Foreign Relations of the United States, 1969–1976, Volume E–11, Part 2, Documents on South America, 1973–1976

399. Action Memorandum From the Acting Assistant Secretary of State for Inter-American Affairs (Ryan) to Secretary of State Kissinger¹

Washington, May 27, 1976.

Foreign Military Sales Credits (FMS) for Venezuela

The Problem

You told Venezuelan President Carlos Andres Perez last February in Caracas that you would look into the legal impasse which has prevented the Venezuelan Government from utilizing its $17 million FY 1975 and $16 million FY 1976 credit allocations.

Background/Analysis

The impasse stems from the court venue clause of the standard text of the FMS loan agreement which allows Treasury’s Federal Finance Bank, the entity charged with administering FMS, to select either a Venezuelan or a District of Columbia court to adjudicate litigation arising from the agreement. The Venezuelan Government interprets its Constitution as prohibiting it from accepting the clause whereas the FFB insists upon its inclusion. Ambassador Shlaudeman set forth this problem in a February 20 message to you (Tab 3).

There was no impasse prior to 1975 when the Defense Department, then charged with FMS administration, omitted the disputed clause on the premise that Venezuela’s excellent credit rating made potential default or litigation remote. In 1975, the Federal Finance Bank, which then became the agent for virtually all FMS credits, insisted upon a standard text for its loan documents containing the venue clause to which Venezuela objects. Despite requests by Defense and State last summer and again last month, Secretary Simon has steadfastly maintained that no exception to that text would be made.

A new aspect of this case is the willingness of the Defense Department to extend a $10 million direct credit to Venezuela, a procedure not involving FFB financing or the disputed clause. Under Secretary Maw ruled December 10, however, that FFB credit more appropriately should be assigned that country. Defense has nonetheless recently indicated that sufficient new obligation authority to support a $10 million direct credit program appears available, providing that projected FY 1976 funding levels are enacted by the Congress. Defense firmly believes that a continued modest FMS credit program for Venezuela is in our national interest.

The Options

1. When FY 1976 authorization and appropriation is passed, authorize Defense to extend a $10 million direct credit to Venezuela on a one-time basis.

Pro—You would be responding favorably to Perez, extending the credit which he very much desires to placate his military. You would also be lessening the impact of decisions this year to terminate all military assistance (i.e., indirect FMS credit, the military group presence in Venezuela, and a modest grant military training program). Further, Perez could use reassurance that commitments taken in Caracas last February have not been forgotten. Additionally, authorization on a one-time basis would provide additional time to accustom Venezuela to the phaseout of our military assistance programs and for us to seek new ways to maintain traditional close relations with the Venezuelan military. Such authorization would not, however, do violence to Congressional and other Executive Branch views aimed toward bringing these programs to an early termination.

Con—The authorization would risk undermining FFB procedures with other Latin American countries, as well as limiting new obligation authority for Israel. It would conflict with the L view that no FMS credit be given Venezuela because of the “inadequate” compensation paid U.S. companies affected by the recent petroleum industry nationalization (ARA and EB disagree, believing that it would be inappropriate for the United States Government to take a position on the adequacy of compensation in that American companies have settled with the Venezuelan Government). Moreover, PM fears that the provision of direct credit this fiscal year will create an undesirable precedent causing Venezuela to seek additional authorization next year despite our qualification to the Venezuelan Government that the $10 million credit is on a one-time basis. PM and Treasury further object to the adverse impact of such authorization on budget outlays.

2. Inform the Venezuelans that you have ascertained that the Treasury ruling on retention of the FFB venue clause remains irreversible and that, consequently, the United States Government cannot be of assistance.

Pro—If FMS credit is to be terminated, it is far better to place the onus on Venezuela over a narrow legal impasse than to place it on us over a political finding that Venezuela is “ineligible” or “oil-rich”.

Con—You would appear unresponsive to Perez’ personal request to you.

3. Seek to have the venue clause deleted from the FFB agreement with Venezuela via a letter to the Secretary of the Treasury.

Pro—The request would demonstrate to Perez your personal interest and involvement.

Con—The request would not be fruitful. Secretary Simon reiterated to us this month that no exception would be made to the FFB standard text for Venezuela or any other country. Treasury strongly opposes FMS credit to Venezuela on economic grounds as well.

Bureau/Department/Other Agency Views

ARA and Defense support Option 1, basically because of the political advantage gained by responding favorably to this key Third World leader, without doing injustice to the planned phaseout of assistance. Defense, although accepting the “one-time” caveat of Option 1, nonetheless firmly believes that a continued modest FMS program in FY 1977 is in our national interest.

PM, L, T, Treasury, and OMB prefer Option 2, basically because it would uphold the role established for FFB and reflect their and congressional opposition to “assistance” to oil-rich nations in general and Venezuela in particular in light of that country’s “inadequate” compensation for the recent nationalization of U.S. petroleum companies.

Recommendation:

That you authorize Defense to extend $10 million FY 1976 FMS direct credit to Venezuela on a one-time basis (Option 1 favored by ARA and Defense although Defense recommends a continued FMS program in FY 1977).

ALTERNATIVELY, that you sign the letter to the Venezuelan Foreign Minister at Tab 1 noting that you have ascertained that the Treasury ruling on retention of the FFB venue clause remains irreversible. (Option 2 favored by L, PM, T, OMB, Treasury and, if Option 1 is not selected, by ARA.)

ALTERNATIVELY, that you sign the letter to the Secretary of the Treasury at Tab 2, requesting that the venue clause be deleted from the Venezuelan FY 1976 FMS Credit Agreement text (Option 3 favored by no one).

Attachments:

1. Suggested letter to Foreign Minister.

2. Suggested letter to Secretary Simon.

3. Caracas 2062.

1. Summary: Ryan laid out three options for Kissinger on providing direct FMS credits to Venezuela.

   Source: National Archives, RG 59, Central Foreign Policy File, P840125–2520. Confidential. Sent through Maw. Drafted by Sonandres and Williams on June 3. Stern, Ganz, Lewis, Eisenhower, Crosswhite, and Lyle concurred. Kissinger approved Option 1. He wrote in the margin, “Send a letter to Pérez explaining decision.” Attached but not published are Tab 1, an undated suggested letter from Kissinger to the Foreign Minister; Tab 2, an undated suggested letter from Kissinger to Simon; and Tab 3, telegram 2062 from Caracas, February 20, published as Document 397. Kissinger’s letter to Pérez is in telegram 141194/Tosec 160171 from the Department to the Secretary’s Delegation in Mexico, June 10. (Ibid., D760222–0847)