LAST year, Iran produced 31,000,000 tons of petroleum. The fact sums up the urgency of Iran's current problems. The ancient Persian kingdom is not yet a satellite of its Russian neighbor, but it is far from being a fully sympathetic member of the Western system. It suffers, and may suffer far more grievously yet, from emotional xenophobia, national frustration and compensatory fear and resentment, and traditional Persian "splitthe-opposition" diplomacy. Operating there, too, are new and ill-digested elements of Comintern activity and, of course, modern technology. The rationale of neutralism arising from this complex of factors has become, at least temporarily, the first principle of Iran's national existence. The practice of it endangers the oil economy of the Western world and foreshadows a chain of events which might result in the disappearance of Iran itself into the Soviet orbit.

In a world of global tension and war, where the United States and its allies--willing or hesitant--are directing every resource into essential programs of economic expansion and military preparedness, Iran has become a sore that does not respond to the traditional healing measures of diplomacy or commercial negotiation. It will, apparently, require unusual political medicine. We are being perilously slow in writing the prescription.

A glance at the map of Asia will show why Iran would be a prize for the Soviet Union. It is the gateway to military conquest of the Middle East, flanking Turkey. It is far from the sources of Western military strength, and, once taken, could be exploited in relative security by the Russians. Iran offers warm-water port facilities for the growing industrial empire of Asiatic Russia, and even under primitive methods of agriculture has been an exporter of foodstuffs and fibers. Were its water resources developed, it could help considerably to meet the food deficits that plague India. The Iranian oil resources on the northern plateau might provide the margin of economic strength that Russia would need to hope to win a world war, even though these resources are undeveloped and would require a prodigious investment by the Soviets. Such factors must carry great weight in the Kremlin's calculations.

Strategically, Iran is no less important to the West, offering a base for military action from which Soviet industry in Central Asia might be neutralized and from which Russia's own vital oil fields in the Caucasus could be destroyed. So long as Iran is at least neutral, the existing cordon sanitaire of the Middle East remains unbroken. Most important of all to the West are Iran's oil products. Thirty-one million tons of oil are about 6 percent of the world's output. Iran supplies about 20 percent of Western Europe's requirements, and more than 50 percent of the needs of Asia. An important amount of aviation fuel used by the United Nations air forces in Korea has been coming from the Abadan refinery, the second largest in the world. Here, at the head of the Persian Gulf, is the key to the significance of Persian oil.

From the muddy head of the Gulf, through the Red Sea, the Suez Canal and the Mediterranean to Europe is a long and costly trip. In the early days of the exploitation of Iran's oil by the Anglo-Iranian Oil Company it was prudent to calculate that the refining of oil products at the source would be cheaper than carrying the crude to European refineries. And Asia, the Middle East and Iran itself constituted a market that was potentially enormous. Accordingly, a vast refining plant was erected, and greatly extended in the last ten years as a result of the terrific expansion of the world's oil requirements. Now, on a hot, sandy island bristling with giant retorts and a nightmare of pipes and chimneys, 24,000,000 tons of crude are turned into a whole range of essential oil products. The world could perhaps replace the loss of the total Iranian production of crude oil in a short time, but it could not replace this refining capacity quickly, particularly in Asia.

Moreover, the effect upon Iran's neighbors of a worsening of the situation there might endanger the entire structure of the oil economy of the Middle East. The religious ties of the Moslem countries are not necessarily binding, but the virus of nationalism and the longing for a recrudescence of the power of Islam are endemic. Even Turkey, at one with the West in opposition to Russian expansionism, might be greatly influenced by any clear-cut alignment of the Islamic nations on the issue of oil exploitation.


In a succession of measures in March, April and May of this year, the Iranian Parliament voted to expropriate the oil industry, to oust the British company (of which the British Admiralty is majority-owner), and to take over and manage both oil fields and refinery as a government enterprise. During the same period, terrorist elements assassinated Prime Minister Ali Razmara, who had been opposing the nationalization program, and forced the resignation of his successor, Hussein Ala, an able statesman who is friendly to the West, for hinting at a moderate policy. At the end of the tempestuous period, the Parliament had rejected all other candidates for the premiership and by acclaim named an aged demagogue, Dr. Mohammed Mossadegh, the champion of oil nationalization, as the reluctant Shah's First Minister. It was a victory for nationalism, for the politico-religious Shi'ite mullahs who had aligned themselves with the so-called National Front Party; and it was a victory for the Iranian Communists of the growing Tudeh Party. The defeat for Great Britain, and for the United States (which is inescapably linked in the Iranian mind with British influence), was correspondingly great. Russia's victory was not direct, though if the consequences of the affair are not quickly neutralized, Iranian political and economic conditions may deteriorate to such a degree that capitulation to Tudeh leadership becomes inevitable. In that event, Iran will go the way of China.

The nationalization of the oil industry did not come about suddenly. The antagonism to Britain in Iran is of long standing. The political ruthlessness of Victorian expansionism in "backward" areas of the world has left Britain with an unhappy legacy of distrust. Even though in the first years following World War II Britain released India as gracefully as possible, launched Burma in modern independence, admitted political reforms throughout the Empire, and ceased to administer her consulates in Iran from the India Office, economic circumstances forced her to follow a commercial policy that has closely resembled colonialism. Britain's markets overseas are essential to her industrial life. Marshall Plan aid solved only the dollar shortage. The recapture, by commercial means, of markets that had once been protected by political astuteness became essential for her. If Britain was to pay more sterling for Iran's oil, because more oil was needed, the increased amount of sterling must be spent in Britain and not converted into gold or dollars. Accordingly, the British effort (not only in Iran) to sell British goods has been forthright, and has been in many ways a cardinal aspect of foreign policy.

Before the Anglo-Iranian Oil Company opened negotiations with the Iranians for an increased rate of royalty and other concessions the burden of Britain's balance of international payments already was plainly staggering. It was obvious, however, that the disparity of payment per ton of oil in South American countries and in the Middle East would have to be rectified. Venezuela, for example, was receiving nearly twice as much as Iran or Iraq received, and nearly three times as much as Kuwait was receiving. The Iranians agreed to negotiate with the Company, and over a period of six months the negotiations produced an involved document of about 5,000 words, carefully and minutely cross-referenced to the previous 1933 concessionary agreement. It established two basic points. First, the rate of royalty was to be increased by about 50 percent, according to a complicated formula involving profits and tax distribution as well as straight royalty payments. Second, it reëstablished the Company's title to the concession. (The agreement, although initialled by the Government's Minister of Finance, had under the Iranian Constitution to be ratified by the Parliament (Majlis), and the Company desired, prudently enough, to have its concession reaffirmed.)

Although from a financial point of view the agreement was a considerable improvement for Iran, it was received by the Iranians virtually in silence. Few officials read the difficult document which was presented publicly by the Government in July 1949. Many Iranians had heard of the 50-50 formula that had been put into effect in Venezuela, and thought the same principle would be fitting and not unreasonable in Iran's case. That formula, in essence, established a corporation which governed all the operations within the concessionary boundaries in the country, and both losses and profits were shared equally by the exploiting foreign interest and host country. Actually, during the early stage of negotiations between Anglo-Iranian and Iran, the Company suggested consideration of such a formula, but the Iranians felt at the time that stock ownership (even without voting rights) in a world-wide organization was a better financial arrangement. In the Supplementary Agreement, as the document was named, the Company consented to a distribution of 30 percent of profits after British taxes, and did not press for the new formula.

By the autumn of 1949, it was increasingly clear that literate public opinion in Iran thought that the agreement as it stood was inadequate. Most foreign observers tended to share this opinion, officials of the American Embassy included. It was felt, however, that given certain additional Company concessions of a non-financial character the complicated agreement could be made palatable. The Company stood fast and volunteered no changes. However, it maintained as cordial relationships as possible with the succeeding Cabinets, advancing royalties to financially beleaguered governments and continuing its postwar programs of better housing and welfare services for its employees. A more realistic estimate of the situation would have indicated that the Supplementary Agreement was dead. The elections of 1949 had installed in the Majlis a small group of determined men who called themselves the National Front Party. These men were openly pledged to nationalism as an absolute principle, and they boldly attempted to undermine every government that came to power. From then on, virtually all progressive legislation became impossible.

The National Front and its fantastically emotional leader aligned themselves with ambitious mullahs whose word spread through the mosques and gave nationalism a religious sanction. This was a combination difficult to subdue. The young and earnest Shah, Mohammed Reza Pahlavi, who had been wounded in February 1949 by an assassin's bullet traceable to the terrorist arm of the church, named Ali Mansur as Prime Minister, in March 1950. This wily man agreed to try to obtain the approval of the Majlis for the oil agreement, but early recognized the impossibility of the task. On his own initiative, he informally discussed with Company representatives renegotiation of the agreement, and suggested consideration of the 50-50 formula. The Company stood firm, on the legal ground that until the Majlis had rejected the Supplementary Agreement no changes could be made. Mansur resigned after three months of unsuccessful administration.

The Shah next named the popular Chief of Staff of the Iranian Army, Ali Razmara, as Prime Minister. Against Razmara's better judgment, the Company and the British Embassy persuaded him to present the agreement to the Majlis. At about this time the Arabian-American Oil Company (Aramco) let it be known that Saudi Arabia was accepting a 50-50 formula which would result in considerably more revenue to King Ibn Saud's Government than was envisaged in the Iranian agreement. Even so, Razmara pressed for passage, and his Minister of Finance was promptly forced to resign after the presentation to the Lower House. The National Front had done its work well. Razmara, hoping to avoid precipitate nationalization, withdrew the agreement. Now the British Government was convinced of the need for action, and the Company, with the British Ambassador, approached the harassed Premier and offered the 50-50 formula. It was too late. Before Razmara could discuss the offer with the Majlis, he was shot. The following day, in an atmosphere charged with dangerous emotion, the Majlis passed a resolution that was to result in the situation we find currently. The breaking of the contract made the headlines of the world.


This too-brief record of the controversy is not intended to justify the conclusion that the Iranian Government, the British Government or the Company is singly at fault. Persian public opinion is the opinion of a few hundred thousand people, from whom are drawn the civil servants, the merchants, the professorial people, the clergy, and, at the economic peak of the social structure, the landowners. The social pattern is feudal. There are perhaps 16,000,000 peasants who support this literate top layer. They live in clusters of windowless mud huts, as they have lived for centuries. Their daily diet is a pound of wheat bread, a few onions, tea and sugar. The means of economic production of most of them are hands and back, a few primitive tools, and if they are lucky, an animal. Their promise of life is God's pleasure; but the landlord takes 60 to 80 percent of what the peasant grows. There are several million peasants too unfortunate even to have a landlord. Perhaps a quarter of Iran's population live in tribal groups, whose chiefs are important figures in the frenetic politics of Teheran. A million at the most are workers in the oil industry, the textile centers of Isfahan and the Caspian area, or in small factories in Teheran and other cities. These workers are the chief target of the Comintern, incidentally, and will strike or demonstrate for almost any cause, as their organizers decree. When the standard of living is as low as it is in Iran (the income per family is perhaps $70 a year), where news and views are transmitted only orally, it takes little to organize sentiment--for nationalization of oil, or for revolution either.

In Iran, as in much of the Islamic world, the church is a strong factor in the encouragement of anti-foreignism. The temporal power of the church was cut down in the period between the First and Second World Wars. The collapse of the Ottoman Empire and the rise of such dictators as Kemal Ataturk in Turkey and Reza Shah in Iran reduced the mosques to the level of parish churches. The more ambitious mullahs were silenced. In Iran today these dignitaries are anxious to regain power, and two of them have gained prominence as avowed enemies of the West in particular and all foreigners in general. Ayatollah Kashani, once exiled but now an elected member of the Majlis, is the most popular religious leader in Iran. This aged mullah, with Dr. Mossadegh, the leader of the National Front, has engineered the mass movement for nationalization of the oil industry. His activities have given rise to Fadaiyan Islam, a terrorist band of fanatics led by an ascetic young mullah named Navvab Safavi. He claims 5,000 followers. From this group came the killers of Razmara, and of at least four other men whose moderate approach to Iran's relations with the outside world had enraged the leaders of Islam.

In seeking power, these fanatics have followed the general pattern of Comintern propaganda no less than the precepts of demagogy. This does not mean that they are obedient to the Party line, but rather that they utilize the emotional appeal to xenophobia which the Communists are so sedulous in cultivating among all Asian people. There is, however, some evidence that many of the activities of these intrepid mullahs have been financed by the Soviet Embassy. Recently, Safavi and Kashani were separately interviewed by foreign journalists, and they indicated a remarkable kindliness toward Russia while expressing bitter hostility for the British. Safavi stated hopefully that "the Tudeh Party would follow me rather than Stalin." This same interview indicated that Safavi had broken his alliance with Kashani and the National Front, a fact that is likely to mean competition in terrorism between them. The behavior of Mossadegh, seeking sanctuary in the Parliament building, suggests the degree of unrest prevailing.

Moscow need not rely on these excitable clergy. Its Tudeh Party has grown in the last two years to the point where it can take the initiative in inciting riots and harassing public officials. There are perhaps 15,000 hardy members of the Party--a sufficient number to stage a coup d'état. They are disciplined as is no other force in Iran and include a large proportion of the younger intelligentsia. The Party failed in the Azerbaijan crisis of 1946 because the Russian was despised as a foreigner. Although the social problems in the overcrowded province of Azerbaijan needed and still need correction, the alignment of the so-called Democrats with the Russian occupation doomed the movement. A lesson has been learned, and while the phrases of the Stockholm "Peace Petition" are seen on banners in the frequent student parades, the basic theme is an appeal to nationalism. The infidel farangi is the scapegoat for Iran's misery.

The size and prominence of the oil company make it the easiest target. The Company employs more than 65,000 people. Through royalty payments and taxes it contributes directly about 32 percent of the Iranian Government's income. Indirectly, the total contribution is perhaps another 20 percent. The Company dwarfs every other enterprise in the country, excepting only the Government itself. Its operations supply about 80 percent of the foreign exchange earned by Iran. Its very size causes many otherwise logical Iranians to fear it and believe with religious intensity that it is capable of the most sinister behavior. If the Company erred, its error has lain chiefly in the failure to recognize that such disproportionate bigness is dangerous.

Despite the increased contribution of the Company, which even under the 1933 schedule of concessionary payments has more than doubled in the past 11 years, Iranian finances have deteriorated, and with them the administrative structure of the country. For the last three fiscal years, the deficit of the ordinary Iranian budget has been growing. On a cash basis alone, last year's deficit will equal about $31,000,000--about 16 percent of the cash income of the Government. The Government has reached the end of prudent and legal borrowings from its central bank and now faces a recurrent technical bankruptcy. Realistically, this condition can be alleviated only by a combination of measures of which, as is obvious, the settlement of the oil problem is paramount. It could be accomplished even with nationalization if the forces at work in Iran can agree on effective foreign management and technical and marketing assistance. This is the essential ingredient of a solution of the financial problem.

Under present circumstances, budget reform appears to be politically impossible. About 90 percent of the budget is devoted to payment for personal services, including payments to the military. While most officials will readily agree that the number of civil servants is excessive, the structure of the bureaucracy precludes any wholesale reduction of staff without a basic reorganization of the methods of carrying on the Government's daily business. Unproductively employed civil servants are now protected. Reduction in staff further assumes that there are employment opportunities available. This is not the case, although a basic justification for the much-heralded Seven-Year Development Plan was to provide such new employment. The recent inflationary spiral has worked against this, and the Government has been unable to afford the Plan, in the dimensions in which it was conceived.

The political problem inherent in government staff reductions does not affect the lower-income group (who can be transformed into unskilled labor on public-works projects without difficulty) as much as it involves the higher-grade employees. These few thousands represent the administrative strength of the country. While their salaries have increased some 200 percent since 1939, the cost of living has increased about 585 percent. This inflation has undoubtedly had its effect upon the integrity of government administration, giving rise to an increase in part-time employment and increasing corruption. The more immediate problem arises from the fact that the growing "intellectual" strength of the Tudeh Party is being recruited from this hard-hit group. The failure of the Government to help young engineers and technical administrators utilize the skills they possess has multiplied frustration and brought many to the point where they are ready to accept the slogans of the Tudeh Party. Nor does the West help in measures sufficiently dramatic to capture the imagination of the Iranian. Britain, particularly, has failed as a leader because she chose to approach Iran almost entirely in commercial terms.

It is impractical to expect any appreciable reductions in the cost of Iranian government. On the contrary, there is increased pressure for military expenditure brought about by the modernization of the army as a result of the Mutual Defense Assistance Program of the United States even though most of the cost of this is being met by the United States. The current instability of the country necessitates the maintenance of the army, although as yet it hardly constitutes an important link in the defenses of the Middle East. Improved collection of taxes, or improvements in the present structure of taxes which penalize the poor and leave the rich relatively free, cannot be expected without stability and leadership. These qualities are certainly not in evidence today. Under present conditions the Iranians are not able to maintain their own government services, or to carry out a development program, unless they receive assistance through the next few years. Unless the West is prepared to lose another Asian nation to the Soviet system they must be helped. It is almost too late--and Iran, like China, is a very difficult nation to aid.


To Iranians, the recent record of the West's failure to help them began with the Teheran Declaration. Americans and British alike dismiss this claim by citing the text of the document: ". . . any economic problems confronting Iran at the close of hostilities shall receive full consideration, along with those of other members of the United Nations, by conferences or international agencies, held or created to deal with international economic matters. . . ." There was no promise of material aid in these words. Citing them, however, in 1947, the Iranians approached the International Bank and informed this new and cautious institution that Iran proposed to undertake a $650,000,000 development program; and of the amount named they asked that $250,000,000 be loaned by the Bank. Then began a series of discussions, which although conducted sympathetically by the Bank, have resulted in no loans to Iran. The Iranians still cannot believe that if the Bank desired to help a way would not have been found. America, which in Iranian eyes is indistinguishable from the Bank, had publicly given much support to the development plan from its very beginning, and had urged the Iranian application to the Bank. The lack of result has thus seemed to the Iranians, who do not yet understand the sophistications of Western banking, to mean lack of sincere support by the United States.

The Bank first pointed out that commitments of funds of this magnitude, without detailed information about the self-liquidating aspects of the projects in view, was against its fixed policy. The management expressed interest in the Iranian effort and suggested that it be given engineering studies of the Seven-Year Plan as a whole, and of specific projects in particular. Iran responded by commissioning an American engineering company to prepare such an over-all study. This study confirmed the hopes of the Iranian planners, but it did not provide the specific plans on which the Bank could act. In the summer of 1948, Iran asked the Bank to nominate a number of consultants who would be able to assist the Iranians in preparing the specific projects that were required as a next step. The Bank suggested that this could be better done, for a program as ambitious as the Seven-Year Plan, by a firm of industrial engineers with broad experience. Overseas Consultants, Inc., a consortium of American engineers, was suggested among others. Assisted by a British firm, this group prepared a comprehensive study, at Iranian expense. An extensive program was drawn up, and an organization established. Before six months had elapsed, however, it was clear that (particularly after two bad crop years) Iran could not afford a development program of the size planned without the increased oil royalties. The Bank, being a bank, did not find Iran a suitable risk.

The result was that the execution of the Plan virtually came to a stop. Had it not been for the efforts of the Shah's younger brother, Prince Abdorreza, the Plan would have died. He, with a few younger men, remained determined to keep the concept alive. And fortunately some inexpensive projects that had been undertaken showed early results. Nearly 500,000 cattle and sheep were inoculated for protection against rinderpest; 30,000 hectares of the Moghan steppe, almost virgin grain country on the Russian border, were put under cultivation; more than 50,000 peasant dwellings were sprayed with D.D.T. Moreover, essential engineering studies for a score of major projects were undertaken, and the largest of these are now acceptable to the International Bank. The heaviest expense for the Plan lay in financing the nearly moribund Government industry, and here there have as yet been few tangible results. The Plan also undertook to complete a railway extension to Tabriz, linking Azerbaijan with Teheran. Unfortunately, few of the projects actually undertaken were devoted to the improvement of agriculture--the basis of the Iranian economy--since most of the funds available had already been allocated to other enterprises.

The Plan was originally conceived as an orderly, economic revolution. When the conditions of Iranian finance undermined the Plan, the desire of the Iranians to develop their country on any realistic basis was defeated. The Seven-Year Plan was an Iranian concept; but to most Iranians, because of the assistance received from O.C.I., it represented the technical efficiency of the West, and notably America. It failed partly because of the Iranian failure to manage the country's affairs properly; but it failed also because the West did not recognize that the Plan was a last-ditch effort by Iranian liberals to erect a bulwark against political chaos and resultant Soviet intervention. If the West had recognized this two years ago, presumably its contribution to the effort would have been more tangible. If, instead of viewing Iran in terms of the substantial sterling payments which the Anglo-Iranian Oil Company was prepared to make, the United States had found a way of insuring the Plan against financial failure, as it insured the economies of Western Europe, much of the near disaster of today might have been prevented. It would have cost far less than the loss of Iran could mean.

The United States did take some action, and more may be taken now. In the summer of 1950, after repeated pleadings from the Embassy, the United States offered a $25,000,000 Export-Import Bank loan, mostly for agricultural development; but the political unrest had gone too far for this small figure to capture anyone's imagination. The figure was small in relation to the requests which Iran had been making to America, small in relation to Iran's own currency reserves, small in relation to Iran's strategic importance. All of these are political realities, and American failure to perceive them is at least one of the causes of Iran's present "neutralism." The loan, while still available, is not likely to be accepted by the present Majlis, which must approve such loan transactions by the Government. However, at the request of the Shah and the Government, the United States is supplying military assistance in equipment and advice. It is a hopeful fact that the Iranians, despite constant pressure from the Tudeh Party and Russian broadcasters, continue to accept this aid and advice. We are also supplying a small amount of technical assistance under the Point Four program, and intend to augment this technical service by a moderate grant-aid program under the Foreign Assistance Bill now being considered in Congress. Unfortunately, the aid presently given or offered does not correspond to inflated Iranian impressions of the size or type of investment which Iran requires and can absorb. It therefore may lack the power to stimulate the Iranians to reverse the trend toward further deterioration of the whole situation.

The recent mistakes of policy and approach are now clear. Until too late, the British pressed for a commercial solution of a political problem. The United States left a political problem to economists, who added up Iran's gold reserves and potential oil income and decreed that they were large enough to be the basis of progress; they were perhaps--except that the political ingredient of Iranian self-confidence was not included. In working with Asia, it is almost an axiom that the Asian's belief in himself, his country and his job is an absolute prerequisite for progress or reform. It is, of course, equally true of an American or Britisher. In Asia, where few men are aware that industrial power is a tool of mankind, where survival is a grim daily problem, confidence comes hard. It can be possible--and many times in the past has been--for an emperor or dictator to instill confidence through discipline. There is no such leader in Iran today. Even the Shah, whose concern for his people is great, whose orientation is clearly to the West, has yet to show that he is the leader for these times. The West should certainly continue to give him support, for he may yet be able to supply the needed leadership. To do this the Shah must have behind him the unifying and disciplinary force of the Army, at least as a symbol, if not as an executive arm. Even this cannot be counted upon.

In the crucial task of rebuilding the confidence of Iranians in themselves and in the West, America must realize that though we may bear the heaviest burden of a new policy, no unilateral approach to Iran can succeed. The United States must work with the British (regardless of what mistakes we think they have made), and through a broad international effort if possible. The task is to recreate the desire of the Iranians to develop their country themselves. It is not too late to talk of development--but it is clearly too late to speak of oil concessions outside the context of international economic and social development.

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  • EDWARD ASHLEY BAYNE, recently Financial Consultant to the Prime Minister of Iran, now consultant to the Economic Coöperation Administration; economic adviser to the Nationalist Government of China, 1946-48; loan officer for the Middle East, International Bank for Reconstruction and Development, 1948-49
  • More By E. A. Bayne