TABLE OF CONTENTS FOR 9 NOVEMBER PRC ON IRAN

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Table of Contents
For 9 November PRC on Iran
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Tab A Agenda and NSC Discussion Paper
Tab B OER Comments on Discussion Paper
Tab C Iran: Economy in Upheaval
Tab D Impact of Iranian Oil Strikes
Graphics
Response to Claim that SAVAK Prompted Oil Strikes
Tab H
Tab E A Brief Assessment of the Iranian Military
The Iranian Military Government: Its Capacity to
Govern and Its Expected Policies
Tab F French Communist Involvement in Iranian Unrest
Tab G Soviet Actions and Views
Tab I
Tab J
Tab K
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 NATIONAL SECURITY COUNCIL
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SECRET ATTACHMENT November 6, 1978
MEMORANDUM FOR: PAC.
THE VICE PRESIDENT
THE SECRETARY OF STATE
THE SECRETARY OF THE TREASURY
THE SECRETARY OF DEFENSE
THE SECRETARY OF COMMERCE
THE SECRETARY OF ENERGY
ASSISTANT TO THE PRESIDENT FOR DOMESTIC AFFAIRS
DIRECTOR, OFFICE OF MANAGEMENT AND BUDGET
THE CHAIRMAN, JOINT CHIEFS OF STAFF
DIRECTOR OF CENTRAL INTELLIGENCE
SUBJECT: PRC Meeting on Secretary Blumenthal's Trip
to the Middle East, November 9, 1978
The attached paper was prepared by the Department of State
as the basis for the discussion at the meeting. Obviously,
the situation in both the Arab-Israel negotiations and the
developments in Iran are moving very fast, and some aspects
of the paper will no doubt need to be updated in the presen-
tations at the PRC itself.
? ci
Christine Dodson
Staff Secretary
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PRC MEETING
ON
SECRETARY BLUMENTHAL'S TRIP TO THE MIDDLE EAST
NOVEMBER 9, 1978
AGENDA
1. Regional Context in Which Visit Takes Place
a. Saudi Arabia
b. United Arab Emirates'(UAE)
c. Iran
d. Kuwait
2. Oil Pricing and Supply
3. Middle East Peace Process
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PRC MEETING
ON
SECRETARY BLUMENTHAL'S TRIP TO THE MIDDLE EAST
NOVEMBER 9, 1978
Overview
Secretary Blumenthal's visit to Saudi Arabia, the
United Arab Emirates (UAE), Iran. and Kuwait comes at
a critical period in our, relationships with these
countries in a nufnber of major policy areas. The focus
of the visit will inevitably be on oil pricing, support
for the dollar, and other important economic issues.
In addition to the economic subjects, however,
major issues of regional security will be very much on
the minds of the leaders in the countries visited. The
Secretary goes as a senior member of the Administration
to an area in which basic assumptions, which have long
motivated US policy toward the region and our relation-
ships with the countries concerned, are facing the dyna-
mics of rapid political change. In all four countries
the Secretary must deal with reactions to the Middle
East peace process, with concern about the impact of the
political problems in Iran on both the stability of the
Iranian regime and the security of the broader region,
and with a more general concern about US responsiveness
to what the states of the area perceive as a Soviet policy
of encirclement of the Persian Gulf. The visit, therefore,
presents a critical opportunity to project in a credible
fashion the confidence of the Administration in dealing
with the Great Power responsibility which the US bears.
In the countries to be visited, the leadership will
be looking for reassurances about the strength of the
American economy, the effectiveness of our anti-inflation
program, the prospects for the dollar's recovery, and the
efficacy of our energy policy. The Secretary will need
to reinforce the perception that there is a strong mutuality
of interest between the US as the leader of the industrial
world and these countries as the most affluent OPEC
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producers in working together to assure international
financial health and economic recovery.
In addition, they will be looking for reassurances
that the US is prepared to assert its own. positions as
a full partner in the negotiating process to achieve
a comprehensive Middle East peace. The Shah will, of
course, be looking for evidence that US support for the
regime in these very troubled times is sustained, and
in Saudi Arabia and the Gulf states the leadership will
be extremely interested in the constancy of our-support
for Iran and our assessment of the situation there.
Finally, all of the states visited would welcome reassur-.
an ces that the US, in fulfilling its role as a world power,
is alert to Soviet intentions towards the Persian Gulf,
dedicated to maintaining the sort of global balance which
will continue to deter Soviet penetration of the area,
and prepared to continue supporting the states of the
region in their efforts to provide for the Gulf's security.
In addition to the fundamental questions of oil
pricing and the Middle East peace process, the following
issues are of urgent concern to the countries to be
visited.
Saudi Arabia
1. Regional Security Issues. Saudi security concerns
remain acute. They perceive a Soviet strategy of encircle-
ment aimed at Saudi Arabia. During the last year these
perceptions and fears have been fueled by the fighting in
the Horn of Africa, the assassinations in North Yemen, the
assumption of power by a more rigidly Marxist regime in
South Yemen, the domestic turmoil in Iran and the coup in
Afghanistan. Their greatest concern has been the stability
of the fragile government in North Yemen, but the deterio-
rating situation in Iran is causing increasing concern.
Growing self-confidence, ability to provide financial
aid and the development of a modest but modern defense
capability have nurtured constructive Saudi leadership in
fostering the security and orderly development of the
Arabian Peninsula. Saudi Arabia's policy has been generally
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supportive of our interest in Saudi-Iranian cooperation
for the security of the oil-rich Persian Gulf.
?
For our part, the US has assisted the Saudis to
develop their defensive capabilities. The sale of the
F-15s was a benchmark in the rapid expansion of our
longstanding security assistance relationship. In addi-
tion, we have recently agreed to the Saudi request to
accelerate and expand our joint program of providing
equipment and training to North Yemen.
2. The Dollar. To the best of our knowledge Saudi Arabia
has never come out more strongly on an international
economic issue than its current support for the US dollar.
With a significant portion of Saudi reserves invested in
dollars and oil priced in dollars, the Saudis' concern for
the dollar and the economic health of the US is very real.
3. Transfer of Technology. Saudi Arabia is generally
pleased with the US role in transferring US technology
to assist its development program. While most Saudis
recognize the role the Joint Commission has played in
this regard, some officials have suggested that the
Commission has not gone far enough in its activities. It
is difficult for the Saudis to accept the limitations
which their own manpower constraints place on absorbing
technology.
4. US Regulations Regarding Trade and Taxes. Saudis are
also concerned by what they perceive as US-erected obstacles
to closer US-Saudi private business relationships. They
regard our laws and rulings on taxation of overseas Americans
as an obstacle to expanding the US role in Saudi development.
They are also concerned about US laws and regulations on
the Arab Boycott which they regard as hampering trade and
investment. Currently they are especially concerned about
the IRS Revenue Ruling 78-63 on Foreign Tax Credits on
their revenues. This could be eliminated as a factor if
the ARAMCO takeover is completed by year's end, but in
the view of the shareholder companies this is unlikely.
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United Arab Emirates (UAE)
1. Regional Security As in the case of Arabia, as
noted above, regional developments of the past year
have caused the UAE leadership great anxiety. This
anxiety can become particularly acute.because of the
UAE government's realization that there is little it
can do to effect developments, particularly in Iran.
We have stressed to'the UAE that its moderate and con-
structive attitude toward regional issues makes a con-
tribution to the area's stability, and that its own
success in developing an effective federation can be
a major contribution to this end.
Another regional crisis center, Lebanon, has been
a focus of UAE activity. The UAE has constructively
cooperated with other moderate Arab states by construc-
tively cooperated with other moderate Arab states by
contributing both money and a modest but symbolically
important number of troops.
2. International Lending and Investment The UAE has
taken an active and generous role in international
financial and developmental institutions. Its liberal
bilateral -lending (and grant) policy to many under-
developed nations is also noteworthy. The support- for
Egypt is particularly significant.
1. The Setting Secretary Blumenthal's visit to Iran
occurs at a moment when the Shah's fortunes have never
been lower. In almost all Iranian cities demonstrators,
predominately college and high school students, clash
violently with police and army and openly defy them when
they refuse to use force. A wave of labor unrest has
touched every sector of the economy causing investment
uncertainty, exacerbating capital flight, and contribu-
ting to the overall slowdown in growth. Generous wage
settlements, designed to buy labor peace, will add
possibly $4 billion to the Iranian budget deficit this
year and $3 billion the next year.
The most serious of the strikes has taken place in
the oil industry, Iran's lifeline. A walkout led by
white collar staff has caused production to plummet to
about 1.5 million barrels per day (It had been running
about 5.6 - 5.8 million b/d). Exports, because of the
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stop in production, were less than one billion b/d as
of Tuesday, October 31. At this level, Iran will lose
about $50 to $60 million per day in revenues, or about
95% of gross foreign exchange earnings.
There is some hope that negotiations under way
between the government and moderate secular and reli-
gious leaders may produce an accord which could end the
opposition in the streets and among strikers. There is
considerable doubt, however, that the extremist reli-
gious leader, Ayatollah Khomeini, will agree to any com-
promise short of his demand for the end to the Pahlavi
Dynasty. Without his acquiescence, there is little
prospect that the negotiations will be fruitful.
Senior military officers consider the civilian
government ineffective and unnecessarily soft and have
talked frankly of a possible move to exert stronger
influence, presumably maintaining the Shah as a figure-
head ruler. If the situation continues to deteriorate,
the military will almost certainly intervene. The mili-
tary would deal harshly with the opposition, making any
arrests, clamping down on the press and suppressing street
demonstrations. The counter reaction from the masses would
be equally harsh, though possibly somewhat delayed. Plain-
ly, this Administration would find it difficult indeed to
support a military regime in Iran.
The Shah has severe long term problems, but also an
urgent need to establish effective government within a
few weeks. Among all classes there is a new questioning
of the Shah's effectiveness and legitimacy. The absolute
prerequisite for a restoration of stability is a measure
of public credibility in the Shah's regime.
2. What the U.S. Has Done': Secretary Blumenthal's trip
to Iran will take place after visits by Under Secretary
Newsome, Deputy CINCEUR Huyser, Marine Commandant Wilson
and Deputy Secretary Duncan. All of them saw the Shah
and conveyed a strong expression of U.S. support. Under
Secretary Cooper left Tehran on November 1 after two days
of discussions with Iranian officials about the current
economic situation. The President telephoned the Shah
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on September 10, mentioned Iran in his press conference
one month later, and conveyed his support for the Shah
in a personal message on the Shah's birthday, October
26, and in a meeting with the Crown Prince on October 31.
3. U.S. Policy. U.S. policy was stated by Secretary,
Vance in his press conference of November 3:
--We fully support the efforts of the Shah to restore
order.while continuing his program of liberalization.
--...law and order can be restored;...at the same time
one can continue along the course which the Shah has
chartered for himself and for his nation; as you know,
he has set forth a plan which would lead to elections
in the year 1979; and there is no inconsistency in
reestablishing stability within the nation and moving
on subsequently to the holding of elections according
to his liberalization plan.
4. Secretary Blumenthal's Visit. In support of these
objectives, the Secretary's visit will enable us to:
-- offer again Administration support for the Shah
in face of his current difficulties;
-- express our interest in and support for the
Iranian Government's program of economic reform;
-- examine first hand current economic and financial
trends and to assess their implications for politi-
cal stability; and
-- offer ways in which the U.S..could, possibly
through the Joint Commission, extend advice and
assistance (on a reimbursable basis) to help the
GOI with its economic planning and the rapid im-
plementation of projects with high political impact.
The World Bank has also expressed interest in re-
suming technical assistance activities in Iran on
reimbursable basis.
Kuwait
1. Regional Security. The regional security developments
of the past year have been deeply disturbing to the Kuwaitis.
As noted above for Saudi Arabia and the UAE, the Kuwaitis
have been unsettled by the domestic turmoil in Iran as well
as the leftist successes in Afghanistan, South Yemen, the . _
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fighting in the Horn of Africa and the coups in North
Yemen. Although Kuwait lacks the political influence
of Saudi Arabia among the Arabian Peninsula states, it
was an early force for seeking closer cooperation among
these states in the interest of overall security and
orderly progress. In recent years, since the end of
the British Defense Treaty in 1971, Kuwait has entered
a significant security assistance relationship with the
U.S., and quietly recognizes the importance of the U.S.
role in maintaining a global balance and deterring out-
side intervention in the Persian Gulf.
As with Saudi Arabia and the UAE, Kuwait has played
a constructive role among the moderate Arab states seeking
to reestablish a stable environment in Lebanon this year.
We, of course, share this goal with the Kuwaitis.
2. Other issues.
a. Oil production levels. Kuwait has roughly a
million barrels per day excess capacity. Given the strong
conservationist mood in Kuwaiti society., as well..as'_minimal
economic incentives to produce more oil, it is doubtful
they will increase production in the foreseeable future.
b. International Finance and the Dollar. While the
Kuwait role in international finance is generally con-
sidered sophisticated and responsible, Kuwaiti leaders
feel deeply that the country's interests have suffered as a
result of the decline of the dollar.
c. International Development Lending. Kuwait was the
first OPEC country to develop sizeable financial surpluses
and was a leader in developing lending programs to assit
poorer nations. It also has a well-developed and constru-
tive relationship with international developmental institu-
tions.
d. Proposed IRS Regulation Changes. The Kuwaitis are
seriously upset about the proposed IRS regulation which
would codify rulings of the IRS Code pertaining to the con-
ditions under which the commercial income of a foreign
government from sources within the US is exempt from
taxation.
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OPEC Price Decision
There are strong pressures within OPEC for an oil price
increase of at least five percent at the December 16 OPEC
meeting in Abu Dhabi. Every OPEC member is on record, offi-
cially or unofficially, favoring a price increase. Amounts
vary from Iraq's call for a 25% increase
that the Saudis will agree to an increase or 2-77.7-The U.S.
has made informal approaches to governments of OPEC and OECD
countries pointing out the adverse economic impact of an oil
price increase at this time. Responses received so far from
OPEC capitals have supported the view that a price increase
of at least five percent is likely. OECD capitals have
generally agreed with the U.S.. analysis of the adverse impact
of a price hike on growth, inflation, and trade balances. At
the same time, these countries have indicated reluctance to
play an active role in seeking to prevent a December price
hike.
Secretary Blumenthal during his Middle East trip could
most usefully seek to obtain a clear indication of the Saudi
position on oil price and respond appropriately. In the
unlikely event that the Saudis are prepared to support a con-
tinuation of the 1977-78 price freeze, Secretary Blumenthal
should indicate that the U.S. is very appreciative of the
Saudi position and is prepared to assist the Saudi effort by
additional representations to key countries.
If, as is more likely, the Saudi's indicate that they are
committed to a price increase, Secretary Blumenthal should
ascertain the amount of increase which the Saudis will accept
and point out that:
--U.S. recognizes mounting pressures within OPEC which
have led to this decision by Saudi Arabia.
--U.S. understands that concern over loss of purchasing
power by OPEC as the dollar has depreciated against
several important currencies has been the main reason
for OPEC pressures.
--U.S. believes that even so-called "moderate" increases
will impose a significant economic burden on oil-
importing countries -- both developed and developing.
--U.S. believes that prospects for appreciation of the
dollar are good for several reasons: (1) measures
announced by the U.S. on November 1; (2) U.S. energy
legislation, which will restrain growth in demand for
oil significantly; (3) a major effort by the U.S. to
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reduce inflation and increase exports; and (4) the
reflation of the other OECD economies.
--U.S. questions whether an oil price increase would
do much to restore OPEC purchasing power since it
would have an adverse impact on the programs of the
U.S. and other countries seeking to ameliorate
structural problems which contribute to inflation
and currence instability.
--Since any oil price increase will have potentially
adverse impacts on global economic and financial
stability, the U.S. urges that prices be raised no
more than 5% for the entire year, preferably with the
effect mitigated by phasing over the year. The U.S.
could accept this outcome as responsible. under the
circumstances.
Secretary Blumenthal should attempt to elicit an under-
standing from the Saudis regarding oil prices for the full
year even though the Saudis might prefer to leave the matter
of post-January increases open. Secretary Blumenthal's role
publicly and in Iran, the UAE, and Kuwait will be largely
. dependent on the Saudi's position. Obviously, in the unlikely.
event that the Saudi
t f
s op
or a continued freeze, the Secretary's
role will be to build support for this decision. The Secretary
should plan to make strong demarches in Iran, Kuwait and the UAE
if this is consistent with Saudi advice.
More likely, the Secretary will have to try to minimize a
price increase by presenting the U.S. case to those countries
in terms of the potentially adverse global economic and financial
impact of any price hike. If appropriate to the political
situation existing at the time in Iran, the Secretary could repeat
the arguments made to the Saudis for limiting any price hike,
pointing out the maximum price hike which the U.S. could consider
responsible. Unless the Saudis suggest that it would be desirable
for him to seek the agreement of the UAE and Kuwait to a specific
figure, he should leave this task to the Saudis and concentrate
on delineating for those governments the adverse impact of any
price hike. Premature or public acquiescence by the U.S. to a
moderate price increase could lead to an uncontrollable process
resulting in an unacceptable price increase.
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Middle East Peace Process
The status of the peace process and the results of
the Arab Summit will be repprted at the PRC meeting.
As of this writing the positions of the countries are as
follows:
1. Saudi Arabia: We have been in close contact with
Saudi decision-makers at all levels; most recently the
President lunched with King Khalid in Washington on
October 27. The initial Saudi reaction to the Camp David
agreements was reserved. The Saudis are deeply concerned
about political divisions in the Arab world and feel they
will be under great pressure to defend their ties with
the US and Sadat. They initially conditioned their
support for Camp David on a number of unrealistic requests:
direct US contact with, and recognition of , the PLO;
direct linkage of the Egyptian-Israeli treaty with Camp
David framework agreement and the West Bank/Gaza negotiations
flowing from it; and assurances that at the end of the five
years there will be Israeli withdrawal and Palestinian
? self-determination. More recently, in private conversations
with Ambassador West, Crown Prince Fahd has moved significantly
to a position of support for the Camp David process. We
are hopeful that that private position will increasingly
be reflected in. public Saudi positions. There is already
some evidence of the Saudi shift in its consultations with
the smaller Gulf states prior to the Baghdad meetings.
2. United Arab Emirates: Despite its importance
as an Arab financier, on a political issue of such magni
tude in the Arab world as Camp David, the UAE: carries
little weight. To date its public and private positions
have reflected restrained criticism of the Camp David
Agreements and a non-committal attitude toward eventually
supporting Jordanian and Palestinian participation in the
negotiations. The UAE clearly will not get out in front
of Saudi Arabia in support of Camp David.
3. Iran: The Shah has indicated his understanding
that Sadat has no choice but to move forward toward peace
with Israel, and he has assured Sadat of his support. While
the Shah would like to be helpful to us on this issue and
warmly endorsed the President's efforts, he remains
somewhat skeptical about the eventual success of the agree-
ment. He is, of course, particularly aware of the
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strategic implications of Camp David for the Middle East
generally, and is concerned that divisions in the Arab
world would permit new Soviet inroads.
4. Kuwait: The Kuwaitis have taken the position
that the Camp David framework is inadequate in its assurances
of Palestinian rights.: Traditionally Kuwait tries to stay
on a non-controversial, middle-of-the-road path in inter-
Arab affairs. Being essentially moderate, Kuwait feels
under enormous pressure in the present Arab political
environment. Even under the best of circumstances--
public Saudi support for Camp David--it is highly unlikely
that the Kuwaitis will get off the fence in our support,
and their public position will probably remain one of criti-
cism of the Camp David agreement.
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