IRAN'S ECONOMIC RELATIONS WITH COMMUNIST COUNTRIES (S-2291)

Created: 5/22/1967

OCR scan of the original document, errors are possible

REUASEAS

ffOHt Mr. Bhrold H.

hotiot^^TOriiy Council Staff

CceoutlVo- Office ITaa'a Kcaxnlo Halations with Ccsnunlst

1. Attached In tbo paper which Mr. EUot at State requested of xsa, endiscussed with you onpril. The original has been dleneicbeft 'toliot.

S. Bqcgusc the paper vna intended for use at tho highoet lci-olo, ve havg included, on pageone intellisence which would unyo heen ceittcdaper for general circulation. As youce> Vo bsTQ Bated fir. Eliot to onit tMs aaterial if the pnper la eeen by any hutpolicy offlolala.

Director RiiBesroh end Reports

Attachasnti Aa started-

MAY

Mr. Theodore L. Eliot,ountry Wreotor" for Iran iXttNjaa of Hoar Eastern end

Booth /elan Affaire Dcpdrteeat of

vttb CcoBunlifb

X. Attached is tho paper you requested on vblch actl^yao eesigaed to this Office.opy is boina cent 'to Kai Gaunaero.

2. Pecause we were ayexe that the paper KM intended for use at- the hltheet levels, ve towslccetf Itfcp-ration vhtoh vould have beenGr ft*olrcvJftilra. for to the footnoted material

dfrJiM vitVthc:*rloe at WCyt^xtiv^ ia ftaattMaghaJi. Tf the

policy official* of tba floYeHOanVrtfe-rcatto fihouM be delated. ^Vith the deletion, the japer can be freely used vithin the Units Imposed by-its clftosiflcatlon.

3> tase let ue know ifurther assistance.

Director Research and porta

Attachment: An stated.

CEKTRAL INTELLIGENCE AGENCY Directorate of Intelligence7

MKKORAKDill*.

Iran's Economic Relations with Ccoraunist Countries

Although Soviet motives are in part political, Iran's economic relations with the USSR and .the Eastern European Communist countries reflect mutual economic interests, and are unlikely to threaten seriously Iran's predominately Western orientation.

In, the USSR abandoned its efforts to weaken Iran's ties with thc West through propaganda and subversion, and began wooing Iran with offers of economic assistance. Since then, the USSR has extended economic credits to Iran totalling0 million, and the Eastern European Communist countries have extended0 million (sec the table). The two principal credits have been:

A Soviet credit9 million, extended in it helpsteelas pipeline to the Soviet border, iron ore mines, coaleavy machinery plant, and water control projects. Repayment is to be in natural gas which is now flared and wasted; the gas will be carried by the proposed pipeline.

A Rumanian creditillion extended inhich finances the shipment of Rumanian tractors and machinery. Repayment is to be in oil.

Inhe USSR suggested to Iran that the delivery of. gas0 be at the rate Originally plannedillion cubic meters). The USSR also suggested that gas deliveries eventually be doubled; this would .require an additional pipeline. No agreement has yet been reachedsuggcstions.

Iran stands to gain considerably from the agreement with the USSR. The projects covered will contribute to Iran's economic development, and thc pipeline will carry gas not only to the USSR but to localities in Iran as well. ran will have

accumulated from caD coles to tho USSR oooo &OQ million more than thc amount noedod to pay off tha Soviet credit. Tho steel mill,elatively high cost producer, vlll cave Iran up0ens* in foreign exchange. At tlie crane tlmo, tho Soviet credit dooo not cover tlie entire coot of the voriouo projects. In addition to meeting local.currency coBts, Iran vlll have to borrow0 million to meet foreign exchange coeto.

Thc USSR vill also benefit economically. Craving demand and dwindling local supplies In the Transcaucoauo area make the import ofillion oubic meters per year from Iran attractive and(under analogous cimmjotanccB, the US iinporte Canadian goo into the Pacific northveot). Moet of the gas would he uoed locally, and any surplus vould add only marginally to the overall Soviet supply. The suggestion that Iranian deliveries be doubled toillion cubic-meters is less easy to understand In terms of domestic Soviet PoBOibly tho Soviets have in mind freeing soma of thair ovn gao for export.

The economic agreement with Rumania also px-onlsos to benefit both oideo. The Shah has tbe right, under his agreement vith the Ucstcrn Conoortium, to take crude oillocountod price in lieu of royalties. Inhe Conoortium agreed to fumioh up toillion tons through lc/fl/St about one-third the going soiling prlcc*Jfor sale only to Eastern European countries. Iran boo agreed to shipillion tons of this oilhree-year period. The price, though unknown, lo almost certainly voll above the discounted price to Iron. The goods to be procured vith tbo oil ore of acceptable quality, and, although ve lack information, arc presumably of'greater value than those which could have been purchoood claavhcro with the royalties foregone. For its port, Rumania has excess rofining capacity, con export tha additionalroducts to Vcbtern and Eautcro Europe, and has been trying to diversify its sources of supply for crude oil and othorgoods to strengthen its independence rrau "the USSR.

To impresshe Shah oa-ctlmca claims that ho is "buihUog bridges" to Eastern Europe, lilo cotlves, however, are primarily economic, leavenedesire to show Mb independence. Honnthulcoe, hlB doallngo^lWi the Eastern European countries vill help these countries at loaot marginally in efforts they may makeverom Kogcow.

In principle, any sales of Iranian oil in Eastern Europe vould release equivalent amounts of Govlot oil for sale in the Veot since the USSR has up to now been Eastern Europe's principal supplier. But thc matter of displacement cannot be viewed eo simply. The market

'."or ninlex ande, and the effect ofe svi'eipodost ofnfluences.' The USSR itself hasneasinessts future supply position, endo meet the rapidly proving requirrncnts of Eastern Europe ror oil. Thus, the Soviet oil theoretically made available by Irarii&r, sales to eastern Biirope would notisplace Westernarketsimple one-to-one fashion. Even if onc-to-onc displacement occurred, there vould stillet gain from the Shah's coins cf view, because Soviet sales in the West would be at the expense of all sellers and not of the Consortium alone.

The credits have had little effect as yet on Iran's trade vith Communist countries, which has accounted forercent of Iran's total trade. (However, the Cceraunist countries have been taking about one-fourth of Iran's non-oil exports). As the recent agreemet-.si arc implemented, Iran's trade with Communist countries vill increase very substantially. Shipments of natural gas to the USSR will beglr at0 million0iuionh. Deliveries of equipment under Soviet credits alone will probably average0ear6 YO. Iran should have noin obtaining satisfactory imports from the USSR and from Eastern Europe.

Iran has not accepted Communist &id because* of any pressing short-term need. While it is true that Iran now requires additional outside assistance to sustain its present rapid growth, it can obtain large credits from Western countries and financial institutions. Thc deals with the Communist countries, however, ennVle Iran to make additional investments while repaying inot saleable on Western markets.

The USSR is acquiring some influence und good will,esult of itsOiaic agreements vith Iran, but not decisive-economic leverage. Over the longer term, Soviet-Iranian econa-nic relations may grow, ana this growth nay bring greater influence. For example, the USSR is oros pec ting for offshore oil in thender contract with Iran. If oil is found, it could hose "easily bc shipped to the USSR,

voulc be

oil most continue to be marketed in -no; West, and it is difficult toituation in which the USSRacquire an econcoicover Iran.

In one sense, the agreement bet-ten the USSRIran'orc-fzr stability, because it results in interlocking mutual interests. Tne USSR knoua that the Successful completion of thc capital projects tc which itarty will require that Iranarge amount Of foreign exchange. Both the USSR and Iran know that the confeLiyjed deliverys depends or. the ^nir.ten-npwd production of the oil vith which the gas is associated. Finally, Iran knows that its balance if payments position, its access to Western credit, and Its future economic health depend on its ability to market oil in the West.

Table 1

Soviet and East European Economic Aid Extended to

Million US $

Total

Europe

Original document.

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