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

639. Minutes of Senior Review Group Meeting¹ ²

Washington, November 17, 1972, 3:04–4:13 p.m.

Subject:

• Peru (NSSM 158)

Participants:

• Chairman Peter Flanigan
• State
  • John Irwin
  • Charles Meyer
  • Sidney Weintraub
  • Sandy Pringle
• Defense
  • Armistead Selden
  • Raymond Leddy
  • Col. Francis McCarthy
• JCS
  • L/Gen. Louis Seith, USAF
  • B/Gen. Gordon Sumner USA
• CIA
  • L/Gen. Vernon Walters
  • James Flannery
• Treasury
  • Dr. Charls Walker
  • John M. Hennessy
• CIEP
  • Deane Hinton
  • Lawrence Rosen
• Commerce
  • James Lynn
  • Lawrence Fox
  • Andrew Gibson
• NSC
  • Richard Kennedy
  • William Jorden
  • Robert Hormats
  • James Hackett

SUMMARY OF CONCLUSIONS

It was agreed that:

—An effort will be made to delay IADB consideration of loans for Peru as long as possible.

—Meanwhile, CIEP and Treasury will work together in devising a new initiative toward Peru on the IPC case, which may include as part of the package an offer to release Ex-Im Bank credits.

—If there is no progress in ninety days, another SRG meeting will be held to consider what steps should be taken at that time.

Mr. Flanigan: Is Dr. Kissinger coming to this meeting?

Mr. Irwin: I don’t believe he can make it.

Mr. Flanigan: Well, we may as well go ahead. Charlie (Meyer), do you want to brief us on the current situation?

Mr. Meyer: The one factor that is central to all of our relationships with Peru is the uncompensated nationalization of the International Petroleum Company (IPC), but it is necessary for us to keep in mind that our interests in Peru are greater than IPC. The IPC problem looms so large that it tends to obfuscate these greater interests, but we must not forget them or the fact that they are greater. The question now is how do we protect those larger interests. Since mid-year the Government of Peru has become unnecessarily strident in its attitude toward the United States, due in part to the Gonzalez Amendment (enacted into law March 10, 1972). Peru has since become particularly sensitive about U.S. policy toward economic interests and now appears unwilling to negotiate away from its tough 1968–69 stance on the IPC expropriation. During the past four years, the U.S. has maintained an unspoken policy of economic support to Peru, but with the possibly imminent application of the Gonzalez Amendment the fig leaf covering our policy is gone and our nudity is revealed. There is a soft money loan coming up for consideration in the Ex-Im Bank very shortly. It has already been deferred for two years and we can’t put if off much longer. We have to address the issue and to do so we need a policy toward Peru. However indirect or obfuscated it may be, we need a policy that addresses the IPC problem and U.S. relations in general toward Peru. We don’t have a Latin American policy as such; what we have are individual policies for the various countries of the Hemisphere, and we need such a policy now for Peru. The various options are all outlined in the paper (response to NSSM 158, September 26, 1972). I prefer option 3A, because I want a solution that does not do violence to the posture of this Administration with respect to its stated policy vis-a-vis uncompensated nationalizations. I support the policies on expropriation that have been laid down, and we at State have been trying to help implement those policies. I believe that option 3A will enable us to maintain our position on expropriation in principle, while at the same time we move ahead and support our larger interests in Peru.

Mr. Flanigan: Jack (Irwin), do you want to add anything?

Mr. Irwin: No, I think that covers our position pretty well.

Mr. Flanigan: Charls (Walker)?

Mr. Walker: We in Treasury think we already have a policy. It has been hammered out in recent years and now is beginning to bear fruit, if not in Peru then in Panama. We think the policy of non-overt economic pressure is working and when the word gets around there will be some changes in attitudes, perhaps even in Peru. We prefer option 1.

Mr. Flanigan: I know you prefer option 1, the question is do you want to continue with that policy or change to something different?

Mr. Walker: We prefer to continue with option 1. It is working and we see no reason to change now.

Mr. Flanigan: Does Defense have any comment?

Mr. Leddy: We have a long, traditional, proven relationship with the Peruvian military. We lost our Milgroup there in 1969, but the Peruvian military remains basically pro-U.S. Many of their military leaders have been trained in the U.S. and a number of them have American wives. We have continued military training for Peruvian officers and I was amazed at the attitudes expressed by the students from their military college, who were up here recently on a trip. They showed a profoundly sympathetic understanding of our policies. Our traditional geographic relationship with Peru is as important to the United States from a national security viewpoint as our trading relationship. The Department of Defense would look with concern on the establishment of a hostile regime on the west coast of Latin America. The present policy has caused us problems. We refused to sell Peru F–5s and they went out and bought Mirages from the French. There is, however, a basic desire for friendship with the United States. They haven’t picked up one of our tuna boats in years. Nevertheless, Soviet influence is great. There is a cable in from Embassy Moscow this morning reporting that the Soviets are prepared to offer $200 million in credits. We have a close military relationship with Peru through the Inter-American Defense Board, and the visit by Mrs. Nixon after the earthquake further solidified our good relations. Now these good relations are imperiled by this policy, which is aimed at the IPC case but which is affecting all of our relations with Peru. The IPC issue is not likely to be settled in the near future and we would like to salvage the situation now, before our relations deteriorate further unnecessarily.

Mr. Irwin: I agree with all of your comments, but the question is which option do you prefer?

Mr. Leddy: We prefer 3A. Ambassador Belcher wants to talk with the Peruvians and we would like to get the guidance in option 3A down to him as soon as possible.

Mr. Flanigan: Does CIA have any observations?

Gen. Walters: This is a policy question. I believe I’ll defer.

Mr. Flanigan: What about Commerce?

Mr. Lynn: I’m concerned about the cause and effect aspects of this. I didn’t see much in the paper on how we can get what we want from Peru. Why should we remove the non-overt economic pressure we have been applying? Why do we believe that removing this pressure will lead to a solution of our problems with Peru?

Mr. Flanigan: I don’t believe the paper suggests that the removal of the non-overt pressure will solve the IPC problem. What it would do would be to create an atmosphere in which the other problems, such as Grace, Marcona, Morrison-Knudsen, etc. , could be solved.

Mr. Lynn: Then you would be saying, in effect, to the other Latin American countries, that they can go ahead and nationalize a company like IPC, but if they leave other U.S. companies alone, we will work out a deal with them.

Mr. Flanigan: IPC is sui generis. The claim of Jersey Standard in the IPC case has a cloud on it, so we will use that as an excuse for not applying the President’s expropriation policy to IPC, while applying it quietly to other U.S. interest in Peru.

Mr. Lynn: Do you think other countries will understand that?

Mr. Flanigan: We will explain that IPC is a special situation with a special set of circumstances. Let’s move this conversation toward a discussion of the options. The current policy of non-overt pressure is producing a deterioration in our relations, we’re not making any headway on the IPC case and we’re losing business in Peru to other countries. The question is what should we do about it? The options we have before us are: 1. to continue the existing policy of non-overt economic pressure, 2. move to a tougher policy, applying all or some of the legislative sanctions, or 3. conclude that the IPC issue can’t be resolved in the short run and relax sanctions to reduce damage to other U.S. interests, while keeping our options open on a possible future settlement of the IPC case. I assume no one is seriously considering option 2, is that right? (no response) So let’s give further consideration to options 1 and 3. The first thing we should know is how long we can avoid the problem of a vote in the Inter-American Development Bank. When will the question of a Peruvian loan have to be considered?

Mr. Hennessy: The earliest it will come up will be in December.

Mr. Meyer: It could be January.

Mr. Hennes: I believe December is more likely.

Mr. Flanigan: Can you delay it?

Mr. Hennessy: Assuredly, at least until mid-January.

Mr. Flanigan: I think we should try to delay it and seek a solution to the problem posed by the Gonzalez amendment.

Mr. Kennedy: How long can we delay consideration without paying a cost to the Peruvians?

Mr. Hennessy: I don’t know. Delay has been our policy for years. I don’t think we’ve paid a very high cost for it.

Mr. Irwin: Well, that may be true, but at some stage we will reach the breaking point in our relations with Peru, if we continue the present policy. We have already delayed for some time and can’t do so much longer. A few more months is probably the most we can postpone this issue. There are certain broad political trends under way in Latin America that have an influence on our relations with that part of the world. The Church is becoming more radical; the military are taking over more often in more places—not necessarily the radical military, but a more benign type of military, as in Peru; economic issues are more and more affecting political issues and even bringing about political results. This is one of the reasons the President went through a review of our expropriation policy, because the expropriation policy affected other interests of our government. The expropriation policy can be applied either for economic reasons or for politico/military reasons, depending on the situation. We have kept the pressure on in Peru during the past four years because of the IPC case. We have had other expropriation cases in Peru, but only the IPC case has been treated as a closed issue by the Peruvians. They have been willing to discuss the others, but on IPC they have put themselves in a box. We have not accepted their decisions on IPC as final and perhaps they don’t really consider them that way themselves, but they have themselves boxed in. So the question for us is whether we should apply a strict or a liberal interpretation of the expropriation regulations. Peru’s claim to a 200 mile territorial sea is another aspect of the problem. The question of Ex-Im Bank credits is especially important. Can we make Ex-Im Bank credits available with the IPC case unsettled? Should we consider the Gonzalez Amendment applicable? I personally think it would be a very bad precedent to consider the Gonzalez Amendment legally retroactive to expropriations that took place before it was enacted into law. Our lawyers tell us they believe it can be considered either way. Leaving Peru completely aside, I think that’s bad law and bad policy. I don’t want to hide behind Congress and say, well, they passed a bad law so we have to implement it. My preference would be to put the Gonzalez Amendment aside. If we chose option 3A, our expropriation policy would be weakened to some extent. On the one hand, the problem of expropriations is a very important issue and we want to support our policy on that score, while against this we must weigh the political costs and consider the potential for further expropriations that our action might encourage. There is also the issue of Latin American support for Peru. If we try to be too tough on a debatable issue such as IPC, we may find ourselves facing a solid bloc of Latin opposition. We may hurt ourselves on the law of the sea issue. Peru has influence on that issue with the other Latin countries whose support we are seeking. In a recent press conference, Secretary Peterson seemed to say that the IPC case was an exception, and I think we should consider it as such. The weakness of option 3A is that it might be considered a precedent by other countries, which might believe that they could nationalize an American company like IPC and get away with it, so long as they don’t touch other U.S. interests. Our expropriation policy has three basic purposes: 1. to state the basic U.S. principle of opposition to expropriation without compensation, 2. to apply pressure after an expropriation to gain adequate compensation and 3. to deter expropriations in other countries. The policy has already been weakened by our application of non-overt pressure in Peru. Other countries have shown a readiness to trade with Peru and to pick up business that we would normally get there. Also, it works counter to our larger interests in the area. Charlie (Walker) said it worked in Panama. I’m not so sure, maybe it has, but has it worked for us during the three years we have applied it in Peru? It hasn’t, and therefore I think option 3A is the best.

Mr. Flanigan: Option 1 is considerably different in that it suggests that there are some new initiatives that can be taken in the context of the present policy. Jack (Hennessy), do you have any thoughts concerning the Southern Peru Copper Company?

Mr. Hennessy: The negotiations between Southern Peru Copper and the Government of Peru took place over a period of more than a year and then broke down when a story on them appeared in the local press. There have been other discussions with the GOP, for example, there have been some discussions of a tax credit mechanism which would allow Peru to give a tax credit to IPC and thereby provide compensation. Ortiz Mena was active behind the scenes there and also in Panama. As head of the Inter-American Development Bank he can work both sides of the street. We have two big carrots we can use in the case of Peru, one is a S270 million credit and the other is a $500 million hydroelectric project. The IADB is carrying out a feasibility study on the latter and trying to arrange something to get it started. Peru has insisted that any solution should be a covert one, but it does continue to show interest in a solution.

Mr. Flanigan: Has this tax credit idea been approved by the Peruvian Government?

Mr. Hennessy: Yes, it’s been passed. It’s on the books.

Mr. Flanigan: So that would be option 1?

Mr. Hennessy: Right, they would pay $80 million on another project.

Mr. Flanigan: That’s the same theory that was rejected before.

Mr. Hennessy: Same theory but a different project.

Mr. Flanigan: The Peruvians are trying to get control of 50% of Marcona, 100% of Grace and 100% of Standard Oil of California. If that can be arranged satisfactorily, we could then go ahead and say Southern Peru Copper is being settled. In that case, we could have a solution satisfactory both to us and to Standard Oil of New Jersey. If we pursue this kind of solution, we may be able to get it. I understand that a new government may be coming to power shortly.

Mr. Meyer: I am concerned about everyone leaving this room thinking that the coming to power in January of Edgardo Mercado makes any difference in the situation we are discussing. Mercado is Alvarado’s man (Pres. Juan Velasco Alvarado) in every respect and is taking office only because he is loyal to Alvarado. I think it will make no difference whatsoever.

Gen. Walters: Alvarado is trying to establish social democracy in Peru. Sure, it is an authoritarian government, but it has been in power for four years and during that time it is the major opposition groups in the country that have been weakened, not Alvarado. I went with Mrs. Nixon on her visit to Peru at the time of the earthquake and I was impressed to see Velasco Alvarado profoundly affected emotionally by Mrs. Nixon’s visit. He was visibly moved and at one point said “it is only when one goes to bed sick that one learns who his true friends are.” He has a strong personal feeling of friendship for the United States, which is entirely apart from economic issues. Mercado is due to become prime minister in January. He is forceful and less emotional that Alvarado, but he is fully dedicated to the President’s policies. I see nothing to indicate that he will change any of the present policies. He will not be a free agent and for that matter, Alvarado is not a free agent either. There are political pressures in the country he must be responsive to.

Mr. Flanigan: What you are saying in effect is that we may as well go ahead and make a decision on this today as three months from now, because the situation is not likely to be any different then.

Mr. Meyer: I think that’s agreed.

Mr. Irwin: I think it is going to be very difficult to settle the IPC issue while President Velasco Alvarado is still in power. If we can solve the compensation issue, it will be relatively easy to resolve the other problems we have with Peru. Mercado may be a bit easier to deal with since he is less emotional than Velasco Alvarado, but this is unlikely to change the scene so far as the IPC case is concerned.

Mr. Flanigan: There appears to be no possibility that Velasco Alvarado will leave the scene in the near future, so we seem to have two basic choices. One is to start a new inter-American initiative on the basis of IADB and Ex-Im bank loans. The other would be to follow option 3 and put the IPC issue aside. Then the question would be whether to follow option 3 before or after this new initiative.

Mr. Irwin: We have a problem here that should be resolved. Are we going to apply the Gonzalez Amendment and vote against a loan for Peru in the IADB? If we don’t have to do that—have a confrontation in the Bank—then I don’t see any immediate problem. But we need a decision on that issue.

Gen. Walters: If we take no action, the military in Peru will just drift.

Mr. Flanigan: If we can devise a reasonable new initiative toward the IPC issue and deter the financing questions for awhile, we may be able to work out a solution. Treasury and ourselves (CIEP) can get together and coordinate a new approach to the problem, if there is no objection.

Mr. Irwin: We (State) prefer not to apply the Gonzalez Amendment retroactively.

Mr. Selden: As I understand it, if you can get negotiations under way there will be no problem on the Gonzalez and Hickenlooper amendments, isn’t that true?

Mr. Hennessy: That’s right, there is a clause that says they are not operative while negotiations are under way.

Mr. Irwin: Then the Ex-Im Bank issue will disappear, too.

Mr. Hennessy: The Ex-Im Bank has three new loans under consideration, one of which is for the Peruvian Railroad and one for the City of Lima.

Mr. Irwin: I think direct credit of this sort should be considered, regardless of the other problems. This is export promotion.

Mr. Lynn: How much time does the Bank have to consider these credit requests?

Mr. Flanigan: How big are these three loans?

Mr. Hennessy: I have some approximate figures. The loan for the railroad is $3.5 million direct credit and a $1.5 million guarantee, a loan to Peru Steel is $1 million direct and $1 million guarantee and the loan for the City of Lima is about S6 million direct and $6 million guarantee. Those are not precise amounts, but the total of the three loans is about $17 million.

Mr. Lynn: If you look at our trade balances around the world over the years, one of the few places we have had a favorable balance is Peru. I don’t think we should let that business go elsewhere, and it will if we don’t provide Ex-Ina Bank credits.

Mr. Flanigan: With regard to Peru, our policy has been clear that we will allow direct loans but not Ex-Im Bank credits.

Mr. Lynn: If the timing of those loans is such that they can wait awhile, why not let them wait?

Mr. Flanigan: What is the timing?

Mr. Hennessy: They’ve already been pending for some time.

Mr. Meyer: We can flex a bit on the question of direct credit. We can give them a carrot on that issue without undercutting our own policy. As an old merchant, I hate to see us foreclosing ourselves competitively in this way.

Mr. Lynn: There is a half billion dollars worth of business there that our businessmen are not even after because they can’t get credit or guarantees.

Mr. Flanigan: You are assuming the Peruvians are going to buy these things anyway, so we may as well get the business?

Mr. Lynn: Sure they’re going to buy them anyway, but aren’t we going to look like a paper tiger to the world, if we have a policy and then don’t enforce it? Shouldn’t we take a hard look at this question?

Mr. Kennedy: The question now is whether our moving on any of these other loans will affect the IPC case. If Peru is going to act on IPC anyway, regardless of what we do on the other loans, then we should be able to take steps on them without regard to IPC.

Mr. Lynn: Does it make any sense to have the Ex-Im Bank included in our expropriation policy? I don’t think it does.

Mr. Hennessy: It is always a big carrot we can use.

Mr. Flanigan: (to Mr. Lynn) You know from your own experience in negotiating with the Russians how anxious they were to get Ex-Im Bank credits. Ex-Im credits are very much in demand and do represent a good carrot. Jack (Hennessy), are these Ex-Im Bank loans short term or long term?

Mr. Hennessy: Short term. They are five year loans. Mr. Kennedy: What is the one for the City of Lima for?

Mr. Hennessy: Buses.

Mr. Lynn: A lot of people around the world want to sell buses. We have no monopoly on buses. If we won’t provide credits for them, the French or the British will.

Mr. Meyer: Or the Japanese.

Mr. Flanigan: Will providing such credits help or hurt an initiative on IPC? If it helps or has no adverse effect, we should go ahead with it (the Ex-Im Bank loans). State says we should, are there any other comments?

Mr. Lynn: This is only $17 million, if we are going to break our policy we should do it for a big money deal.

Mr. Walker: $17 million is $17 million. We need all the exports we can get, including $17 million dollars worth.

Mr. Lynn: $17 million is peanuts. It’s nothing compared to the business we are losing in Peru.

Mr. Kennedy: If someone is talking gently to the Peruvians in negotiations and could offer a small loan from the Ex-Im Bank, it may be a useful carrot.

Mr. Meyer: When talking to the Government of Peru, you must remember that it is a government that came to power on the nationalization of IPC. That is their raison d’etre. Even money won’t move them away from it.

Mr. Lynn: I’d like to see some creative ideas from CIEP and Treasury to float that money out of Peru (payment for IPC).

Mr. Hennessy: If we make a new initiative and it doesn’t work, then what do we do?

Mr. Flanigan: Then we’re right back here without option 1. We’ll have to have another meeting, but then we will have only options two and three to consider.

Mr. Meyer: Can you try to work it out in ninety days?

Mr. Flanigan: Sure. If we haven’t made progress in ninety days, we’ll have another meeting here to consider what we do next.

Mr. Hennessy: That’s O.K. with me.

Mr. Flanigan: Thank you, gentlemen.

1. Source: National Archives, Nixon Presidential Materials, NSC Files, NSC Institutional Files (H-Files), Box H–113, SRG Meeting Minutes, Originals, 1972–1973. Confidential. The meeting took place in the White House Situation Room. A portion of the study produced in response to NSSM 158 is published as Document 638. Minutes of a future SRG meeting on Peru have not been found. The CIEP/Treasury initiative was not found.
2. The Senior Review Group discussed outstanding problems with Peru and policy options outlined in a study memorandum prepared by the NSC–IG/ARA.