PERU: PROSPECTS FOR INCREASED SOVIET BLOC INFLUENCE (SNIE 97-85)

Created: 11/1/1985

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Declassified and Approved for Release by tne Central Intelligence Agency Date: loQX

Special National Intelligence Estimate

Warning Notice InteBigeoeo Sources or Metlf (WNINTEL)/

Involved

NATIONAL SECURITY INFORMATION Unaufhcxiicd Disclosure Sj*bject to Criminal Sanctions

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peru: prospects for increased soviet bloc influence

InJotmHOn araitible nol ilurdhel (hbr <l* Matronaloard on thai dale.

this estimate is issued by the director of central intelligence.

the national foreign intelligence board concurs.

The following intelligence organizations participated in the preparation the Estimate:

The Central Intelligence Agency, ihe Deferue InteEgence Agency, the National Security' Agency, and the iatdtigence organliatioa al iheol Slate.

Also Participating:

The Aivitont Chlet ol Slaft (or Inteulgcnce, Department of the Army The Direct ot of Novo! InteBJgence, Deportment of the Navy Ihe Ajwront Chief ol Stolf, InleWaeoee, Deportment of the Air Forcer eel or af IntcKicencc. Hcadquarteri, Marine Corps

CONTENTS

SCOPE

KEY

oreign Policy

ReUUons With the Soviet

Economic

Relations With Other

The Soviet and Cuban

The Significance of Peru to Soviet

Soviet Views.of

Ties to the

Influence on Labor and the

Broader Regional

Cuban

Ceneral

Key

Most Likelyft.

Alternative

Increase in Soviet

Downturn in Soviet

Implications for the United

ANNEX: The Economic

SCOPE NOTE

Thereariety of indications that the Soviet Union believes that its political, economic, and military relations with Peru can be significantly improved under tbe new administration of social democrat President Alan Garcia. Tbe Soviets have been generous in rescheduling much ofearlyillion debt on concessionary terms, and they have offered lo improve military ties as well. For his part. Garcia reportedly has requested increased economic and military aid from the Soviets, and he also looks to improved relations with Cuba, Nicaragua; and North Korea.

On the other hand, there are limits to just how much increasedGarcia is willing to allow the Soviet Bloc inispute over leadership ontin debt issue has at least temporarily strained relations between Garcia and Cuba's President Castro. Garcia also wants to reduce Peruvian arms expenditures, and he shows signs of ato reduce the Soviet military advisory presence in Peru.

This Estimate assesses the prospects for increased Soviet Bloc political, economic, and military links to Peru over the nest five years, as well as whether these ties will result in enhanced Soviei Bloc influence both there and in the regioa It also addresses the implications for the United States of potential Soviet inroads in Peru.

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KEY JUDGMENTS

The viclory of Alan Garcia and the American PopularAlliance (APRA) in Peru's5 national elections brought toovernment significantly less sympathetic to the United States and more inclined toonaligned foreign policy than its predecessor. We believe that,onsequence, Garcia will present frequent challenges to US policy interests in the region, and that the Soviets will be able to expand their already eitensivc ties to Peru.

We anticipate an increase in Peruvian-Soviet trade as wellrowth in Soviet technical assistance and some increase in development loans, although we do notassive commitment of economic assistance to the Garcia government Moscow is also likely to providemilitary assistance,ossible short-term reduction of the Soviet advisory presence in Peru.inimum this aid will include expanded trainingoderate acceleration in sales of military equipment to the Peruvian Army and Air Force, and it could be greater if Garcia is unable to conclude an arms limitation agreement with Peru's neighbors. Beyond this, there will be some possibility of Soviet equipment acquisitions by the Peruvian Navy.

. Despite this intensification of Peruvian-Soviet ties, we expect, especially over the short term, only modest gains for Soviet influence in Lima. Moscow is likely to beetter position to augment its contacts with Peru's military and with leftist poUtical and labornd it mayarginal impact on Garcia's foreign and domestic economic policies. We judge, however, that Garcia's nationalism and commitment to nonalignment, as well as the military's traditional anti-Communism, will be important constraints on Soviet influence. Garcia does not appear to have any sympathy for Soviet policy goals, and has stated his desire to keep Peruath "between the twoNevertheless, the Soviets already have extensive ties to Peruvian political, labor, and media groups, and we know little about the attitudes of younger military officers who have been exposed to Soviet influence.

Moscow apparently has decided to court Garcia, but will probably work to avoid being seen as trying to significantly improve its influence during his term in office. The USSR has undoubtedly been encouraged by Carcia's postelection overtures. Moscow also will be watching for opportunities, suchreak between Garcia and his Western creditors, to increase its economic leverage in Peru, all tlte while

calculating that continuing economic and social disintegration will eventually enhance the prospects of its radical allies in Lima. Moscow risks overplaying its hand, however, with overbearing demands in return for increased economic assistance. Moreover. Soviet prospects would be likely to wane if Peru were able to make economic progressharp break with the West. Even without an economic crisis, exposure of any Soviet collusion with leftist insurgents would induce Lima to draw down significantly its ties to Moscow.

US interests in the hemisphere are likely to be adversely affected even in cases where Soviet influence in Peru remains limited. To thethat the Soviets are able to maintain the imageesponsible and dependable ally, their chances for inroads into other Latin American countries will be enhanced- In these circumstances, Peruvian-USutes will have potentially more damaging consequences for US interests in the region than they might have had under the previousThese disputes are likely to present new opportunities, if not direct gains, for the Soviet position in Lima. For example,onfrontation with US oil companies in Peru, if not resolved, may give the Soviets the chance, at relatively small cost, to aid Peru with crucial technical assistance and thereby reap substantial good will. The debt issue, trade disputes, and new arms needs might offer the Soviets similar openings.

In no case do we believe Moscow will obtain sufficient leverage, while Garcia is President, to utilize Peruase for its own military use orfor the active subversion bf US regional security interests. Wc do not believe it likely that any developments in the economy or domestic security situation will be sufficiently adverse to push Garcia beyond these limits. It is unlikely that the insurgency willerious" threat to the Garcia government during the period of this Estimate,onsiderable effort will be required to keep it contained.

.

Nevertheless, if the Garcia government is unable to solve Peru's

serious economic and social problems, the stage could be setictory in0 national elections by an overtly pro-Soviet leftist coalition. Although we believe it unlikely, the armed forces might possibly acquiesce in the assumption of power by Peru's first Marxistif its traditional anti-Communism were sufficiently undermined.

DISCUSSION

The victory of the American Popular Itcvolution-arv Alliance (APRA) In Peru's5 national clectiont and the subsequent assumption of tltein July by Alan Garcia (see figure I) brought toegime significantly less sympathetic to the United States and more incurved toon-aligned foreign policy than its predecessor. Moreover. Carda's decision toighly nattonallsllc.appioach to resolving Peru's severedebt problem has complicated relations with the West, and with the United States in particular. Under these circumstances, we fudge that the Sovietwhich has had significant political, economic, and military ties .to Peru since the earlyits allies will be well placed to expand their relations with Peru. We anticipate, however,umber of factors, especially Carcia's strong nationalism, will work over the next year or two to sharply limit any leverage over Peru tbe Soviet Bloc might gainesult of increased economic and military aid.there is some danger lhat Soviet Influence within the Peruvian political system and armed forces could grow over tbe longer term, perhaps even to the point of facilitating the ejection of an overtly pro-Soviet government

Garcia's Foreign Policy Objedrves

foreign policy approach will beprimarily bv tbe traditional nationalism.integrattooism, and "arm-imperialism"APRA party.lso likely to supportof nonintervention as weB as oppose USWestern economic domination of LatinThis, combined with Garcia's desire to beregional figure and toentral roleWorld polities, will almost certainly result inmore activist and noruuarned foreign policyof the previous government.

have alreadyumber of examples:

Peru has sought, so far without mucheadership position in the Nonaligned Movement (NAMJ

Caicia has calledummit meetingaiin American heads of slate, tt seeking lo revitalize Ihe Andean Pact, and hat proposed armi(or ihe region

Carets hasore direct involvement in resolving Central American issues through the recent formalion of the Coo taupport Croup, which was initiated in Lima by Peru. Argentina. Uruguay, and Bra&I

erhaps the most dramatic rrianifestation ofactivist. Third World-oriented approach topolicy is his stance on the debt issue. Bythe Inlemalional Monetary Fund (IMF) and shatply limiting Peru's repayment of debt through the coming year toercent of protected exports, be is using the issue to attack ihe IMF and tbe private banks as agents of US economic domination of Peru, thereby reinforcing his Third World credentials. Further, by proposing his approachegional strategy and callingeeting ol Latin American Presidents to discuis the debt problem, he is seeking lo become the principal Latin Arnerioan spokesman

arcia almost certainly fudges thaionaligned foreign policy requires that he distance Peru from what he regards as the previous administration's pro-US stance. Thb has been most immediately reflected In his rhetoricumber of occasions he has, by implication, attacked the Untied States as an "imperialist"ovement away from US positions is also evident in policy issuea. Thus. Foreign Minister Wagner delineated Peru'* orwjositionhat he railed the US "commercial blockade" of Nicaragua and Its "so-called humanitarian assistance" to the Contras, We expect, further, that Peruvian support for the United Slates in the United Nations and the Organization of American States will decline from even the modest level of the previousi

6 At the same lime. Caicia is likely to seek closer ties to the Soviet Bloceans of achieving "balance" in Peru's foreign policy- Before taking office, Garcia reportedly met with Soviet Ambassador Filatov and expressed his desiie for improved Soviet-Peruvian relations and increased Soviet assistance Careia apparentlyefinitive answer in July, just after his inauguration Bavken Ashimov, Deputy Chairman of the Supicme Sovicl and head of the Sovirl delegation to the Inauguration, renoitedly of-

roadl support, lo include increased military aid nnd financial/technical assls-lance.

evertheless, we believe lhat Garcia is eommit-ledruly nonaligrsed policy, and there are limits to the degree he intends lo shift Peruvian policy away from the United States and toward cooperation with the Soviet Bloc. He does not appear to be motivated br any particular sympathy for the Soviet Union or Soviet policy goals He has in fact stated hiswe believe to bekeep Peruath "between the twoe has also taken pains to point out that he Isarxist and that APItAulwark against Communism. We erpect that Garcia 'j tendency to define foreign policy Issues in North-South rather than East-West terms will limit his indinations to draw closer to the Soviets He will occasionallyro-US position in order tohaip deterioration in his relations with Washington. However, to the extent that Peruvian-US relations worsen, there will be new opportunities for Moscow lo expand Its Influence.

Relations With the Soviet Bloc

he most visible aspect of the Soviet-Peruvian relationship Is the extensive Soviet military sales and technical assistance program (see tablehe Soviets

Table I

Soviet Mililary Agreements With; Ddiveries To, and Advisers/Technicians In5

have accounted for about half ol all Peruvian military purchasesith agreements totaling more than SIS billion. All of ibe weaponry has gone to the Army and Air Force (see frgureSo far. the Navy has staunchly refused to accept Soviet hardware and advisers. The military has aho made some attempts to reduce iu dependence on thedecision, lor example, to buy0 fighter-bombers from France, Furthermore. Peruvian Air Force and Army officers have periodically voiced complaints about maintenance and performance problemswith Soviet equipment Nevertheless, severerestrictions, the relatively low cost of Soviet arms, ihe lack of alternative sources for spare parts, and highly favorable financing terms will continue to make Soviet weaponry attractive, to the Peruvian military.

e estimate lhat the Soviet military advisory and training presence numbers. There is some evidence that the Peruvians want to cut back tbe number of Soviet advisers for economic reasons, and some reduction may already have occurredwe fudge that any decrease will still leave the Soviet presence at relatively high levels (Seehe Soviets have also provided extensive uaining to Peru's armed forces. We estimate thateruvian military and Intelligence personnel have received training in the Soviet Union since the. Moscow is reportedlyeruvian icquest for increased training In ihe Soviet Union to makeeduction of Soviet advisers In Peru. Thus, any reduction In the Soviet training presence is likely to be offset by Increased training of Peruvian mililary personnel In the USSR.

e lodge thai tbe Soviet assistance program so far has not provided Moscow with any demonstrable influence over decision making In the Peruvian armed forces. Tlie Soviets in Peru haveow profile and have been careful to avoid antagonlilng the nationalistic sensitivities of the military. Fraternization with Peruvians is limited, and political discussions and propaganda are strictly prohibited. Although ouris scanty, we have noted no tendency for Soviet-trained personnel to espouse pro-Sovietindeed, have been soured on the Soviet Union by thdr experiences there

espite this, there willonlinuing danger thai, over ihe long term, exposure to Soviet hardware, training, and doctrine could undermine the anti-Communitl orientation of the military. Whileindicates the Peruvian military hierarchy remains relatively conservative "nil ami-Communist In out-

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iiutr"nTjl hu remained Itrtlv oooOirir fee tho tut several years Earlier5stimated tame USol these Soviets were military advisers. rlthc-ir.it this number cu. now be decreasing Ninety-sisnrlo the Eabun. The renumaa Soviet penormel aren ihe USSR's eooenmie mini em AeeoMOt.eoro-mercltlonsulate, its media out leu- and in Sovtnna and Sovrvblhsl. it) fiihlna eotorpeties We estimate lhat. of the total pretence.ooviet! ire inteluacac* officers.hie*nathes who are prcbablr menibm of rr.il:lary inlrllice&oe Uponet economic tecbrtteiam per year alio wort In Peruemporary duty basis

Tlie SovietGiltunl Association maintains centers in Lima and in IT of the eooatryU departnsents. These entitles seonira cukoral cents. Rnnii. biapoce ctiuei. and leetoreacai the USSfl They ahoooal points lo adveetise Moscow'scholsnhin procramidentify potentialhuveai ihe Sovietsebcaarsrilpt WeeUimate thaieruvian students are emrenlly in the USSRn Eastern Europe and Cab*

All the Hait European Bloc countries and Cuba havein Lima. However, irlatfons with Hi vans have been lestncied lo the chaise daflntn level. Nevertheless.ubansuncivil toiplomatic miOaon ie Limi Caresi has eaprovdn upc'adina fetatiootCuba,this moveoffer the Cubansopportunities to eapind their activities lo so doing (hey can build on estensivethe Cmbassy report] they have to various leftist leaden. Peruvian eapotts to Cuba have fluctuated In0 million 'since the.

Nicaraavsive-person Embassy In IJma headed by an Ambassador. While leas prcanircnt than the Cubans. Nican.Euan Ouaotrots have com sets in Peruvian molt, circles and with heyfl leaden

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look, much less it known about the altitudesofficers who have been exposed toMany iuntor and middle-gradefrom modest backgrounds and have hadless exposure to the West than their superiors,also (easonable lo assume that the Soviet*some Peruvian military officers over Iheof whom now may be atwc lack reliable evidenceis Ihe

otential vehicle lor increased Soviet influ ence is through greater intelligence

Continuing contacts with either ihe civilian or military intelligence organizations would assist tbe Soviets' efforts to further their influence byLima's counterintelligence capabilities and making it easier for them to penetrate the Peruvian military and other organizations.

Econontk lies 1

1iho Wi ISir [umih Serne

he level of Peruvian trade with ihe Soviet Union (see tabicemains low relative to Its trade relations with tbe United Stales, other Latin American countries, and Western Europe.eruvian export* lo ihe Soviet Union amountedilb'on. those to the Uniied Stales1 million, ando Latin America3 million In all. trade wilh ihe Soviet Bloc4ercent of Peru's eaportsercent of imports Although the absolute level is small. Peruvian Soviei trade did increase sharply in relative terms4 This was primarily the resultrade agreement, formalized3 under the Bel sondewhich called for the repayment olmillion of Peru's debt to ihe Soviet Union in goods over aperiod. Carcia hopes to make similarwith other Bloc creditors^

T Moscow is also trying lo ai range multilateral trade agreements involving Peru. Cuba, Nicaragua, and Mexico. We anticipate further increases Intrade with the Soviet Bloc over Ibe steal few years, and Communist countries are likely to become some of Peru's major trading partners

esult of substantial Soviet militaryto Peru over ibe last decade, Lima now owes Moscowor militaryshort- aod long-term debt The Soviets have made tome tentative moves to respond lo Garcia's request for further aid. They have renewed their offer to support ibe Olmos hydroelectric pr overt, and Garcia expects Ihey will provide additional economic aid. The Soviets might increase assistance tied toerhaps by anr to,

ishing will reoWn an important area of Soviet-Peruvian economic cooperation. The SovieUubing fleet ofoat* off ihe Peruvian coast, and it Is eitenslvcly serviced from the ports of Cailao and Paita. In keeping wilh normal Soviet practices, some of these fishing boats may also collect1 protocol and severalcontracts govern their activities. Some Peruvians have questioned the equity of the arrangements, and the previous government temporarily impoundedoviet fishing boats for Falling to nay required feoi Several officials in the Carcia government, notably the Minister of the Navy, oppose ihe fishing accords, and the Dolential lor friction remains. But. for the short-to-middle term, Uma's need for revenue, the lack of lit deep sea Inning fieri,esire not to soui

relations wilh ihe Soviets will piobably dictate thai Peru coniinue lo support the arrangement

Relations With Other Countries

Before Garcia became President, we hadhe would move toward improved relations with Cuba. Since then, however, the debt issue has surfacedharp point of friction between Fidel Castro and Carcia. Castro's attempt to exploit tbe debt problem by callingepudiation of the debta tin American nations has mn counter to Garcia'5 desire to play an important leadership role on the Issue through his advocacytrategy limiting debt repaymentixed pcrccntaec of exports. Castro and Carcia have traded harsh words on ihe issue, and competition between Cuba and Peru for influence on Third World matters will almost certainly continue. This mayelay In Garda's plans to upgrade relations with Cuba to the ambassadorial levelelieve that full relations will eventually be restored, as both countries apparently believen their best interests to do so..

Givenanti-imperialist'* attitudes and his intent to have Peruore active part In Central American affairs, he may provide active political support to Nicaragua, particularly through the Contadora Support Group. Garcia will probably continue to oppose what he regards as infringements on Nicaraguan sovereignty by the Unitedprobably bdleves that the Sandinista regime would become more moderate were It not for external threats. Peru may also serveunnel for Soviet economic assistance to Managua.^

3

e have had numerous reports that Carcia intends to establish diplomatic relations with North Korea. This appears touid pro quo for North Korean financial support to Carcia before hiscampaign. We do notubstantial growth In contacts between the two countries Trade, which is minuscule, may Increase somewhat, but Peru's commercial ties to South Korea are likely to remain much more Important. There are noof any impending military cooperation betsveen Peru and North Korea. Nor do we antidpatcincreased ties to East liuropean Bloc members.

although Moscow may promote some increase in liloc economic and political relations to bolster its own position in Lima.

The Soviet and Cuban Perspectives The Significance of Peru to Soviet Policy

believe Moscow values Peru as Its bestnear-term and long-term political payoff inThe Soviets probably perceive theand economic environment fn Peru aspositive for extending their influence.likely to consider that, through the carefulstate-to-stateappropriatethe Carcia admlrustratlon, theytheir ties to Lima and betterand their allies in Peru to realizegoalro-Soviet CommunistLima. The Soviets areaiting; gamecalculating that its economic problems arein the sliort run, and that this willbadly on Carcia and discredit APftA withelectorate Ntecosv reportedly isthe electoral prospectsadical leftistwill be considerably enhanced

Soviet Views of Garcia

From the early days of the recent presidential campaign, the Soviets reportedly decided that lhc Soviet-line Peruvian Communist Party (PCI') and the other leftist parties of the United .Left (IU) coalition had no chance for victory. The Soviets identified Garcia as the optimum candidate to succeed President Belaunde. We believe that the Soviet Fordgn Ministry currently favors working with the Garcia government because of its orientation to nonaltgncd Third World causes and anti-fmrxrialism- One example ofGarcia'5 call for Latin American blochas read as an anti-US position and something the Soviets can exploit Other features of the Garcia presidency have encouraged the Soviets. For example, Moscow believesro-Sandinista sentiments may help to integrate its allies In Managua into the Latin American political and economic mainstream.

Moscow perceives that Carda's ties to themilitary arc still tentative and that he may feel forced to accede to iheir demands for additional equipment. Moscow has readed positively to Carda's recent requests In the name ot tlie Peruvian armed foices for militarv assistance and military intelligence

liaison. Hut Moscow Is playing its hand with some subtlety Q

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that the Soviets reason there is more toTeboth the Peruvian and tegionalacting the responsive, businesslike partner.

Ties lo the Left

e believe that the ursderside of Moscow's formal government liaison with Carcia will becarefully calculated support for rival political groups, such as the PCP. the other leftist members of tbc IU, and the more leftist elements of APRA- (See table 3XT

Tbe Soviets will undoubtedly continue to fund the PCP and to exercise significant authority over Its policy decisions. Party membership Is. and Moscow believes that Its near-termospects are poor. Because Soviet Influence wilh the IUimited. Moscow will attempt to augment Its leverage over the other IU member parties.

oscow probably hopes to influence Carcia through pressure from within his own party. It has maintained dose contacts with tbe far left wing of APRA and lis leader, Armando

Status ot Ilw Iniwgeney

Wrfh reaa'd to proipeeii (or the imwgeoey. we behevaLurcvneno wiHoafLrauing. il Unities, threat became ol Hi deep roots la iaoliled rural areas where the government lias lone born neglaotfnlf the insurgency to new areas and Sendero Luminoos'i resilienceounted nsurgencyhave been causing Incicued public aniiety and miliiacy frustration. Moreover, although the guerrillas hire ahenilod highland praaoQ through pnoiTeut brutality, abtacs against peasants by security forces have prevented the government from gaining much suDOOrt In throe rural areas Carda's recent efforts to curb abuw and implement new economic and social prograat) la rural areas are likdy lo ruengthen the tm rriwawrtti support evetKusllv, bat the proem winiidenibie time

Sendero Luminoso is unlikely to evolve Into aorganization Its rigid adherence to Maoist ideology severely limit) its appeal even to the left in Peru andaior barrier lo receiving support from Cuba or other potential foreign backersadical leftist insurgent movement It Is doubtful that It will come to terms wilh Carda's government, even ifuO amnesty.

With regard lo the MKT A. we believe it dots noterious Insurgency threat at thb atage. It hasnilateral Iruce with the government andait-and-see attitude However. It has not ruled out operations against foreign targets In Peru, and in the part has particularly targeted US Interests.

Villanueva became an alternating general secretary in ibe summerlthough Carcia does not trust Villanueva. be does have scene advisers from the left wing of APRA.

e have no indications that Moacow has any ties to Peru's two radical Insurgent groups, the Sendero Luminosor tbe Tupac Amaru Revolutionary Movementor do we have reliable evidence that Cuba or the Sarklinistas have tics to the SL. (Seeima has charged that some MRTA loaders were tiained in Cuba in, and we suspect that Havana or Managua may currently have tome contact wilh ihcm.

Inltjencc on labor ond the Medro

he Soviets have dose lies to key labor and media groups in Peru. Moscow has promoted the use of TASS and Novosti wire services by Peruvian news-papeis, and through middlemen has purchased shares in some of them.!"

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one-third of Peru'sare unionized.oscow has access to some key labor groups, such as the Marrirt-dominated teachers union, SUTEP, and the largest trade confederation, the General Confederation of Peruvian Workersluough the PCP. The CCTP receivessupport from Moscow, and in rum is eapected to be responsive to many Soviet policies. We believe Moscow may now be curbing activities tbat might compromise its imageesponsible bilateral partner with Garcia For example. Ihe CCTP may postpone its annual congress0 because Moscow hason its promise to (und the event

8'coder Seconal Cools

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states, notably Argentina, to CMMhfar increasing their ties to Moscow. At the same time, we believe the Soviets want to challenge US prerogatives in the area and keep other players; such as China, from making comparable Inroads. Moscow reportedly Intends lo use its recent economic and military assistance offers to encourageupport of the Sandinistas and opposition to tbe US position In Centraloviets may hope to Integrate Its two major Latin Americanand Nicaragua-more deeply Into the political and economic fabric of the area,

Cuban Attitudes

e believe Havana will promote improved diplomatic relations with the Carcia regime while cultivating Its contacts with Peruvian revolutionary movements for the future. Although relations between th* two countries may eventually be upgraded, more tangible forms of cooperation will probably beby personal enmity and rivalry for regional leadership between Garcia and Castro. Havana may. however, hope tp influence and move the Garcia administration toward more radical. anti-US positions through its links to the legitimate opposition and other Interest groups. Among the parties of the IU.ubans probably will continue to maintain contact with the PCI', the Revolutionary Socialist Party, end the Mariategulst Unified Party. Castro has particularly courted IUMayor efBarrantes. and the Cuban leaderose personal friendship with the Revolutionary Socialist Party president, retired Cen. Leonidas Rodriguez. In addition to these links, reports Indicate that Havana may seek to influence Peruvian politics through mass Institutions, such as tbe Catholic Church, which In-dudes some prominent advocates of liberation

astro probably has not abandoned his eventual goal ofarxist government lo power In Peru, dther through elections or by pronvoting armed revolution.^

^yiavana may also find

cooperation with tlie MRTA attractive, as it is likely to be mote indined to accept Cuban support than will be tlie SI. However, we have no evidence to indicate that Cuba It pursuing tills option, and Moscow probably would actively discourage it

Nicaragua

e bdicvo the Sandinistas probably shareapproach to Peru to some extent Thus, while they may provide some training lo Peruvian leftists in Nicaragua, they are likely to be drcurnspect In their contacts with tlte far left within Peru. Managua regaids Carciaotential ally, particularly in tbe diplomatic arena. The Sandinistas were anxious to involve Carcia in the Con ta dors process, and probably view Peru's participation in-the Contadora Support Gioup as an important new source of diplomatic aid. We ludge that Nicaragua will not want to jeopardize this, or possible economic assistance from Peru, by unnecessarily provoking Garcia. The Sandinistas are likely to continue to cultivate Cardaolitical ally by playing on both his fearsS Intervention in Nicaragua and his belief that he will be able to moderate the regime In Nicaragua. Nevertheless,probably will keep an open line to the Peiuvjan left and encourage local radicals to lobby thefor propolicies.

General Outlook Key Variables

e believe the aeveiopment of Soviet influence in Peru will be shaped primarily by ihe course of the Peruvian economy and tbe debt problem, themilitary's desire for new equipment, and the status of Peruvian-US relations. In particular;

A sharp decline in the economyrotracted impasse in negotiations with Western banks would increase the potential economic leverage that the Soviet llloc could wield In Peru.

The militarv equipment needs of the armed forces willey variable In the relationship. For example, should the insurgent situation not worsen significantly, and should Carda conclude an arms limitation agreement with Peru'sthe country's military equipment needs would probably be reduced, thus resulting in smaller purchases of Soviet military equipment

Setbacks in Peruvian-US relations will constitute opportunities for the Soviets to advance thdr standing in Lima.

additional factor, eruolal in significance, will be Moscow's responsiveness lo Carcia's requests for aid and. in particular, its willingness to commit tin- requi-lite economic resources to eiploit opportunities fot increased influerice.

Most Likely Cose

e believe thai Peru's lies to the Soviet Union will expand during Garcia's term, and Soviet Interests in Peru, and in the hemisphere, are likely lo be enhanced:

Soviet military aid lolely to increaseossible regional arms limitation agree-menl. While the Insurgency probably will not worsenustained military effort will be required to contain it. Thus Soviet armi sales probably will Include countcrinsurgency equipment for the Army and helicopters and liartsport aircraft for tbe Air Force (tee intet(

Soviet economic aid toha likely to Increase While wc do notassive commitment of economic assistance lo thelegime, wc anticipate new Soviet technical and project aid. along wilh related advisersfor energy and agricultural programs. This would result In an increase in Soviet civil-uu Peru's already Large debt to the Soviet Union will probably continue to increase despite soft loans and rescheduling agreements.

The Soviets also are likely to retain considerable ties to the mass media and influence in the major labor confederation. CCTP. Nevertheless, the APRA party will probably challenge Communist control of the CCTP. and Moscow might be forced to curb some of Us ties to organ! red labor oronfrontation wltb the Carcia government.

A close and supportive Soviet relationship with Peru over tbe neat five years may assist Soviet efforts to improve relations with other Latin American democracies Potrtical and economic relationships with Brazil and Argentina Inmay well etpand, and the Soviets may even succeed in selling military equipment, such as transport aircraft, to some Latin countries.

espite this intensification of Soviet-Peruvian ties, we cipect only modest gains in direct Soviet influence. The Soviets will be well placed lo augment their contactt with the military, and they may have some limited impact on Carcia's domestic economic and foreign policies. We beheve, however, lhatnnllonalism and commitment to nonafirnment. as

IVoif Mti for Soviet Miliioryto the Peruvian Navy

Akkouah ih* USSR aagaaaaaalffer attractive una and equipment packages, trie Peruvian Navy remains the only tornee that doer oat purchate Soviet military equipment Soviet of fen ttneeave Included minipatrol boats, amphibious rupooit ships, anandnit loot, but the Navy hierarchy !ui turned them downariety of reasons. First amongn unwtOiragnefs to become dependent on Soviei hardware and training, which ateoM from the Navy'i Iraditlonil aati-Cocsrnuniti oriental ion. Navy rsUnaeii reportedly aba believe spare parts are more difficult la obtain for Soviet cqairarnerat, and that Westernuperior in <iuil.iv and more compatible withead sin the Navy'i Inventory.

Nevertheless, trveral factors point to an Increasing possibility that the Peruvian Navy mar eventually acquire Soviet equipmentradual, oecemeal basis.esperate economic,aving its effect on military acquoitiom. Then arrears on interett payrnentt io various European suppliers, and. given President Garcia's trance on ihe debt issue, these countries are not likely to provide favorable credit terms In the near future- If the USSR.to offer the Navy items It feeti It needs to participate In counterin-aurgeney aod narcotics interdiction, such as transport heUeecgers. river craft, and patrol boats, and the Navy could not afford to buy them from any Wesiern source, its bkiarchy would beempled lo buy Soviet equipment

Soviei supply of until items such at patrol boats and helicopters would be unlikely to change the highi basic aMl-Crsrnmunist Ideology, or afford tbe Soviets auach Influence within the Navy over the near term. It would attow the USSR the opportunity to establish itselfaval inns supplier, however, and rrUght open the door to further purchase* Over time. thb and other factors caocrivibly may Drain US-Peruvian Navy-to-Navy relations and dbrupt the yearly UN1TAS bilateral naval eiercftes

well as ibe military's traditional anti-Communism, will be important limits on Soviet influence. We do not believe it likely lhat any developments In the economy or domestic security situation will be sufficiendy adverse to push Carcia beyond these limits in seeking Soviet aid. There will, at the same time,umber of potential points of friction between Peru and the Soviet Bloc For example, the fishing question will retain some divisive potential, though we exneel both sides to seel: lo ronlain any disputes

le

SCCHC4-

noli v* Scenarios

e believe that Mono- hat decided toaiting tjanve in Peru (or the next lev* years. It will discourage local pro-Soviet factions from challenitlnB tlie Carcia government. Nevertheless, the variables noted above may alter the Soviet tame plan and encourage greater involvement In Peru'i internalThb could result In significantly Increased Soviet inroads in Lima, or ft could backfire and leadeduction In Soviet influence. Economic variables, particularly the debt Question, are most likely toramatic change In Soviet-Peruvianrelations.

Increase in Soviet Involvement

complete break between Peru and itscreditors would probably cause Carcia to turnfor compensatory assistance. Certainlywould be templed to Increase its supportituation, anticipating concessionsand growing influence in Lima, and wewould commit greater resources IoBut we do not believe that Garcia hasIo induce the Soviets to provide thenecessary to subsidize the PeruvianPeru would probably sockfrom the USSR.*

we would expect Moscow toassistance to Lima, Io Increase Itsof Peruvian commodities, and to encourageassimilation of Peru into Bloc economicMoscow would calculate that thesestand In sharp contrast to Westernof Peru. At the sairie time, Moscowits relations with the armed forces bvnew weapon systems and Increasing Itsall at little or no cost to theMoscow would probably reason thaieconomic disintegration In Peru woulddisenchantmept with APRA and Increaseof Its leftist allies In Peru.

Downturn in Soviei Involvement

rospects for increased Soviet influence will very likely wane Ifble to make economic

' Mateo- ha> txo-vSrdadih wtmiMUl Level, ofbilbon ind SI billion rooectittn the foinu ot wit currency trade crcditi and subsidieskelp to ocotrei these enmities Iran firam-til etposwe in theSueh anUtance lo Peru>eouiieienlal ion at traJr in both cevneii mate Theircet tiarulV- ol theamatiatl of Inn* curieiwr llurtll require. INNaVJ be It.

iiiilieviedciilod in iomt aid lelalloin with nil comilrt. K>

ptogressharp break with tbe West, thus allowing for salts!actorv debt rescheduling andWestern credits In more prosperous clrcum-stances, Lima might terminate Its fbhtng agreement wilh the Soviets. Moreover. If the armed forces had more generous funding or reduced requirements for new arms they would probably seek to purchase Western military equipment to gain greaterfrom Soviet supply lines and advisers. On the other hand:

If Garcia were unable lo turn the economy around and forge an acceptable debt agreement, Moscow's credibility would beo prove unresponsive to Lima's plight and provide only token support In this case, Soviet Influence and presence in Peru, would probably decline significantly.

II the economy drastically deteriorates. Carcia might be removed from the politicaleither through resignation or militarybe replacedovernment less sympathetic to the USSR.

ther events mightomplete break between Lima and Moscow. Onerous Soviet demands on Garcia In return for massive economic assistance couldevere backlash, possibly leading Carcia to drastically scale back relations with the Soviet Union. Similarly,osition could be gravely threatened were it to risk Increasing its covert support to legal leftist elements in Peru, or to extend such support to insurgent groups. Exposure of Soviet manipulations would severely strain Soviet-Peruvian millions and reinlorce anti-Communist altitudesPeru. Evenituation where Peru was facing more serious economic difficulties, Soviet collusion with the SL or MBTA could cause Lima to sever Its ties to Moscow.

Implications for the United States

e do not believe the Soviets will obtain suf fi-ciont leverage In Lima to push Garcia Intoniformly anti-US foreign policy. We expect him to resect such attempts. However. Peruvian disputes with the United Sates will have potentially more damaging consequences to US interests than they might have had under the previous government These conflicts will threaten to constitute new opportunities. If no* direct gains, for the Soviet position tn Lima.ecent rescission of contracts with US petroleum companies In Peruase In point. He has given the companies untilovember to renegotiate the contracts on terms more favorable to Peru II negotiations fail, the Peruvianitch' to take over operation

of Ilw oilfield* and perhaps even nationalize some assets of the comoanies. Tha situation could give the Soviets the chance,elatively small cost, lo provide critical technical assistance to Peru and reappolitical goodwill. The debt issue and Peruvian-US trade disputes could provide the Soviets similar

3ft Even in ihe case where Soviet inlluence remains limited. US interests in the region may nevertheless be adversely affected. To the extent that the Soviets are able to maintain the imageesponsible and dependable allyon-Marxist dvilian government, their chances for inroads Into ether Latin Airiertean countries will be enhanced The demonstration effect of Moscow's assistance to Peru will stand some chance of enticing countries such as Argentina. Brazil, and perhaps even Venezuela into accepting offers ofSoviet trade and assistance

n no case do we believe that Moscow can accumulate sufficient leverage while Carcia isto utilize Peruase for its own military purposes or for the active subversion, with the1 now lodge, of US security Interests in the region. Thus, the scenario with perhaps the roost ominous implications for USne that lies beyond the term of the Carcia government. The most dangerous situation, which we believe to be unlikely, might be one where the Carcia administration is discreditedailure to manage the economy or contain the Iruurgencv, while the Soviets ictain considerable prestigeopular perception of their having provided Peru increased aidime of great need. This could set ihe stage for an electoral victory0ro-Soviet leftistThe principal obstacle lo such government In tbe past has been the armed forces. But, If the military's aMi-Communlsm were lufficiently undermined by theyear exposure to Soviet influence andight acquiesce in the assumption of power byfirst Marxist govcrnrnenL

he United States Is likely to be presentedifficult foreign policy challenge In Peru over the next five years. Washington will have to seek to blunt or co-opt the nationalist aspirations of Garcia's regime that run counter to US interests withouthim into Soviet hands. At tbe same time, Carcia's confrontation with Cuba on the debt issue Indicates his determination to gain regional leadership, his Intention toonaligned foreign policy, and histo play one side off against the other. This can provide tbe Uniied Stales wilh opportunities to oppose the potential increase in Soviet influence in Peru. More Important, ihe United Slates must seek leverage to ensure that the potential failure of the .Carcia administration to solve Peru's economic problems does not leave tbe radical left as the only viable alternative to an APRA government0

-occma

ANNEX Peru; The Economic Scene

Garcia has moved swiftly to implement new economic policies lo restore growth, improve social welfare, and reduce foreign dependencehe remains committed lo bypassing the IMF and limiting debt servicing toercent of export earnings over Ihe nextonths, promoting Mint action among latin debtors to secure easier repayment terms,"economictrengthening controls over foreign Investment and tightening ex changeto reduce Imports- Doeriestjcauy. Garciadevelopment to eliminate foodimport-substitution behind tariff barriers toIndustry. To stabilize the economy, thewants lo tax heavily wealthy Individualsand implement tighter planning Iothe budget We m

4

Peru; Balance of

us t

im tao iM*. logs,

Figure 4

Peru: Sdectcd Economic Indicators

Tlbat Carcia'i intent in these policieself-impoard stabilization program, similar lo those- in Colombia and Veneiuela, Ihal would win support from foreign tenders without the needormal IMF adjustment program.

Following through on pledges given in his inaugural address, Garcia hasolitically popular attack against iriflatloa bv lowering domestic Interesteezing rents, and purling price controb on basic consumer goods. He also has frozen dollarforays and devalued the currencyercent to reduce capital flight, and placed import controlstems to protect industry and foreign ciclange-Garcia. in addition, has reduced salaries of topfrozen government hiring, and begunthe agricultural and oil bureaucracy to reduce the budget delicti He has also granted wage hikes to Quell worker restiveness and promised technical andassistance to farmers.

Carda views debtey political issue, according to various sources, because it impedes his flexibility to initiate social welfare programs, which be regards as necessary to prevent polilical unrest. While thehas yet to formulate concrete debt repayment k'heduhu, US Embassy reports suggest be may follow Bolivia's footsteps by dribbling out payments toinstitutions and ihen to governmentepresentative of Peru's foreign bank steeringhas visited Lima to discuss current debt policy on interest payments, but Carda's public posture isthe resumption of negotiations. Meanwhile, be recently rescinded US oil companies' contracts, citing their failure to reinvest profits, but providedays to renegotiate these contracts on more favorable terms, according to the US Embassy. Recent reports Indicate tbat similar action may be taken against Southern Peru Copper Corporation, another US venture

One of Carcia's major problems will be to obtain sufficient investment funds to revitalize agriculture and local industry. He hopes to shift government sperKling lo cutting back state ownership of irieffidenl eraerprlses, reducing bloated bureaucracies andsalaries, and holding down military weapons procurement. He also wants to attract new foreign investment and bank financing

Imanv Western bankersremain firm that no debt rescheduling can occur until Peru accepts an IMF-supported economic pro-grarn Tbey view his unilateral cap on debt repaymentangerous preccdenl and so far appear unwilling to raise new loans.

20

cm i

Carcia's crusading style in launching his initial economic moves has contributed lo bis broad domesticapproval rating ofoercent in the latest opinion polk As he attempts to translate this support into policy, we believe that he will have difficulty holding to his current planelf-imposed austerity course, while at the same time stimulating agriculture and Industry. Weontinuing impasse in debt negotiations, which will cut off the country from tbe resources needed tothe economy and assure worseniri^ economic conditions for some mootlis. (See

Even in tbe best case, we believe economic growth will slow from lastercent because ofof industrial imports and foreign credit, and uncertainty Is likely to stifle domestic investment and construction. Moreover. Garcia will be hard put to keep inflation under control unless he can drastically reduce tbc government's fiscal deficit. Carcia will probably be aided by an anticipated trade surplus, but Peru's persistent debt service burden is likely to resultontinuing current account deficit {Seever lite Longer run, the success of Garcia's economic programs will dependarge extent on his ability to attract funds from multilateral lenders, such as the World Bank and the Andean Fund, as well assolutions to the entire Latin American debt problem-'

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