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

576. Briefing Memorandum Prepared in the Department of State for the President’s Assistant for National Security Affairs (Kissinger)¹ ²

Washington, January 28, 1969

SUBJECT:

• Peru, the US and IPC

The expropriation on October 9 of major assets of the US-owned International Petroleum Company will require the President to apply to Peru within six months, i.e. by April 9, provisions of US law suspending assistance and the sugar quota, unless the Peruvian Government takes steps to compensate the company adequately. The expropriation, however, is now so entwined in Peruvian nationalistic emotion and the military government has set itself so firmly against compensation satisfactory to IPC that it seems very unlikely that the US will be able to find grounds justifying non-application of the mandatory requirements of the law.

Suspension of aid and the sugar quota will have a serious adverse impact on the Peruvian economy, probably lead to reprisals against other US investments, alienate the Peruvian people and stimulate an actively hostile policy toward the US, perhaps push Peru further toward economic and diplomatic relations with the Soviet bloc, and damage US-Peruvian relations for a long time to come—all with repercussions harmful to our interests elsewhere in the hemisphere.

Aside from the seriousness of these potential consequences, the timing is such that the actions required by US law will be among the first ones taken by the new administration and hence its image will unavoidably be colored thereby.

The Compensation Problem. The Peruvian authorities, led by General Juan Velasco who engineered the October 3 coup, have become increasingly intransigent on this problem. There are no negotiations underway with the company. The authorities have stated that compensation will be decided in the courts. An appointed commission has just finished its evaluation of expropriated assets, and presented its report to the company which has 8 days to present its views. The Government, however, has also asserted that the company owes “debts” for all the production from the oil fields since, the Government claims, it never had title to the fields, and that these “debts” will be balanced off against the assets’ value. The prospect, therefore, is that there will be no compensation. The company’s claim to title of the fields was accepted for over 35 years and unilaterally disavowed by a Peruvian Government action a few years ago. Our view has been that a court procedure which merely balances the valuation of expropriated assets against a Peruvian calculation of “debts” would not satisfy the terms of the Hickenlooper amendments relative to procedures looking toward adequate compensation. It is not clear that the company will be allowed to assert its claim to title or to challenge the matter of indebtedness in the courts. While the question of effective local, legal remedy is not yet totally resolved, the Supreme Court ruling a few weeks ago against the company’s habeas corpus appeal suggests that the courts may—not rule on the title/debt issue in a way which the company (or we) would view as satisfactory.

Current Supply Problem. There is now an immediate complication over the drawing of and paying for supplies by the company from the expropriated refinery to supply the country. A modus operandi in effect since the date of expropriation has now been challenged by the Government, which has placed the company’s remaining assets under “preventative embargo”. The GOP is seeking a $15 million payment and has instituted a forced collection procedure. If payment is not made by January 31, the company’s remaining assets may be seized to make collection effective.³ Company officials in Lima have failed so far to negotiate an immediate interim arrangement involving continued operations and payments on account pending ultimate settlement of prices and conditions. The company now believes that the rest of its assets will be expropriated. If this happens, IPC may request application immediately of Hickenlooper sanctions or espousal of their claim diplomatically.

The Peruvian Political Implications. The military government used the IPC issue as their principal pretext for the October coup, and derived enormous popular support from expropriating the IPC properties. That act remains highly popular and no sector or leader can afford to repudiate it or even appear to “sell out” on this issue. In any confrontation with the US, particularly in the form of US sanctions, the GOP would be widely supported by the people, and indeed elsewhere in Latin America.

Anti-US nationalism is not only something on which the Velasco government has built its appeal, but it may be something it will use to transfer from the shoulders of itself, the elite and the population generally, the blame for any future political and economic failures. This nationalistic antipathy was not created by Velasco or the IPC issue itself. It has roots in other irritants—disagreements on fishing and territorial waters, aid terms, the Mirage issue—as well as in the country’s heavy dependence on official and private US finances. US firms dominate the export industries and US aid has been heavy. Beneficial as this relationship has been, viewed through the eyes of Peruvian nationalists, it creates emotional reactions against “dependence”.

Although General Velasco retires from the Army on January 31, the Junta has ruled he should continue as President. The Junta continues to be the final arbiter as to the presidency, and its decision probably indicates a need to avoid giving an impression of division within the military in the face of the approaching IPC showdown with the US. More moderate elements, especially the Prime Minister, General Montagne, have apparently decided not to make a bid for power now. In any case, continuation in power of the nationalistic General Velasco bodes no good for US-Peruvian relations, at least in the short run.

Consequences for US Relations. Up to now we have apprised the GOP quietly but forcefully of the existence in US law of the Hickenlooper amendments. We have sought to avoid confrontations so far, so as to give the Government room to maneuver and find a graceful way out. Unfortunately, the GOP’s reaction to our approaches has been truculent rejection of the sanctions as an intrusion in internal affairs.

What has made the situation so tragic is the mandatory requirement of the US law. Were it not for that, the US would have more flexibility, more options, and greater time to handle the problem, and without the need to appear to “punish” which makes the present confrontation so serious.

Aside from the expectable consequences already noted, application of US sanctions will surely precipitate widespread and vehement criticism of the US throughout Latin America. The larger Latin American countries especially would view such action as “intervention”, and would see the power to sanction in this way as threatening to themselves. In short, it would almost surely provide impetus toward unifying the now fractionated anti-US sentiment that exists in the region.

Given even the best relationship which could be salvaged from the IPC impasse, the popular and political mood in Peru will surely require, over the next year or so, an increasing demonstration of independence from the US. It is thus likely, in any case, that coolness will characterize our relationships and the traditional friendship between us will bear an ugly scar for some time to come.

We must now face the questions of a) how far we can and will go in order to induce some sort of settlement among the two parties; and b) whether, in the absence of such flexibility, we can or should avoid a direct confrontation.

Ambassador Jones has been asked to return to Washington for consultations the early part of February in order to provide State with first-hand appraisals and analyses of the situation and probable future developments, and generally to review with State what the next steps might be. It would be useful for him to brief the President personally, if this is possible, given the potential serious consequences of this problem for our entire Latin American policy.

NOTE—The issue of the remaining IPC assets is coming to a head faster than we anticipated. State was informed by telephone yesterday afternoon by IPC in Coral Gables that the Peruvian Government physically took over the Company’s headquarters at noon. IPC understands the government is preparing a decree which may authorize the seizure of the Company’s remaining assets. It is not clear when the decree will be issued, but it is possible the government will act before January 31. (We have never been certain that the government set January 31 as a firm deadline.)

1. Source: National Archives, Nixon Presidential Materials, NSC Files, Box 794, Country Files, Latin America, Peru, 21 January–31 March 1969, Vol. I, IPC Hickenlooper Amendment. Confidential. The note at the end of the memorandum, added by the NSC staff, was based on a January 28 memorandum from Rogers to the President; National Archives, RG 59, S/S Presidential Evening Reading, 1964–7/73: Lot 74 D 164, Box 410. Kissinger informed the President in a January 29 covering memorandum that the NSC IG for Inter-American Affairs was working up plans if U.S.-Peruvian relations deteriorated.
2. The Department reported that Peru’s expropriation of a portion of the International Petroleum Company (IPC) would require the President to suspend assistance and the sugar quota unless Peru adequately compensated the company. The Department predicted that these sanctions would precipitate widespread criticism of the United States throughout Latin America.
3. See NOTE on bottom of page 5.