470. Telegram From the Embassy in Peru to the Department of State/1/

Lima, January 15, 1964, 1 p.m.

/1/ Source: National Archives and Records Administration, RG 59, Central Files 1964–66, PET 6 PERU. Confidential; Limit Distribution.

829. For: Mann. IPC Case. Embtel 822./2/

/2/ In telegram 822 from Lima, January 14, the Embassy advocated a flexible "policy of restraint," i.e., linking the level of economic assistance to progress in the negotiations for an IPC settlement. (Ibid.) In approving the Embassy’s recommendations, the Department also provided the following guidance: "Peruvians can make own deductions to this effect, but link must not be obvious and must be denied if they ask. You will simply have to give bland explanation of further delays (i.e. on projects still frozen) by stating programs ‘being processed’ and that this taking longer than originally expected; part of blame could be placed on reorganization here." (Telegram 549 to Lima, January 22; ibid.)

Reference contains our recommendations for action immediate future subject case and related effect aid program. As you doubtless informed, since GOP broke off negotiations with IPC on October 28 and submitted an unsatisfactory draft bill to Congress we have been dragging our feet on implementing aid program and endeavoring by this means to influence GOP toward more sound and sober attitude this case.

Peculiarity situation is that in effect we have been applying Hickenlooper amendment/3/ without Peru as yet having taken specific acts which would legally warrant such course. This in part came about, ironically, through President Belaunde’s asking Moscoso last September if USG through AID might not facilitate solution with IPC./4/ What he actually had in mind was USG help for IPC to pay $50 million bonus GOP sought. While we of course could not do this, we were on the point of announcing a rather large AID package totaling some $64 million and I was instructed on the last critical weekend of October 28 to inform Belaunde that this amount was ready for announcement. The idea was that such an announcement might help to deflect any Peruvian public or congressional criticism from Belaunde administration-proposed settlement with the IPC.

/3/ Amendment to the Foreign Assistance Act of 1961 initially approved in August 1962 and subsequently revised in December 1963. Sponsored by Senators Bourke B. Hickenlooper (R–Iowa) and E. Ross Adair (R–Indiana), the amendment stipulated that the President suspend assistance to any country that expropriated the property of U.S. citizens or corporations without proper compensation. (76 Stat. 260)

/4/ Moscoso raised the issue with Belaúnde on August 28, 1963. For background information on the IPC case, see Document 478, and Foreign Relations, 1961–1963, vol XII, Document 432.

Since GOP took course it did notwithstanding this gesture, and there ensued press campaign here, principally through El Comercio, to demonstrate that Peru could do what it wanted with IPC without penalty, we took decision to hold back on these new programs in hopes of using this asset to influence a better course. In my opinion this was proper thing to do. It has had effect of sobering GOP attitude and, I hope, of increasing chances for satisfactory solution. Nevertheless, to use AID program at such a stage to influence the outcome of a particular problem is of course to tread on dangerous ground for obvious reasons. I earnestly hope, therefore, that we can resume a normal pace of operations at earliest possible moment consistent US interests. I believe this moment will have arrived when and if the executive branch is once again in negotiating contact with the IPC.

Once this has happened, we will have gone full circle and nothing concrete will have been changed with single exception of GOP’s laws nullifying arbitration awards which formed tax base for IPC operations. As to these acts, however, we have officially stated our reservations; IPC has declared its view that awards remain in full force and effect; and UK has now formally protested and, for its part, declared awards still to be valid.

As you are doubtless aware, this case, plus that of Peru telephone company which now seems to have a more hopeful aspect,/5/ constitute the only dark clouds on a rather encouraging situation here. A respectable, democratic and progressive regime is in office and it gives every evidence of a desire for close collaboration and warm friendship with US. The economy is sound, growing and diversified. While Peru has severe problems, it also has many elements of strength which should make it possible to achieve real progress here under Alliance for Progress. I hope you will agree with us as to the tactics to follow at this stage, and that you will be able promptly to impress on Peru’s new Ambassador, Celso Pastor,/6/ as we have tried to do, the importance of renewing actual negotiations as soon as possible and, eventually, of achieving bilateral solution of this problem./7/

/5/ The Peruvian Telephone Company, a subsidiary of the International Telegraph and Telephone Company, was engaged in negotiations to maintain its position in Peru. Documentation on these negotiations is in the National Archives and Records Administration, RG 59, Central Files 1964–66, TEL PERU; ibid., ARA/EP/P Files, 1955–1964: Lot 67 D 566, Perutelco—TEL 11; ibid., ARA/EP/P Files, 1963–1967: Lot 70 D 139, Telecommunications, IT & T Working File.

/6/ Mann met Ambassador Pastor and Peruvian Vice President Seone on January 30. (Telegram 575 to Lima, January 31; ibid., Central Files 1964–66, POL PERU–US)

/7/ President Johnson asked Mann about Peru on February 12. Mann replied: "I don’t think Peru is my main concern at the moment. I have a report that President Belaunde has a plan of a takeover [of IPC] in 30 years. There is a claim for back taxes of $50 million. I’m going to have to warn about expropriation and the Hickenlooper Amendment applies to this." (Memorandum of telephone conversation; Johnson Library, Papers of Thomas C. Mann, Telephone Conversations with LBJ, Jan. 14, 1964–April 30, 1965)

Jones

471. Editorial Note

In a June 27, 1964, letter to Ambassador Jones, the Peruvian Minister of Government and Police requested U.S. assistance to equip and maintain a Special Police Emergency Unit (SPEU). (Airgram A–020 from Lima, July 8; National Archives and Records Administration, RG 59, Central Files 1964–66, DEF 19 US–PERU) After considerable debate in Washington, the U.S. Government informed the Peruvian Government of its tentative support, citing the prospective role of the SPEU in dealing "with a variety of threats including riots, subversion, terrorism, demonstrations, land invasions, civil disobedience, and uprisings up to and including small-scale guerrilla activities." (Airgram A–294 from Lima, October 29; ibid., POL 23 PERU) The formal negotiations to establish the SPEU were conducted primarily through the Agency for International Development and complicated by competing interests of the Department of Defense and the Central Intelligence Agency. In a December 10 letter to Jones, Nicholas McCausland, the officer-in-charge of Peruvian affairs, reported that the JCS feared the SPEU was "a pilot project by which CIA plans to get its oar into operational activities in Latin America." (Ibid., Lima Embassy Files, Classified Personal Papers of Ambassador J. Wesley Jones: Lot 73 F 100, McCausland, Nicholas V.)

On April 8, 1965, the Special Group (CI) met to consider the counter-insurgency situation in Latin America, particularly in view of the SPEU proposal. According to the minutes of the meeting (Document 28), the participants "endorsed the CIA/AID proposal for a special airborne police unit to be tried on an experimental basis in Peru." The provisional agreement stipulating U.S. assistance for the SPEU was signed in Lima on June 26. In a memorandum to Secretary Rusk, August 18, Assistant Secretary Vaughn reiterated the importance of supporting the program: "the insurgency situation in Peru has shaken the Peruvian Government and we are now hearing reports of a possible military coup if President Belaunde does not deal with it effectively." "We believe that the correct way to deal with insurgency is first with civilian police forces [i.e. the SPEU]. When it escalates to the point where civilian police forces can no longer handle it, then it becomes a problem for the army." (National Archives and Records Administration, RG 59, ARA Files, 1967–1969: Lot 72 D 33, Special Group CI (1964–1966))

472. Letter From the Deputy Director of the Office of Ecuadorean-Peruvian Affairs (Barnebey) to the Ambassador to Peru (Jones)/1/

/1/ Source: National Archives and Records Administration, RG 59, ARA/EP/P Files, 1959–1968: Lot 72 D 101, PET 6 (IPC) 1965. Confidential.

Washington, September 30, 1965.

Dear Mr. Ambassador:

I want to report to you on the results of a meeting Jack Vaughn had last Friday/2/ with Tom Mann, with Rostow, Sayre, Johnston, and myself in attendance. The meeting covered Jack’s approach to date and proposed increased flexibility in our policy on the IPC negotiations.

/2/ September 24.

Let me stress at the outset that this is merely an advance notification of how Jack is thinking of handling the problem, and is subject to modification depending on the outcome of certain key conversations he will hold in coming days. Jack reviewed for Mann the results of his conversations with President Belaunde,/3/ concluding by saying that there seems to be little prospect for solution of the IPC case in the next year or so. Moreover, Jack is inclined toward the view that Belaunde may prefer to keep the IPC case around for resort to possible expropriation as and when the political going gets particularly rough.

/3/ Vaughn visited Lima in early-September as part of a 2-week trip to Latin America. An account of his meeting with Belaúnde is in telegram 347 from Lima, September 2. (National Archives and Records Administration, RG 59, Central Files 1964–66, ORG 7 VAUGHN)

Based upon Jack’s report, he and Mann discussed what would be the next appropriate step. Their conclusions were essentially as follows:

1. An assurance would be sought from Belaunde that he would not expropriate IPC during the remainder of his presidential term.

2. Subject to getting this assurance from Belaunde and further conversations as Jack deems necessary with Congressional leaders (notably Senator Hickenlooper) and the company, IDB soft loans to Peru would be resumed. The first such loan would be the $18 million Comunidades Indígenas loan to be approved in the course of the next few weeks. (Activity under this loan, to be administered by several ministries and Cooperación Popular, would be directed toward strengthening the legally recognized indigenous communities of the highlands; proceeds of the loan would be re-lent to the communities for agricultural improvement and community development projects.)

3. Until a satisfactory solution is achieved in the GOP–IPC negotiations, we would continue the policy of denying AID loans to Peru. Belaunde would be told that we recognize his political difficulties in settling the IPC case, but he would have to come to recognize U.S. domestic political considerations as a limitation on AID lending decisions.

During the conversation a great deal was said about Belaunde’s apparent weakness as a President and as a politician, as illustrated by his lack of determination to settle the IPC case. Mann called attention to the country’s economic problems, such as a potential inflationary spiral, the Government’s failure to put its fiscal house in order, and its failure to adopt progressive taxation which would work toward eliminating some of the greatest disparities in Peru’s income distribution. Mention was made, too, of the counter-insurgency campaign, with Ambassador Pastor having told Jack how seriously he views the problem and the new Foreign Minister apparently having told Reuters that communism is no problem in Peru. Dr. Rostow reiterated his view that we should approve specific development loans as a counter-insurgency move (a position not regarded as persuasive, particularly as to combatting insurgency on a short-term basis). On the other hand, Dr. Rostow’s statement in support of Belaunde’s efforts toward rural modernization and national integration was received rather better.

There was general agreement as to the disenchantment Mann, Vaughn and others have come to have regarding Ambassador Pastor’s contribution toward improving U.S.-Peruvian relations. The consensus seemed to be that Pastor has not been able to look beyond Peru’s boundaries during his service as Ambassador here, and apparently cannot see, let alone convey to his Government, a larger view of U.S. or free world interest in many of the issues confronting his and our Government.

In this regard Jack called attention to Ambassador Pastor’s latest offer to take a leading role in the IPC negotiations. During the September 22 conversation, Pastor mentioned seeking "plenipotentiary powers" from Belaunde to negotiate this dispute. Pastor also said he might ask that two or three Peruvian experts concerned with these negotiations come to Washington to join him in working out this matter. During the conversation Jack did not comment upon this possibility, but I would be interested in your views as to whether such a course of action would be useful.

I will keep you informed as to the progress of the impending policy change./4/

/4/ In a December 23 letter to Jones, Barnebey reported that Vaughn was seriously considering whether to modify the soft loan freeze policy, possibly as early as the end of January 1966. In reference to the possibility that APRA might obstruct a settlement in the IPC case, Barnebey also offered the following suggestion: "It occurs to me that given the excellent relations that another agency has with Aprista leaders in Lima, you might want to explore how some of these contacts can be used effectively in the event that an overt approach to Aprista leaders does not yield beneficial results." (Johnson Library, Papers of John Wesley Jones, Classified [Correspondence])

Sincerely,

M. R. Barnebey/5/

/5/ Printed from a copy that bears this typed signature.

473. Memorandum of Conversation/1/

Sec/MC/21

Rio de Janeiro, November 17, 1965, 3 p.m.

/1/ Source: National Archives and Records Administration, RG 59, Central Files 1964–66, PET 6 PERU. Confidential. Drafted by Neil A. Seidenman in LS and H. W. Baker, labor attaché at the Embassy in Brazil, on November 19 and approved in S on January 20, 1966. The meeting was held at the Hotel Gloria. The memorandum is part III of III. A draft memorandum of the entire conversation is ibid., ARA/EP/P Files, 1967: Lot 70 D 139, POL 3 OAS—General. Rusk was in Rio de Janeiro November 16–24 for the Second Special Inter-American Conference.

SUBJECT
Relationship of International Petroleum Company and U.S. Loan Policy

PARTICIPANTS

U.S.

The Secretary

Walt W. Rostow, Counselor, Dept. of State, and Chairman Policy Planning Council

Jack Hood Vaughn (Coordinator), Assistant Secretary of State for Inter-American Affairs

Neil A. Seidenman, OPR/LS, Reporting Officer

H. W. Baker, American Embassy Rio de Janeiro

Peru

Jorge Vasquez Salas, Foreign Minister of Peru

The Secretary said that this was a problem that was making our lives very complex, and Presidents Kennedy and Johnson had made special efforts to move resources into Latin America and specifically into Peru in support of the Belaunde Government. However, legislation on foreign investments has been passed by the United States Congress./2/ Specifically, foreign assistance legislation has provisions limiting appropriation of funds for countries whose governments confiscate investments or property of American enterprises./3/ The Secretary said he was not here to negotiate on the IPC problem and reiterated our commitment to support the prosperity and independence of Peru.

/2/ The phrase, "which is the source of [the] problem," concluded the sentence in the draft memorandum, but was subsequently removed in S.

/3/ The final version of the memorandum also eliminated the following sentence at this point: "The Secretary said he had testified against this legislation but it was passed, and we have it."

The Foreign Minister expressed his appreciation for the Secretary’s concern over this problem. "My government," he said, "shares this concern." This was a matter that has been the subject of serious, earnest, concentrated study by the Peruvian Government. He said the Peruvian Government has never expected and does not expect or intend to confiscate or seize any property or infringe on the rights of any individual or company within the territorial bounds of its country. Peru simply desires to be in a position where it can control and manage the natural wealth of the country. In the process of implementing the laws and regulations applicable to this area in Peru, he said, Peruvian authorities have no intention of subjecting any party to discrimination but rather adhere to the principle that non-national interests certainly should not be allowed to enjoy greater benefits than Peruvian nationals; that all should have equal status under the laws of the country. To proceed otherwise would be tantamount to going back to the practices of extraterritoriality. The Foreign Minister said he hoped the United States would realize a country must be in a position to dispose of its own wealth and resources, not with a view to punishing any one, but in a way that parties concerned will be justly compensated. Peru has undertaken a program of land distribution. To carry out this reform it is necessary to expropriate to progress toward an equitable redistribution of the national landed estate. However, Peru lacks adequate financial resources to pay for all of this property and must compensate former owners with long-term bonds which the GOP intends to make fully redeemable within the prescribed period. If it is legal to make compensation for expropriated property in the form of bonds, certainly this should be acceptable to foreign property owners as well. This is not a plan for confiscating property.

The Secretary said that he would like to have some time to review the Minister’s remarks and talk again while they are still here together. The Secretary said that perhaps it would be desirable to have further discussions between the governments, since previously there had only been contacts of the company involved with the Peruvian Government.

The Foreign Minister said he believed the problem was a matter of national jurisdiction, not subject to handling on a government-to-government basis. In the view of the GOP it would be a great mistake to transfer this problem to the realm of diplomacy which would simply mean repeating an historic error committed by Peru at a time when it allowed important property within its territory to remain under the ownership of British interests.

The Secretary stated that this was a decision to be made by the Peruvian Government; the Peruvian Government makes its decisions and the American Government makes its decisions, so these decisions should be balanced. The Secretary said we are only asking that due consideration be given to the factors involved in the hope that both parties can adjust their respective interests. On our side, the Secretary said, it is a matter of our being able to tell the American taxpayers what we are doing with their tax money and that it is worthwhile.

474. Editorial Note

In early January 1966 Ambassador Jones suggested a plan for "political action" to resolve the status of the International Petroleum Company (IPC) in Peru. In a January 4 message, Jones explained that President Belaúnde could not submit an IPC settlement to Congress without the tacit support of the American Popular Revolutionary Alliance (APRA). There was, however, a problem: "A decision of such importance to APRA can only be made by party leader [Victor] Haya De La Torre who is at present in Europe." Jones, therefore, recommended that a U.S. official approach Haya in Europe in an attempt "to persuade him to send assurances to President Belaunde that the Apristas will make no trouble over the issue and urge him [Belaunde] to act now." (Memorandum from Broe to Vaughn, January 4; Department of State, INR/IL Historical Files, Latin America Country File, Peru, 1961–1964)

[text not declassified]

At a meeting with a U.S. official in Hamburg, January 16, Haya agreed to support a fair settlement of the IPC case and acknowledged that Belaúnde’s latest proposal, as outlined by the officer, was, in fact, reasonable. According to a subsequent report: "No financial or other commitments were made, nor were any requested by Haya." (Memorandum to the 303 Committee, January 17; ibid., 303 Committee Special Files, January–June 1966)

475. Memorandum From the Ambassador to Brazil (Gordon) to President Johnson/1/

Washington, January 29, 1966.

/1/ Source: Johnson Library, National Security File, Special Head of State Correspondence, Peru—Belaunde Correspondence. Confidential. Another copy indicates that Bowdler drafted the memorandum. (Ibid., Memos to the President, McGeorge Bundy, Vol. 19) Gordon was in Washington for his Senate confirmation as Assistant Secretary of State for Inter-American Affairs; he did not formally assume his new responsibilities until March 9. In a memorandum to the President, January 27, Bundy explained that Gordon "will bring cool good sense" to the IPC case—a case on which, he admitted, "we have been a shade rigid." (Ibid.)

SUBJECT
Letter to Peruvian President Belaunde

In a recent conversation with Ambassador Jones, President Belaunde expressed deep frustration over Peru’s failure to obtain major concessional assistance from the U.S. which he attributes to the fact that he has not yet reached an agreement with the ESSO-owned International Petroleum Company (IPC) on the basis for its continued operations./2/ Belaunde is under strong political pressure to expropriate the IPC holdings, which he does not want to do. On the other hand, he has not been able to accept a satisfactory settlement with the Company because he assesses the political risks to himself and his party as too high. The Company has made several reasonable proposals during the past two years. A fuller description of the issues involved in the IPC case is at Tab C./3/

/2/ Belaúnde summoned Jones on January 20, declaring that "he would never sign an agreement [with IPC] under pressure, that US aid policy must first return to normal before he could conclude an agreement." In reporting the conversation, Jones suggested that "a promise of additional aid now might be an important element in support of those other factors which the Department is aware now working toward a settlement." (Telegram 1036 from Lima, January 21; National Archives and Records Administration, RG 59, Central Files 1964–66, PET 6 PERU)

/3/ Dated January 29; attached but not printed.

Walt Rostow, Tom Mann and I have been reexamining our position on the IPC case in the light of the Belaunde–Jones conversation. We have reached the conclusion that the conversation opens the door for a new effort to work out a basis for more effective cooperation with Peru’s development plans and a simultaneous understanding on the IPC case. We have decided that Walt Rostow, under the cover of a CIAP mission to discuss multinational projects for opening the South American heartland, should go to Lima next week to discuss with Belaunde:

1. Peru’s economic, financial and reform performance and prospects, including their relation to possible increased USG and multilateral assistance to Peru.

2. His willingness and ability either to reach a mutually satisfactory settlement with the Company or, at least, to give assurances that the status of IPC will not be changed for the duration of his term (3 years) except as mutually agreed by Peru and the Company. The present operating conditions are not unsatisfactory to the Company.

Tentative guidelines for Rostow’s talks with Belaunde are at Tab B./4/

/4/ Dated January 28; attached but not printed.

Walt Rostow’s hand would be greatly strengthened if he were to carry a personal letter from you to Belaunde. Based on previous conversations with Belaunde, we believe that having the letter may well spell the difference between success and failure of his mission. The thrust of the letter would be your interest in seeing Belaunde carry forward his economic and social development plans on the basis of a strong self-help program backed by well-organized and sustained external support and in clearing the path of misunderstandings and obstacles which impede full cooperation between our two governments. The obstacles refer not only to the IPC case, but also to Belaunde’s public criticism of the Alliance and the need for better management of the Peruvian economy and greater effort in basic reforms. The text of a suggested letter is at Tab A./5/

/5/ Dated January 29; attached but not printed. The final version of the letter is in the Johnson Library, National Security File, Country File, Peru, Vol. II, 1/66–10/67.

The way this letter is phrased and the CIAP cover which Rostow would use in making the trip (one of many he has made to Peru in recent years) reduces the risk of disclosure of the purpose of the visit and places us in a good position publicly to refute charges, should they be made, that the Rostow visit is a pressure move on the IPC case.

I think we should take advantage of this opportunity to seek a solution to this knotty problem which, if left unsettled, poses a serious threat to US–Peruvian relations and to our Alliance image. Another consideration is that aspects of the Belaunde program are designed to bring the long neglected Indian population into the mainstream of national life, thereby countering communist efforts to use Indian discontent to launch a guerrilla movement. Much stands to be gained by the Rostow trip, and the risks are minimal.

I recommend that you send the suggested letter./6/

/6/ Bundy forwarded the proposal under the cover of a memorandum to the President, January 29, on which he wrote the following parenthetical comment: "a good bargain with Belaunde will help us on all fronts & Walt is a good bargainer." Johnson indicated that he would "prefer not to send the letter," but "let’s discuss [the issue] further." (Ibid., Special Head of State Correspondence, Peru—Belaunde Correspondence) The President discussed the letter, as well as the "overt and covert purposes" of Rostow’s trip to Peru, at a February 3 meeting in the Oval Office. (Johnson Library, President’s Daily Diary) After minor revisions, Johnson signed the letter and directed Rostow to deliver it to Belaúnde. (Note from Marie Fehmer to Juanita Roberts, February 3; ibid.)

Lincoln Gordon

476. Memorandum From the Counselor and Chairman of the Policy Planning Council (Rostow) to President Johnson/1/

Washington, February 10, 1966.

/1/ Source: Johnson Library, National Security File, Country File, Peru, Vol. II, 1/66–10/67. Secret; Eyes Only. The President also received an advance report on the Rostow mission from Bromley Smith on February 9. (Ibid., Memos to the President, McGeorge Bundy, Vol. 20)

You have the cabled reports of my mission to Peru plus the Washington instructions I followed./2/

/2/ Rostow’s instructions were attached as Tab B to Document 475. Bowdler forwarded the "cabled reports" to the President under the cover of a February 10 memorandum. (Johnson Library, National Security File, Country File, Peru, Vol. II, 1/66–10/67) These were telegrams 1107 and 1114 from Lima, both February 5. (Also in National Archives and Records Administration, RG 59, Central Files 1964–66, PET 6 PERU and POL 29 PERU, respectively) Rostow delivered the letter in a meeting with Belaúnde on February 4. A detailed account of the meeting is in airgram A–450 from Lima, February 9. (Ibid., POL PERU–US)

The facts are:

1. Belaunde fully met the condition we laid down; namely, that he give to you personally his assurance that the status of IPC would not be impaired in the lifetime of his administration.

2. He subsequently confirmed his verbal message to me in a conversation with Ambassador Jones. He knows I reported in writing; he knows you have that report; and he has confirmed its accuracy./3/

/3/ In telegram 1124 from Lima, February 8. (Ibid., POL PERU–US)

3. What he permitted me to communicate to you, he has often said to some of our officials. But this time he knew he was making a most solemn and personal political deal. It could be explosive for him if it is known. He has put his political life in your hands. That is why I asked my cables to be handled with such special care.

4. Before I left, Linc Gordon cleared the deal with Senator Hickenlooper. As you know, I was recruited for this job by all three of my Latino pals: Tom Mann, Jack Vaughn, and Gordon.

5. As the attached cable/4/ indicates, there is some irony in all this: Belaunde is the most pro-U.S. business President in Latin America. IPC is simply an inherited political problem peculiarly difficult for his rickety coalition. His campaign speeches and subsequent dilatory tactics have not helped. But basically he wants a settlement if he can swing it: he doesn’t want to nationalize: if he breaks his word to you, the Hickenlooper Amendment is there, and he knows it.

/4/ Telegram 1138 from Lima, February 10; attached but not printed.

6. I recommend that we proceed promptly with the $15–20 million A.I.D. package as promised.

7. Sometime at your leisure and convenience, I’d like to tell you what the east slopes of the Andes look like. The last real frontier. Real nice place to bring up kids.

Walt

477. Memorandum From the President’s Deputy Special Assistant for National Security Affairs (Komer) to President Johnson/1/

Washington, February 15, 1966, 5:30 p.m.

/1/ Source: Johnson Library, National Security File, Country File, Peru, Vol. II, 1/66–10/67. Confidential.

SUBJECT
Peruvian President’s Reply to Your Letter

I received the Peruvian Ambassador this afternoon who wanted to deliver President Belaunde’s reply to the letter which you sent to him via Walt Rostow./2/

/2/ The letter from Belaúnde to Johnson, dated February 10, included an English translation. (Ibid., Special Head of State Correspondence, Peru—Belaunde Correspondence)

The reply is in Spanish and I have sent it to State for translation. The principal points are:

1. He is profoundly grateful for your letter.

2. The conversations with Walt Rostow permitted a fruitful exchange of constructive ideas. Before replying to you, he wanted to talk first with Ambassador Jones.

3. The opening of the eastern slopes of the Andes offers a new frontier for colonization which will help win the battle over hunger and poverty. U.S. help in the initial phase of feasibility studies, as well as the new phase of actual work, will be of inestimable importance.

4. The cordial relations between our two countries is reflected in the growing participation of U.S. private capital in Peru. The contribution of these companies is much appreciated.

5. The only point that causes "certain preoccupation" is the "notorious difference" between the loan assistance given by "Official Institutions" to Peru in comparison to other countries. From his conversations with Rostow he gathers that there is the intention to "balance the flow of assistance" under the Alliance.

6. There is no reason for concern over the activities of U.S. businesses in Peru, which throughout the history of the country have never been the victims of arbitrariness or unjust treatment. Where problems have arisen, they have been discussed with a high sense of responsibility and without precipitous action. He is confident that the few cases pending solution will be resolved by harmonious agreement.

7. He greatly appreciates your personal support for his "Cooperacion Popular" program designed to bring the Indian communities into the mainstream of Peruvian life.

8. He has sent through Ambassador Jones his pledge of support for the Pope’s peace efforts in Vietnam.

The letter in tone and content is friendly and forthcoming. Point 2 is his way of referring to his understanding with Walt Rostow on the IPC case (Tab A). His reference to wanting to talk to Ambassador Jones before replying to you refers to his desire to review the memorandum of understanding which Walt prepared. Points 4, 6 and 7 are designed to provide additional reassurance./3/

/3/ The President wrote the following instruction at the end of the memorandum: "Bob see me." For an explanation of what Johnson may have had on his mind, see footnotes 2 and 3, Document 479.

RWK

Tab A

Memorandum of Understanding Prepared by Walt Rostow and Shown to President Belaunde by Ambassador Jones

The following memorandum will be the basis of my report to President Johnson:

(1) President Belaunde wishes President Johnson to understand that he will try to settle within the next year the IPC case.

(2) Under no circumstances does President Belaunde intend to confiscate IPC. (Ambassador Jones will say that he presumes that this is in response to the formula which we reiterated three times yesterday that the status of IPC "would in no way be further impaired.")

(3) It is President Belaunde’s judgment that his political possibilities for settling the IPC case would be improved by a resumption of normal aid relations with the U.S. along the lines of the sequence presented to him on Friday afternoon.

(4) With respect to Viet-Nam President Belaunde wishes President Johnson to know that he will continue to support the peace initiatives of the Vatican.

478. Memorandum From the Under Secretary of State for Economic Affairs (Mann) to President Johnson/1/

Washington, February 19, 1966.

/1/ Source: National Archives and Records Administration, RG 59, Central Files 1964–66, PET 6 PERU. Confidential; Nodis. In an attached transmittal note to the President, Mann explained that the IPC problem was a "case study on the difficulties of (a) using aid as a lever to further the national interests and (b), without going into detail, getting the Inter-American Bank to play an effective role in promoting self-help." The memorandum was forwarded under the cover of a February 21 memorandum from Komer to the President. (Johnson Library, White House Central Files, Confidential File, Co 234)

AID TO PERU AND THE IPC PROBLEM

The La Brea y Parinas oil field in Peru (which is only part of the IPC’s holdings) was the subject of a dispute between the United Kingdom and Peru in the early part of this century. In 1918 the Peruvian Congress authorized its Foreign Minister to arbitrate. An arbitration award was handed down in 1922 which established a tax regime for this particular oil field. In 1924 the IPC, now but not then a subsidiary of Standard Oil of New Jersey, bought this oil field from the British owners. As far as I know, it is undisputed that the American company bought in good faith reliance on the award.

The Miro Quesada family, which owns the largest Lima newspaper, El Comercio, has conducted for many years a newspaper campaign for nationalization of the entire oil industry in Peru. In addition, this newspaper asserts that the award was not valid and hence, under its tax calculations, IPC owes Peru more than the approximately $70 million dollars at which the company values its assets in La Brea y Parinas.

Like Illia in Argentina, Belaunde, who depended on El Comercio’s support in his campaign, promised to settle the IPC problem. In his inaugural address on July 28, 1963 Belaunde stated that he would settle it within 90 days.

In August 1963 Mr. Moscoso went to Lima and discussed with Belaunde the possibility of announcing a large aid package in order to provide a better atmosphere in Peru for a settlement. Active negotiations between Peru and IPC were going on at that time and when it appeared, near the end of the 90-day period, that a solution was imminent, our Ambassador was instructed to offer a $64 million dollar aid package to Belaunde. Two days after this offer was officially made, Belaunde broke off negotiations with the company and submitted two options to the Peruvian Congress. One was nationalization. The other was a contract under which, according to the company, IPC would have been obliged to pay more than 100% of its net earnings and which it therefore considered confiscatory.

The Peruvian Congress did not follow either option recommended by Belaunde. Instead, it passed two other laws; one nullifying the 1918 Act which had authorized the arbitration and the other declaring the arbitration award null and void.

At this point, in the first week of November 1963, it was decided not to go ahead with the $64 million dollar aid package previously promised with the aim of encouraging the Peruvian government to resume negotiations with IPC. The Peruvian government was not officially informed of this decision.

In February 1964 the Peruvian Congress passed another law, in essence authorizing the President to negotiate with IPC and to submit the negotiated solution to Congress for approval. This was part of the "buck-passing" between Belaunde and the opposition-controlled Congress which has recently complicated the problem.

In 1964 and 1965 I and various Department officers talked with Belaunde, urging him to reach agreement with the company or, in the alternative, to agree to submit the legal issue of the validity of the award, which underlies the problem, to the International Court or to arbitration. Belaunde says in essence that domestic political pressures are too great to permit agreement on what the company regards as fair terms. He refuses to go to the World Court or to arbitration because he knows he will almost certainly lose.

He talks, instead, of the dangers of communism if we do not increase aid levels. He has made several public statements criticizing the sluggish AID procedures; and his Ambassador to Washington (and his brother-in-law) and others conducted a campaign consisting of complaints about our alleged attempts to influence internal Peruvian policy. Meanwhile, El Comercio has stepped up its attacks against IPC. Its line was to urge the President to nationalize, arguing that the U.S. would not react.

Certain elements in our Congress and press have spoken about my "hard line" policy and about the big U.S. jumping on poor, defenseless, democratic Peru in order to increase the profits of oil companies. These sources do not mention the United States’ stake in opposing widespread disregard of contracts in the contract society in which we live. Nor do they mention the importance to the success of the Alliance of the private sector, whose participation on an adequate scale depends on observance of contracts.

In spite of these criticisms, I believe the policy has been successful in achieving its principal objective, i.e., deterring confiscatory action by Belaunde.

The tactic has been not to cut off, but to cut back, aid without specifically admitting to Belaunde that we were doing so. Our premise was that our relations with Peru would in the long run be better if we deterred confiscation than if Belaunde were lulled into a sense of security leading to confiscatory action which would then oblige us to apply rigidly the Hickenlooper-Adair Amendment. During calendar year 1964 we authorized road loans of $39 million dollars through AID and Eximbank; agricultural credit of $8 million dollars, and a labor housing cooperative loan of $6 million dollars. These were made on Ambassador Pastor’s oral assurances to me on three separate occasions that the IPC case would soon be settled.

In 1965 we made a $2 million dollar project loan for an agricultural university and continued our Peace Corps, technical assistance and military aid programs which total about $26 million dollars a year. In addition, Peru continued to receive substantial loans from the Inter-American Bank and other international institutions. In 1966 the Inter-American Bank made a $20 million dollar soft loan which, like its loans in 1965, were almost wholly from U.S. funds.

During 1964 the company, incidentally, offered to give up its title to the oil and gas in place and to accept in lieu thereof an operating contract to terminate in twenty-five years. In September 1964 the company thought it had reached an understanding, which had been reduced to writing and orally agreed upon by two representatives of Belaunde, only to have it rejected by the President a few months later who claimed throughout that he was under irresistible domestic pressures. One principal issue remaining is whether the total "tax take" of Peru will be 85% or a smaller figure in the range of 65–75% which the company wants. The company considers this precedent important to its efforts to hold the present world tax split. They tell me they would prefer nationalization and loss of this investment to agreeing to a bad tax split precedent.

Mr. Gordon proposed the recent Rostow Mission to Peru. As near as I can make out, Mr. Belaunde has committed himself not to "confiscate" the IPC property during his term of office. In his letter to you, President Belaunde states:

"The misinformed and irresponsible statements made in recent years by certain organs of the foreign press about the intended confiscation of foreign companies established in this country are completely groundless and are disproven by facts in a nation whose acts conform faithfully to its constitution and laws."

The question is whether, despite the undertaking not to confiscate, Belaunde may take other action such as increasing taxes which might be tantamount to confiscation. On this I understand we have Belaunde’s oral assurances to Rostow and Jones that he will take no action which will further impair the company’s position. The majority opinion here is that Belaunde will probably not take any precipitate action during his term of office against the company but will leave the problem for his successor. Belaunde is not a decisive person and if he is not misled into thinking that the United States will continue a large aid program regardless of his actions, I think we could afford to take this chance. Belaunde is a weak man, but he has his good points. I concurred in the Rostow Mission and in view of Mr. Gordon’s feeling on the matter, I concur in the following recommendations:/2/

/2/ According to a letter from Barnebey to Jones, March 4, the White House informed the Department on February 26 that the President approved these recommendations. Barnebey remarked: "In view of all the current interest in assistance to Peru on the 5th, 6th, and 7th floors of this building, not to exclude that of the White House, we should strike while the iron is hot." (National Archives and Records Administration, RG 59, Lima Embassy Files, 1966: Lot 69 F 191, PER Jones)

1. We make additional project loans to Peru as follows:

$9 million dollars agricultural credit loan, part of which would be funded with P.L. 480 local currency; $2 million dollar loan for community development (Cooperacion Popular); $3 million dollars for feasibility studies of new projects; $11⁄2 million dollars for civic action training and $4 million for road construction.

2. That no additional project or program loans be made from AID funds without your approval until we have negotiated with Peru a realistic self-help program comparable to those already negotiated with Brazil, Chile and Colombia. The self-help negotiations can best be conducted under the leadership of the World Bank, which is interested in playing this role, and with the cooperation of the International Monetary Fund.

Inflation in Peru was at a 15% rate in 1965 as compared with 10% in 1964 and 6% in prior years. The inflation is in part due to budgetary deficits and the inadequacy of Belaunde’s agricultural policies.

3. Belaunde should be told orally, when the project loans are signed, that self-help is essential; that we will be obliged under the Hickenlooper–Adair Amendment to stop disbursements on all outstanding loans if confiscatory action is taken; that our ability to extend large scale loans on soft, concessional terms is limited both by our own balance of payments and budgetary problems and by the relatively strong position of the Peruvian economy; and that we expect Peru to be more forthcoming and consistent in dealing with the threat of communism to the hemisphere.

Finally, I should add that our tactics in dealing with Belaunde have been influenced by large U.S. private investments in Peru, particularly in mining.

Thomas C. Mann/3/

/3/ Printed from a copy that bears this typed signature.

479. Memorandum From the Under Secretary of State for Economic Affairs (Mann) to President Johnson/1/

Washington, February 22, 1966.

/1/ Source: Johnson Library, National Security File, Country File, Peru, Vol. II, 1/66–10/67. Secret. A notation on the memorandum indicates that the President saw it.

SUBJECT
Allegations About Change in Our Aid Policy for Peru

Mr. Komer has a summary of the facts regarding the IPC problem as it affected our aid program in Peru. I hope you will have a chance to read it./2/

/2/ At 11 a.m., Mann called the President to ask if he had seen the memorandum on the "IPC–Peruvian matter." (Document 478) Johnson admitted he had not, but instructed his staff to "get him an announcement that balanced this thing." He told Mann "to get it on paper but to make sure that the President was not announcing that we have back-tracked and made a bad mistake and Bobby Kennedy had forced him to change it." The President further stated that "he did not object to the deal made" but "does object to announcing both deals which says that the Mann–Johnson policy has been abandoned and we are going to sit back and let them confiscate." (Johnson Library, Papers of Thomas C. Mann, Telephone Conversations with LBJ, May 2, 1965–June 2, 1966)

From the beginning, our objective has been to prevent a confiscatory-type action. The record does not show any difference of objective or tactic between the Kennedy Policy in late 1963 and our policy in 1964–66.

This policy has been successful. We will have our maximum chance of ultimate success if we follow the three recommendations made in my memorandum of February 19. However, if the Peruvian press were to report Belaunde’s promise not to confiscate, Belaunde would be charged with having "sold out" the national patrimony. The danger is that Belaunde would then feel obliged to prove his "patriotism" by moving against the IPC property. This could, in turn, bring into operation the Hickenlooper–Adair Amendment, relations between the U.S. and Peru would then be in open crisis. And we would have failed to obtain our objective.

The proposed AID loans to Peru do not represent a change in policy or tactic. From the beginning we have been granting or withholding soft loans depending on whether we thought it would help us achieve our objective. In 1964, for example, we made larger loans than those now proposed.

The investor agrees with our tactic. Yesterday the highest officials of the IPC volunteered to me their appreciation. They expressed agreement with the tactics which have been recommended. Their hope is that they can go quietly to work and reach some kind of a modus vivendi which will postpone the problem of this particular oil field while enabling them to get on with improvements they wish to make in other properties. I do not, therefore, expect any dissent from Senator Hickenlooper or from the private sector.

The Eder article is therefore incorrect in its major premise./3/ But I do not think it follows from this that we help ourselves by debating details of delicate foreign policy issues in the press because, given Latin American realities, this would make it impossible to achieve our foreign policy objectives.

/3/ In an article attributed to Richard G. Eder, February 10, The New York Times disclosed that the United States had quietly reversed its policy of restricting economic assistance to Peru as a means to force a favorable settlement in the IPC case. President Johnson’s reaction was twofold: he demanded an investigation of the leak and instructed that "no new loans are to be made to Peru without [his] prior approval." (Memorandum from Bowdler to the President, February 10; ibid., National Security File, Country File, Peru, Vol. II, 1/66–10/67) In a February 21 letter to Jones, Cutter explained: "The spate of newspaper articles concerning our AID policy in Peru caused considerable worry here coming as it did with the Viet Nam debates and other Senate criticism of our policies and the President became personally involved. In view of this high level interest, no decision could be made until fully cleared with the White House. The receipt of Belaunde’s letter has now made it possible to move ahead with recommendations to the White House." (National Archives and Records Administration, RG 59, Lima Embassy Files: Lot 73 F 100, Cutter, Curtis C.)

The difficulty we are having with press treatment of our Latin American policy stems from the fact that the other side has preempted the field. No knowledgeable person outside of government is willing and able to take them on and to counterattack by dealing with the real, and not the phony, issues. I have already spoken with you about my suggestions on how to deal with this. I expect to have something concrete on this soon.

Thomas C. Mann

480. Memorandum From the President’s Deputy Special Assistant for National Security Affairs (Komer) to President Johnson/1/

Washington, February 23, 1966, 5 p.m.

/1/ Source: Johnson Library, National Security File, Memos to the President, McGeorge Bundy, Vol. 19. Secret. A notation on the memorandum indicates the President saw it.

The Peru Matter. After further checking, I feel obligated to report back honestly my private feeling that countering the unfortunate news leak runs too much risk of stirring up even more trouble—and of a setback to the promising course set in train by Rostow’s successful visit:

1. Disturbing as such leaks are, this one was a two-day wonder unnoticed in the country at large. But if we leak a counter-story, even as mild a one as Walt Rostow reluctantly suggests, we may open the whole issue up again. Will smart-aleck reporters like Kurzman/2/ and Eder settle for the Rostow line or start digging again? Our quiet deal with Belaunde also undermined Bobby Kennedy and others, who were planning to speak out on Peru—we might stir them up again.

/2/ Dan Kurzman, foreign correspondent for The Washington Post.

2. On the merits, we got the maximum politically possible from Belaunde on the IPC case. Moreover, things are going our way in Peru. Stirring up the IPC case again might put us right back in an impasse again.

3. Should we penalize Belaunde, who acted in good faith? We still want to be tough with Peru, but (as Tom Mann proposes) it’s better to shift the argument to the much firmer ground of needed self-help and anti-inflation measures. If we press hard on these lines, no one can legitimately complain.

4. We could keep Peru on a short rein by stretching out the four small loans (actually totalling only $15 million, since the rest is local currency), and saying that any help beyond this would depend on adequate self-help. Putting out this story 4–5 weeks from now when the first loan was ready for signature would create no problems.

5. Then in six months or so, if all goes well, we’ll have ample opportunity to correct the record by demonstrating how the hard line on aid has paid off in such countries as Pakistan, India, Turkey, Colombia, Brazil, and Peru.

I have no special axe to grind on this Peruvian affair, and I fully realize the problems created by loose talk. It doesn’t come from over here. But in this case correcting the record may hit the wrong culprits./3/

/3/ The President wrote the following note at the end of the memorandum: "I agree—go ahead." In telegram 854 to Lima, March 9, the Department instructed Jones to tell Belaúnde his assurances that IPC would not be "further impaired" were satisfactory; and the U.S. Government would consider individual AID project loans "on their merits," including the Cooperación Popular community development loan of $2.1 million. (Johnson Library, National Security File, Country File, Peru, Vol. II, 1/66–10/67) Jones relayed this message to Belaúnde on March 17. (Telegram 1303 from Lima, March 10; ibid.)

R. W. Komer

481. Memorandum From the President’s Special Assistant (Rostow) to President Johnson/1/

Washington, May 27, 1966, 8 p.m.

/1/ Source: Johnson Library, National Security File, Country File, Peru, Vol. II, 1/66–10/67. Confidential. Earlier in the day Rostow received a memorandum from Read which, "in view of the President’s interest in this particular problem," requested White House concurrence for the loan. (Ibid.)

SUBJECT
Loan to Peru for COOPOP/2/

/2/ Cooperación Popular.

Last February you authorized resumption of significant concessional lending to Peru, provided President Belaunde agreed to solve, or maintain the status quo on, the International Petroleum Company (IPC) case and take effective self-help measures. You told Bill Bowdler that you did not want the loans to be authorized without your prior approval.

The first loan is now ready. It is a good loan—$2.1 million for community development programs in Indian villages. Belaunde has kept his word on IPC and is working out in a highly satisfactory manner with us and the World Bank a development program based on sound self-help measures. All interested agencies, including Treasury, have approved the loan.

I recommend that you authorize us to go ahead.

Walt

Approve/3/
Disapprove
See me

/3/ This option is checked. A notation by Bromley Smith indicates that S/S and Bowdler were informed on May 28.

482. Memorandum for the Record

Washington, May 8, 1967.

[Source: Department of State, INR/IL Historical Files, 303 Committee Files, c. 51, May 5, 1967. Secret. 3 pages of source text not declassified.]

483. Memorandum From the President’s Special Assistant (Rostow) to President Johnson/1/

Washington, May 19, 1967.

/1/ Source: Johnson Library, National Security File, Country File, Peru, Vol. II, 1/66–10/67. Confidential.

SUBJECT
Program Loan for Peru

The attached memoranda contain a request by Bill Gaud for authorization to negotiate a $40 million program loan with Peru, and concurrences by Charlie Schultze and Joe Fowler./2/

/2/ Attached but none printed.

Need for the Loan. Since he took office in 1963, President Belaunde has pressed a development program targeted largely toward opening the interior of Peru. Public investment has outstripped revenues and led to inflationary pressures and a foreign exchange drain which now threaten financial stability. The program loan—part of a joint program worked out with the IBRD and the IMF totalling $175 million—is designed to permit Belaunde to correct his financial difficulties while continuing a reasonable development effort.

Conditions for the Loan. Belaunde’s budgetary deficit for the year starting July 1, 1967 is expected to run up to $186 million if remedial action is not taken. Exchange reserves dropped nearly $30 million during the first quarter of 1967.

The proposed loan would be negotiated if:

—The Peruvian Congress authorizes new revenue measures which will net $116 million.
—The government cuts back expenditures by $15 million.
—Belaunde turns down the military’s bid to spend some $30 million on supersonic jet aircraft.
—Peru negotiates a satisfactory standby agreement with the IMF.

These conditions involve tough decisions from which Belaunde has until recently shied away. But on May 8 he asked the Congress for authority to raise revenues and cut expenditures in the amounts indicated above. The loan will be contingent on his getting this authority and accepting the other conditions.

The loan would be disbursed in three installments, each contingent on compliance with the terms agreed upon.

Funding the Loan. Funds are presently available from the FY 1967 appropriation to cover the loan. If there is a long delay in the negotiations it will have to be funded in FY 1968.

Other related considerations. Together with Frei, Lleras and Leoni, Belaunde represents a new generation of political leaders of democratic bent, deeply interested in modernizing their countries. We have a stake in seeing Belaunde and his program succeed.

Belaunde has stuck faithfully to his promise not to impair the position of the International Petroleum Company. IPC continues to operate under the same conditions that existed when Belaunde took office. Negotiations between IPC and government continue. Differences have been narrowed, but a final settlement has not been reached.

In the past we have had trouble with Peru over seizure of our tuna boats. There have been no recent incidents. We have proposed negotiations on a conservation agreement and are awaiting Peru’s response./3/

/3/ On October 2, 1966, three U.S.-owned tuna clippers were detained for operating within the 200-mile fisheries jurisdiction claimed by Peru. The boats were released on October 6. Memoranda on the tuna boat incident from Rostow to the President, October 4, 6, and 7, are in the Johnson Library, National Security File, Country File, Peru, 1/66–10/67. Documentation on the incident and the controversy over the legal limit of Peru’s territorial waters is in the National Archives and Records Administration, RG 59, Central Files 1967–69, POL 33–4 PERU.

Recommendation

I joined Fowler and Schultze in recommending authorization to negotiate the loan subject to the conditions stated and to further consultation with you prior to signature of the loan agreement.

Walt

Approve
Disapprove
See me/4/

/4/ The President checked this option and wrote: "What does [Lincoln] Gordon & [Sol] Linowitz do or say on these loans? They should be in on them. L."

484. Telegram From the President’s Special Assistant (Rostow) to President Johnson in Texas/1/

Washington, May 29, 1967, 1648Z.

/1/ Source: Johnson Library, National Security File, Country File, Peru, Vol. II, 1/66–10/67. Confidential.

CAP 67481. Peru Program Loan.

On May 19 I sent you a memorandum transmitting a request from Bill Gaud for authorization to negotiate a $40 million program loan with Peru./2/ The loan is designed to help Belaunde correct inflationary and balance of payments problems while continuing his development efforts. Joe Fowler, Charlie Schultze and I concurred in the request.

/2/ Document 483.

The loan was to be tied to four self-help conditions. These conditions represent tough political decisions for Belaunde, but are essential to any stabilization program. I noted that we did not know whether Belaunde would be willing to make these decisions and get Congress to act on additional revenue measures.

You sent the memo back to me inquiring whether Secretary Rusk and Linc Gordon had endorsed Gaud’s request. It has the full endorsement of Gordon who originated the authorization request.

Since Bill Gaud acts as Secretary Rusk’s agent in these matters, the loan authorization was not submitted to him. I am confident, however, that he would go along with the Gaud–Gordon recommendation.

Since I forwarded the memorandum to you, President Belaunde has acted—successfully—on one of the four conditions: a cutback in government expenditures. He has had partial success in a second: substantial additional revenues via new import duties and internal taxes.

It is important that we be in a position to tell Belaunde that we are prepared to help him if he is willing to take strong self-help action. He may be unwilling to meet all our conditions or, accepting them, unable to get the Congress to enact new taxes. In either case, the responsibility would be his and not our unwillingness to help as we have in the case of his principal neighbors: Brazil, Chile and Colombia.

With the clarification on Linc Gordon’s endorsement of the loan, may we proceed with the negotiations subject to the stipulated conditions?

Yes/3/
No
See me

/3/ The President dictated the following instructions: "Walt: I don’t want Gaud making loans to South America without consulting with our Latin America men. You might talk to Oliver about this when he gets back." (Note from the President to Rostow, May 29; Johnson Library, National Security File, Country File, Peru, Vol. II, 1/66–10/67) Jim Jones, Assistant to the President, subsequently reported: "Walt Rostow said Covey Oliver has now reviewed the Peru loan and agrees with the necessity of going ahead. Does the President approve?" Jones informed Rostow of the President’s approval on May 30. (Note from Jones to the President, undated; ibid.) According to a memorandum from Rostow to Gaud, May 31, President Johnson authorized the negotiations "in the understanding that the agreement reached with Peru will be submitted to him for review prior to signature." (Ibid.)

485. Telegram From the Department of State to the Embassy in Peru/1/

Washington, June 17, 1967, 8:01 p.m.

/1/ Source: National Archives and Records Administration, RG 59, Central Files 1967–69, DEF 12–5, PERU. Confidential; Immediate. Drafted by Sayre, cleared by Vance, and approved by the Secretary.

212297. Ref: Embtel 5814./2/ For Ambassador.

/2/ Telegram 5814 from Lima, June 14, reported that Peru was considering the purchase of Mirage fighter aircraft from France. (Ibid.) In a June 15 memorandum to the Secretary, Oliver explained that "a contract between Peru and France on the Mirage seems imminent." He recommended that Rusk raise with McNamara a proposal to begin delivery of supersonic fighters to "the major South American countries" in 1969. In an attached note Rusk wrote that he would "like to speak to Covey Oliver on this." (Ibid., ARA Files, 1967–1969: Lot 72 D 33, Military Assistance Program) According to the Secretary’s Appointment Book Rusk met Oliver and Sayre on June 17 at 5:28 p.m. (Johnson Library) No substantive record of the meeting has been found.

1. You should seek immediate interview with President Belaunde regarding program loan and Peruvian plans purchase Mirage aircraft.

2. You should inform President you will receive instructions within a few days which will authorize you to discuss Peruvian Air Force requirements for F–5 aircraft. These instructions will define as specifically as possible at this time how we would propose to carry out our commitment to assist Latin Air Forces in obtaining suitable replacement jet fighter aircraft beginning in 1970. It should be made clear that financing would be on commercial basis outside MAP.

3. At the same time you should make clear that you cannot make specific commitment that this means delivery of F–5 aircraft to Peru could begin in 1969. This would depend on overall performance of Peruvian economy as set out in program loan negotiation paper.

4. We could not agree to be party to transaction which diverted substantial Peruvian resources from economic to military purposes when the latter purposes are of low priority.

5. You should also make clear that your instructions on the program loan specifically provide that diversion by Peru of substantial resources to low priority military requirements (read jet fighters from France) would preclude the negotiation of program loan.

6. We cannot of course tell Peru how to utilize its resources. We assume Peru is committed goals of Alliance as we are and that it wants to give highest priority to economic and social development. If Peru decides otherwise then U.S. must make its decision consistent with Charter of Punta del Este and Declaration of Presidents. We would regret our inability to help Peru in such circumstances but we would be left with no other alternative./3/

/3/ In a meeting with Jones on June 20 Belaúnde maintained that Peru needed supersonic fighters due to the "unsettled condition" of the world. Jones explained that the United States was reviewing its policy on supersonic aircraft in Latin America, but warned: "If GOP decided use its resources buy plane like Mirage, USG would feel it inappropriate use its resources for program loan." After arguing that the "two things should not be tied together," Belaúnde blamed the Department for its "uncompromising attitude toward Peruvian armed forces and suggested we adopt more understanding position of Pentagon." Jones reported: "I restrained myself." (Telegram 5881 from Lima, June 20; National Archives and Records Administration, RG 59, Central Files 1967–69, AID(US) 9 PERU)

Rusk

486. Editorial Note

On July 6, 1967, the Department instructed the Embassy to discuss the status of economic assistance with President Belaúnde, particularly in view of legislation before the Peruvian Congress to expropriate holdings of the International Petroleum Company. (Telegram 2229 to Lima; National Archives and Records Administration, RG 59, Central Files 1967–69, PET 6 PERU) In a meeting on July 10 Ambassador Jones recalled Belaúnde’s assurance to Walt Rostow in February 1966 that the IPC would not be "further impaired" during his administration. (Telegram 211 from Lima, July 12; ibid., DEF 19–8 US–PERU) Jones also warned of the "adverse effect this law would have, once promulgated, on US–Peruvian relations," referring to the penalties set by the Hickenlooper amendment. (Telegram 190 from Lima, July 11, ibid., PET 6 PERU) Belaúnde replied that he needed more time to resolve the IPC case and pleaded for action "this week" on the program loan. After a heated exchange concerning Peruvian efforts to purchase French aircraft, Belaúnde complained "with strong words about local forces conspiring against him to defeat his program of government and force devaluation." "I have seldom seen the President so distraught," Jones observed. "It was a stormy session." (Telegram 192 from Lima, July 11; ibid., DEF 19–8 US–PERU) Telegrams 190 and 192 from Lima were retyped and forwarded to President Johnson, with a note from Rostow on July 13. Marvin Watson recorded the President’s response: "Walt get this over to C[ovey] Oliver. Ask him to talk with T[ony] Solomon and Tom Mann about it. Oliver give the President a memo of recommendations." (Johnson Library, National Security File, Country File, Peru, Vol. II, 6/65–9/66)

487. Memorandum From the Assistant Secretary of State for Inter-American Affairs (Oliver) to President Johnson/1/

Washington, July 15, 1967.

/1/ Source: Johnson Library, National Security File, Country File, Peru, Vol. II, 1/66–10/67. Secret.

SUBJECT
International Petroleum Company Case in Peru

The Peruvian Congress has adopted and sent to President Belaunde a law purporting to expropriate a portion of the properties of the International Petroleum Company (IPC). Belaunde must now decide (1) either to sign or act otherwise on this legislation, and (2) once the law is promulgated to take one of several alternative actions to carry out its terms. Our latest information indicates that Belaunde is trying to postpone signing the measure until late this month, in the hope that meanwhile he can work out an acceptable solution to this problem. We believe that the best such solution would be for Belaunde to conclude the long-pending negotiations with the company for a 25-year service contract—in return for the company’s ceding its claim to surface or sub-surface rights on its oil property in northern Peru.

We have had Ambassador Jones set out our views on this problem to President Belaunde and Foreign Minister Vasquez./2/ We have sent our Deputy Chief of Mission in Lima to London to talk with Haya de la Torre, leader of Belaunde’s political opposition, to urge him to take some of the pressure off Belaunde on the IPC issue./3/ We have also suggested following up your exchange of letters with Belaunde of February of last year by sending a letter to him from Walt Rostow urging a reasonable settlement./4/

/2/ Jones met the Foreign Minister on July 13 to discuss the issues raised in his meeting with Belaúnde, July 10. (Telegram 251 from Lima, July 13, National Archives and Records Administration, RG 59, Central Files 1967–69, PET 15–2 PERU)

/3/ Haya was visiting Oxford University. At the instigation of IPC representatives, Jones recommended Siracusa for an "urgent" mission to secure Haya’s support in the IPC case. (Telegram 231 from Lima, July 13; ibid., PET 6 PERU) The Department authorized Siracusa’s trip to London after consultation in Washington. (Telegram 6379 to Lima, July 13; ibid.)

/4/ Bowdler wrote the following note on the memorandum: "Walt Rostow has asked your views on whether to do this." Rostow also sought guidance in a July 15 memorandum to the President. The President decided that Rusk should write the letter; Read was so informed on July 17. (Ibid.) No evidence has been found that Rusk sent the letter to Belaúnde.

We are considering still further steps. Depending on developments, we could send a high-level emissary to Lima to urge Belaunde to reach a settlement with IPC. We are also trying to use our other assets to help Belaunde reach a reasonable decision, and our best means for this purpose would be the immediate approval and announcement of the pending $15 million program loan to his country. Our objectives are to convince Belaunde that the IPC decision is up to him, and him alone, and to use all the means available to us to persuade him to reach the right decision.

C.T.O.

488. Memorandum From the President’s Special Assistant (Rostow) to President Johnson/1/

Washington, July 15, 1967, 5 p.m.

/1/ Source: Johnson Library, National Security File, Country File, Peru, Vol. II, 1/66–10/67. Secret.

Mr. President:

President Belaunde faces probably the toughest situation of his three-year administration. He is engaged in three hard, interrelated fights:

—with his military on the acquisition of French supersonics and higher military expenditures.

—with his Congress on the IPC expropriation.