INTELLIGENCE MEMORANDUM POSSIBLE RESUMPTION OF SOVIET AID TO INDONESIA

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700020044-0
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 18
• Document Creation Date: December 22, 2016
• Document Release Date: March 2, 2010
• Sequence Number: 44
• Publication Date: October 1, 1971
• Content Type: IM

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Secret
Intelligence 1V1~emo~ra~.dun~
Possible Res~cm~ition Of Soviet Aid To Indonesia
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W.A.~~NING
'I'Ius documenl? contains information affecting the national
defense of the United States, within the meaning of Title
X8, sections 793 and i9~I, of the US Code, as amended.
Its transmission or revel2tioti of its contents to or re-
ceipt by an unauthorized Berson is prohibited by 1=rw.
GgOUP 1
Fratloded from oulomalic
downgrading and
dralouifiroiion
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CENTRAL .INTELLIGENCE AGEPdCY
Directorate of Intelligence
October 1970
INTELLIGENCE MEMORANDUM
POSSIBLE RESUMPTION OF SOVIET AID TO INDONESIA
Introduction
1. The recent arrival in Indonesia of a Soviet team to study the
feasibility of completing two Soviet?aided projects abandoned after an
abortive Communist coup in September 1965 presages the probable
resumption of Soviet economic aid to that country. As part of an
Indonesian-Soviet debt settlement of August 1970, the USSR and Indonesia
agreed to consider completing a steel mill at Tjilegon and a phosphate
fertilizer plant at Tjilatjap. During the past year, Moscow also has made
vague offers of aid for other Indonesian development projects. This
memorandum assesses the. current status of the Soviet-Indonesian economic
relationship .and suggests the prospects for a renewal of a Soviet economic
aid program in Indonesia during the next several years.
Discussion
A Decade of Soviet Aid, 1956-65
Military Assistance
2. By the time of the abortive Communist coup in 1965, the USSR
shad extended about $1.4 billion of aid to Indonesia. About $1.1 billion
of the total was allocated for military assistance (see Table 1, Appendix
A). Deliveries of Soviet military.. equipment under seven arms accords
concluded between February 1957 and October 1964, totaled about $860
n~iaion before .the USSR stopped its arms shipments to Indonesia in 1965.
Deliveries included a large variety of naval craft, ranging from missile patrol
.Note: This memorandum was prepared by the Off ce of Economic
Research and coordinated within the' Directorate of Intelligence.
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25X1
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boats to a light cruiser (the only cruiser Moscow has sold to a Third World
country); late, model fighter, bomber, and transport, and utility aircraft;
a surface to air missile system; and assorted ground equipment (see Table
2, Appendix A).
3. About one-fourth of the estimated value of Soviet military aid
to Indonesia represented discounts from list prices. The balance consisted
of credits of up to 10 years at 2% interest, repayable after varying grace
periods. Soviet .assistance made Indonesia's military -particularly its navy
.and air force, which had received about three-fourths of their equipment
from the USSR -heavily dependent on Moscow for spare parts and
maintenance. Termination of Soviet deliveries in 1955 severely reduced the
operational capability of these services. It led to eventual grounding of most
of the aircraft and scrapping of many of the naval vessels. Late. in 1970,
Djakarta sold four naval units (a Skory-class destroyer, an LST, a salvage
ship, and. a gunboat), originally purchased for an estimated $7 million, to
Japan for about $250,000. Ships remaining to be so;d include the light
cruiser Irian (purchased at a discounted cost of S33 million) and many
destroyers, destroyer escorts, and submarines. Indonesia also is attempting
to dispose of many of its Communist-supplied bcmbers, MIG fighters,
helicopters, and ?ransports.
4. Because Mc~;cow insisted that Indonesia settle its debt to the
i;SSR before spares would be provided for Soviet. military equipment, it
was' riot until after a debt rescheduling in November 1966 that Moscow
would agree to sell $]0 million worth of spares to Indonesia. 'fhe Soviets,
however, in an accord signed in September 1967 refused to provide credit
and agreed to .sell the spares on a cash. basis only. Even then, Indonesia
placed orders for only about $5 million worth of the spares. Delivery of
these orders .were completed by the end of 1969, after which
Soviet-Indonesian arms dealings were terminated. This occurred despite
Soviet willingness to provide Indonesia with the remaining $5 million of
spares on credit.
Economic 'Assistance
5. Moscow's economic aid agreements with Indonesia totaled about
$332 r.~illion, of which some $105 million has been drawn (see Table 3,
.Appendix A). In contrast to the rapi,i delivery. of sizable amounts of military
equipment, not a single industrial. establishment was completed with Soviet
aid. A dozen merchant ships, a small hospital, some textiles, a sports
stadium, roads, and .several uncompleted plants comprise the extent of thf
Soviet. legacy to Indonesia's development program.
6. Most ~f .the. economic aid allowed 12 years for repayment, after
a grace period, and carried interest of 2.5%. The first Soviet economic aid
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to Indonesia was a $100 million credit extended in 1965 for the
construction of roads, the steel mill at Tjilegon, and the superphosphate
plant at Tjilatjap and for the purchase of merchant ships. In 1959, Moscow
extended a $17.5 million credii f'or a sports stadium and a school for
shipbuilding and oceanography. The stadium, a showplace for both
Indonesians and the USSR, ~?ras completed in 1962, in time for the Asian
Games. Although little progress. was made t+n the construction of other
projects under the 1956 credit, IChrushchev extended another $250 million
of new credits for hea~ry industi?.ial development during a visit to Indonesia
in 1960.
7. Deliveries to Soviet-aided projects continued during the first half
of the 1960s, but much of the equipment remained crated at the port
or lay rusting at construction sites. Sukarno's preoccupation with the West
Irian issue and .his "confrontation" .with Malaysia diverted much of the
country's resources to military use, and Djakarta was unable to provide
the local cost financing f'or the labor and materials necessary to install the
equipment. Moreover,. the, continuing deterioration of Indonesia's economy
left Djakarta unable to .finance many. current budgetary requirements, let
alone. to pursue its development program. In 1964, at Indonesia's request,
approximately $gG million of the. 1960 economic aid credit was d~~/erted
to the military, practically the only use o# the Khrushchev credit by the
time of the halt. in Soviet aid activities after 1965.
8. Although the attempted coup .did not immediately affect the
Soviet-Indonesian aid relationship,. the post-Sukarno regime gave higher
rriority to achieving economic stability ar,d deferred further investments
on !ong-te: m development projects.. This decision particularly affected
Soviet-aided industria? projects, causing them to be indefinitely postponed
and eventually terminated. As a result,. credits totaling some $215 million,
for which contracts had rot been entered into under tt~z 1956 and 1960
accords, expired in 1964 :uid 1967, respectively.
9. dome work, however, continuE.i on the research reactor at
Serpongtl~ and the shipbuilding anal oceanography school at Ambon, but
recently, these activities also were sto+~ped. About. $2.5 million from the
1959 credit for +he school still rema,ns to be used.
10. The rapid curtailment of Soviet aid acti~~ities led to a concomitant
drop in t,~-e number of Soviet e~~onomic technicians employed in Indonesia.
In -1963here .were. an estimated 430 Soviet economic technicians in
Indonesia. The number fell to 100 in 1967, and to only 20 in 1969 and
1970,
1. Under 'the 1960 line of credit.
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A Nsatus in the Soviet-Indonesian Aid Relationship, 1, 967-70
11. At the time Moscow terminated its aid activities, Djakarta owed
the USSR some $800 million.~2~ In spite of Soviet attempts in 1963 to
reduce the burden of Indonesia's debt by rescheduling the payments, only
about $60 million of principal and interest had been repaid on the long-term
debt by 1965. A .second rescheduling was negotiated in November 1966,
but Indonesia made no payments under this accord. A-new debt settlement
was reached in 1970 which allowed the more generaus 30-year terms agreed
to by Indonesia's Western creditors (see Appendix B). Indonesia made its
first payment -about $16 million - as scheduled in the 1970 protocol
on 1 December 1970. Tlie USSR and Indonesia also agreed, under the 1970
protocol, to study the possible completion of the Tjilegon steel ~;Zill and
the Tjilatjap superphosphate project and to consider Soviet assistance for
processing tin and bauxite in Indonesia.
12. Although some reports implied that Indonesia preferred Western
assistance for completing the construction of the Soviet-aided plants at
Tjilegon and Tjilatjap, Indonesia signed a contract. with the USSR in July
1971 for a survey of the plants.. The two-month study (for which Indonesia
has budgeted $50,000-$100,000 for the local costs) will inventory
equipment at the sites, will review the origir!.:; plans to decide whether
they should be revised, and will estimate the cost of completing the plants.
The report will serve as a basis for Indonesia's decision on whether or riot
to go ahead with construction of the plants and will determine the amount
of additional financial assistance required from the Soviet Union.
Preliminary estimates indicate that approximately $40 million of foreign
exchange will be required to put them into operation. About one-fourth
2. Including the foZZoning:
Long-term debt
Million US $
799
748
Military. 523.
Economic 98
Accumulated interest 127
Medium-term debt
Short-term debt, including
interest
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of the. steel plant (see the photograph) and one-half o` the superphosphate
plant had been completed when Soviet aid was terminated, and roughly
80%-90% of the .equipment for the tv~o plants had been delivered at that
time. The, amount that is salvageable, however, is not known; since much
of the 'equipment either has been stolen, has dexe:iorated, or has become
Prospects ?.-for Increased Economic. Relations
13. With the, return of relative .financial stability to Indonesia, it is
likely that the ggVernme nt will opt for completion of the, steel mill and
the superphosphate. plant if they are judged to be economically feasible.
Though :there" have ueen .reports. that Indonesia would. prefer Western
assistance. for. the plants, it would be difficult to .solicit' the support of
Western firms to undertake projects with so large a component of Soviet
equipment: A, conversion process would be too costly: Therefore, a decision
to complete the plants would almost certainly require additional financing
from the Soviet 'Union.
14. ' Moscovr apparently is anxious fora rapprochment; as the USSR
is intereste~9 in .reestablishing asignificant political presence in the largest:
Stiutheast Elsan country. Economic factors are, also a 'consideration. The
precipitant decline. in Soviet exports to Indonesia after 1965 reversed the
USSR's; trade lalance,with Indonesia from a surplus to a deficit (see '`able
4, ,Appendix A).~ Soviet exports to Indonesia declined from $54 million,
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in 1965 to less than $5 million in 1966; Soviet imports from Indonesia
fela only slightly between 1965 and 1966, from $32 million to $31 million.
This balance in Indonesia's favor was sustained through 1970. The USSR
would .like to expand its exports to Indonesia in order to redress the
imbalance, particularly since the USSR pays hard carrency for its imports
from Indonesia. F~ut Soviet participation in Indonesia's `_otal trade was
insignificant. With the rise in Indonesia's total turnover t~ $2.3 billion in
1970, even if Soviet trade with Indonesia were. at the record 1962 level
it would account for. less than 5% of Indonesia's total trade.
15.: As relations between the two countries are normalized, it is likely
that Soviet economic aid will flow to Indonesia. This aid, -compared with
Western assistance was always small (see the chart), and during the. next
several years probably will be limited to wc,rk on the steel mill and
superphosphate plant, assuming t;lat their construction is to be resumed..,
In spite of Soviet interest in providing assistance for tin and bauxite
processing plants, this assistance probably wily not be undertaken until
additidnal tin and bauxite deposits are exploited, since most of the current
production of , these metals alrCady has been committed. Japan has
contracted to fake almost all of Indonesia's current annual output of
bauxite -about 1 million ions -and tin production does .not yet support
capar,:ty operations at the government-owned smelter in Indonesia. Thus,
even if deliveries of Soviet aid are resumed, the amount provided will be
relatively insignificant for Indonesian development, in which foreign private
interests plan to invest almost $1.5 billion (exclusive of oil development).
It also will be dwarfed by the far larger aid flows from Western nations,
which in 1969 totated $350 million.
16. There is no .immediate prospect that Indonesia will resume
purchases of arms from the USSR. Djakarta not only has curtailed military
expenditures, but. Indonesia's Defense Department also has recommended
against spare parts purchases in spite of reported Soviet offers to provide.
Indonesia with military equipment and spares on easy terms. The present
military establishment in Indonesia appears to prefer to scrap. Soviet
equipment rather than to purchase. more of it.
COIIC1USlO11S
17. The arrival of a Soviet technical team in Djakarta in August to
survey two Soviet projects, on which construction was stopped .following
the abortive local Communist coup in Septerr~ber 1965, could lead to the
resumption of Soviet aid to Indonesia, Before the attempted coup, Moscow
had delivered some $$60 million 'of arms and $100 million of economic
aid to Indonesia under agreements totaling about $1.4 billion.
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Aid Deliveries to Indonesia, 1956-65
Million US $
18. The termination of Soviet military deliveries, particularly of spare
parts, ]tit Indonesia's naval and air force particularly hard. Much of the
air and naval equipment eventually became useless, and some of it has been
sold as scrap to foreip~ buyers for a small fraction of the original cost.
By the time Moscow agreed in 1967 to sell some $10 million worth of
spares, Djakarta had cut back sharply on its military outlays and exercised
only half the option. Iii spite of recent Soviet offers of arms credits, it
is unlikely that Indonesia will resume arms purchases from the USSR arty
time soon.
19. When Soviet economic aid deliveries to Indonesia were stopped,
not one industrial project had been completed. Two projects - a steel mill
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at Tjilegon and a superphosphate .plant at Tjilatjap -were only partly
completed. An agreement sig~led in August 1970 to reschedule Indonesia's
debt to the. USSR called for a survey to determine the feasibility of
completing the. two projects, as well as for possible assistance for the
construction of tin and bauxite processing plants. It is these possibilities
that the Soviet technicians will explore.
20. In spite of Moscow's desire to expand its economic ties with
Indonesia as a means of establishing a significant presence in ?hat country,
Soviet aid is likely to be relatively small because of the limited opportunities
presently available for Soviet economic aid involvement. Such assistance
is likely to be confined. to the two plants and to tin and bauxite processing
facilities when additional deposits of these ores are exploited. Soviet
economic aid to Indonesia during the next several years also will be
insignificant, compared with .aid received from Western nations and from
anticipated private foreig~~ investment. Official deliveries of aid from the
West in 1969 totaled $350 million, about three and one-half times the
amount delivered by the USSR during 1956-65.
21. Moscow also would .like to expand its exports to Indonesia in
order to redress the imbalance that has characterized its trade with Indcnesia
since 1966, particularly since the USSR pays hard currency for its imports
from Indonesia.. Soviet trade with Indonesia, .however, always has been
relatively insignificant, and even if it were to reach the record level of 1962,
it still would account for less than 5`% of Indonesia's total trade.
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APPENDIX A
Table 1
Soviet Military Aid To Indonesia
Million US $
Extended
Drawn
Total
Credit
Discount
Total
1,092
824,
268
858
1957
8
8
1959
5
5
1960
283
200
83
1961
441
332
109.
1962
95
69
26
1963
61
51
10
1964
139
159
40.
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Major Communist Military Equipment Delivered
1957-65
Type of Equipment Units
Naval ships
Light cruisers 1
Destroyers 16
Submarines 12
Minesweepers 6
Submarine chasers and escort
vessels 16
Motor torpedo and missile boats 26
Other, including auxiliary vessels
and landing craft 57
Medium jer bombers 26
Light jet bombers 28
Jet fighters 112
Heavy transports 6
Other, including non-jet combat
aircraft, trainers, transports,
and helicopters. 258
Light tani:s ( amphibious )
Personnel carriers, armored
amphibious
Artillery pieces a/
155
400
550
Surface-to~-surface f/ 12
Surface-to-air e/ 8
Air-to-surface c/ 12
Air-to-air d/ 26
Guided missile systems b/
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157-65
(Continued):
a. Including reeozZZess cannons an
Major Communist Military Equipment Delivered
mortars
b. Data reflect numbers of aircraft, ships,
vE;hieles havincr missile capabiZitz~.
c.:' Indicating number. of TU-76 aircraft equipped
L?ith A5M (two per aircraft) ..
d. Indicating number of fighter aircraft equipped
rsith AAM (two to four per aircraft).
e.' Indicating number of SAM. firing battalions
(sites) -- six launchers-per. SA-2 sits, .four
launchers per SA-3 site.
f. Indicating number of Komar-.and Osa-class boats
equipped with SSM (two to four per vessel).
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Soviet Economic Aid to Indonesia
1956-70
Million US $
Extended
Drawn
Total
332.2
105.1
'1956 Line ofcredit
100.0
84.0
Of which
Ships
12.5.
Textiles
1.0
Road construction
34.0
Steep mill
36.0
Superphosphate plant
8.5
Farm
1.3
1.959 Credit
17.5
15.1
Sports stadium
12..5
Shipbuilding and oceanography
school
5.0
1960 Line of credit
210.0 a/
4.1
1960 Hospital b/
1.4
1.4
aid.. .
b . Grant .. .
a. The o>iginaZ extension. of 250 million was re-
dueed b~ $40 mi ZZion that was. trares~ erred to mi Zitar~
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Soviet Exports'to and Imports
from Indonesia
Million US $
Imports Balance
Year Exports
196.2
1963
1964
1965
1966
1967
1968
1969
1970
16.2
31.4
31.3
33.9
58.6
38.7
49.9
29.8
47. 1
25.8
54.4
3:'!.0
4.8
30.8
5.2
24.3
5.2
19.1
3.6
23.8
5.0
27.8
-15.2
- 2,6
19.9
20.1
21.3
22.4
-26.0
-19.1
-13.9
-20.2
-22.8
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Excerpts from Protocol ~n Economic Relations
Between ?hs Republic of Indonesia
and the USSR, August 1970
Article 1 At the request of k-ie Government of the Republic of
Indonesia for the postponement of payments to settle
its long-term government debt, and its medium-term and
short-term debt, the Government of the Union of Soviet
Socialist Republics has agreed that payment's for the
settlement of debts existing on I January 1970. and
originating from loans extended wider Indonesia-Soviet
Union agreements signed on 15 Septernoer 1956, 28
February 1960, 22 November 1963, 6 October 1964,
1 G May 1965 and Protocols dated 30 April and 13 Jurc
1963, and also based on related contracts between
organizations of both parties, will be conducted in 30
years in equal annual installments of 22.5 million rubles
(1 ruble contains 0.987412 grams of pure gold),
beginning in 1970.
The above-mcntioncd payments will be made annually
on 1 llccember at the lastest.*
Article 2 Payment of interest on long-term government loans, and
medium-term and short-term commercial loans in
accordance with Condit ions attached to the agreements
and contracts concerned, will be made over a I S-year
period beginning in 1985 '~'. equal annual installments
amounting to 3.2 million rubles.
These payments will be made asuzually on I Dcceinber
at the latest.
Both parties a~'ec that a moratorium interest will not
be charges' rni the total debt mcntioncd in Article 1.
* The amounts due fur pri~rcipal, ussunrlug hrdvucsia takes the option
to defer part of pavn~e~it allowed i~~ Article 3, will be $15.7 mrllivn fraur
1970 to 1977, $25.0 u:illiar frui> 1975 to 1991, and ~'.34..~ NlllhaN front
1992 throciglt 1 V99.
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Article 3 lndonesia may decrease annual installment payments
during 1970-77 by 8.4 million rubles a year,
This tunount will be aJdcd on to annual payments
during 1992-99,
Interest of 4~I~ a year will be charged for the deferred
amount until the deferred payments arc settled.
This interest is to be paid in c~~ual annual installments
during 1992-99.
Article 5 Payments n:entioncd in Articles 1 and 2 of this Protocol
will be made in freely corvcrtible currency at the
direction of the State Bank of the Union of Soviet
Socialist Republics, into the accounts of the Foreign
Trade Bank of the Union of Soviet Socialists Republics
in banks of a third country.
Article 7 Both parties agree to consider complctin~ the
construction of the steel project in Tjilegon and the
superphosphate project ~u Tjilatjap.
Article 8 Both parties agreed to consider tlic possibility of
economic and technical aid by the USSR for processing
tin and bauxite in lndonesia.
Article 10 When this Protocol goes into effect, any provisions
contained in other Protocols or agreements noted in
Article l of this agreement will no longer be valid.
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