Foreign Relations of the United States, 1969–1976, Volume E–10, Documents on American Republics, 1969–1972

600. Study Prepared by the NSC Interdepartmental Group for Latin American Affairs¹ ²

Washington, May 24, 1969

PERU and IPC
Review of U.S. Strategy

I. Present Policy

Our efforts to induce an acceptable settlement between Peru and IPC—one which at a minimum involves some appreciable net payment to IPC as compensation—now involve three lines of action:

—discreet application of maximum economic pressures against Peru, while avoiding overt acts that might be exploited as “economic aggression”;

—continuing discussions by Ambassador Irwin with the Peruvian authorities to explore every possible avenue which might lead toward a settlement; those under current discussion being:

(1) formal negotiations toward a specific compensation formula compatible with both U.S. and Peruvian legal requirements, and

(2) entry of another petroleum company into Peruvian operations on some basis which would provide a disguised form of compensation to IPC.

—parallel consultations with IPC to identify the company’s views on compensation based on a formula that follows Peru’s juridical concepts.

Meanwhile, we are continuing the political campaign elsewhere in the hemisphere described in NSSM 42.

The basic GOP position remains that the problem is an internal affair subject to Peruvian law. They maintain that the courts of Peru are open to IPC and in effect challenge the right of the USG to prejudge the Peruvian judicial process. Ambassador Irwin has told the GOP (and IPC) that the U.S. Government could not in good conscience ask IPC to return to the courts of Peru; the principal reasons are that the GOP has preempted the courts with its decrees and orders, and has inflamed public opinion to the point that an impartial adjudication would be too much to expect.

The most recent round of discussions recessed May 14 with an agreement by the Peruvian team to report to the GOP on the presentation to them by the U.S. of an example of a practical formula for settlement consistent with their juridical theory—a formula which they invited. Although it is not clear that this will result in meaningful negotiations, there is an apparent desire on their part to continue the talks with Ambassador Irwin. He has said to the Peruvians that he is prepared to return to Lima if the Velasco Government indicates to us that it is seriously willing to discuss possible solutions.

Despite the attitude displayed here by the Peruvian team, the Foreign Minister’s reiteration May 23 that Governor Rockefeller’s visit would be “inopportune”—after we had asked that this decision be reconsidered—underscores our fear that Peru may be moving toward an early confrontation with us. Although a final breakdown of discussions has not yet occurred, the outlook is bleak.³

Although the Velasco Government faces numerous and serious economic problems—only a minor portion stemming thus far from our economic pressures—none of them is likely to become so critical in the short run as to bring about its collapse or a reversal of the position on IPC. Peru’s direct financial loss from invocation of the Hickenlooper sanctions would not exceed about $70 million in the first year, including $20 million in aid disbursements and $50 million in the sugar sales premium. Over the long run, however, indirect effects on international credits and private investment would be severe.

In sum, a decision whether or not to impose the sanctions may have to be taken without Peru’s having taken more than token steps toward a settlement.

II. Hickenlooper Sanctions—The Issues

The decision should take account of three different sets of U.S. interests: obtaining compensation for IPC, future U.S.-Peruvian relations, and the general impact on the U.S. position elsewhere in the hemisphere. The net of costs and gains from invoking sanctions will vary with each interest.

A. Eventual Compensation for IPC

Invoking sanctions will postpone for a very long period any hope of obtaining compensation, direct or indirect. The ensuing Peruvian reaction will be so bitter against the U.S.—probably including moves against other U.S. investors, and possibly violence against official U.S. facilities—that it will likely be years before any Peruvian Government might again be prepared to discuss this issue.

Since the chance of obtaining net compensation for IPC is slight in any event, however, the cost to this U.S. interest of invoking sanctions is small.

B. U.S.-Peruvian Relations

Here the calculus becomes more complex, affected by several unknowns. Peru’s internal political dynamics are obscure. However, we conclude:

—The Velasco regime is something quite new in Peruvian history; a strongly nationalist, middle class, military group determined to remain in power and enunciating its intention to mount a comprehensive attack on the traditional social and political order. It cannot be neatly characterized as “Nasserist” or “Peronist”, and certainly not as “Castroist”, although it exhibits some elements of each. If one had to select a partial parallel, however, it would be the Peron period in Argentina, although Velasco lacks Peron’s personal charisma and many aspects of the setting sharply diverge.

—Plans and tactics are still evolving, and radical, “statist” and anti-U.S. nationalists are struggling to maintain the upper hand over more moderate leaders. Thus far, the radicals have won every round.

—Opposition to Velasco still exists within the government, but he continues to out-bluff and outmaneuver his rivals, capitalizing on the IPC issue to wrap himself in the flag. He gains strength from the atmosphere of tension and potential confrontation.

—No civilian group can challenge the Velasco regime without strong military allies. Velasco is thus far succeeding in neutralizing potential military defection.

—The U.S. will have, at least for the short term, only minimal positive influence over the direction taken by the Velasco Government, whether or not sanctions are invoked.

These conclusions point to the following balance sheet if sanctions are invoked:

Gains:

—Would maintain credibility for the U.S. Government in Peru; we have repeatedly said we must enforce our law unless a satisfactory solution is reached.

—Might persuade moderate officers that Velasco’s policies were too costly, and speed his replacement after an initial nationalist spasm against other U.S. interests in Peru.

Losses:

—Would facilitate efforts by radical nationalist faction to transform government into a more “statist”, ultranationalist regime, hostile to the U.S.

—Would temporarily strengthen Velasco’s hold on power by giving him and Peru martyr roles.

—Would make it impossible for opponents of the regime to coalesce without being charged with actions tantamount to treason.

—Would eliminate whatever small chance exists that U.S. influence could play a constructive role in helping shape direction of the government’s social and economic reform programs.

—Could result in retaliatory confiscation of many U.S. business interests in Peru, as well as damage substantial trade, transportation, and communications interests. (Total U.S. private assets exceed $600 million.)

—Would embitter all other aspects of U.S.-Peruvian relations so long as military junta retains power—likely to be for a long time.

—Could lead to rupture of diplomatic relations and withdrawal of all U.S. mission personnel.

C. The Hemisphere

All other Latin countries are most anxious to avoid taking sides in this dispute. Our deferral decision met wide approval, although a few leaders privately questioned the strength of our resolve. U.S. caution and moderation to date have temporarily neutralized Peruvian efforts to mobilize a Latin bloc against us. Our quiet economic pressures against Peru are little known elsewhere in the Hemisphere; where known or assumed, they are regarded merely as inevitable byproducts of the dispute. Even so, if we eventually invoke sanctions, most Latin leaders will be compelled publicly to side with Peru. The inevitable wave of anti-American publicity and emotion would be less severe and more short lived if our decision responded to obvious Peruvian provocation.

A decision to invoke sanctions after our extended efforts to find a solution would have the following effects:

Gains:

—Would reaffirm the credibility of U.S. statements about requirements of our law and the limits of executive branch discretion; this can be an important element in future negotiations on other issues elsewhere in Latin America. Indefinite deferral without achieving compensation would on balance undermine Latin confidence in U.S. statements of resolve to enforce our laws.

—Could have some deterrent effect on future confiscatory expropriation schemes in other countries—although we conclude that expropriations in Latin America nearly always stem from unique local political conditions and the country’s self-interest.

Losses:

—Would prejudice administration efforts to introduce new Latin America policies which stress greater sensitivity to Latin viewpoints; would label Nixon Administration with image of “big stick” diplomacy and undercut favorable impact of Rockefeller Mission.

—Would probably require lining up against U.S. by Latin governments, in glare of widespread anti-U.S. public emotion, concentrated in press, intellectual, and youth groups.

—Would lead to accusations of economic coercion in violation of OAS Charter, and possibly to attempt to involve UN.

—Might complicate solution of other pending investment problems in nearby Latin countries.

D. The Balance Sheet

This analysis excludes political effects in the U.S. Congress, in the business community, and in other areas of the world, of a decision whether or not to invoke sanctions. On the three foreign policy interests involved, however, we conclude that the weight of argument strongly supports deferring sanctions for a prolonged period so long as any plausible basis for progress toward compensation can be found. This calculation is most heavily weighted by our concern about the future of U.S.-Peruvian relations. The current prospects for compensation for IPC are minimal in any event. In the hemisphere, the losses and gains from the imposition of sanctions are fairly evenly divided over the long term, although the short-term effects would be painful.

III. Implications for Current Strategy

On the basis of this conclusion, we believe our long-term strategy should give a very high priority to keeping lines of communication open to the present government and to avoiding public hostility toward Peru. We must follow this strategy for many months if it is to have any real chance of success. We need this time to explore more actively a variety of formulae which could eventually lead to compensation. Time is also essential to allow the lowering of the thermometer of public emotion on this issue, and to produce the political strains within the military establishment which could lead to some change in the government’s present composition. The chance that some compensation may eventually be paid probably depends on such a change, just as has been the case in other countries like Ceylon and Brazil where politically-charged expropriations occurred.

While continuing to defer sanctions, we would try to develop further such approaches as administrative debt recalculation and “buy-out” schemes. Meanwhile, however, we would continue quiet economic pressures to reinforce the arguments of the more moderate GOP elements that Velasco’s present complete intransigence is too costly, and that some settlement, even well-disguised, must eventually be reached.

This long-term strategy calls for the following short-run operating principles:

—we should seek actively all plausible ways of deferring sanctions, even well beyond the end of the present administrative appeal process. So long as that appeal process runs and discussions continue, deferral remains plausible. Once the appeal process ends, on or before August 6, other actions must be underway to provide plausibility for our not invoking the sanctions. Our current efforts will therefore include:

(a) negotiation on some form of debt reduction/compensation formula;

(b) active attempts to develop a viable petroleum company buy-out scheme.

If neither of these efforts prospers, we may then be faced with a final decision whether or not to accept the Peruvian argument that “judicial remedies” exist and use the availability of those remedies as a plausible reason for further deferral. We have thus far rejected this Peruvian contention. However, before applying sanctions, we would review the judicial route again with IPC to see whether some assurance concerning the objectivity or terms of reference of a judicial process might be negotiated which would warrant IPC’s again entering the Peruvian courts.

Other short-term operating principles would include:

—continue freeze on new U.S. government bi-lateral assistance, including EXIM lending;

—continue present policy of discreetly providing factual information to U.S. banks and investors, leaving private financial pressures on Peru to result from their business judgments;

—take similarly discreet position on IBRD and INF assistance—relying on their internal policies to preclude substantial weakening of overall economic pressures;

—continue to discourage informally new IDB lending; however, if loans come to a formal vote, advise the Secretary of Treasury to review the situation in consultation with the Secretary of State, bearing in mind that a negative vote could precipitate a public confrontation with Peru in a difficult multi-lateral forum.

This strategy is designed to maintain pressure to move Peru slowly over an extended period in the direction of some formula for settlement, even though disguised, while avoiding any actions which would precipitate confrontation. If all plausible bases for further deferring sanctions are exhausted, every possible effort should be made to see that Peru, not the U.S., provokes the invocation of sanctions.

1. Source: National Archives, Nixon Presidential Materials, NSC Files, NSC Institutional Files (H-Files), Box H–135, NSSM Files, NSSM 18. Secret. A May 26 covering memorandum from Davis to Pedersen, Nutter, Smith, Unger, and Lindjord stated the memorandum would be sent to the President.
2. The NSC–IG/ARA study examined U.S. policy toward Peru, issues with employing the Hickenlooper sanctions, and the implications of those issues on current strategy. It recommended that economic pressure on Peru be continued, while continuing consultations with the Peruvian Government and IPC. In addition, the study concluded that it was important to maintain harmonious inter-American relations.
3. The accompanying intelligence assessment concludes that: “Velasco’s tactics have made it politically impossible for him or any conceivable successor to agree any time soon to a settlement of the IPC case that involved Peruvian compensation for the property.”