Economic and political relations between Iran and Israel, 1975–1985

¶ … government, economics, and business in the Middle East. Specifically it will discuss the economic interaction between Iran and Israel from 1975 until 1985 and how the Islamic Revolution in 1979 has influenced the economy during this time until today. With the formation of Israel in 1948, tensions in the Middle East increased, and battle lines were drawn. However, Iran was one of the first countries to formally recognize Israel as a viable state in the Middle East, which led to relatively cordial relationships between the two countries, at first. However, today, all relationships between the two countries have dissolved, and Israel threatens to attack Iran if they further develop their nuclear capabilities. This animosity was not always the case, as Israel and Iran actually have many elements in common.

Even after Iranian leader "derecognized" Israel in the 1950s, the two countries shared a bond. Over 100,000 Jews live in Iran (Weiss), and many other Iranian Jews live in Israel, which creates sympathetic cultures in both areas. Author Weiss continues, "Before Iran's 1979 Islamic Revolution, ancient cultural bonds and common strategic interests between Persians and Jews made Iran and Israel close allies" (Weiss). In fact, their economies, their governments, and much of their business was concentrated between the two countries, and it is only fairly recently (since the approximately 1985), that relationships between the two countries have deteriorated to the point of hostility and hatred. Before that, both countries tended to place themselves above and beyond their Arab neighbors. Author Trita Parsi writes, "Both tend to view themselves as somewhat superior to their Arab neighbors. Many Iranians think of the Arabs to their west and south as culturally inferior; as brutes who had the good fortune to have Persians as neighbors who could civilize and refine them. Similarly, having defeated the Arabs in numerous wars, most Israelis have little respect for their capabilities" (Parsi 5). They also both tend to distrust the outside world for various reasons, and they even have languages that resemble European language, rather than the traditional Arabic of the surrounding area (Parsi 5-7). Therefore, it seems natural that the two countries might form a bond, and for a time, at least, that was certainly the case.

1975 - Israel and Iran

After the 1967 Six-Day War, Israel proved they were a force to be reckoned with in the Middle East, and the alienated most of their Arab neighbors, including Iran. Iran was caught in a delicate balance between Israel and its other Arab neighbors, and Iran wanted Israel to be strong, but not too strong. An expert on the two countries notes, "In a balancing game, Iran did not want Israel to be weak, but neither did it want Israel to be too strong. A weakened Israel would bolster the Arabs and Soviets, and prompt them to turn their focus towards Iran" (Parsi 30). Thus, the war created tension between the two countries, but they still held alliances, and these alliances continued through at least 1985 in many areas. Many of these alliances were clandestine, so Iran's Arab neighbors would not know about them. As another writer notes, "The Shah delegated Iran's secret police to handle relations with Israel through the Mossad, Israel's external intelligence service. Usually, the ministry of foreign affairs - which was critical of Iran's ties with Israel - was kept out of the loop" (Kirshner). Outwardly, the two countries did not have ties, but politically, the governments kept ambassadors in both countries, although the Iranian ambassadors in Israel were referred to as Swiss ambassadors publicly, and they traveled through Turkey to arrive in Israel (Parsi 26).

By 1975, the Shah had signed an agreement with Iraq, and voted with the UN that Zionism was racist, which enraged Israel. However, until 1985, Iran still sold weapons to Israel, even during skirmishes with the Arabs, and they did not join in the Arab oil embargo of Israel. In fact, author Yossi Melman notes, "Beginning in 1975, the military cooperation focused on an Iranian investment of $1.2 billion in several research and development initiatives of Israeli armaments" ("How Israel Lost"). These investments included an Iranian munitions plant, ground-to-ground and sea-to-sea missiles, and a fighter plane. The cooperation ended in 1979 when Khomeini came into power. This indicates how the two governments worked together, even when it seemed as though they would not support each other, and it indicates how their business and economy were entwined with their own politics and the politics of the region. $1.2 billion was a lot of money in 1975, and the Iranian investment indicates their economy could support the investment and could support Israel's interests, as well. In addition, Iraq worked with Israel through 1985 to help keep the Iraqis out of Iran, another political move that kept the two countries joined, long after many people thought they had gone their separate ways. Author Weiss continues, "Mutual animosity toward Iraq - and Israel's desire to preserve influence with Tehran moderates - led Israel to supply weapons to the Islamic Republic well into the 1980s, including service as middleman in the Reagan administration's arms-for-hostages deal" (Weiss). Therefore, the weapons flowed both ways, and helped boost both countries economies, as well, even at a time when Khomeini denounced the western notions of economic profitability and modernization.

Israel and Iran - Business and Economy

Clearly, the oil pipeline agreements were business decisions between the two countries, and animosity over those decisions lingers today. In the 1970s, oil became the lifeblood of the Middle East, and Iran had oil. That meant they had power over their neighbors, but it also meant they had a growing economy, bolstered by rising worldwide oil prices. After the gas crisis of 1973, Iran enjoyed quite a boom in the oil business, the middle class grew, acquired wealth, and the economy was booming, too. As Iran began to modernize, it angered many of the conservative Islamic citizens of Iran. This helped lead to the Shah's overthrow in 1979, and the rise of the Islamic Revolution, which began in Iran and spread to neighboring Arab countries. This increased tensions with Israel with all these neighbors, but it also lead to a major downturn in the Iranian economy, because Khomeini did not believe in modernism at all, including economic capitalism, which he blamed on the westernization of Iran. Of course, by 1985, the country was in trouble financially, which is why that is the year they began investigating suing Israel over the Trans-Asiatic Pipeline. Even today, the economy has not recovered to the point that it was in the 70s oil boom days, and the economy is one of the major problems Iran faces today. Poverty rose after the Islamic Revolution, and so did unemployment, leaving Iran largely uncompetitive in the global marketplace. Their largest export is the sale of oil and gas, and Iran holds what is estimated to be 10% of the world's oil reserves, so their economy is growing again, and they are successfully paying off old debt that was restructured in the 1980s (Editors).

While Iran was sinking into a depression, Israel, on the other hand, was gaining ground in many areas of their economy. While they still have to import oil, and that continued during the 1975-1985 time period, their economy has modernized and gained much more ground and diversity than Iran's, at least today. However, from 1975 to 1985, the economy was a very different story. While Iran was undergoing a boom because of oil prices, Israel enjoyed no such luxury. In fact, their resources were depleted after the 1973 Yom Kippur War, and their economy was on a severe downslide. An economist notes, "Not only was Israel's economic growth rate much lower after 1972, it was also far less stable. The reasons most often cited for this slowdown include a sharp increase in defense spending, the 1982-83 energy crisis, and increased expenditures on social welfare" (Coutsoukis). Because their defense expenditures were so high during this time, Israel's growth stagnated, and they had to take foreign aid from other countries, (specifically the United States), and they had difficulty exporting enough items to create a healthy economy. The defense investments of Iran during this time helped ease some of the burden on Israel's population, and the oil agreement and pipeline investments helped ensure Israel would survive internally. However, during the period between 1975 and 1985, defense spending accounted for 25% of Israel's Gross National Product (GNP), an enormous amount no matter what the situation surrounding them was like (Coutsoukis). This was made up largely of military imports, because Israel has to import most all of its defense machinery and weaponry, and the U.S. helped out with about one-third of those defense costs during that time (Coutsoukis). By the end of 1985, the defense spending had been reduced to about 10% of the GNP, a more manageable number. In addition, the value of exports increased by the same time, which meant a reduced GNP, which meant Israel's economy was coming back on track and was ready to grow, just when Iran was reaching one of its lowest points. Social services also increased in Israel during this time, which added yet another burden to their economy, and social services had to increase in Iran during this same period, because there was more unemployment and cries out for economic reform. Many Iranian leaders and the highly educated left during this time, and immigrated to Israel and other countries like the United States to escape the Islamic Revolution regime and the toppling economy.

Another aspect of Israel's economy during 1975 through 1985 was the increase in oil prices, which harmed their economy, as well. Israel has no oil resources of its own, and has to import all its oil from other countries, and so, the price increases in the 1970s really added a burden to their economy. Iran, on the other hand, holds massive oil reserves, and is one of the premier members of the Organization of the Petroleum Exporting Countries (OPEC), and so their economy was helped by these rising oil prices, both before and after the Islamic Revolution in 1979. Therefore, while Iran was on the decline, Israel was on the rise, and today, Israel has a healthy economy, and Iran is basking in the spoils of the oil price increases of this year.

In conclusion, today, Iran and Israel are two of the most powerful countries in the Middle East, which clearly keeps them at odds. Understanding their history, however, adds context to the current situation in the Middle East. Iran and Israel have always "set themselves apart" from their Arab neighbors, both believing that they are above the Arabs of the region in many ways. In this, they share a common bond, and for many years, that bond stayed together despite outside influences. From 1975 to 1985, the area changed drastically, including modernization and stimulated economies. Israel continued to boom, while Iran essentially went bust for many years.