271. Memorandum From the Under Secretary of State for Security Assistance, Science, and Technology (Benson) to Secretary of State Vance1
SUBJECT
- Trip to Yugoslavia
As you know I spent two and a half days last week in Yugoslavia, primarily to listen to the Yugoslav’s views of the Westinghouse Nuclear Power Plant project, a joint project of the Slovenia and Croatia federations.2 I also discussed the Foreign Military Sales program at some length with Ambassador Eagleburger. Among others, my colleagues and I met with the Presidents of Croatia and Slovenia, the Energy Ministers of the two Republics, the Yugoslav Managers of the Project as well as with Ambassador Eagleburger and members of his staff.3 My trip to Yugoslavia followed a visit Under Secretary Hodges and I made to Pittsburgh to listen to Westinghouse’s side of the story.
Several points in the Westinghouse matter are now quite clear:
—The contract, signed in 1974 with some push from President Nixon, is now in serious difficulties. The project is 80% completed, 18–24 months behind schedule, and Westinghouse is suffering a serious cash flow squeeze due to high inflation during the life of the contract.
—The two parties are heading for a major legal imbroglio which will be of no long-term benefit to either and which will undoubtedly be a burden on good Yugoslav-US relations. It could result in lengthy arbitration during which construction could be halted, resulting in serious political-economic problems for Westinghouse.
—In a continued effort to head off the potential legal confrontation, I believe the US Government should extend its good offices to both [Page 895] parties. My trip with Luther Hodges to Pittsburgh and my trip to Yugoslavia were made to see if we could head off this confrontation by helping both sides find ways to resolve their problems without resorting to arbitration.
These efforts in the first instance should include (a) maintaining pressure on both sides to work out mutually satisfactory resolutions, (b) urge Export-Import Bank to offer an acceptable refinancing arrangement and (c) convince Westinghouse to complete the project in early 1981. There are other remedies possible such as direct USG involvement in procurement of essential components, but we should keep these possibilities in abeyance until we see how well our other efforts will work. I have already talked with Gordon C. Hurlbert, President of Westinghouse Power Systems Company since my return. I emphasized to him the importance we attach to the achievement of an amicable solution not to mention the stake Westinghouse has in this matter if it has any hopes of obtaining future contracts in Yugoslavia (and perhaps even in the Third World). While of course the USG has no legal standing in this matter, I am convinced, as was Ambassador Eagleburger, that the Yugoslavs welcomed our trip and our offer of good offices. As for Westinghouse, I believe that the Corporate Management recognizes the assistance the Department has extended in all parts of the world (e.g. Korea, Philippines) in order to channel sizeable contracts to an American manufacturer.
—You need not be burdened with the details of the dispute. Basically, the Yugoslavs wish to have the project completed as soon as possible (original contract called for operations in 1979—“on the line in 79”. Now at best it will be 1981). Westinghouse needs cash since the project has cost much more ($230 million) than originally expected. Beyond that, both sides have a myriad of complaints of differing magnitudes against each other. We think these could be settled amicably if both sides could achieve their principal objectives.
As for the FMS, there can be no question that Ambassador Eagleburger’s complaints concerning the Dragon case have validity. As in the Westinghouse matter, an earlier alert might have prevented the current situation. The Dragon case is a good illustration of the need for an Embassy to closely monitor the implementation process of FMS cases. (We all need to watch implementation of major cases more closely.) There is practically no chance for that being done effectively in Washington, given the wide dispersion of responsibilities among agencies. The Ambassador was reluctant, as are most of our Chiefs of Mission, to add to his staff, but the importance of having the critical sales “go right” outweigh in my mind the costs of an additional staff member. I think Ambassador Eagleburger would agree.
Although we obviously have not managed the FMS program satisfactorily, I believe the Ambassador feels that the Yugoslav military-to- [Page 896] US-military relationships are still improving. I have the same feeling after talking to Col. General Vujatovic on Tuesday4 and that is, after all, what is important. But we’d better not have another fiasco.
I will keep you posted on further developments.
- Source: Carter Library, National Security Affairs, Staff Material, Europe, USSR, and East/West, Larrabee Subject File, Box 68, Yugoslavia: 8/78–12/79. Confidential. Copies were sent to Newsom, Aaron, Vest, and Eagleburger.↩
- Benson traveled to Yugoslavia October 10–12 to attempt to resolve the ongoing dispute between Westinghouse and the Yugoslav authorities regarding the Krsko nuclear power plant. In telegram 7797 from Belgrade, October 17, the Embassy reported that the “visit has calmed the waters—at least for now.” (National Archives, RG 59, Central Foreign Policy File, D790481–0525)↩
- Benson met with Croatian President Flekovic on October 12. (Memorandum of conversation, October 12; National Archives, RG 59, Office of the Under Secretary for Security Assistance, Science, and Technology, Chron Files, Speeches, and Papers of Lucy W. Benson (1979) and Matthew Nimetz (1980), Lot 81D321, Box 3, Lucy Wilson Benson—Chron, October 1979) She met with Slovenian President Vratusa later that day. (Memorandum of conversation, October 12; ibid.)↩
- Benson met with Vujatovic on October 16 to discuss the Foreign Military Sale relationship with Yugoslavia. (Memorandum of conversation, October 16; ibid.)↩