 providestudy of plans to expand thc port's facilities and to improve customsat thc Iranian border towns of Jolfa and Astara.

34. In6 thc two countries discussed the possibility of improving road facilities between Meshed and Bajgiran on the Soviet border to facilitate thcof lead ore from the Meshed area to thc USSR. Such

imports currently are trucked to Bandar Pahlavi, where they are loaded on Soviet ships. The cost ofto the USSR ostensibly could be reducedith this improvement. If an agreement is reached, an assay station also would be constructed at Bajgiran.

USSR has offered to undertakeprojects and toubway inthe Shah reportedly rejected the latter offerconcern over the possible propaganda impact ofuse of such facilities. The Soviet delegationIran early in7 indicated that theis willing to discuss the project.

Iran's Trade with Communist Countries

recent years thc share of the USSREurope in Iran's trade has been(see These countriesercent of total Iranian trade and for 9

toercent of the total excluding the trade of thesector, which consists mainly of exports by the Western oil consortium. Although the USSR and Eastern Europe have been providingercent of Iran's imports (aside from imports by the oilhey have been absorbing about one-fourth of Iran's exports other than oil (see

37. The value of trade with the USSR has changed little5 (except, but trade with Eastern Europe has grown considerably. The jump in Soviet-Iranian trade4 largelyharp drop in Iranian sugar productionubsequent threefoldin sugar purchases in the USSR (seeran's imports from Communist countries have consisted largely of sugar, iron and steel products, and machinery and equipment. Fish products, fruits and vegetables, animal products, and cotton have accounted for most of Iran's exports to these countries.

iran's trade with thc ussr and eastern europe


: |

tbe oil sector

percentage shareand easternton ustotal iranian trade

excluding trade

year total ussr europe of tbe oil sector of the oil sector

9 lo0 11


59 V*


a- data are for iranian fiscal years beginning onarch. because of rounding, components may not add to thc totals shown.

anticipated growth

38. trade agreements signed with communist countriesrowing level of payments foraidharp increase in iran's trade with these countries in the next few years. three-year tradewith czechoslovakia, hungary, and poland call for trade to riae8 millionomparedillion ive-year agreement with the ussr calls for sizable annual increases that would boost trade toillion9 and0 millionrade between the two countries totaledillion actual trade with the communist countries probably will not reach the magnitudes envisioned, as tradequotas rarely arc fulfilled. forhree-year agreement signed with the ussr4 called for

trade to reachillionubstantially more than the level actually achieved. Nevertheless, Iran's trade with the Communist countries should jump sharply during the next few years,ate which probably will be much greater than the rate of growth of Iran's total trade.

39. Iranian exports of petroleum are likely to play an important role in the increaae in trade with the Eastern European countries. Iran has concluded an agreement with the Western consortium to purchase increasing amounts of oil at reduced prices for export to these countries. Iran will purchaseillion ton*nd the agreement calls for purchases to riseillion tons annually during tho succeeding four years and toillion tons Several Eastern European countries apparently arc possible purchasersubstantial share of this oil. Rumania haa already agreed to importillion tons, part of which will be used to repay the Rumanian credits extended to Iran and the rest to pay for other Rumanian industrial equipment. Bulgaria has agreed to purchase at0 tons of Iranian oil Trade with the USSR also will be boosted considerably by the scheduled deliveries of Iranian natural gas on commercial account and as payments on credits.


40. Commodity payments for aid drawn on credits extended through7 are expected to amount to aboutillion8illion9 and to accountarge part of the anticipated growth of Iran's exports to the Communist countries in subsequent years. It is estimated that such payments will riseeakillionecline graduallynd drop sharply afterward (secndstimated aid payments0 will exceed the total value of Iranian exports to the Communist countries

41. By the endf all projected payments are made on schedule. Iran will have paid an5 million in commoditiesillion in hard currency to Communist aid donors. Interest payments will account for0 million of this total. An7 million will be paid in the form of natural gas shipments to the USSR to cover principal and interest payments for9 million industrial credit and0 million military credit. Such exports will be in addition to the annual export quotas included in the Soviet-Iranian five-year trade Since scheduled natural gas shipmentsmount to nearlyillion, Iran should have

a balance of0 million available for additional

purchases of Soviet goods (see



Table 3

Projected Iranian Payments of Principal and Interest for Communist Economic and Military Aid Extended Through

Million, US $



Table 4

Planned Iranian Deliveries of Natural Gas to the


Est lea ted Paraentaed Ita la the Form cf Natural Gaa Shlpcen'-a

Total Natural Gaa

Million Industrial Credit

Will on Military Credit

Shipment to Finance


Othrr Imports




Additional paymeotaotaling other goods-

b. Additional paymenteotaling other goods.

illion are to moreillion are to

made In be made In

Iran's Exports to and Imports Irom ihe USSR and Eastern

Iran's Trade with the USSR and Eastern Europe by Major Commodity or Commodity Group

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