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May 4, 1971
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e __ . . tj~ Approved For Release 2008/02/12 : CIA-RDP85T00875R001100100054-6 W%Wf Secret flflPIIMrn' _ I 11 U"MUGH Flic DIRECTORATE OF INTELLIGENCE it. JL7 DO NOT DESTROY Intelligence Memorandum Peru: Thirty Months of Revolution Secret State Dept. review completed 88 4 May 1971 No. 1686/71 Approved For Release 2008/02/12 : CIA-RDP85T00875R001100100054-6 Approved For Release 2008/02/12 : CIA-RDP85T00875R001100100054-6 WARNING This document contains infon. ation affec'.ing the national defense of the Uni.`ed States, within the meaning of Title 18, sections 793 and 794, of the US Code, as amended. Its transmission or revelation of its contents to or re- ceipt by an unauthorized person is prohibited by law. GROUP I Excluded Iron V.I.. 0 Ill downgrading and denlmrifcolion Approved For Release 2008/02/12 : CIA-RDP85T00875R001100100054-6 ??~ Approved For Release 2008/02/12 : CIA-RDP85T00875R001100100054-6 SECRET CENTRAL INTELLIGENCE AGENCY Directorate of Intelligence 4 May 19 71 INTELLIGENCE MEMORANDUM Peru: Thirty Months of Revolution Summary In October 1968 the Peruvian armed forces pledged themselves to produce a thorough national revolution. In the succeeding 30 months, they have promoted a strong sense of aggressive nationalism and have begun to restructure the country's basic institutions. Their objectives, extensive and sometimes conflicting, include destroying the hegemony of the native oligarchy; promoting agricultural development and rapid industriali- zation; limiting foreign (basically US) economic and po- litical influence; and diversifying political and eco- nomic contacts in the non-Western world. They condemn both capitalism and Communism and have adopted measures that do not fit into any firm ideological outline. In some instances, their measures follow those previously instituted on a piecemeal basis by other Latin American countries. Despite some current problems, military leaders still appear convinced that they can promote a genuine revolution and that their methods are ba- sically valid. They intend to stay in power until they have made significant progress in solving the country's ills and until they are sure that a succes- sor regime will continue the general direction of their policies. Note: This memorandum was prepared by the Office of Current InteZZigence and coordinated within CIA. SECRET pAMMApproved For Release 2008/02/12 : CIA-RDP85T00875R001100100054-6 Approved For Release 2008/02/12 : CIA-RDP85T00875RO01100100054-6 SECRET Beginning a Revolution 1. During its 30 months in control, the mili- tary government has concentrated on restructuring the economy, but the changes instituted have also laid the groundwork for an eventual major redistri- bution of politiccl power. Close government involve- ment in the economy has been adopted as a basic prin- ciple. Some industries have been reserved for govern- ment development: petroleum refining, steel, cement, non-ferrous metals, basic chemicals, fertilizers, and paper. The government will control all new invest- ments in these areas and eventually buy out existing private companies. 2. Six days after gaining power the military expropriated the properties and facilities of the US- owned International Petroleum Company (IPC). Since then, it has nationalized the largest private tele- phone system, expropriated the large sugar plantations, and announced that it plans to nationalize all remaining private communications systems and the electric system. It has bought out several large private commercial banks, taken control of all foreign exchange transactions, assumed charge of export marketing of minerals and fishmeal, taken possession of the largest private rail- road company, and is considering nationalizing the major Peruvian international airline, which is al- ready partially state-owned. The regime has agreed to pay cocompensation for all properties taken, but its offers to IPC and W.R. Grace are considered in- adequate. 3. Firm limits have been placed-on foreign paz- ticipation in industry. All manufacturing companies with a yearly gross income of $23,000 or more, whether in existence or to be established, must be at least 5,1 percent Peruvian owned. Foreign ownership in ex- cess of this amount will be transferred to the gov- ernment or private Peruvians. The regulations permit the company to regain its original investment and make an undefined "reasonable profit." Similar reg- ulations applicable to the large fishmeal industry were included in regulations issued in March 1971. sr;cxE-i Approved For Release 2008/02/12 : CIA-RDP85T00875RO01100100054-6 Approved For Release 2008/02/12 : CIA-RDP85T00875R001100100054-6 ~.CR ErT, 4. Regulations governing the ownership and oper- ation of producing mines have not yet been issued. Restrictions have been placed, however, on future foreign participation in the development of new mines. The government established a firm schedule of dates for the submission of proposals for mine development, evidence of assured financing, and the initiation of mineral production. Some of these regulations re- quire a specified percentage of government financial and administrative participation. The US-owned Ana- conda Company, for example, lost its Cerro Verde cop- per concession because it refused to agree to 51 per cent government control of the operation. Other US min- ing companies have lost their undeveloped concessions because of problems in meeting the deadline to begin development, government allegations that their con- cessions did not have proven ore del ,its, or inability to provide evidence of assured financing by the re- quired date.. The major copper concession still being developed by a foreign firm is the Cuajone deposit of the US-owned Southern Peru Copper Company (SPCC). This mine will require a total investment of approx- imately $355 million. In late January, President Juan Velasco Alvarado warned SPCC that it would lose the Cuajone concession unless the mine is developed ac- cording to the contract schedule. 5. For other industries, the government has es- tablished a broad set of incentives to encourage the expansion or establishment of priority sectors and is urging new firms to locate outside areas already developed. The government has also granted incentives to encourage the formation of mixed public/private com- panies. 6. The most radical of the government's economic measures is the decree, new to Latin America, that grants industrial employees eventual 50 percent owner- ship and management of their companies. All indus- trial firms are required to contribute 15 percent of pre-tax profits to an entity called the "industrial community," which represe::ts all the company's em- ployees. The industrial community will use this money to buy shares in the company until it owns 50 sEcRET? Approved For Release 2008/02/12 : CIA-RDP85T00875R001100100054-6 Approved For Release 2008/02/12 : CIA-RDP85T00875RO01100100054-6 SFC R FT percent. Despite the strong objections of businessmen, the same regulation was included in this year's de- cree on the fishing industry and is likely to be in- cluded in the forthcoming general regulations for the mining industry. The contribution to the indus- trial community is in addition to a cash donation of 10 percent of pre-tax profits paid directly to the firm's employees. The same benefit, in a modi- fied form, has been extended to employees of the fish- ing industry and will probably be established for mine workers when the general mining law is released. 7. The concept of worker participation in owner- ship and management ??ias embodied in the original agrarian reform law of June 1969. The law, which pro- vides for government compensation, calls for the gov- ernment to nationalize the large sugar estates and agro-industrial enterprises and convert them into co- operatives as well as to nationalize smaller planta- tions and distribute th?. land to individual farmers. Approximately 65,000 farm families have already re- ceived land or are members of newly established co- operative farms. The basic problem facing the agrarian reform program is that there is not enough arable land to permit individual distribution to all eligible re- cipients. To make a start at resolving the problem, the government canceled the original distribution of one large estate and turned it into a cooperative, as more recipients could be benefitted by this ar- rangement. President Velasco's recent statements im- ply that many large estates will be converted to co- operatives, rather tnan distributed to individuals. Political Effects 8. Some of the government's measures, as well as its well-publicized posture as the defender of the "little man," have won it significant popular support among Peru's long-neglected urban and rural low-income groups. This has resulted in some erosion in the political strength of the American Popular Revolutionary Alliance (APRA), the country's largest political party, long anathema to the Peruvian mili- tary. Partly because organized opposition has been Approved For Release 2008/02/12 : CIA-RDP85T00875RO01100100054-6 Approved For Release 2008/02/12 : CIA-RDP85T00875RO01100100054-6 SECRET subdued, the government has made little serious ef- fort to form political groups to support its poli- cies. In addition, the military does not intend to withdraw from power in the near future and feels it can afford to postpone forming the political base for a successor regime. There are some indications, however, that President Velasco hopes eventually to mold an organized base of support for the government, possibly by building a controlled labor confederation or by establishing the committees of "social mobili- zation" that he has been discussing recently. 9. Other political measures were motivated by the desire to eliminate actual or potential opponents. Such actions included the almost total reconstitution of the Supreme Court, the revision of local judiciary bodies, and the appointment of new municipal officials. Restrictions on the press resulted in the moderation of the editorial position of an anti-government Lima daily and the forcible subordinations of two Lima news- papers to progovernment journalists' federations. International Relations 10. In order to promote nationalism and to re- duce foreign influence, the government took deliberate steps to confront private US companies and the US Gov- ernment; fewer such moves have been made in 1971. The first major act was the seizure of IPC's oil fields and facilities. This move was very popular, because the Peruvian public had long been convinced that the company's concessions and operations were in violation of Peruvian law and common justice. By artificially setting the company's alleged debts far in excess of the proposed compensation,. Peru challenged directly the US policy requiring compensation For expropriated properties. The US Government has delayed application of economic sanctions because the question of compen- sation is theoretically still under discussion. Presi- dent Velasco, however, has made it clear that he con- siders the matter closed. This demonstration of the government's ability to stand up to the United States SECRET Approved For Release 2008/02/12: CIA-RDP85T00875RO01100100054-6 Approved For Release 2008/02/12 : CIA-RDP85T00875R001100100054-6 SECRET made significant political capital for the new re- gime and indicated that the military intended to carry out its announced revolutionary goals. 11. The question of compensation for the nation- alized agricultural holdings of the W. R. Grace Com- pany is still under negotiation. Grace has refused to accept the proposed compensation because it con- siders it inadequate. This problem, now almost two years old, is of immediate concern because of pressure by Grace and some US congressmen to reduce or tax Peru's sugar quota in the US market to obtain what they consider a just compensation. Peru has not, as yet, begun a major propaganda offensive against the company or the US Government over this issue. 12. Peru has also conducted an energetic cam- paign in support of its claim to 200 miles of ter- ritorial waters. In 1969, when relations with the US were strained because of the IP( problem, Peru seized a number of unlicensed US fishing boats within the 200-mile limit. This action led to the tempo- rary suspension of US military aid to Peru. The Velasco government retaliated by asking the US mili- tary mission to leave, although it permitted a seven- man Military Advisory Group to remain. In 1970, two US fishing boats were seized and fined; so far in 1971, only one has been captured. Peru reportedly has overlooked the less flagrant violations of other US fishing vessels this year, and it appears that the government is deliberately trying to avoid creat- ing a new incident over this issue. 13. Over the past year Peruvian officials appear to have muted other situations that could lead to new incidents and have given some indications that they' desire a closer relationship with the US. US earthquake relief after the May 1970 disaster was widely publicized, and the personal visit cf Mrs. Nixon was uniformly lauded by Peruvian of including President Velasco. The Peruvian foreign minister reportedly did not attend last month's OAS meeting in Costa Rica because his statements in favor of the re-admission of Cuba to the OAS went beyond President Velasco's position. The government may have believed Approved For Release 2008/02/12 : CIA-RDP85T00875R001100100054-6 Approved For Release 2008/02/12 : CIA-RDP85T00875RO01100100054-6 SECRET that a reiteration of this proposal would have cre- ated another point of friction with the US. Recently a Peruvian official said that his government intends to advise the US of its planned moves in the inter- national sphere so they will not be misunderstood; the US was informed in advance of the arrival of a Chinese Communist trade group in Lima in late April. 14. Part of this softening attitude apparently is derived from the presence of the Allende regime in Chile. Several Peruvian officials have expressed concern that Chile may adopt classical Communist forms. in addition, Peruvians have always feared Chilean mil- itary might; apparently this disquietude was the basis of the government's reported plans co request an in- crease in US military aid and the reassignment of a JS military mission to Peru. 15, To complement its reduced dependence on the US, Pei:u has established diplomatic relations with all the countries-of Eastern Europe except Albania and East Germany; Cuba and, the Asian Communist coun- tries have not been recognized, however. The visit of a Chinese Communist trade delegation in April re- sulted in the establishment of formal commercial rela- tions but there is no evidence that diplomatic ties are imminent. 16. In its relations with the USSR, Peru has made wide political and cultural contacts, but prog- ress in the economic field has been limited. In Au- gust 1970 Peru accepted a Soviet credit agreement for $30 million ($28.3 million after downpayments) for the purchase of machinery and equipment. There is no indication, however, that it will be used in the .ear future. The ministers of agriculture and fisheries have concluded independently that Soviet machinery would not be appropriate for their needs. President Velasco recently commented that the announced Soviet interest in aiding a Peruvian irrigation proj- ect was limited to inspecting the area. 17. The Soviets seem'most interested in fostering the reduction of US influence in Peru and improving 25X1 Approved For Release 2008/02/12 : CIA-RDP85T00875RO01100100054-6 Approved For Release 2008/02/12 : CIA-RDP85T00875R001100100054-6 SECRET their own relative position but want to do it without significant financial commitment. The largest So- viet assistance to date is the $2.5 million in earth- quake relief aid. The USSR purchased some Peruvian cotton in 1970, but the total value of Soviet bloc trade was less than two percent of Peru's total trade last year. 18. In recent months Peru has become increasingly suspicious of Soviet motives and activities. The Peruvians probably hold the Soviets at least morally responsible for this year's costly series of mine strikes by the pro-Soviet General Confederation of Peruvian Workers. in addition, the activities that led to the expulsion of five Soviet diplomats in Mexico recen evidently made an impression on the government. tl, e oreign minis er as suggested- that is government might protest formally the alleged involvement of Soviet diplomatic representatives in the country's internal affairs. The presence of Soviet diplomats in Lima is one way for Peru to dem- onstrate an independent foreign policy, however, and the Velasco government probably still has some hopes of significant commercial sales. As a result, it seems unlikely that Peru will make strong moves against the Soviets without some specific proof of their interven- tion in internal affairs. 19. Peru has not pressed for closer relations with Cuba, nor has it given any firm indications that it plans to resume commercial relations with Havana. Peru has publicly expressed its willingness to support the readmission of Cuba to the OAS, although it has said it does not intend to sponsor the proposal and will not take unilateral action to recognize the Cuban regime. Although Castro originally derided the revo- lutionary credentials of the military government, by mid-1969 he was viewing events in Peru more sympathet- ically. He now considers Peru to have the type of "rev- olutionary government" he would be pleased to see estab- lished in other Latin American countries. 20. Peru has developed contacts with the non- aligned nations in order to promote support for its position on territorial waters and to strengthen demands for more trade and aid from the developed countries. 25X1 Approved For Release 2008/02/12 : CIA-RDP85T00875R001100100054-6 Approved For Release 2008/02/12 : CIA-RDP85T00875RO01100100054-6 SFC:R FT Problems 21. The growing number of strong government measures has produced a series of problems, primarily of the economic sort but with political implications. It does not appear likely, however, that these prob- lems will result in a basic change in the orienta- tion or implementation of government policies. The major problem is a continuing hesitancy on the part of foreign investors to finance development projects. Government spokesmen, including President Velasco, have tried to convince them that their assistance is welcomed and in fact required, but investors are generally waiting to see if these verbal appeals are backed up by a comparable revision in the government's investment laws. 22. The situation in the mining industry il- lustr.