630. Telegram 3356 From the Embassy in Peru to the Department of State1 2
Subj:
- Assessment of Threatening Confrontation in US-Peruvian Relations
For Asst Secy Meyer, Asst Secy Armstrong, Treasury for Asst Secy Hennessey.
1. Since my return from my Washington consultation and Bogota Chiefs Mission meeting, I, along with my Mission staff here, have assessed and reached some conclusions on the threatening confrontation that is building up in US-Peruvian relations. I am sending it in telegraphic form since it may be useful during this week’s CIAP review of Peru as well as in the June 7 meeting of the CIEP repeat CIEP.
2. In essence, US assistance policy toward Peru since IPC expropriation in October 1968 has sought exert non-overt economic pressure on Peru in order force Peru negotiate settlement IPC dispute. Subsequently, Grace and US road contractor cases were added. During first year following IPC expropriation, US-Peruvian relations deteriorated considerably. New US bilateral assistance was denied, and US used its power in multilateral agencies to delay or obstruct loans from them to Peru. AID’s technical assistance program was cut back though not terminated.
3. Following disastrous earthquake of May 1970 US decided assist Peru in emergency and reconstruction phases [Page 2] on humanitarian grounds. Obviously, US assistance in this regard was also intended to a. reestablish better climate for resolution disputes, b. buy time enable US policy achieve its objectives and c. restore damaged image of US with Peruvian people. This US response was generous and appreciated, and US objectives were achieved.
4. As a result the improved climate, and because of and despite some pressure exerted by US, Peru a. reached an agreement in principle on the Grace expropriation—buy out, b. agreed to reopen negotiations on the US road contractor dispute, c. at substantial domestic political it avoided seizure of US fishing vessels and d. began delicate secret negotiations in an attempt to resolve the IPC case.
5. Despite an apparent moderation in Peru’s approach to US-Peruvian bilateral issues, new ones kept arising. Peru, in keeping with its policy of universality in external relations and desiring demonstrate its independence from US, pushed ahead with its plan to recognize Castro’s Cuba. At same time, Peru also became more and more frustrated by its inability obtain an adequate level of external financing essential for its development and became increasingly aware of US role of “non-overt economic sanctions.”
6. Actions of US Congress on new sugar legislation, and later, in response to Chilean situation and the hardening of US congressional and executive positions on expropriations, led Peru to reappraise its trend toward moderation.
7. When the ipc negotiations broke down because GOP requirement for absolute secrecy had been blown by press and circulation opposition inspired letter, GOP took the only position politically open to it—it denounced the alleged negotiations as a fictitious counter-revolutionary plot. As further evidence its position, the GOP then moved to complete final legal steps to pay IPC compensation but immediately embargoed this payment as partial satisfaction of government’s counterclaim against IPC. Hard see [Page 3] how effect these measures has not been to irrevocably close IPC case in Peru and thus then preclude any possibility of a negotiated settlement.
8. MinFin Morales Bermudez, in the face allegations he involved in the secret OPC negotiations, and in response to US organized delay three IDB loans to Peru, made hard-hitting speech at the Quito meeting of job which rejected once again that US pressure on Peru could force latter back down from its reforms and revolutionary principles.
9. This was followed by other actions in Peru directed at US companies—a. Peruvian finance court declared illegal a stamp tax exemption for Conchan (Standard Oil of California) of 14 years standing and firm has been intervened for payment some $1 million in back taxes, and b. a six year long court case against Marcona Mining Company was resolved in favor of GOP, thus denying that Marcona had right to depletion allowance under 1952 contract between the company and the Santa Corporation, owner of the concession, with result that marcona will be liable to payment of back taxes.
[Page 4]10. Efforts to reach negotiated settlement of major claim of U.S. road contractor have again bogged down. Recently MinTrans publicly charged AID with withholding remaining $19 million in loans for Tarapoto Rio Nieva road allegedly because Peru committed crime of trying defend its rights and require reasonable contractor performance.
11. Recently, CIAP completed its report for annual economic review of Peru scheduled for June 5–9 in Washington. The document laments the fact that Peru is being denied access to adequate levels of external finance from the World Bank and IDB, and places the blame squarely on U.S. policy.
12. As result of recent consultative group meeting by the World Bank, and of a series of high level GOP missions to Europe and the socialist countries, Peru has obtained a substantial volume of new credits or promises of credits—almost $180 million from Japan, Germany, Spain and France alone—which will tend to reduce the importance of U.S. and multilateral assistance.
13. Finally, the three out of three exploration strikes by PetroPeru and the strong money on the line interest of foreign oil companies in Peru’s jungle oil prospects have had the effect of boosting Peru’s self confidence and making it even more independent and determined to pursue its revolution. GOP and foreign oil [Page 5] companies have faith that Peru’s jungle contains very substantial commercial quantities of crude which in reasonable number years will greatly increase financial resources available Peru.
14. The above series of actions by Peru against U.S. private investment and its current and potential access to other than USG and multilateral financing, appear to signal a change in Peru’s posture toward the U.S. In short, Peru may have now decided that the prospects for meaningful U.S. support are too low or its price too high, or both. GOP may feel that it has less to lose in these circumstances than U.S. from a confrontation,
15. The first confrontation is likely to be at the CIAP meeting during week June 5–9, when Peru and perhaps other CIAP reps, can be expected to accuse the U.S. of obstructing multilateral credits to Peru. Other confrontations appear imminent in relation to Conchan and IPC, especially in view of the all-encompassing rigidities of the Gonzalez amendment.
16. Examining our present policy and likely repercussions of that policy in future, it useful analyze costs and benefits to both parties.
17. From Peru’s point view, it would appear IPC is not negotiable. IPC is more than an expropriation case—it is the very symbol of the Peruvian revolution. No Peruvian Government, let alone a revolutionary one of the armed forces, could afford politically to back down on its position on IPC, unless USG and Jersey Standard can agree to secrecy of settlement and even this is doubtful under present circumstances.
18. Cost to Peru of its unwillingness to settle IPC dispute is very high. If IPC were not an issue, Peru could have obtained a substantially greater volume of external assistance from the US and from the multilateral agencies, as is well documented in the CIAP report. A conservative estimate of the value of foregone assistance from these sources would be of the order of $100 to $150 million per [Page 6] year for the last three years. This compares unfavorably with the $60–$70 million which it would have cost Peru to compensate IPC.
19. There is also a cost to us in terms of foregone trade opportunities, (of the order of $100 million per year as Peru’s development efforts gain momentum). A more serious cost, however, would be the long term effect of a retaliatory policy by Peru against U.S. private investment valued at $700 million or more. For sake of IPC, and principle of adequate, etc. compensation for expropriated properties, U.S. private investment in Peru could be made to pay a heavy price indeed if the Peruvian Government adopted a retaliatory nationalization policy. Aside from these economic costs, a high price would also be paid by us in the to be anticipated negative effect on our whole Latin American relations.
20. What might USG gain from hardening its policy and going to the mat with Peru? Clearly, we would have defended the principle of compensation for expropriated U.S. property. Our defense of this principle conceivably might deter other countries from the temptation to follow Peru’s lead. But this is a debatable thesis for two reasons: (a) aside from IPC case, Peru has compensated or is working on compensation agreements; (b) LDC governments expropriate (without compensation) foreign owned property for a complex of internal politico/sociological economic reasons and not just because some other government has set them an example. The internal situation and not the outside example appears to us governing factor in expropriation, seizure and discrimination cases.
[Page 7]21. While US policy is righteous and in accord with international law, it is a policy with very high practical costs and less real benefits. While Mexico eventually came around to compensating for expropriated US oil companies, there is no assurance that Peru will do so. And time is much more compressed in our era, while Peru’s options are much wider than Mexico’s were.
22. Clearly, a re-examination of US policy is urgently needed before the level of confrontation between the US and Peru results in exchange of blows. We do not think such blows would make Peru back down or gravely injure it. We do think such a situation would set Peru on new course detrimental to much wider US interests in Peru and LA, such a reexamination should be pragmatic and should carefully weigh the costs and benefits involved. While there is concern about Congress and replenishment of multilateral lending agency funds, attention must be paid to fact that at very highest level USG we have authorized undertaking of substantial humanitarian earthquake and flood reconstruction [Page 8] program, which we must complete or pay substantial consequences. Also there are equally important considerations of selling as many US products abroad as we can and of protecting interests from the repercussions of isolated government-private foreign investor disputes. In latter case, we still think new acceptable arrangements for foreign investment in Peru and elsewhere LA and LDCs which will come in time, are only likely to be reached by patient, innovative, understanding negotiation and not by pressure and blows. Another important consideration is effect on our policy of shifting development lending from bilateral to multilateral financing. When we allow our bilateral objectives to interfere with these agencies’ purposes and relations with their member countries, our policy, as well as the institutions themselves, can be seriously jeopardized.
- Source: National Archives, RG 59, Central Files 1970–73, POL PERU–US. Confidential; Priority; Exdis.↩
- Ambassador Belcher reviewed the last two and a half years of U.S.-Peruvian relations and argued that, despite what appeared to be moderation in its actions against U.S. economic interests, it seemed Peru had recently decided on a firmer policy stance against U.S. business. Belcher though Washington should pursue patient negotiations to resolve disputes.↩