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December 22, 2016
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March 2, 2010
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October 1, 1971
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Sanitized Copy Approved for Release 2010/03/05 : r'j CIA-RDP85T00875R0017000 Sanitized Copy Approved for Release 2010/03/05 CIA-RDP85T00875R0017000 Sanitized Copy Approved for Release 2010/03/05 :CIA-RDP85T00875R001700020044-0 2 Secret Intelligence 1V1~emo~ra~.dun~ Possible Res~cm~ition Of Soviet Aid To Indonesia Sanitized Copy Approved for Release 2010/03/05 :CIA-RDP85T00875R001700020044-0 L Sanitized Copy Approved for Release 2010/03/05 :CIA-RDP85T00875R001700020044-0 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 Sanitized Copy Approved for Release 2010/03/05 :CIA-RDP85T00875R001700020044-0 Sanitized Copy Approved for Release 2010/03/05 :CIA-RDP85T00875R001700020044-0 SECRET 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. SECRET 25X1 Sanitized Copy Approved for Release 2010/03/05 :CIA-RDP85T00875R001700020044-0 Sanitized Copy Approved for Release 2010/03/05 :CIA-RDP85T00875R001700020044-0 SECRET SECRET Sanitized Copy Approved for Release 2010/03/05 :CIA-RDP85T00875R001700020044-0 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 Sanitized Copy Approved for Release 2010/03/05 :CIA-RDP85T00875R001700020044-0 SECRET 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. SECRET Sanitized Copy Approved for Release 2010/03/05 :CIA-RDP85T00875R001700020044-0 ~,~ Sanitized Copy Approved for Release 2010/03/05 :CIA-RDP85T00875R001700020044-0 SECRET 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 SECRE'~.' Sanitized Copy Approved for Release 2010/03/05 :CIA-RDP85T00875R001700020044-0 Sanitized Copy Approved for Release 2010/03/05 :CIA-RDP85T00875R001700020044-0 SECRET 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, SECRET Sanitized Copy Approved for Release 2010/03/05 :CIA-RDP85T00875R001700020044-0 Sanitized Copy Approved for Release 2010/03/05 :CIA-RDP85T00875R001700020044-0 SEC~2ET 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. ;.SECRET: Sanitized Copy Approved for Release 2010/03/05 :CIA-RDP85T00875R001700020044-0 Sanitized Copy Approved for Release 2010/03/05 :CIA-RDP85T00875R001700020044-0 SECRET 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 SECRET Sanitized Copy Approved for Release 2010/03/05 :CIA-RDP85T00875R001700020044-0 Sanitized Copy Approved for Release 2010/03/05 :CIA-RDP85T00875R001700020044-0 SECRET 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. SECRET Sanitized Copy Approved for Release 2010/03/05 :CIA-RDP85T00875R001700020044-0 Sanitized Copy Approved for Release 2010/03/05 :CIA-RDP85T00875R001700020044-0 SECRET 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. SECRET Sanitized Copy Approved for Release 2010/03/05 :CIA-RDP85T00875R001700020044-0 Sanitized Copy Approved for Release 2010/03/05: CIA-RDP85T00875R001700020044-0 SECRET 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/ SECRET Sanitized Copy Approved for Release 2010/03/05: CIA-RDP85T00875R001700020044-0 Sanitized Copy Approved for Release 2010/03/05: CIA-RDP85T00875R001700020044-0 SEC,i(t F'r 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). SECRET Sanitized Copy Approved for Release 2010/03/05: CIA-RDP85T00875R001700020044-0 Sanitized Copy Approved for Release 2010/03/05 :CIA-RDP85T00875R001700020044-0 SECRET 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~ SECRET Sanitized Copy Approved for Release 2010/03/05 :CIA-RDP85T00875R001700020044-0 Sanitized Copy Approved for Release 2010/03/05: CIA-RDP85T00875R001700020044-0 SECRET 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 sECR~T Sanitized Copy Approved for Release 2010/03/05: CIA-RDP85T00875R001700020044-0 Sanitized Copy Approved for Release 2010/03/05 :CIA-RDP85T00875R001700020044-0 SECRET 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. SECRET Sanitized Copy Approved for Release 2010/03/05 :CIA-RDP85T00875R001700020044-0 Sanitized Copy Approved for Release 2010/03/05 :CIA-RDP85T00875R001700020044-0 SECRET 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. SECRET Sanitized Copy Approved for Release 2010/03/05 :CIA-RDP85T00875R001700020044-0