NEAR EAST AND SOUTH ASIA REVIEW

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP05S02029R000300890001-6
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 72
• Document Creation Date: December 27, 2016
• Document Release Date: June 19, 2012
• Sequence Number: 1
• Publication Date: February 27, 1987
• Content Type: REPORT

Declassified in Part - Sanitized Copy Approved for Release 2012/08/27: CIA-RDP05SO2029R000300890001-6
Directorate of
Intelligence
Secret
Near East and
South Asia Review
27 February 1987
Secret
NESA NESAR 87-006
27 February 1987
327
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Secret
Near East and
South Asia Review
Articles US-Iraqi Relations: Argument for More Trouble Ahead
US-Iraqi relations may have been more severely damaged by
Washington's Iran initiative than many observers currently believe.
The revelations of the Iran initiative may well have convinced Iraqi
leaders that their move toward the United States was a fundamental
error, and they may now reassert their revolutionary ideology.
Jordan: Perspectives on the Iran-Iraq War
Jordan's King Hussein is becoming increasingly concerned that
recent developments in the Iran-Iraq war indicate Iran is gaining the
upper hand. The King continues to be Iraq's most committed ally
but has grown deeply apprehensive about the economic and security
implications of an Iranian victory.
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Egypt: Anti-American Comment in the Press 7
Over the past three months the Egyptian press has become
increasingly critical of the United States. The press campaign
against the United States almost certainly can be seen as a warning
sign of deepening disillusionment among Egyptian officials with US-
Egyptian ties.
Saudi Arabia-USSR: No Quick Fixes 9
Saudi Arabia appears to have relaxed its reluctance to expand ties to
the Soviet Union, but recent speculation that Riyadh is considering
significant upgrading of its relations following Saudi Petroleum
Minister Nazir's visit to Moscow in mid-January is overstated. The
chances for a dramatic breakthrough in the short term are minimal.
Secret
NESA NESAR 87-006
27 February 1987
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Prime Minister Shamir's beleaguered economic reform package is
under relentless assault from powerful interest groups in business,
labor, and the government. Shamir's policy of fiscal appeasement is
heading Israel toward renewed inflation that may well reverse the
earlier gains of the National Unity government.
Israel-Jordan-West Bank: New Bank Hits Snaj
After nearly three months in operation, the Nablus branch of the
Cairo-Amman Bank is losing money because of structural
limitations imposed by Israel. The Jordanian Government can ill
afford to lose the Nablus branch because its collapse would deprive
Jordan of a solid institutional presence on the West Bank.
Syria-Turkey: Steering Clear of Controversy
Syria has sought to preserve its uneasy reconciliation with Turkey
over the past year by making incremental concessions on
longstanding bilateral disputes. As Syria regains its confidence, it is
certain to increase support to Turkish subversives as its principal
bargaining chip.
Within the last year Syria's worsening economic crisis, the revival of
Palestinian strength in Lebanon, and intense maneuvering within
the Alawite elite have put Syrian President Assad on the defensive,
but these developments have not weakened his resolve to press the
Arab struggle against Israel and ultimately to recover the Golan
Heights.
The Syrian-sponsored Palestine National Salvation Front continues
to face a major uphill battle in its efforts to become accepted among
Palestinians as a credible alternative to the PLO led by Yasir
Arafat. Despite the Front's dependence on Syria, President Assad
may be slowly losing his Palestinian card
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Created to ensure the survivability of the Christian enclave, the
National Fund is controlled by the Lebanese Forces, which receives
two-thirds of the fund's money. With annual estimated revenues of
$23 million, the fund is further evidence of the Christian quest for
autonomy in the absence of a political solution in Lebanon
Algeria: Economic Slump Continues
Last year Algeria experienced its most serious financial crisis since
independence, and the outlook for 1987 is little better. More protests
against the regime can be expected as austerity intensifies, and more
pressure on President Bendjedid to return Algeria to the socialist
fold is also likely.
Pakistan: Warm Words, Few Deeds Welcome 47
Foreign Investors)
Pakistan offers foreign investors words of welcome, legal protection,
and a growing market-but a wide gap exists between promise and
performance in reducing bureaucratic obstacles. The investment
climate is likely to deteriorate as foreign payments strains mount
and revival of political activity slows the pace of economic reforms.
India: Impact of Military Spending) 53
India's long-term program to modernize its defense forces has not
unduly strained its economy or hampered its development programs
so far. Nonetheless, the large-scale purchases of weapons from
foreign suppliers and the associated debt servicing costs are likely to
strain India's fragile foreign payments position.
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Libya: Status of Tajura Nuclear Center
India: Succession Implications of Cabinet and Congress Party 57
Changes
the list of candidates in the event of a succession struggle.
Prime Minister Rajiv Gandhi's shakeups of his Cabinet and the
ruling Congress Party have resulted in a lack of second-echelon
leaders with broad political support in either organization. P. V.
Narasimha Rao, the senior Congress Party Cabinet Minister, heads
The Tamil insurgency has placed serious strains on Sri Lanka's
democratic institutions. Despite controversial measures undertaken
by the government to combat the insurgency, in the long run Sri
Sri Lanka's Tamil militants have turned to high-risk, high-profit
international crime-particularly drug trafficking-to maintain
their war chests. They are not only becoming more actively involved
in drug trafficking but also are likely to continue their involvement
regardless of the outcome of the autonomy struggle in Sri Lanka.
Cuba-Sudan: Reported Training for Sudanese Rebels
69
70
India: New Atomic Energy Commission Chairman L
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Some articles in the Near East and South Asia Review are preliminary views of a
subject or speculative, but the contents normally will be coordinated as
appropriate with other offices within CIA. Occasionally an article will represent
the view of a single analyst; an item like this will be designated as a
noncoordinated view.
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Near East and
South Asia Review
US-Iraqi Relations: Argument
for More Trouble Ahead '
US-Iraqi relations may have been more severely
damaged by Washington's Iran initiative than many
observers currently believe. Iraq is a revolutionary
society and is bound by revolutionary principles. In
reestablishing diplomatic ties to the United States,
Iraq compromised its revolutionary ideology. The
revelations of the Iran initiative may well have
convinced Iraqi leaders that their move toward the
United States was a fundamental error, and they may
now reassert their ideology more strongly than ever.
In a development that may signal the beginning of
such a trend, First Deputy Prime Minister Taha
Yasin Ramadan-a longtime foe of the United
States-has made the initiative the basis for several
blistering attacks on Washington. In the coming
months Ramadan could make further trouble for the
United States and collect a following of individuals
similarly hostile to US interests. The result could be a
reversion by the Iraqis to previously held hardline
positions, such as support for the more extreme
Palestinian groups.
Iraq as a Revolutionary Society
Despite some evolution in its domestic and foreign
policies, Iraq's revolutionary political culture remains
alive. As a revolutionary society, many of Iraq's
leaders regard the United States as an imperialist
power with interests ultimately inimical to those of
Iraq. As a result, the underlying aim of the United
States-in the eyes of these members of Iraq's ruling
Bath Party-is to reduce Iraq to the status of a
subjugated nation, a colony.
Although Iraq deemphasized this ideological view
when it agreed to reestablish relations with the United
States in 1984, it is possible to argue that this move
was based solely on expediency. At the time, the US-
orchestrated arms embargo seemed to Iraqi leaders
one of the few possibly effective means of winding
down the war.
An Intense Debate
According to the US Embassy, the proposal to renew
relations with the United States encountered intense
resistance at the time and probably would have failed
had it not been for Foreign Minister Tariq `Aziz.
`Aziz, an extremely sophisticated diplomat, pushed
for the resumption of ties and, according to the US
Embassy, steered the proposal through Iraq's ruling
body, the Revolutionary Command Council (RCC).
According to the US Embassy, `Aziz used his
considerable debating skills to talk his less
sophisticated RCC colleagues into going along with
the proposal.
Arguing against the proposal was Ramadan, not
generally esteemed as a deep thinker and with no
special knowledge of international affairs.
Nonetheless, Ramadan-a cold, bristly individual,
described by the US Embassy as the epitome of a
tough Ba'thist-is respected for his political savvy.
His instincts have enabled him to avoid pitfalls that
have destroyed many of his Ba'thist colleagues. F_
Ramadan, according to the US Embassy, was the last
key figure in the regime to agree to reestablishing
formal ties to the United States. Once he approved,
however, like a good soldier he endorsed the policy
and gave the appearance of supporting it
wholeheartedly. He granted interviews to US
visitors-something he had never done before-and
spoke, apparently with conviction, about the need to
Secret
NESA NESAR 87-006
27 February 1987
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Secret
develop strong bilateral ties. Ramadan, however,
almost certainly retained some mistrust of the pro-US
policy, and his support may well have been a tactical
expedient. Once the revelation about the Iranian arms
sales emerged, Ramadan appears to have cast aside
whatever sympathy he had for Washington and began
openly attacking the United States.
Ramadan Takes a Stand
In his recent anti-US blasts, Ramadan adopts the
revolutionary perspective of a hardline Ba'thist. He
attacks the United States for being an imperialist
power. He claims its aim is to carve up Iraq,
promoting the creation of a Shia republic in Al
Basrah and an independent Kurdish state in the
north. The United States acts, according to Ramadan,
to prevent Iraq from becoming a strong, independent
state because this would foil Washington's scheme to
establish hegemony over the Persian Gulf.
Washington's partner in this plot, says Ramadan, is
Israel.
Ramadan's line-essentially a conspiracy theory-
conforms not only to Ba'thist ideology but also to the
Iraqis' basic beliefs about the conduct of politics in
the Middle East. It explains a number of
embarrassing and potentially ruinous military defeats
Iraq has suffered in the past year by blaming the
United States. In Ramadan's interpretation of events,
the setbacks at Al Faw and later near Al Basrah were
caused by US duplicity in selling arms to Iran and
passing false intelligence to Iraq, not by the ineptitude
of Iraq's military machine. Ramadan's theory also
gets Baghdad off the hook in another area. It explains
why Saddam has been unable to end the war-the
United States and its ally Israel are keeping it going
by supporting Iraq's enemy.
Ramadan Attracts a Following
,There is evidence Ramadan's enunciation of a
conspiracy theory has other supporters within the
Iraqi regime. Information Minister Latif Jasim has
begun parroting ideas originally voiced by Ramadan.
Jasim's attacks, moreover, provide a clue to a more
disturbing development. According to the US
Embassy, Jasim is a sycophant who attempts to do
nothing that would offend Iraq's President Saddam
Husayn. If Jasim is spouting Ramadan's views,
Further evidence that Ramadan's views may have the
upper hand in Baghdad's leadership circles can be
seen in an interview in early February between the
US Ambassador in Baghdad and `Aziz. Saddam's
views on the initiative-as laid out by `Aziz-appear
to parallel those of Ramadan. `Aziz told the
Ambassador that Iraq believes the US arms sales to
Iran are part of a conspiracy against Iraq aimed at
perpetuating instability in the region.
Outlook and Implications for the United States
If the above arguments about the extent of damage to
US relations prove correct, Washington can expect
more trouble from Iraq. It will take a while for
Ramadan's ideas to trickle down into both the party
and the bureaucracy, but trickle down they will. Iraq
is a thoroughly regimented society, and approaches
decided on by the top leadership are transmitted to all
sectors of society in the manner of an imperial decree.
As such they are supposed to be assimilated, upheld,
and acted on without question.
An indication of further trouble for the United States
would be the reemergence throughout the Bath Party
structure of ideological hardliners. These
individuals-for example, Salah Mukhtar of the
Ministry of Information-dropped out of sight
following the reestablishment of relations with
Washington. If Ramadan's criticisms of the United
States reflect overall Iraqi policy, they almost
certainly will reappear. They will call for fundamental
changes in Iraq's foreign policy, such as increased
support for the Soviet Union and the Palestinian
resistance.
Ultimately, anti-US talk could be supplemented by
action. The ideological hardliners could come to
dominate important government Ministries. They
could, for example, take over the Iraqi Intelligence
Service (IIS). This probably would be harmful to US
interests in the region. A previous IIS director-
hardliner Barzan al-Tikriti-was a principal
supporter of Palestinian terrorist Abu Nidal.
Saddam may approve of them as well.
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Jordan: Perspectives
on the Iran-Iraq War
Jordan's King Hussein is becoming increasingly
concerned that recent developments in the Iran-Iraq
war-especially Tehran's gains in the fighting at Al
Basrah and its victory last year at Al Faw-indicate
Iran is gaining the upper hand. The King continues to
be Iraqi President Saddam Husayn's most committed
and vocal Arab ally but has grown deeply
apprehensive about the economic and security
implications of an Iranian victory.
In a departure from its traditional practice of
balancing regional rivals, Jordan has given
unswerving support to Iraq throughout the six-year-
old war. Amman has made no overtures to the
fundamentalists in Tehran, refusing to recognize any
legitimacy for the Iranian position in the war. King
Hussein has strongly urged other Arab states to do
likewise despite the major friction this has caused in
relations between Jordan and Syria
Fear Breeds Staunch Support for Iraq
The King is worried that an Iranian victory would
seriously undercut his efforts at forming a moderate
Arab consensus to support Jordan's strategy on peace
negotiations with Israel-a central tenet of Hussein's
regional strategy. The King has worked particularly
hard to moderate Iraqi policies and to speed Egypt's
return to the Arab fold to form a moderate bloc aimed
at defusing regional tensions and to facilitate a revival
of the peace process. An Iranian victory would almost
certainly force Hussein into a closer relationship with
Syria to contain the new eastern threat and would
thereby strengthen the hand of the Syrians and other
radicals.
Jordanians have a deep-seated fear that Iranian-
sponsored fundamentalist fervor will undermine the
established Jordanian social and political order.
According to US Embassy reporting, Hussein is
worried that an Iranian victory would "Arabize" the
fundamentalist revolution and lend it credibility
among the large Shia populations in moderate Arab
states. He is particularly concerned over Egypt's
increasing vulnerability to Iranian-sponsored
fundamentalism and fears that Saudi Arabia and the
smaller Gulf states could fall prey to Islamic radicals.
Economic Impact of the War
Jordan has benefited financially from its close
relationship with Iraq during the war, giving further
impetus to Amman's strong support for Saddam
Husayn. Iraq has become Jordan's leading trade.
partner. About 25 percent of Jordan's exports go to
Iraq, and Baghdad has become Jordan's leading
source of oil. Some of the oil has been used to reduce
Baghdad's $500 million debt to Amman. This
arrangement reduces Jordan's heavy dependence on
Saudi oil, which must be paid for in cash. Amman is
in arrears to the Saudis for past oil deliveries.
Jordan's transport sector-including port handlers,
truckers, and freight forwarders-also has greatly
benefited from the war. The US Embassy estimates
that nearly two-thirds of the cargo transiting the
Jordanian port of Aqabah is destined for Iraq. The
cargo, including both military equipment and large
quantities of civilian goods, is shipped overland
through Jordan to Baghdad.
Despite these economic benefits, Jordan has more to
gain from an acceptable end to the war than from its
continuation. Jordan probably expects that its
subsidies from the Gulf states would increase after the
war, since Iraq's heavy demands on them would
subside. Jordan also probably expects to play an
important role in Iraq's reconstruction efforts after
the war. Several Iraqi cities have been heavily
damaged during the course of the war and will require
years to restore and rebuild. Jordan would expect to
provide large numbers of workers and receive
construction contracts for Jordanian companies for
the postwar rebuilding of Iraq.
Secret
NESA NESAR 87-006
27 February 1987
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On the other hand, an Iraqi defeat would be an
economic disaster for Jordan. Amman would have
little hope of collecting on Iraq's debt, and transit
revenues gained from supplying Iraq's war effort
would be lost, as would nearly one-fourth of Jordan's
export market. Amman would once again be
completely dependent for its crude oil on the Saudi
pipeline. King Hussein probably fears that he could
not develop, at least in the near term, a normal
working relationship with a postwar fundamentalist
regime in Iraq, given Jordan's unwavering support for
Saddam during the war.
ability to sustain extended combat operations on its
own borders-much less hundreds of kilometers away
in Iraq-is questionable.
Jordan's Chief of Staff, Lt. Gen. Abu Taleb, last year
denied rumors that Jordan was prepared to send
troops to Iraq.
that such a move made little sense and that
Jordan would not send forces. He noted that a
Jordanian expeditionary force of as much as two or
three brigades would in no way improve Iraq's ability
to resist Iran but would significantly deplete
Amman's forces and erode its ability to defend itself.
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Military Support Limited ...
King Hussein has matched strong political and
rhetorical support for Iraq with low-level military
assistance. Jordan provides training-considered the
best available in the Arab world-for Iraqi pilots and
artillerymen. Jordanian interlocutors also have
negotiated arms purchases for Iraq. For example, a
Jordanian delegation recently went to China to
negotiate an aircraft purchase for the Iraqis,
Since Iraqi ports were closed during the initial phase
of the war, Aqabah-Jordan's only port-has been
used extensively to handle military equipment
destined for Iraq. Because of the distance involved,
most of the gear shipped through Jordan consists of
support equipment such as trucks, light vehicles, and
ammunition.
that the materiel is checked out and in some cases
possibly assembled at Jordan's maintenance facility at
Az Zarqa.
... But Few Options Open for Amman
Jordan has few other options for contributing
militarily on Iraqi's behalf. Jordan's Army-
consisting of four divisions with fewer than 75,000
men-is insignificant compared to the forces Iraq has
assembled. The bulk of Jordan's military
equipment-except a small amount of Soviet air
defense weaponry-is Western-built and could not be
maintained by the largely Soviet-equipped Iraqis.
Moreover, Jordan's military suffers from severe spare
parts shortages, maintenance problems, and is
equipped with increasingly obsolescent equipment. Its
Some alternatives-albeit distasteful to Amman-
could have some short-term impact on Iraqi military
capabilities, according to the US Embassy. If an Iraqi
collapse seemed imminent, Jordan could provide one
or two squadrons of Mirage F-1 fighter-bombers-the
only aircraft common to the two countries' air forces.
Jordanian pilots, maintenance crews, and support
equipment would probably improve the performance
of Iraq's Air Force but would make little difference in
the outcome of the ward
Jordan would be extremely hesitant to make such a
commitment. Its two squadrons of F-1 Is are likely to
remain the most modern aircraft in its inventory and,
given Amman's dire financial position, may be for
some years to come. King Hussein is keenly aware of
the heavy losses Iraq's Air Force has suffered
recently, and almost certainly will not risk losing a
large number of his best planes-and more important
some of his scarce pilots-in what would ultimately
be only a show of support for Saddam.
Frustrated With Iraqi Performance
Jordanian military leaders-often accompanied by
King Hussein- frequently visit Baghdad to get
updates on the fighting. In their discussions with Iraqi
officials, the Jordanians consistently counsel Iraq to
take a more aggressive posture in the war
They have long pressed the Iraqi
it Force to accelerate its attacks on Iranian
economic targets and have urged the Iraqi Army to
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conduct massive counterattacks using its superior
armored forces. Jordan has often warned that
Saddam's defensive tactics over the past several years
are doomed to fail, given the Iranians' religious fervor
and vastly superior manpower resources.
Iraq's consistently optimistic view of the war has
made the King increasingly distrustful of Baghdad's
information. According to the US Embassy,
Jordanian assessments often differ fundamentally
from what the King is told in Baghdad. For example,
a high-level Jordanian official visited Baghdad last
year just before Iran's offensive at Al Faw and was
told by Saddam that the Iranians were in a desperate
situation. The Jordanian warned the Iraqis that their
defensive strategy could have dire consequences, but
to no avail. Jordanian military leaders have told US
officials that none of the Iraqi generals have a
realistic grasp of their situation.
Prospects for the War-Viewed With Dread
in Amman
Jordan has given up expecting an Iraqi victory,
according to the US Embassy. Jordanian military
leaders see only two possible outcomes to the war-a
clear-cut Iranian victory or a stalemate forcing the
Iranians to the negotiating table. The Jordanians
fervently hope for the latter outcome, but many
believe that every limited Iranian battlefield gain,
such as A] Faw and Al Basrah, makes Tehran closer
to becoming the eventual victor.
Despite his view that Iraqi fortunes are waning, King
Hussein evidently perceives no acceptable alternative
to continuing his open support for Saddam. The King
believes that a leadership change in Iraq, which the
Iranians have long demanded as a requisite to ending
the fighting, might in itself hand victory to the
Iranians. He recently told US Embassy officers that
Saddam's departure probably would cause the Iraqis
to collapse and thus is not a viable option for ending
the war.
Implications for the United States
Revelations of US dealings with Iran late last year
shocked and outraged the Jordanian leadership and
deepened its apprehension that Iraq eventually will
lose the war. Chief of Staff Abu Taleb, like other
Jordanian military leaders, had long pressed for direct
US support to Iraq.
King Hussein felt particularly betrayed by the United
States, believing the US action undermined years of
effort to isolate Iran. Hussein had believed that
Washington supported his Iraqi policy and now views
the United States as actively undermining a major
Jordanian foreign policy initiative.
Since the US-Iran revelations, Jordanian leaders have
increased their support for international efforts to
restrict arms sales to Iran. Given its disillusionment
with US policy, Amman increasingly believes that
intervention by both the Soviet Union and the United
States may be the only way to avoid an Iranian
victory and its dire implications for Jordan's future.
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Egypt: Anti-American
Comment in the Press
Over the past three months the Egyptian press has
become increasingly critical of the United States.
Articles in both the government-owned "national"
press and the independent opposition press have
focused criticism on US arms sales to Iran, the US
role in the Middle East peace process, and US policy
on Foreign Military Sales (FMS) debt relief.
Opposition newspapers have carried particularly
strident attacks on US policies and officials.
The Egyptian press is freer to print such attacks on
US--and by implication-Egyptian policies than at
any time in its recent history. Under President
Mubarak's regime of safety valve democracy, Egypt's
newspapers probably are the freest in the Arab world.
Nevertheless, the Egyptian press remains under at
least limited forms of control, including self-
censorship and "guidance" from senior government
officials, and the press campaign against the United
States almost certainly can be seen as a warning sign
of deepening disillusionment among Egyptian officials
with US-Egyptian ties. In our view, Mubarak
tolerates the criticism of the United States and
probably has encouraged some of it to defuse
Egyptian frustrations, to build credibility with other
Arab states, and to improve his nonaligned image.
? US credibility as a broker for Arab-Israeli
negotiations subsequently was called into question.
A1-Jumhuriya published an editorial on 19 January
commenting that, "Following revelation of the
dubious US role in fanning the flames of the Iran-
Iraq war, it has become a national necessity to
discount `the American alternative.' "
? US-Egyptian differences over FMS debt relief
surfaced strong indications of resentment over US
policies and the alleged US tilt toward Israel. On 13
January al-Akhbar published a frontpage interview
with Prime Minister `Atif Sidqi given by the
newspaper's retired editor, Mussa Sabri. Opening
the interview, Sabri asked the Prime Minister a few
questions about the meeting on debt relief scheduled
with US representatives for that day. Sidqi's
answers were brief, but the paper carried Sabri's
own criticism of the United States, including his
closing comment that, "I still understand the US
policy toward us is based on the American
philosophy of `do not let them die, do not let them
live.' "
The opposition press carries even more inflammatory
attacks on the United States, calling for Egypt to
sever its relations with Washington, break the treaty
with Israel, and return to the Arab fold:
Targets of Egyptian Criticism
Criticism of the United States in the Egyptian press
has steadily increased in the years since the 1978
Camp David accords, but in recent months several
events have come together to prompt harsher attacks
on US policy:
? The exposure of US arms sales to Iran intensified
anti-US comment in the Egyptian press. The mass
dailies sensationalized "Irangate," speculating that
it was a "massive plot" to impose "US-Israeli
domination" over the region.
? In a characteristically vituperative attack, on 27
January al-Shaab, the newspaper of the opposition
Socialist Labor Party, commented in an article
entitled "The Lying Ambassador" that the US
Ambassador to Cairo had misrepresented the true
character of US policy in the Middle East on several
issues. The truth, according to al-Shaab, was that
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the United States would increase aid to Israel at a
time when further aid to Egypt was being refused,
that an attempt was being made to weaken Egypt
economically, and that Egypt was being forced to
abandon the idea of an international conference on
peace in the region.
The Egyptian Press Under Mubarak
Mubarak's concept of "safety valve" democracy has
allowed substantially greater freedom of the press in
Egypt. On taking office, Mubarak resumed the policy
of political liberalization undertaken in the early
years of the Sadat regime. Mubarak extended greater
autonomy to groups in and outside of government,
attempting to circumvent the political instability and
the resulting violence that ultimately destroyed his
predecessor. With specific regard to the media,
Mubarak has adhered to the Egyptian Constitution of
1971 and to the Press Law of 1980 that grant freedom
of the press.
Under Mubarak, government confiscation of
newspapers and purging journalists of the opposition
press have ceased. By and large the government
disregards the inflammatory rhetoric of the opposition
press, claiming that it has limited popular appeal.
Nevertheless, government controls over the press have
not been lifted entirely. The Shura Council owns the
national press and must approve any new
publications. The government-controlled High Press
Council makes major press appointments. The
censorship department in the Ministry of Culture
screens material for treasonable substance or
"morally deviant" items. Although guidance is less
stringent than under Sadat and less frequently
imposed, chief editors meet regularly with Mubarak,
presidential adviser Osama al-Baz, or Minister of
Information Safwat al-Sharif. In addition, journalists
have learned to impose self-censorship.
Orchestrated Attacks on US Policy?
In the weeks before the Islamic Conference
Organization's summit meeting in Kuwait in late
January, Mubarak delivered some unusually critical
remarks on the United States in the course of
interviews with Arab journalists. He bemoaned
Washington's "loss of credibility" as a result of the
Iran affair, and charged that Washington is too
preoccupied with its own problems to focus on steps
toward resolving the Arab-Israeli conflict. Mubarak
also reproached the United States for not meeting his
expectations on relief from debts incurred from US
military sales.
The President's attacks on the United States, like the
press campaign over the previous several months, falls
well short of an unrestrained campaign against the
United States and US relations with Egypt. US
Embassy officers in Cairo reported that there was no
evidence of a government effort to orchestrate press
attacks on the United States. Mubarak, moreover,
almost certainly was seeking primarily to underscore
his independence from Washington and his solidarity
with Arab causes before his meeting with other Arab
leaders in Kuwait.
Nevertheless, the anti-American comment appearing
in the Egyptian press is at least tacitly approved by
the government, and-as Mubarak's interviews before
the Islamic summit meeting indicate-the frustration
and resentment the comment reflects are felt at the
most senior levels of the regime. We do not believe
Mubarak wishes to instigate a crisis in US-Egyptian
ties or to cool relations, but the anti-American
comment appearing in the press appears to be a
warning of deepening Egyptian disillusionment with
Washington.
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No Quick Fixes
Saudi Arabia appears to have relaxed its reluctance to
expand ties to the Soviet Union, but recent
speculation that Riyadh is considering significant
upgrading of its relations following Saudi Petroleum
Minister Nazir's visit to Moscow in mid-January is
overstated. Although Saudi-Soviet relations have
improved marginally over the past few years, the
chances for a dramatic breakthrough in the short
term are minimal. Riyadh continues to insist that the
Soviet occupation of Afghanistan and poor Soviet
treatment of Muslims in the USSR are impediments
to expanded ties. The Saudis are also worried about
Soviet inroads in the Yemens and the Horn of Africa
and what they judge is lukewarm Soviet support for
the Arabs in the Arab-Israeli confrontation.
Nazir's visit, however, will undoubtedly be used by
Moscow as a steppingstone to better relations, and
Saudi-Soviet contacts are likely to increase. In
addition, a number of factors are gradually pushing
Riyadh closer to Moscow, including overlapping oil
interests, concern over Iranian aggression, and a
desire to appear nonaligned by putting distance
between itself and the United States.
Saudi Petroleum Minister's Visit
The US Embassy reports that, following a special
session of Persian Gulf oil ministers in early January
to review the impact of OPEC's December accord, the
group proposed that Saudi Arabia and Kuwait
intensify contacts with non-OPEC oil producers to
help stabilize world oil markets. On 19 January
Petroleum Minister Nazir arrived in Moscow for an
unprecedented four-day visit-the first ever by a
Saudi Petroleum Minister. A Soviet spokesman
described the visit as "an unusual event" in Saudi-
Soviet relations. According to press reports, Nazir
held talks with senior Soviet officials, including
Foreign Minister Shevardnadze and Premier
Ryzhkov. The discussions focused on the international
oil market, the Arab-Israeli conflict, the Iran-Iraq
war, Afghanistan, and bilateral issues, according to
the US Embassy in Moscow.
Moscow's efforts to extract maximum propaganda
value from the visit and portray it as a major
breakthrough in Saudi-Soviet relations, which have
atrophied since 1938, have been a source of
consternation to the Saudi Government. Senior Saudi
Foreign Ministry officials insist to US officials that
Nazir's trip was solely to seek cooperation in
stabilizing world oil prices. They are embarrassed by
Moscow's exploitation of the visit through the media
to convey the impression that substantive discussions
were held covering a wide range of nonoil matters,
including sensitive political issues. Moreover, Riyadh
refused a request before Nazir's visit for greater
contact between Soviet and Saudi academics
pecifically to avoid giving the impression that the trip
according to the US Embassy in Riyadh.
Unresolved Obstacles
Although Moscow strongly wants to improve ties to
Riyadh, a number of major impediments-
Afghanistan, treatment of Soviet Muslims, and
ideological differences-are likely to prevent quick
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combined with the usual Saudi caution on major
foreign policy decisions, will limit Riyadh's
receptiveness to recent Soviet overtures.
Riyadh continues to insist that the Soviet occupation
of Afghanistan, in large part, prevents expanded ties.
Late last month King Fahd called the intervention "a
historic and strategic error" and demanded the
withdrawal of Soviet forces from Afghanistan.
Shevardnadze tried hard to persuade Nazir-
apparently with some success-of Moscow's and
Kabul's desire to achieve national reconcilation
among the Afghan people, according to US Embassy
reports. Soviet officials asked
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a visiting PLO delegation in early January whether
the Saudis would accept a Soviet offer to reestablish
diplomatic relations if Moscow removed its troops
from Afghanistan. Fahd, however, remains insistent
that the USSR demonstrate its sincerity before he
gives any serious consideration to the reestablishment
of diplomatic relations,
Moscow's treatment of its Muslim minority and
Riyadh's reluctance to reestablish diplomatic ties to a
nation that officially espouses atheism also hamper an
improvement in relations, according to Embassy
reporting. During the past several years only a
handful of Soviet Muslims have made the annual
pilgrimage to Mecca, and Saudi religious leaders
remain vehemently opposed to increased contacts with
the USSR. Fahd would be unlikely to provoke these
conservative elements, upon whom he depends for
support, without having clear gains to show for it.
Crown Prince Abdallah, although known for his
criticism of US policies, is even more dependent on
religious and tribal constituencies and is unlikely to
move quickly to improve Saudi-Soviet ties should he
become king anytime soon.
Prospects
Although Nazir's trip has marginally improved
Riyadh's poor relations with Moscow, we believe
further improvement will be gradual, at the Saudis'
pace, and carefully weighed against US-Saudi
relations. Following the visit, Soviet Foreign Ministry
officials said there was little chance that the Saudis
and Soviets would formalize relations soon, according
to the US Embassy in Moscow. The Soviet
Ambassador to Jordan publicly said last month that
an exchange of ambassadors between Saudi Arabia
and the USSR was unlikely at this time.
Moscow's attempts to expand ties to Riyadh will
continue to be hindered by the Saudis' deep aversion
to a regime they believe is atheistic, aggressive, and
expansionist. They are sensitive to the Soviet presence
in the Yemens, and they fear that the risks of
subversion would increase dramatically if the Soviets
had a diplomatic mission in Riyadh. Moreover, Saudi
leaders are likely to hesitate as long as they judge that
they will be giving more than they get in return for
Moscow established relations with the
Saudi kingdom in 1926 but recalled its
Ambassador in 1938. Both sides,
however, maintain informal and
discreet contacts.
Saudi importsfrom the USSR in 1985
were $451 million, or less than 2
percent of total imports. Saudi exports
to the USSR in 1985 were only $18
million.
There are an estimated 45 million
Muslims in the USSR, who account for
over 15 percent of the total Soviet
population.
There have been no Soviet military
sales to Saudi Arabia.
reestablishing relations. Any rapprochement with
Moscow would be costly because of conservative
domestic opposition and increased strains in US-
Saudi relations. It also would provide a boost for
Moscow in its efforts to increase Soviet influence in
the region.
The Saudi security relationship with the United
States remains strong, but significantly enhanced
Saudi-Soviet ties would provide Riyadh with an
alternative to the conspicuous US presence and limit
radical Arab criticism of the regime for being too pro-
Western. As long as Riyadh continues to view the
United States as the ultimate guarantor of its
security, the Saudis would be unlikely to make a
precipitate move toward the Soviets. Nevertheless, the
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Secret
Saudis probably will increase informal contacts with
the USSR, and relations are likely to improve
gradually over the next several years. Riyadh's
support for Baghdad in its war with Iran has
accelerated this trend and demonstrated a
commonality of interest rarely seen in Saudi-Soviet
relations.
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Israel: Budget Compromises
Invite Economic Reversals
Prime Minister Shamir's beleaguered economic
reform package is under relentless assault from
powerful interest groups in business, labor, and the
government that are demanding spending increases
and other concessions that favor their constituents.
Shamir's response so far has been to avoid the
political fallout of a budget crisis by providing the
additional funds. His policy of fiscal appeasement,
however, is heading Israel toward renewed inflation
that may well reverse the earlier gains of the National
Unity government and damage his ability to manage
the economy.
settlements in the occupied territories. The reforms
put additional demands on labor by prohibiting
negotiated wage increases and postponing about half
the 5.4-percent cost-of-living allowance until April
1988.
Obstacles
Opposition to the reforms was immediate and almost
universal. Objections poured in from powerful interest
groups, including the Ministry of Defense and the
Histadrut trade union federation, that demanded
annulment of the budget cuts. Other affected
Ministries including Health and Education took-up
Prime Minister Shamir announced last December a
sweeping economic reform program designed to
achieve growth while maintaining Israel's fragile
price stability. The plan called for a 4-percent
increase in real GNP, a reduction in the foreign
payments deficit, and a lowering of inflation to
roughly half of last year's 19.7 percent rate.
A Promising Start
To reach these targets, the government proposed a
package of reforms that included:
? Restructuring the tax code by broadening the tax
base and eliminating many tax exemptions and
deductions.
? Opening the capital market to investments from the
private sector.
? Selling government-owned enterprises to the public
to help improve productivity and efficiency.
Reducing government expenditures-and the budget
deficit-are the keys to the success of the reform plan.
To these ends, Prime Minister Shamir proposed
spending reductions totaling almost $300 million for
the fiscal year beginning this April, including cuts in
the defense budget of about $110 million. The plan
mandated reductions in social programs as well.
Subsidies were to be slashed by $65 million, and the
budgets for the Ministries of Health and Education
each were to be cut by $18 million. The government
contended that no funds were available for new
the chorus.
The government did not even win partisan support as
Likud members joined the Labor Party in criticizing
various aspects of the plan. The proposals drew fire
from the Knesset Finance Committee, the body that
must agree to the budget submission before the entire
Knesset can enact it into law.
To win the Cabinet's backing last month-the first
stop in the tortuous budget approval process-Shamir
had to accept a watered-down version of the economic
package. Yielding to pressure from Defense Minister
Yitzhak Rabin and Foreign Minister Shimon Peres,
Shamir withdrew the planned cuts in defense
spending. Industrial interests, championed by
Minister of Industry and Commerce Ariel Sharon,
extracted a 10-percent shekel devaluation aimed at
making exports more competitive. Despite some
cosmetic fixes, the Cabinet effectively killed the tax
reform measure and made no progress on revamping
the capital market, according to the US Embassy in
Tel Aviv. These compromises made serious inroads in
the government's ability to attain its economic goals.
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Other measures endorsed by the Cabinet set the stage
for renewed opposition to the reforms. Doctors,
nurses, and teachers represented by the Health and
Education Ministries escalated their objections to cuts
in their budgets by threatening to go on strike. The
Cabinet did not help matters when it agreed to defer a
portion of the workers' cost-of-living adjustment until
April 1988 to offset the inflationary impact on import
prices of the shekel devaluation The decision to
maintain the subsidy reductions continued to be a
major point of contention with Histadrut, whose
endorsement was needed before the reforms could
move on for legislative approval in the Knesset.F___
To convince Histadrut to support the reform package,
Finance Minister Moshe Nissim was forced to make
substantial concessions that further undermined the
government's capability to implement an austerity
budget. In exchange for Histadrut's approval, the
government agreed to bail out Histadrut's health care
development fund by providing allocations in the form
of an increased budget and a concessionary loan
totaling about $57 million. Histadrut also forced the
government to preserve most subsidies and to retain
many tax benefits that favor low income groups,
according to the Embassy.
The Knesset broke a two-week deadlock on the budget
debate by giving preliminary approval to a Likud-
Labor compromise on 18 February-but at the
expense of a further battering of the reform package.
In exchange for Labor's support, the Finance
Ministry agreed to reschedule bank loans of $158
million owed by the United Kibbutz Movement. The
concession translates into a contribution of about $20
million to the financially troubled kibbutzim. Labor
in return will not stand in the way of demands from
Herut, Likud's major component, for financial
assistance for a few new settlements in the West Bank
and Gaza, according to the US Embassy. Nissim is
reviewing the Herut proposal, which calls for an
immediate payment of $29 million followed by
another $83 million at a later date. Shamir probably
did not want to give the settler activists, especially
Deputy Prime Minister David Levi who is challenging
Shamir for party leadership, any ammunition to use
against him at the Herut convention scheduled for the
end of March.
To ensure the approval of Avraham Shapira,
chairman of the Knesset Finance Committee and
leader of a major religious party, the government
agreed to his demands for financial support for
religious educational institutions (yeshivas). Shapira
had warned that he would refuse to bring the budget
to a vote unless he was assured of nearly $20 million
for the yeshivas
Prospects and Implications
The budget almost certainly will undergo additional
attacks that will help defeat Shamir's original
recommendations for fiscal restraint. Before final
approval, the budget must go through two more
Knesset debates, each of which offers fresh
opportunities for more political wheeling and dealing.
Health and education advocates will press to overturn
cuts in their budgets. Herut will lobby for a financial
bailout of several debt-plagued moshavim-
agricultural cooperatives. Meanwhile, both Labor and
Likud Finance Committee members are raising new
objections to each other's proposals that led to the
compromise. Signaling problems ahead, the Embassy
reports one Likud ally of David Levi has demanded an
investigation of kibbutz financial practices. Both sides
of the coalition are determined to be in the strongest
possible position should the government call for new
elections before those scheduled for November 1988.
Histadrut will fight proposals that threaten wages or
social welfare programs. Israel Kessar, Histadrut
secretary general, has announced he will demand
compensation in the wage negotiations scheduled for
this April if the government fails to control inflation.
The Embassy reports that Histadrut's Trade Union
Division already has decided to ask the government
and private employers for an early start of wage talks
because of recent price and interest rate increases. If
prices continue to rise, Histadrut has served notice it
will seek the restoration of at least the 2.7-percent
deferred cost-of-living adjustment in defiance of the
government's wage guidelines. It also will resist
elimination of benefits for low income groups and
insist instead that revenues be raised by taxing upper
income brackets, capital gains, and property
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The government stands little chance of substantially
increasing budget revenues, given the strong
opposition to tax increases. Moreover, the revenue
picture will be hurt by the expiration of several
temporary taxes that added $170 million to the
coffers last year and planned reductions of some $500
million in customs duties and employer contributions
to the National Insurance Institute. Discretionary
budget reserves of about $370 million will not be
enough even to cover revenue losses. Moreover, Israel
cannot count on supplemental US assistance that last
year amounted to $750 million.
Shamir's failure to exercise strong leadership during
the budget process will contribute to the government's
inability to rein in budget spending. His pattern
during the recent debates has been to avoid
controversy and to delegate nearly all the economic
decision making to Peres and Nissim. Shamir's
predilection for crisis avoidance will leave a vacuum
that competing interest groups will fill with demands
for additional changes, further eroding the austerity
budget.
A decline in public confidence in Shamir's ability to
manage the economy will not make it easier for him to
tighten the purse strings. Recent Israeli public opinion
polls demonstrate a significant drop in support for his
tenure. Without a perceived sense of emergency, the
populace is less willing to accept stringent measures
than they were during the stabilization program of
1985. A consensus believes that, with the window of
opportunity for reform closed, the government will
have to settle for a revised package that results in the
continuation of the current system at best or, at worst,
leads to spiraling inflation.
Shamir as a result faces the prospect of a large budget
deficit that could lead to runaway inflation, an
outcome that would blot out the gains made over the
past year when prices rose only 19.7 percent
compared with 180 percent in 1985. The deficit could
increase at least $470 million-and as much as $1
billion, according to one Israeli estimate-if, as seems
likely, the government caves in to all the requests for
increased expenditures. Even without the spending
increases, the originally proposed budget deficit was
already an inflationary $850 million, about twice that
of 1986. Covering this revenue shortfall either by
credit expansion or money creation will help push up
the price level. By January the inflation rate was
already running at an annual rate of 28 percent and
probably will exceed this as budget discipline
continues to break down.
The impact of other government decisions on prices
will make it even more difficult for Shamir to contend
with growing inflationary pressures. The currency
devaluation-aimed at stemming the growth in
imports-will help boost the general price level
because imports of goods and services still account for
about 60 percent of Israeli GNP. To counter the
effects of the devaluation-and the surge in consumer
borrowing and spending-the Bank of Israel has
temporarily raised the prime rate to 31 percent per
annum. Although designed to curb consumer demand,
the Bank's decision builds in some inflationary
expectations that could actually worsen the situation
if the monetary authorities are forced to leave the
increase in place for an extended period, as now seems
likely. At the same time, the Ministry of Industry and
Commerce approved price hikes ranging from 4 to 10
percent on a large number of goods probably to
compensate the business sector for the Bank's move.
The Embassy reports the price increases will add 0.3
percent to the consumer price index.
The decisions to raise interest rates and prices will not
enhance Shamir's popularity and may well trigger a
new round of wage and price increases. Histadrut
officials assert the Bank's move runs counter to the
government's stated intention of lowering the interest
rate. Business leaders have denounced the monetary
policy, contending it threatens economic stability and
damages their competitiveness, according to the US
Embassy. We believe higher interest rates will create
an uncertain investment climate that may well retard
growth and compound the government's problems in
implementing even minimal capital market reform.
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New Bank Hits Snag
After nearly three months of operation, the Nablus
branch of the Cairo-Amman Bank is losing money
because of structural limitations imposed by Israel,
according to the US Consulate General in Jerusalem.
The branch's financial troubles may jeopardize the
bank's expansion plans in the West Bank. The
Jordanian Government can ill afford to lose the
Nablus branch because its collapse would deprive
Jordan of a solid institutional presence from which to
channel development funds efficiently into the West
Bank. The Israeli Government would also suffer from
a closing because this would undercut Israel's quiet
cooperation with Jordan to weaken PLO influence
among West Bank Palestinians.
The Nablus branch of the Cairo-Amman Bank
originally was scheduled to open in early October last
year. The opening was delayed, however, because of
the branch's inability to secure an international bank
guarantee as stipulated in its founding agreement
with the Bank of Israel. Logistic problems in
installing computer facilities further delayed the
opening until early November. The opening of the
branch on 3 November was marked by little fanfare,
as both Jordanian and Israeli officials chose a low-key
approach so as not to unduly politicize the venture.
are restricted to 5 percent of the branch's holdings.
Bank officials argue the low level severely hurts the
branch's profitability.
Israel also requires that all letters of credit be issued
through the Discount Bank in Tel Aviv. The US
Consulate General reports that bank officials fear this
restriction makes the Nablus branch of the Cairo
Amman Bank virtually a branch of the Israeli
Discount Bank. Although less onerous, several
Central Bank of Jordan regulations also complicate
the branch's ability to issue letters of credit.
Israel's refusal to allow East Jerusalem Arabs to open
dinar accounts further compounds the branch's
problems. Because Israel does not recognize the
Jordanian dinar as legal tender in Jerusalem, East
Jerusalem Arabs can hold only shekel accounts-a
politically unacceptable option for most. Many
Palestinians were surprised that the Jordanian
Government and the Cairo-Amman Bank agreed to
the exclusion because of the implicit risk of
recognizing Israel's annexation of East Jerusalem. As
a result, the bank's credibility has been hurt, as many
Palestinians, especially businessmen, have chosen for
political reasons not to use the branch.
The branch, however, has not fared well. To date,
only 1,700 accounts have been opened, as it has failed
to draw in large numbers of Palestinians to open
accounts. Reporting from the US Consulate General
in Jerusalem makes clear that most West Bank
Palestinians continue either to hoard personal reserves
at home or work through unofficial moneychangers to
invest their money in banks in Jordan. The branch is
also apparently losing money as a result of structural
limitations imposed by the Israeli Government.
Structural Limitations
Restrictions on foreign exchange transactions have
cut down on the branch's ability to engage in
international operations, according to the US
Consulate General. Presently, foreign exchange levels
Limits on the branch's loan portfolio have limited the
scope of its operations. Bank officials argue that
Israel's refusal to count as branch assets either the
$3 million the Cairo-Amman Bank has on deposit as a
guarantee against bank failure with the Union
Banque de Suisse in Switzerland or the Nablus
branch's deposits at the bank's Amman headquarters
unduly restricts loan potential. The Cairo-Amman
Bank's current agreement with Israel allows for a
10:1 gearing ratio, meaning the branch can lend only
up to 10 times its assets, a somewhat low ratio. By
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Impact of Cairo-Amman Bank's Difficulties on
Other Potential West Bank Financial Institutions
After the opening of the Cairo-Amman Bank's
Nablus branch in early November, several other
banks-Arab Bank Limited, Arab Land Bank, and
Grindlay's Bank-expressed interest in either
opening branches that were in operation before the
1967 war or in opening entirely new branches. The
Cairo-Amman Bank's difficulties, however, have
forced reconsideration of these plans.
Arab Bank Limited. According to the US Embassy in
Amman, the Arab Bank Limited-owned primarily
by Jordanian interests and with assets of slightly over
$12 billion-has submitted a request to the Bank of
Israel to open a branch in Nablus. Arab Bank
officials, however, have made clear they will not
pursue the application until the Israelis liberalize
their initial agreement with the Cairo-Amman Bank.
In particular, the Arab Bank will not accept
restrictions on letter of credit operations, which bank
officials believe would effectively limit the branch to
financing trade through Israeli ports. By financing
trade through Israeli ports, the Arab Bank probably
would find itself in trouble with the Arab Boycott
Office, a development the bank could ill afford, given
its large volume of business in Arab countries. In our
judgment, the Arab Bank is willing to remain on the
sidelines to see whether the Bank of Israel will allow
the Cairo-Amman Bank to broaden its operations.
Arab Land Bank. The Egyptian-owned Arab Land
Bank has been negotiating with the Israeli
Government indirectly through the Egyptian Ministry
of Foreign Affairs to reopen its former branches in
Gaza and Bethlehem, according to the US Embassy
in Amman. According to Arab Land Bank officials,
Israeli approval has been obtained for the reopening
of the Gaza branch, with the reopening of the
Bethlehem branch a possibility. Nevertheless, the
Arab Land Bank is holding out for approval to reopen
both offices simultaneously.
Arab Land Bank officials point out that collateral for
loans could become a highly sensitive political issue.
The first difficulty is that collateral for most West
Bank commercial loans would be West Bank real
estate. jf the Arab Land Bank were forced to
foreclose on any of these loans, its only option would
be to auction off the real estate to recover the loan
value. Since a public auction would leave open the
possibility of an Israeli purchase of West Bank real
estate, this would be politically unacceptable.
Another difficulty is that few West Bank importers
would be willing to pay both Jordanian and Israeli
import duties required to import goods through
Jordan to the West Bank. To avoid the double duty
payments, the Arab Land Bank would have to issue
most West Bank letters of credit for importing goods
through Israeli ports. This would risk putting the
bank at odds with the Arab Boycott Office, which
would be politically unacceptable.
Grindlay's Bank. According to the US Consulate
General in Jerusalem, the British-owned Grindlay's
Bank-the British subsidiary of the Australia and
New Zealand Banking Group-is interested in
eventually reopening the West Bank branches of the
Ottoman Bank that Grindlay's bought in 1969. It
probably will not do so, however, until it can be
assured that an Israeli Government license would not
generate Arab boycott problems or otherwise harm
the credibility of Grindlay's broader operations in the
Middle East. Like the Arab Bank Limited and the
Arab Land Bank, Grindlay s will probably wait to
observe the performance of the Cairo-Amman Bank
branch before seeking to open its own offices.
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Secret
including the additional assets in Switzerland and at
the bank's Amman headquarters and by changing the
gearing ratio, bank officials argue their loan potential
will increase-spurring growth and profitability.
Making the Nablus Branch Viable
The survival of the Cairo-Amman Bank branch in
Nablus is in the unquestioned interest of Palestinians
on the West Bank and, if successful, would allow
Jordan to strengthen its economic and political ties to
the territory. If key structural limitations remain
unsolved, however, West Bank PLO supporters may
step up their attacks on the branch opening as a
purely political venture by Jordan not aimed at
improving the economic status of Palestinians. The
PLO supporters probably would argue that, by
signing the bank agreement, Jordan played into
Israel's hands by implicitly recognizing its annexation
of East Jerusalem.
For the Nablus branch to become a credible
institution, the Bank of Israel will probably have to
ease its current restrictions by:
? Allowing the branch to count as assets either the
$3 million held in the Union Banque de Suisse or
deposits held at the bank's Amman headquarters.
The Bank of Israel is more likely to recognize the
Swiss deposits than those in Amman, given the
political obstacles to a formal agreement with the
Central Bank of Jordan.
? Loosening restrictions on foreign exchange
transactions to allow greater coordination with the
Cairo-Amman Bank's headquarters in Amman.
The Bank of Israel presently is considering a plan that
would permit uninvested dinar deposits-stemming
from insufficiently low loan activity-to be returned
to Jordan for investment purposes. Such a move would
help the Nablus branch's profitability, but it also
would serve Tel Aviv's interests since the Bank of
Israel would require compensating, convertible
currency deposits matching the deposits diverted to
Amman.
Outlook
Israel and Jordan share a common interest in assuring
that the Cairo-Amman Bank branch in Nablus does
not close its doors. With a closure, both would suffer a
severe setback in their quiet cooperation to weaken
PLO influence among West Bank Palestinians. A
closure also would undermine Jordan's ambitious
development plan for the occupied territories by
deepening Palestinian skepticism about Amman's
ability to fulfill its promises.
A compromise stressing flexibility would allow both
sides to save face while ensuring the continued
operation of the Nablus branch. The bank could
normalize its financial activities in the occupied
territories by providing credit and other services
needed to conduct business. A long-term benefit
would be the positive psychological impact of
expanded bank operations, which might convince
Palestinians to deposit as much as $250 million, which
US Consulate General sources suspect lies unused in
"mattress" savings. In turn, this boost in deposits
probably would eventually stimulate additional
branch openings by the Cairo-Amman Bank, the
Arab Bank Limited, the Arab Land Bank, and
perhaps further down the road, Grindlay's Bank.
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Syria-Turkey: Steering Clear
of Controversy
Syria has sought to preserve its uneasy reconciliation
with Turkey over the past year by making
incremental concessions on longstanding bilateral
disputes. Although Syria has become increasingly
concerned over the potential economic impact of
Turkey's control over Euphrates River headwaters,
Damascus has demonstrated good faith in restraining
operations by anti-Turkish subversive groups without
a reciprocal water-sharing agreement. Ankara
probably believes that its control over the Euphrates
offers an effective deterrent to Syrian-sponsored
terrorism. For this reason, Ankara has resisted
Western pleas to press Syria harder on the terrorism
issue and has minimized revelations of Syrian
involvement in recent terrorist incidents and plots in
Turkey. As Syria regains its confidence, it is certain
to increase support to Turkish subversives as its
? Syria and Turkey's respective superpower alliances
create a formidable obstacle to long-term
normalization of relations, and Syria's attempts to
establish closer ties to Turkey's estranged neighbors,
Greece and Bulgaria, have imposed additional
strains.
Syria and Turkey have often moderated their disputes
in the past because of pressing national security
threats on other frontiers. Diplomatic contacts were
stepped up in 1985 to head off potentially explosive
tensions. The reduction of public rhetoric since then
belies the intransigence of both sides on fundamental
issues
principal bargaining chip.
Persistent Tension
Tensions between Syria and Turkey, rooted in
historical antagonisms, continue to be fed by current
frictions:
? So long as Turkey proceeds with plans to expand its
hydrological projects along the Euphrates River, the
Syrians will fear that such plans will substantially
reduce the volume and quality of Euphrates water
flowing south into Syria and will jeopardize its own
ambitious hydrological schemes.
? The Turks are convinced that Syria is supporting
anti-Turkish terrorists-primarily Kurds and
Armenians, but also Turkish Communists-with
training, equipment, and help in infiltrating into
Turkey. Ankara believes that Syrian camps used for
training Palestinians-with Soviet support-are
also used to train anti-Turkish operatives.
Moreover, Turkish security officials met with
their Syrian counterparts to seek cooperation in
eliminating cross-border activity by Turkish dissident
groups based in Syria. Although no accord was
signed, Syrian officials pledged not to support
subversion against Turkey
Temporary Backslide
Severe water and power shortages in northern Syria
last summer caused Damascus to step up its
complaints through diplomatic channels that Turkey
had virtually shut off Euphrates water, according to
the US Embassy in Ankara. These shortages were
probably a result of Syria's chronic technical
difficulties with its own irrigation and hydroelectric
projects in the northwest, however, and Damascus
stopped short of blaming Turkey publicly for
politically unpopular rationing of water and
? Styria does not acknowledge Turkish sovereignty
over the province of Hatay, which the French
colonial rulers of Syria ceded to Turkey, and Syrian
maps show it as part of Syria. The Turks regard
Syrian irredentism as a potential threat to Turkey's
territorial integrity.
electricity.
Secret
NESA NESAR 87-006
27 February 1987
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Damascus's preliminary and discreet unilateral
concessions to Turkey beginning last year were
probably an attempt to counter Syria's growing
political and economic isolation following revelations
of its involvement in international terrorism as well as
intended to secure more water. Although the
concessions to date have been largely cosmetic and
revocable, they have probably pleased Turkey.
Ankara has resisted joining US and West European
efforts to extract greater concessions, such as
requiring Syria to sever relations with international
terrorist groups, particularly Abu Nidal, and is
pursuing an independent course, which it believes to
be more effective. Syria's concessions include:
insurgents from camps near the Syrian-Turkish
border, according to the Turkish press, and sending
them to the Al Biqa (Bekaa) Valley in Lebanon. The
Syrians also extradited to Turkey several Kurdish
Worker's Party (PKK) members last year who
escaped from prison in Turkey and fled to Syria,
according to the US Embassy in Damascus. The
? The restriction of political activity by the PKK and
the Armenian Secret Army for the Liberation of
Armenia (ASALA), although they continue to
maintain offices in Damascus, according to press
reports. Syrian authorities have also begun to
scrutinize the activities of ASALA leader Hagop
Hagopian]
? Cooperation in a de facto security arrangement to
secure their common border, according to a Turkish
Foreign Ministry official. According to an Embassy
report, governors from the neighboring provinces of
Al Hasakah in Syria and Sanliurfa in Turkey met
earlier this year in Turkey to discuss border
security. At the meeting the Syrian governor
admitted that Kurdish militants were at large in
Syria, and both governors agreed to end haphazard
firing between border guards which has resulted in
casualties among civilians and border guards.
? Return of the Syrian Ambassador to Turkey last
year. The Syrians did not have an Ambassador in
Ankara for three years, and the Turks may have
been miffed when the Ambassador did not arrive as
anticipated durin Kasm's trip in March 1986.
F
Turkey Tries the Soft Sell
Turkish officials appear encouraged by the Syrian
moves and probably hope to parlay Syria's heightened
desire for amicable relations into more substantive
concessions on security matters. In recent talks with
US Government officials in Washington, Turkish
Prime Minister Ozal said his government would not
press Syria to withdraw support for terrorist
organizations, and that Turkey must maintain good
relations with Syria to moderate its policies.
Moreover, the Turkish Goverment has avoided
damaging rhetoric against Syria despite incriminating
public disclosures of official Syrian participation in
terrorist plots in Turkey:
? The confessions of Jordanian Embassy interpreter
Adnan Ameri, who was arrested last October in
connection with the assassination of Jordanian
Embassy First Secretary Zaid Sati in July 1985,
directly implicated Syrian Embassy Second
Secretary Darwish Baladi as a principal accessory.
Baladi has since been indicted in absentia and
charged with murder along with seven other
codefendants.
? Ameri's confession, which was leaked to the Turkish
press, also implicated Syrian intelligence services in
a widespread conspiracy with the Abu Nidal
organization to attack economic and military
targets throughout Turkey.
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? Turkish police uncovered an alleged Syrian plot last
January intended to implicate Turkey in terrorism
against Syria. Explosives were discovered in the
apartment of Muhammad Azkour, an employee of
the Syrian Embassy's military attache's office.
Turkish authorities claim that Azkour and two
accomplices intended to fabricate tacit support of
Turkish authorities for fictitious Muslim
Brotherhood insurgents based in Turkey, according
to the US Embassy in Ankara.
President Ozal and his government apparently have
tried to minimize possible damage from these
incidents to bilateral relations and have resisted
attempts by factions in his regime to escalate tensions
with Syria:
Ozal returned, he called for an end to press leaks
and cautioned the press "not to become the tool of
those who are trying to spoil Turkish-Syrian
relations," according to the US Embassy in Ankara.
? In spite of the investigations into Ameri's
allegations, a Turkish Foreign Ministry official told
the US Embassy in Ankara that "Turkish-Syrian
relations are of such a special nature that they
would probably not be broken whatever the Syrian
involvement in the Abu Nidal case."
the Turkish Foreign
Ministry alerted the Syrian Embassy to withdraw
suspects in the Ameri case before they had to be
expelled. Azkour was probably afforded the same
prior notice. Turkey probably feared that expulsions
would force a reciprocal action by Syria against
Turkish diplomats in Damascus and damage
diplomatic contacts.
Near-Term Prospects
Syrian-Turkish diplomatic contacts are likely to
remain active in the near term, but any warming in
relations will be more formal than substantial.
Turkish Prime Minister Ozal may visit Syria this
year, according to the US Embassy in Ankara, and
would probably do so if the previously negotiated
security agreement was completed. The Syrian
Government has formed a delegation to go to Ankara
this year to offer more trade, including development
of Syrian gasfields for the Turkish market, according
to the US Embassy in Damascus, but any economic
talks are likely to be dominated by the contentious
Euphrates water issue.
Both governments have cooled their rhetoric in the
interest of maintaining at least the appearance of
reconciliation, but the absence of real progress in
negotiations probably will soon subvert this process.
Turkey's Euphrates development plans proceed
As Syria's confidence grows and it
emerges from its isolation, Damascus will probably
escalate its support for Turkish dissidents as its
principal bargaining chip.
Long-Term Prospects
Syria would probably restrain Turkish dissidents only
in exchange for concessions on Euphrates water use,
but it will keep a tight rein on the activities of these
groups to avoid cross-border retaliation by the Turks.
Damascus is not likely to abandon Turkish dissident
groups because it wants to keep its options open.
Turkey is likely to continue the planning and
construction of its Euphrates water projects while
relying on heightened border security measures to
offset the transit of anti-Turkish insurgents across the
southern border. Ankara, however, may be willing to
coordinate future plans with Damascus if Syria
pledges to withdraw its support for Kurdish and
Armenian groups.
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Despite their differences, both Ankara and Damascus
clearly prefer handling their differences through
diplomatic channels. Pressing national security
interests elsewhere in the region will probably
discourage both sides from militarizing their common
border as a means of extracting political or economic
concessions. Still, the differences dividing them are
great and unlikely to be overcome anytime soon.
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Syria: Preparing for the
Next War With Israel
Within the last year Syria's worsening economic
crisis, the revival of Palestinian strength in Lebanon,
and intense maneuvering within the Alawite elite have
bedeviled Syrian President Assad. These problems
have put him on the defensive and stretched out his
campaign to attain "strategic parity" with Israel, but
they have not weakened his resolve to press the Arab
struggle against Israel and ultimately to recover the
Golan Heights. Assad believes the pursuit of these
goals is essential for Syria to exercise Pan-Arab
leadership and to ensure that his minority Alawite
regime continues in power.
Strategy
During an interview with the Kuwaiti newspaper
al-Qabas last month, President Assad said that Syria
has not reached nor abandoned its goal of strategic
parity and reiterated that parity is "not a tank for a
tank or a gun for a gun ... but a comprehensive
balance covering various aspects of life." In March
1986, Assad indicated that parity included political,
social, cultural, and economic, as well as military
aspects and cautioned that neglecting any of these
elements created weakness.
Probably because of his training in the USSR,
Assad's formulation is akin to, if not identical with,
the Soviets' "correlation of forces" concept, which
also includes morale and leadership. As they use it in
formulating plans and policies, the Soviets pay as
much attention to an adversary's intangible strengths
as they do to his tangible strengths. Assad's estimate
of strategic parity is therefore flexible and depends
partly on his assessment of Tel Aviv's resolve and its
support by the Israeli populace
Military Forces and Operations
Egypt's conclusion of the Camp David accords with
Israel in 1978 led Assad to embark on a major
expansion and modernization of his armed forces-
particularly the Army-which has been consistently
supported by the USSR. The Israeli invasion of
Lebanon in 1982 caused Assad to redouble his efforts
and led Damascus to review its approach to war,
reorganize its command structure, and develop new
capabilities, especially in the area of electronic
warfare. As a result of these trends, Syria has
markedly increased its inventory of artillery, armored
vehicles, combat aircraft, and air defense missiles.
Syria has basically obtained numerical parity with
Israel, but Tel Aviv still enjoys qualitative superiority
in key areas, including tanks and fighter-bombers.
Doctrine and Tactics. Syrian military doctrine and
tactics closely follow Soviet concepts, which
emphasize concentration of forces, continuity of
military action, and, if possible, achievement of
surprise. According to current Soviet doctrine, the
successful conduct of offensive operations does not
require vast total superiority, but it requires the
achievement of local, suneriority-at least 3:1-alon
emphasizing continuity of action, the Soviets seek to
avoid giving an opponent the opportunity to recover
and counterattack.
Like their Soviet mentors, the Syrians consider air, air
defense, and naval forces as adjuncts to the ground
forces. In planning and conducting operations, the
Syrians emphasize simple tactics taught using
repetitive drills, and combined arms operations-
involving a mix of artillery, infantry, and tanks-are
conducted exclusively by general officers. Large
numbers of men and equipment are required for
offensive operations, and the Syrians believe that they
must be closely monitored by senior commanders,
Secret
NESA NESAR 87-006
27 February 1987
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Secret
ISRAELI AND SYRIAN MILITARY EQUIPMENT TRENDS
ARTILLERY FIGHTERS
1500, 400,
500 200
70 75 s0 ss
4000-1
3000
2000
1000 ~- T---~
70 75 so 85
FIGHTER-BOMBERS
400-1
0+
70
75 s0
ARM PERS CAR/INF FGHTNG VEH___ SURFACE-TO-AIR MISSILES
70 75 so 85 70 75 80
Legend
^ ISRAEL o SYRIA
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leaving few important decisions to general officers
closer to the battle and none to the field and company
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grade officers fighting it.
Upon initial inspection, Soviet doctine and tactics
would appear to be ideally suited to the Syrian
military. Like most Soviets, the Syrians are generally
poorly educated and not well prepared by their society
to handle sophisticated technology, and the Soviet
emphasis on simple tactics and training are positive
factors. Similarly, the Arab penchant for the leader
exercising or appearing to exercise overall control
meshes well with the Soviet philosophy of centralized
command and control. In both societies, proper
initiative is defined as promptly and correctly
carrying out orders, not exercising independent
judgment.
In important respects, the Soviet system is not well
suited to Syria and its needs. Although the Soviets
have provided the Syrians with a large amount of
equipment since the late 1970s, they have been
unwilling to supply, nor have the Syrians been able to
field, the large, well-equipped forces the Syrians need
to implement their doctrine successfully. Restricting
combined arms operations to general officers coupled
with centralized command and control has placed the
Syrians at a serious disadvantage in fighting the
innovative Israelis. Moreover, the Soviets have been
slow and haphazard in helping the Syrians adjust to
changes in Israeli force structure and operations.
Even when the Soviets offer doctrinal and tactical
advice, the Syrians do not always accept it or apply it
well..
The defeat derived more from deficiencies in
Syrian leadership and training than from the
obsolescence of Soviet-supplied weaponry. Although
US assessments would differ on their appraisal of the
efficacy of Soviet doctrine, they agree with the Soviet
estimate of the main causes of the Syrian disaster.
Since then, Damascus has accepted some of Moscow's
suggestions for reorganizing its force structure, but
the Syrians seem to be slow in making changes. Syria
appears to have rejected most Soviet offers of
Organization and Equipment. Upon Moscow's
urging, Damascus has formed intermediate
headquarters to reduce the burden of command and
imnrove military rations.
Ground Forces. Since the start of the partial Israeli
withdrawal from Lebanon in early 1985, Damascus
has embarked on new programs to increase the size,
improve the disposition, and upgrade the equipment of
its Army. Syria began by reorganizing the Defense
Companies-a hodgepodge of regular and special
forces units dedicated to protecting Assad's regime-
into a regular armored division, the 569th, and the
14th Airborne Division. Later that year, Damascus
started to bring the airborne division up to strength
and began to expand the Republican Guards Brigade
into an armored division. In 1986, Syria established a
third corps to control these units and
began to form the 17th Armored Division near the
Turkish border and the 18th Armored Division west
of Hims.
A key Syrian goal remains maintaining hegemony
and, if possible, extending Syria's control over
Lebanon. Terrain and transportation problems
throughout southern Lebanon make the country
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better suited to a northbound than southbound thrust.
ssad wants to prevent
a repetition of the June 1982 campaign when Israeli
armored columns pushed up the Al Biqa (Bekaa)
Valley, threatening Damascus and potentially the
Alawite heartland in northern Syria.
the Syrians have prepared field fortifications and
developed plans to move forces into the southern part
of the valley to accomplish this goal. The continued
presence of Israeli forces in Tel Aviv's unilaterally
declared security zone and that of its surrogate, the
Army of South Lebanon, in and near the zone would
facilitate another Israeli thrust up the valley.
Assad wants to ensure that his
praetorian guard is the best equipped unit in Syria,
and he will undoubtedly keep pressing to outfit the
division with T-80s.
Other Forces. The Israeli air force's success in
suppressing and confusing Syria's air and air defense
forces in 1982 has led Damascus to begin a major
Within the past year, the Syrians apparently have
begun to prepare to realign and buttress their forces
opposite the Golan Heights.
and
terrain studies suggested that the 569th and the 11th
Armored Divisions probably would form a second
echelon for the Golan front. Considering that the 11th
Armored Division is located near Hims, the Syrians
may be planning to move it closer to the Heights-
probably after they have essentially completed
forming the 18th Armored Division.
Syria's lopsided defeat at the hands of the Israelis
over Lebanon also spurred President Assad to press
the Soviets for more and better weapons. Since then,
Syria has acquired some of the Soviets' best
equipment, including two squadrons of the latest
version of the MIG-23 and a squadron of the newest
model MIG-25 interceptors, and is on the verge of
receiving the MIG-29, a highly maneuverable fighter.
which
extends its air defense coverage over the eastern
During the same period, Damascus continued to
receive and lobby for new ground forces equipment.
Mediterranean and most of Jordan and Israel.
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Mediterranean are such that the Israelis will have
difficulty detecting them. Along with the submarines,
The modernization of the small Syrian Navy is
lagging badly, but the acquisition of three R-class
to extend
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Economic Constraints. Although Assad has made
substantial progress in building up his armed forces,
the buildup has been a major factor in causing Syria's
current economic malaise. Like Moscow, Damascus is
secretive about defense spending, publishing only an
aggregate figure called "national security
expeditures." As a share of the gross domestic
product, this figure has fluctuated between 14 and 17
percent since 1980 and probably only includes funds
used for domestic spending. Imports of weapons and
spare parts from the USSR and Eastern Europe
depend heavily on credit. Imports from Western
countries rely exclusively on hard currency grants
from Arab donors, which have been declining since
1982.
Within the last year, Damascus has begun to reduce
its military spending, primarily by saving on
operations and manpower costs.
the Syrians have begun to
release all conscripts and reserve officers at the end of
their duty tours instead of extending their service to
(have lowered the
mandatory retirement age for officers for all grades,
which will foster the removal of older, more expensive
Leadership and Training. Within the last few years,
the Syrians have worked to improve the performance
of their armed forces, particularly the Army.
The partial Israeli withdrawal from Lebanon in 1985
enabled Syria to substantially reduce its military
presence there and reemphasize improving the combat
capabilities of its armed forces. That December,
amascus tested its ability to repel an Israeli
attack from the Heights in the largest
field training exercise ever held in Syria joint
forces exercise included elements of four divisions and
aircraft from a number of fighter, fighter-bomber,
and helicopter units and featured elements of the 3rd
Armored Division-long considered Syria's best-
may have canceled the exercise for economic reasons,
Despite the Syrians' efforts, they still have
shortcomings in all branches of service. In the ground
forces, for example, they are deficient in such key
areas as tank gunnery, which tends to offset gains in
combat efficiency arising from the acquisition of new
models, and in combined arms operations. Although
the Syrians could begin correcting most of these
problems fairly easily, it will be much harder to
improve combined arms operations.
President Assad.
professionalism in these officers, who tend to be
Alawites selected primarily because of their loyalty to
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Problems With Personnel. Alawites constitute less
than 12 percent of Syria's population, but they head
almost all of its intelligence services and, with one
exception, command all Syrian ground forces
divisions and elite units such as the Republican
Guards. Although Sunnis make up more than 80
percent of the population, only a few are included
among Assad's close advisers and none directly
controls troops. Many of these officers and officials
are longtime acquaintances and some are even close
relatives by blood or marriage, but President Assad
guards against any one of them becoming too
powerful-primarily by playing one against the other.
Public disclosure of Syria's involvement in supporting
terrorism in 1986 has apparently stimulated
infighting within Assad's inner circle and also may
have led the President to make changes in the military
hierarchy.
Ihas
replaced several division commanders and may be
planning to reassign Maj. Gen. Shafiq Fayyad,
commander of the 3rd Armored Division, to head a
corps command.
Sustainability. Since the late 1970s, Damascus has
labored to improve its ability to sustain combat.
the Syrians have
significantly expanded their ammunition and
petroleum storage facilities and have amassed large
numbers of trucks, heavy lift transporters, and tank
recovery vehicles to support ground forces operations.
Although Damascus has reasonably good capabilities
to repair or overhaul these vehicles and has
constructed a tank rebuilding facility near Hims, its
capabilities to support air and air defense operations
are not as good. Syria lacks adequate numbers of
skilled technicians to perform more than routine
peacetime maintenance on its modern air and air
defense missile systems. The Syrians overhaul
MIG-21s in country, but they must send MIG-23s
and MIG-25s back to the USSR for major repairs.
During the past year, Syria has encountered
difficulties in supporting military operations-
primarily because of its worsening economy.
Iran's
and mothball part of its tank force.
Moscow did not ship any tank
parts last year, and Syria has begun to cannibalize
it is not prepared to cope with casualties.
repeated failures to deliver crude oil last summer led
to a temporary shortage of diesel fuel and caused a
reduction in ground forces training. The US Embassy
in Damascus says that the lack of hard currency led
Syria to draw down its medical and pharmaceutical
supplies to dangerously low levels last year, indicating
Outlook
Events of the past year have put Syria on the
defensive, but they have apparently not weakened
Assad's resolve to press for strategic parity with
Israel. Buffeted by problems within the ruling elite,
Assad has begun to reassert control, moving carefully
to avoid a complete break with any of his key, but
headstrong, lieutenants. Although reforms might
improve Syria's economy, which is shackled by
Ba'thist socialism and riddled with corruption,
sustained recovery probably will depend more on
higher international oil prices, which would mean
higher export revenues, larger remittances by 4
expatriate Syrian workers, and possibly increased
grants from oil-rich states. In the meantime, Syria
will remain more dependent than ever on Soviet
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probably will lobby hard for the
acquisition of new weapon systems. Given the large
investment the Soviets have already made in Syria's
military, they probably will agree to selectively
modernize it but will not agree to provide the number
and types of weapons Damascus is seeking.
Assad's frank comments on strategic parity show he is
aware of the critical need to improve the human
dimension of the armed forces. If Syria avoids sending
large numbers of regular troops into Lebanon, which
would further strain its operating budget as well as
draw attention from the task of force building, Assad
probably can continue working on training and
leadership. Last year the
had allowed the
personnel strength of even the units in the Golan
Corps to decline to 60 percent of authorized strength,
which, according to Soviet doctrine, would be
sufficient for defensive operations but would virtually
preclude offensive operations. Although the plan to
deactivate one of four maneuver brigades in most
Syrian divisions was made to cut costs, bringing the
remaining brigades up to 85 percent of their
authorized strength will over time boost operational
readiness and facilitate better training. When going to
a war footing Damascus might initially be slightly less
dependent on its mobilization system but would
probably rely more on senior commanders to reassign
brigades. In this regard, the development of corps
commands and their staffs, headed by such trusted
officers as Shafiq Fayyad, becomes somewhat more
important.
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Palestinians-Syria
Problems in the
Salvation Front
The Syrian-sponsored Palestine National Salvation
Front continues to face a major uphill battle in its
efforts to become accepted among Palestinians as a
credible alternative to the PLO led by Yasir Arafat.
The Salvation Front's problems stem largely from its
reputation as a Syrian surrogate. Syria now is faced
with increasingly bitter divisions within its Palestinian
client organization over the camps war in Lebanon
and PLO reconciliation efforts that could eventually
tear the Front apart. Despite the Front's dependence
on Syria for logistic and material support, President
Assad may be slowly losing his Palestinian card.
The Front was formed in March 1985 primarily to
remove Arafat as PLO chairman and to revive the
PLO commitment to armed struggle against Israel.
All Front members are committed to the elimination
of conservative Arab regimes. Only the PFLP has a
developed political ideology that advocates
Marxism/Leninism. The Salvation Front is made up
of the following:
Popular Front for the Libera-
tion of Palestine (PFLP)
George Habbash
1,500-2,000
PFLP General Command
Ahmad Jibril
800-1,000
Said Musa
1,000-1,500
Murgagha
(Abu Musa)
Popular Struggle Front (PSF)
Samir Ghawshah
200-300
Front for the Liberation of
Palestine (FLP)
Abd al-Fattah
Ghanim
Salvation Front acquiescence
to Amal attempts to drive Arafat's Fatah loyalists out
of Lebanon is widely regarded by Palestinians in
Lebanon and in the Israeli-occupied West Bank as
part of Syria's strategy to undermine Arafat and to
transform the PLO into a Syrian puppet
US Embassy sources in Damascus say this has led to
a serious internal dispute over the Front's goals and
strategies. According to the sources, the PFLP-the
second-largest Palestinian group and the only member
of the Front with a substantial popular following-has
taken a decidedly anti-Syrian line. It has split with
the pro-Syrian groups, including the Fatah dissidents,
the PFLP-GC, and Sa'iqa. During the latest round of
fighting in South Lebanon, the PFLP refused to
accept Syrian-sponsored cease-fire agreements.
Unlike other Front groups, the PFLP negotiated on its
own, refusing to turn over territory to Syrian-backed
Lebanese militias.
In addition, the PFLP helped orchestrate a
demonstration at a major refugee camp in Damascus
in hopes of exploiting local Palestinian frustration
over Syria's support for Amal in the camps war,
become so defiant that an armed clash with Syrian
security forces may be inevitable if the fighting in
Lebanon continues.
In reaction to the PFLP's confrontational approach,
the Syrian Government has increased harassment of
Palestinian groups and leaders in Damascus,
Splits Over the Camps War
We believe the latest round of fighting in the camps
war in Lebanon between the Palestinians and the
Syrian-backed Amal militia has seriously eroded the
credibility of most Salvation Front groups and has
limited Syria's ability to sabotage the PFLP's efforts
Secret
NESA NESAR 87-006
27 February 1987
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Moreover, many PFLP officials are
hesitant to leave Syria for fear they may not be
allowed to return. even
Syria's relations with groups that generally toe the
Syrian line, such as the PSF, are becoming strained
Palestinian representatives from attending-indicates
that Syrian control over these groups may be slipping.
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over its Lebanon policy.
Efforts at Reconciliation With Arafat
In the face of increasing isolation from Syria and pro-
Syrian members of the Salvation Front, PFLP leader
George Habbash has made greater efforts to achieve
a formal reconciliation with Arafat. During the past
year he and other PFLP figures have held a number
of meetings with representatives of Fatah-the
largest organization in the Arafat-led PLO. Although
Habbash is pursuing
reunification over the objection of most groups within
the Salvation Front-and even some leaders in his
own organization-Habbash has not budged from
longstanding demands that Arafat formally abrogate
his accord with Jordan's King Hussein, agree to a
collective PLO leadership, and sever contacts with
Egypt. We believe Habbash's efforts are designed to
assert his independence from Assad rather than to
move decisively toward reconciliation with Arafat.
Nevertheless, Arafat's senior deputy Khalil al-Wazir
told US Embassy sources in Amman recently that he
was optimistic about the chances for PLO
reconciliation. Wazir claims that the Democratic
Front for the Liberation of Palestine (DFLP)-the
second-largest Damascus-based Palestinian group
although not a Salvation Front member-and the
PFLP have gradually moved closer to Fatah. Wazir
hopes these changes will lead to a meeting of the
Palestine National Council-the PLO's quasi-
parliament-in 1987 with representatives of the
DFLP and PFLP in attendance. Another Embassy
source said that a recent meeting of the General
Union of Palestinian Writers and Journalists in
Algeria brought together representatives of most of
the PLO's former constituent groups, except the
Fatah dissidents and Sa'iqa, in an impressive display
of unity. Although no substantive agreements toward
reconciliation were made, the participation of most
major groups-despite harsh Syrian media criticism
and official efforts to stop Damascus-based
Prospects
According to the US Embassy in Damascus, the
camps wars have demonstrated that Salvation Front
leaders blindly loyal to Damascus cannot deliver
Palestinians to participate in the fighting in South
Lebanon or Beirut. The willingness of most Salvation
Front groups to negotiate early cease-fires without
concessions from Amal's military commanders has
weakened Front support among Palestinians in
Lebanon and on the West Bank and has led to further
fractionalization of the Salvation Front. To put
distance between themselves and Syrian policy, some
groups are looking to third parties for support. Abu
Musa's Fatah dissidents, for example, have begun to
rely increasingly on Libyan financial and military
support to keep the group from falling apart.
Habbash undoubtedly realizes that he would risk
losing the Popular Front's bases in Syria and in the
Syrian-controlled Al Biqa (Bekaa) Valley of Lebanon
if he seriously attempted a formal reconciliation with
Arafat. As the leader of the largest and most powerful
of the Salvation Front groups, he has long chafed
under Syrian domination and is looking for
opportunities to weaken Assad's control of the
Salvation Front, particularly now that Syria's
attention is distracted in Lebanon. Despite the Front's
reliance on Syria for logistic support, increasingly
bitter divisions within the Front's ranks almost
certainly will reduce Assad's ability to manipulate the
Palestinian movement.
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Secret
Lebanon: The National Fund -
The Christian War Chest
Created to ensure the survivability of the Christian
enclave, the National Fund is controlled by the
Lebanese Forces, the principal Christian militia,
which receives two-thirds of the fund's money. To
promote acceptance of the Lebanese Forces among
the population, the remainder of the fund's revenues
supplement governmental services and finance civilian
projects and services for the Christians. The fund
draws on nongovernmental taxes from ports, gasoline,
and restaurants as well as on illicit activities such as
the narcotics trade. With annual estimated revenues
of $23 million, the fund is further evidence of the
Christian quest for autonomy in the absence of a
political solution in Lebanon.'
Origins
When Christian Lebanese groups formed the
Lebanese Front in 1976, the new organization's
leaders agreed that a financial arm would be
necessary. Their intention was to sustain a protracted
defense of the Christian enclave through independent
financing. In a loose fashion, the Front began to levy
taxes unofficially on a variety of sources including
ports, gasoline, and restaurants and to channel these
to the National Fund. Few checks were made on
disbursements and allocations by the Christian
leadership.
Structure
Until last year, the National Fund remained rather
loosely controlled and organized. This changed
following Samir Ja'Ja's ouster of Lebanese Forces
Commander Elie Hobayqa on 15 January 1986
because Hobayqa had embezzled from the fund,
according to the fund's Director of Public Relations,
Charbel el-Khoury. El-Khoury says that Hobayqa
and his cohorts had left the fund nearly bankrupt.
Ja'Ja has since restructured the fund to prevent a
repetition of the Hobayqa experience. Ja'Ja seeks to
present an image of the Lebanese Forces as
incorruptible and well disciplined.
pounds.
El-Khoury says that the National Fund has emerged
as a full-fledged, well-structured financial
organization over the past year. At the top of the
fund's organizational structure is the Lebanese Front
command council. Reporting to the council are
executive, legal, investment, and social welfare
departments, along with 16 suboffices. The fund has
over 1,000 employees. Half are college graduates,
says el-Khoury.
Sources of Revenue
According to el-Khoury, the National Fund's
revenues for 1986 can be broken down as follows: 45
percent ($10.3 million) from taxes on ports (Beirut and
Juniyah); 20 percent ($4.6 million) from recreational
taxes (Casino du Liban, ferryboats, cinemas); 12
percent ($2.7 million) from restaurant taxes; 10
percent ($2.3 million) from gasoline taxes; 10 percent
($2.3 million) from real estate taxes; and 3 percent
($700,000) from grants.
In 1986, according to el-Khoury, the fund had about
$22.8 million in receipts. Partly because of shortfalls
due to Hobayqa's embezzlement, the fund ran a
deficit during most of 1986. Figures consistently
quoted by different Christian leaders put the deficit at
$340,000 monthly during most of 1986, but only
$80,000 to $90,000 monthly for the latter part of the
year. Lebanese Front official Roger Deeb told a US
Embassy officer in January 1987 that the fund is
projected to take in $34.2 million in 1987.
According to the Embassy, more sensitive sources of
funds including sales of wheat and gasoline on the
black market may have helped reduce the National
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January 1987 the Lebanese Front is selling large 25X1
quantities of flour to Syria, along with an
undetermined amount of gasoline and bottled gas.
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NESA NESAR 87-006
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Secret
fund spending was
divided as follows in 1986 and is expected to remain
proportionately the same in 1987:
Percent Million US $
of Total
Securit r
Information ' 5 1.15
Lebanese Broadcasting Company, El Massira magazine, FM radio station.
The proposal was originally made to Ja'Ja by George
Antun, fund chairman, and intended as a fundraising
measure.
Other Fund Activities
Aside from funding Lebanese Forces activities, the
fund is used to help the civilian Christian population
by engaging in a wide range of activities. This
probably includes sponsoring neighborhood repair
projects during breaks in the fighting to quell
Christian dissatisfaction over the resulting damage.
Another social service is an office that aids the
Government of Lebanon's Internal Security Forces in
solving crimes. The fund's investigation team helped
find culprits in 10 of 13 recent robberies. In social
welfare, the fund helps families pay for medical care.
For example, the government's National Social Fund
is supposed to cover 85 percent of the costs of open-
heart surgery; the National Fund picks up the
remaining 15 percent. On the labor and industrial
side, the fund's Investment Department helps
unemployed Christians find jobs. It recently
purchased a plastics factory on the verge of closure to
ensure that workers would not be laid off. When apple
exporters in the Christian enclave could not find
buyers, the fund bought several tons of the fruit to
bail them out. Regarding housing, the fund has
already built about 150 apartment units near Jubayl
and plans to build 800 more by 1988.
Outlook
Christian leaders have succeeded in establishing a
mechanism by which their militia activities are self-
financed. In theory, the necessity for a fund would
cease to exist if an acceptable political settlement
were to be reached in Lebanon. Christian leaders say
the fund, having served its function, would be
dissolved at that time, but this is unlikely to happen.
The National Fund is an accepted institution and is
further evidence of Christian efforts to build a self-
sufficient ministate.
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Secret
Algeria: Economic Slump
Continues
Last year Algeria experienced its most serious
financial crisis since independence, and the outlook
for 1987 is little better. The worldwide drop in energy
prices cost Algiers some $6 billion in hydrocarbon
earnings in 1986-a devastating development for a
country dependent on energy exports for its economic
well-being. Unlike many other oil and gas producing
countries, however, Algeria reacted quickly by
launching an economic adjustment program.
Although the government succeeded in softening the
economic blow, the political cost was dear. Rioting
against austerity measures erupted in several cities
last November. Moreover, President Bendjedid's drive
for political and economic reform lost momentum as
socialist ideologues within the government blamed
him and his Western-leaning policies for the
disturbances and for the economic crisis. With little
prospect for a dramatic improvement in the world oil
market this year, Algeria's economic difficulties are
likely to continue unabated. More protests against the
regime can be expected as austerity intensifies. More
pressure on Bendjedid to return to the socialist fold is
also likely.
1986 in Review
The once-booming Algerian economy suffered greatly
last year as energy prices plummeted. Algeria
depends on hydrocarbons for 98 percent of its export
receipts, about 50 percent of its government revenues,
and nearly 25 percent of its GDP:
? With export receipts half the 1985 level, Algiers
racked up its largest current account deficit since
the mid-1970s.
? The country's debt service ratio may well have
topped 60 percent as external debt rose to more than
$21 billion.
? Economic growth probably was barely 1 percent-
Algeria's lowest rate of growth in nearly two
decades.
country's deteriorating financial position. The budget,
for example, was drastically cut. Embassy reporting
indicates overall government operating expenses were
reduced 11 percent and development expenditures 26
percent, which slashed imports by about $3 billion.
According to the US Embassy, Algeria cut another
$600-700 million off its services bill by restricting
foreign access to work and residence permits and
eliminating technical services contracts. Algiers also
suspended the costly government-subsidized C.O.D.
postal system, halved foreign exchange allocations for
tourist travel, and reduced annual allowances for
pilgrimages to Mecca.
The Bendjedid government also used less traditional
means to save scarce foreign exchange. Embassy
reporting indicates some ministries offset a fixed
percentage of their annual planned hard currency
imports through countertrade, a highly unusual
practice for Algeria. Some state companies sought
payment for the foreign exchange portions of their
contracts entirely in barter. In addition, Embassy
reporting indicates Algiers deferred foreign exchange
outlays by delaying payment of commercial invoices
and by encouraging foreign companies to provide
long-term financing for Algerian purchases. One US
firm in Oran reported three outstanding invoices for
its merchandise last fall, one 18 months old.
Furthermore, Bendjedid attempted to reduce
agricultural and light industrial imports by
encouraging increased private-sector participation in
the economy.
Algiers attempted to boost export earnings to help
ease its financial difficulties. Bendjedid traveled
extensively last year, particularly in Latin America,
drumming up new markets for Algerian goods-with
some success. Embassy reporting shows Algiers
amended its hydrocarbons investment law last fall to
encourage foreign investment in that all-important
Government Actions
To the Bendjedid government's credit, it did not sit
idle as the crisis unfolded. Algiers almost immediately
announced a variety of measures to salvage the
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Secret
industry by offering several new and attractive
incentives including repatriation of profits and
reimbursement of investment costs. Additionally, US
Embassy reporting indicates Algeria took its first
steps last year toward attracting investment in other
industries by altering its joint venture law. Finally,
Embassy sources report Algiers fought to prop up the
price of oil and gas, taking a tough line within OPEC
and fighting hard to maintain its gas prices in
negotiations with its European customers.
The Results
All of these measures helped Algeria reduce the
negative impact of lost hydrocarbon revenues. Algeria
whittled its projected current account deficit of $7
billion down to about $3.5 billion. We believe most of
the shortfall was covered through drawing down
reserves and borrowing abroad:
? Algiers drew reserves down about $2 billion,
probably leaving a balance for the year of roughly
$1 billion.
? Algeria also won $1.1 billion in new commercial
loans, despite bankers' reluctance to increase their
exposure in oil-dependent economies. Algiers,
however, had to accept much more stringent terms
to win the new monies.
he country financed
the balance of the deficit by allowing about $400
million in debts to go unpaid-an unusual
circumstance for Algiers, which usually repays its
debts promptly.
The benefits reaped by the Bendjedid government did
not come without costs. As austerity took hold, real
incomes plummeted, inflation ran about 14 percent-
double the 1985 level-and shortages of food and
other consumer goods became commonplace. Budget
cuts sliced into social services such as education and
housing, and cuts in the development program
increased already burdensome unemployment
pressures. We believe unemployment-Algeria's most
serious social problem-hit a record 25 percent in
many areas. Indeed, unemployment and
underemployment together may have exceeded 30
percent nationwide. Open sources report joblessness
contributed to growing delinquency and crime among
youths-65 percent of the populace is under 25, and
the population is growing at a rate of more than 3
percent annually.
Political Fallout
For most of the year, the popular response to austerity
measures was muted. Embassy reporting indicates the
government mounted an impressive campaign to
mobilize popular support for its adjustment program.
Through media blitzes and regional meetings and
conferences, the government urged the people to
reduce imports and eliminate resource waste.
Algiers's theme was "self-reliance" in fighting the
"economic war that will be almost as difficult to win
as the war for independence." By November,
however, Embassy reporting indicates the protest
against austerity was too great to be quieted by a
public relations ploy. Economically inspired riots by
students rocked Constantine, the third-largest city in
Algeria, and minor disturbances occurred in several
other cities including Algiers.
Public disturbances mirrored heightened infighting
within the regime over economic policy. The President
had been trying for several years to turn the
cumbersome and inefficient Soviet-style economy into
a more Western-oriented system that relied heavily on
private enterprise-with some success. He had also
tried to improve political relations with the West, in
part to open up new markets for Algerian goods. His
leftist detractors, however, continually fought the
changes, hoping to preserve the country's socialist
heritage. Until last year, Bendjedid's plan seemed to
be working, and his opponents had little leverage with
which to push him back on track. The economy's poor
performance last year and the protests against
austerity, however, provided the leftists with
ammunition to use against him. Indeed, we believe
Bendjedid was forced to step back from some of his
more progressive political goals to preserve his
economic program. For example, Algerian foreign
policy activities last year included rapprochement
with Libya, closer ties to radical Palestinians, and
renewed activity within the "Steadfastness Front,"
which consists of radical members of the Arab
League-Libya, South Yemen, and Syria.
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Algeria: Economic Indicators, 1981-86
Real GDP Growth
percent
151
01--- 01--
1981 1982 1983 1984 1985 198? 1981 1982 1983 1984 1985 1988
Foreign Reserves Foreign Debt
billion US$ 301 billion US$
i
01_
1981 1982 1983 1984 1985 1989
20
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Strains also developed between Bendjedid and the
Army over economic policy because he included the
military in his austerity program. Of particular
concern to officers were the cuts ordered-albeit
small-in the military procurement budget. We
believe many worried that these reductions would give
Morocco an advantage over Algeria in their 10-year
struggle for control of Western Sahara. Embassy
reporting indicates other unpopular measures
included eliminating the pay incentive for mandatory
service in the south and curtailing automatic medical
coverage for dependents at military medical facilities.
According to the US Embassy, the military lost many
privileges including guaranteed supplies of food-
especially meat-as well as clothing, shoes, and
blankets.
The Year Ahead
Algeria's economic outlook for 1987 is bleak at best.
Without sustained improvement in hydrocarbon
prices, Algiers is likely to top last year's current
account deficit-recording a shortfall of nearly
$4 billion. Algeria's losses could be even greater if
petroleum prices fall sharply again or Algiers strays
from its austerity program. Even if the OPEC accord
holds together and achieves the $18 per barrel annual
average it is seeking and current spending policies are
maintained, Algiers will still record more than a
$2.5 billion deficit.
A deficit of even $2.5 billion will be difficult to
finance. We believe the most politically acceptable
solution to covering such a shortfall-depending
entirely on drawing down reserves and borrowing
abroad to make ends meet-is not feasible. Algiers
has only about $1 billion in reserves. With a
$500 million monthly import bill, the Bendjedid
government cannot afford to draw this sum down
much further. Algeria borrowed over $1 billion last
year to cover the 1986 deficit, probably pushing its
debt service ratio to over 60 percent. As a result, the
government is not likely to find many bankers who are
willing to risk loaning more funds to Algiers even
under generous repayment terms. Moreover, Algiers
no longer has the solid international credit rating that
helped it win the needed loans in 1986.
Trade balance
3.6
0.2
-0.2
1.2
Exports
12.6
6.2
5.8
7.2
Crude oil and products
6.7
2.9
2.7
3.4
3.0
1.2
1.1
1.4
1.7
1.3
1.3
1.3
Consumer goods
0.5
0.3
0.3
0.3
Industrial goods
6.8
4.4
4.4
4.4
Net services
-4.7
-3.7
-3.7
-3.7
a Assume crude oil and product exports of 521,000 b/d, condensate
exports of 240,000 b/d, and natural gas exports of 20.1 bcm
annually. Assume prices of $15 per barrel for crude oil, $13.42 per
barrel for condensates, and $2.25 per mBTU for natural gas. All
figures are estimated.
b Assume same export levels as above, but prices of $14 per barrel
for crude oil, $12.53 per barrel for condensates, and $2.10 per
mBTU for natural gas. All figures are projected.
c Assume same export levels, but prices of $18 per barrel for crude
oil, $16.10 per barrel for condensates, and $2.70 per mBTU for
natural gas. All figures are projected.
As last year, Algiers will risk some political backlash
to cover its payments needs. Our analysis indicates the
government will again have to drastically cut
spending in order to supplement limited reserve
drawdowns and new borrowing to make ends meet.
We believe Algeria will try to eliminate at least
$1-2 billion of the projected deficit through increased
austerity. Algiers, for example, has already passed an
austere budget for this year that calls for only a
6-percent increase in operating revenues and no
growth in investment spending, according to Embassy
reporting. Indeed, according to a US official recently
in Algiers, the government will authorize no
investment spending if revenues are too low. The
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Chadli Bendjedid sees private investment as essential
to building a highly diversified economy that will
outlast the country's oil and gas reserves. Under his
tutelage, the country's economic development
strategy has begun shifting away from socialist
economic policies and toward a more Western-style
system. Agriculture, tourism, retail trade, and the
production of consumer goods have been singled out
as areas in which the private sector is to be
encouraged to participate. Algiers will have to
radically change its game plan for encouraging
private-sector participation, however, if it really
intends to reap significant benefits from such a
development.
Algiers's efforts so far to develop a true private sector
have been limited. Declining oil and gas revenues
have severely curtailed government efforts to prepare
the way for such initiatives. More important,
entrepreneurship has not blossomed because many
private citizens appear uninterested in such ventures.
We believe this lukewarm response is largely the
fault of the government, which has failed to create an
appropriate environment for such efforts to thrive.
Nor has the government provided a means for private
citizens to open their own businesses. Would-be
entrepreneurs, used to nearly two decades of
extensive state control, are hesitant to do much
without concrete guidance from the government.
government will also probably try to reduce its sizable
services bill. Algiers may push for a debt rescheduling
to reduce payments pressures. Bendjedid, however, is
unlikely to approach the IMF for help.
Bendjedid will probably continue to encourage
creative solutions to ease the foreign exchange crunch.
He will probably push ahead on his program of
drumming up new customers for Algerian products
and encouraging foreign investment in all types of
industry-especially hydrocarbons. The President is
also likely to order government ministries to continue
to conduct as many transactions as possible in
Private activity in agriculture provides interesting
insights into why local investors hesitate to become
involved. Embassy sources indicate the Algerian
bureaucracy has been slow to turn to private
entrepreneurs after years of dealing primarily with
collective farms. The average private farmer, for
example, has been forced to accept government feed
deliveries-with no control over timing or quality-
because he is prohibited from importing his own
needs. Furthermore, according to the Embassy, even
if a farmer is resourceful enough to arrange a
contract to supplement state supplies, the government
routinely denies him the requisite foreign exchange.
The average farmer also has trouble procuring drugs
and veterinary services-government veterinarians
receive no additional pay for serving private farms.
State control over the marketing of domestically
produced farm products also limits individual farm
production. Prices paid by the state for farm goods
are often far below cost and certainly below market
prices. The government's inability to provide needed
tractors and equipment to new farmers under its land
redistribution program also limits output.
countertrade. Furthermore, he will probably redouble
efforts to increase private-sector participation in the
economy to strengthen domestic agricultural
production and develop import substitution industries.
Political Considerations
Bendjedid will have to be extremely careful in
implementing new austerity measures to avoid
additional popular backlash. Algiers has not hesitated
in the past to use its large and efficient security forces
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Secret
to put down disturbances. We believe the government
would not hesitate to use force to suppress problems in
the future. The security forces, however, may not be
as willing to contain protests because they, too have
been reeling under the effects of austerity.
In our judgment, Bendjedid is not in any immediate
danger of losing his position even if protests become
more numerous and widespread. To date no
opposition has coalesced, and we do not expect that
will change. Nevertheless, pressures from his socialist
colleagues and the military will undoubtedly increase
if protests spread and it appears that the President
cannot turn the economy around. Bendjedid could be
forced to rescind some of his austerity program-
particularly as it affects the military-to preserve his
presidency. He may also have to abandon his desire to
bolster private-sector participation in the economy to
placate some of his more vocal socialist critics.
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Pakistan: Warm Words,
Few Deeds, Welcome
Foreign Investors
Pakistan offers foreign investors words of welcome,
legal protection, and a growing domestic market-but
a wide gap exists between promise and performance in
reducing bureaucratic obstacles. In addition to
cumbersome government regulations, shortages of
skilled labor, energy, good roads, and telephone links
inhibit foreign interest. Equity contributions from
foreign companies have fluctuated widely but
contribute only a small share of Pakistan's total
investment. The investment climate is likely to
deteriorate during the next two or three years as
foreign payments strains mount and revival of
political activity under a civilian government slows
the pace of economic policy reforms. We expect that
direct investment will continue to come primarily
from companies that expect to sell equipment and
services to Pakistan or that are already active there.
Official Welcome
The civilian government of Prime Minister Junejo has
continued the rhetoric of welcome for foreign
investment evident during the 1977-85 martial law
regime of President Zia. Junejo met repeatedly with
foreign business groups during 1986 to promote
interest in joint projects and, according to press
reports, has reaffirmed his interest to domestic
audiences as well. He usually highlighted Pakistan's
guarantees for repatriation of capital and profits.
President Zia-still the key decisionmaker, although
now less concerned with economic policy details-
remains supportive.
Islamabad is especially interested in foreign support
for high-technology, capital-intensive, and export
industries. According to senior officials, Pakistan is
becoming increasingly disenchanted with mere
assembly of imported components
food processing, agricultural and textile machinery,
deep sea fishing, electronic components, and paper
manufacturing.
Investment Incentives
Rapid economic growth and modest policy reforms
that have reduced detailed government controls have
attracted some interest by foreign investors. Good
agricultural weather, combined with massive receipts
of worker remittances and foreign aid, contributed to
7 percent average annual GDP growth during the past
five years. Meanwhile, Islamabad has relaxed import
and industrial licensing barriers, albeit slightly, and
lowered the corporate income tax rate. According to
Embassy and press reports, it has also begun to move
away from price and profit controls that previously
obliged a few producers to subsidize less efficient
competitors. Policy emphasis on the private sector-
and government budget stringency-have even led
Islamabad to open electric power generation to
private investors. More comprehensive proposals for
deregulation are being considered.
Pakistan's laws and explicit regulations rarely
discriminate against foreign business. A 1976
ordinance, which is still in effect, mandates equal
application of income tax and foreign trade controls
for private industrial investment and guarantees
repatriation of profits and capital. Policy guidelines
distributed by Pakistan Embassy officials note a
preference for minority foreign equity holdings in new
investments but permit approval of wholly owned
subsidiaries on a case-by-case basis. Companies with
foreign equity, however, must obtain government
permission for all new investments and share issues,
unlike wholly domestic companies that can take
advantage of simplified approval procedures for small
ventures
Ministry of Industries officials tailor the kinds of joint
venture opportunities they say they are seeking to
match the expertise of businessmen in various
countries. The list for the United States emphasizes
Secret
NESA NESAR 87-006
27 February 1987
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Islamabad offers substantial concessions to attract
new investment in selected regions and industries:
? Location. A five-year tax holiday and total
exemption from duty on imported plant and
machinery for industries in specified remote areas;
50- to 75-percent import duty concessions and
smaller import tax credits for units in industrial
estates or outside major cities.
? Selected industries, any location. Income tax
holiday and import duty exemption for some metal
manufacturing, garments, minerals exploration,
and agrobusiness.
? Export industries. Rebate of import duty and sales
tax; 55-percent income tax credit on export profits;
concessional financing; income tax holiday for units
in Export Processing Zone.
Additional concessions for foreign investors who
accept earnings in rupees have been of interest
primarily to Pakistanis who work in the United
States, Europe, or Dubai.
Limited Foreign Response
Pakistan's policies and official interest have not
brought a significant flow of direct investment.
Private foreign equity has contributed less than I
percent of Pakistan's total annual investment, though,
in a few years, about 7 percent of manufacturing
investment. Still, more than 500 business
organizations in Pakistan have some form of foreign
participation, according to survey data available
through 1984. Foreign equity holdings include
minority shares in public-sector businesses, such as
automobile assembly, and majority holdings in a few
key sectors, such as natural gas. The United Kingdom
and the United States have been leading suppliers of
equity capital.
A surge in direct investment receipts-to $140 million
during 1985, compared with $60 million the year
before-is reported in official foreign payments
estimates but, in our judgment, probably does not
signal a lasting shift. Most new manufacturing
projects, as described in recent Pakistani press
reports, still call for only a small equity contribution,
with most foreign exchange costs met by loans from
Pakistani Government financial institutions or by
supplier credits. The 1985 increase was concentrated
in the third quarter and may reflect either
acceleration of previously approved investment to take
advantage of tax concessions or a move from loans to
equity as part of the Islamization of the economy.
Portfolio investment also increased sharply during
1985 and early 1986, probably less in corporate stock
than in high-interest government bonds offered to
ease a foreign exchange shortage.
Bureaucratic Obstacles
We believe cumbersome approval procedures are a
major deterrent to potential foreign investors who
must negotiate with multiple central and provincial
government agencies. Bureaucratic delays of many
months even plague projects that appear to meet all
Pakistani Government criteria for approval, according
to US Embassy reports. Separate permission is
required to bring in funds, import equipment, issue
shares, employ foreign technicians, and obtain scarce
water and power connections. Proposals to assemble
capital goods or consumer durables from imported
components must include detailed plans to gradually
increase domestic content. A Cabinet official must
approve all projects that cost more than $17 million or
have a substantial import content. Approval, once
granted, is limited to production of specified
quantities of specified products at a particular
location.
Royalty and fee agreements must also be submitted
for detailed government review if they deviate from
standard terms. Automatic approval is granted only
for annual payments of a maximum 5 percent of
factory value and is limited to five years. Royalties
and fees are usually denied for manufacture of
consumer goods for the Pakistani market. Comparison
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Secret
PAKISTAN: GOVERNMENT APPROVALS FOR PRIVATE FOREIGN INVESTMENT
Million US$
300 r
1982 1983 1984
Fiscal Year
^ Repatriable
M
Pakistani fiscal year ends June 30.
Some projects approved by the government are never implemented.
Totals shown are lower than reported by the Pakistan
government because they exclude some installment sales and
miscellaneous transactions.
July-March
0
M
Million
150
140
130
120
110
100
90
80
70
60
50
40
30
20
10
0
PAKISTAN: RECEIPTS OF NET DIRECT INVESTMENT
us$
These estimates, based on balance-of-payments data, may include some
loans. They differ from and are usually higher than government
survey data.
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Secret
of published regulations indicates that these terms are
less favorable than in some other developing
countries.
The bureaucratic stranglehold continues even after an
investment has been approved. Comprehensive,
extremely detailed credit controls limit the working
capital available from Pakistani banks, according to
US Embassy analysis. Borrowing from abroad
requires government approval, which is granted
readily only for long-term loans with interest limited
to 1.5 percentage points above LIBOR.' Labor
regulations limit dismissal of superfluous or
inefficient employees. Price and profit ceilings, now
imposed on a few products, such as petroleum and
pharmaceuticals, could be extended by administrative
fiat to as many as 66 items covered by legislation
regulating essential commodities.
Although foreign investors face only minor legal
discrimination, Pakistani regulations give middle-level
bureaucrats considerable discretion, and US Embassy
officials believe that foreign investment proposals are
subject to more detailed scrutiny than domestic
ventures. Some US companies have complained that
they must pay taxes and comply with controls that
their local competitors can evade. They are also at a
disadvantage compared with other foreign investors
because US laws forbid kickbacks and bribes that
could smooth the way in Pakistan. Pakistani
authorities have been sometimes reluctant to
authorize exemptions for foreign investors to standard
royalty ceilings-on pharmaceuticals, for example-
arguing that transfer pricing between parent
companies and subsidiaries in Pakistan affords
adequate profits. In addition, a few explicit
regulations, such as an excise tax on foreign brand
soft drinks, disadvantage companies with strong
foreign connections.
Economic and Political Disincentives
Bureaucrats are not the only impediment to foreign
investment. Lack of skilled labor limits industrial
productivity and quality control, according to US
Embassy reports, because training is inadequate and
many qualified workers have taken jobs in the Middle
East. The road network cannot cope with increasing
traffic, and telephone links frequently break down.
Electricity and natural gas shortages, partly a
reflection of inappropriate pricing policies, handicap
industrial users. Islamabad will have to subsidize
production from its inefficient, Soviet-supplied steel
mill to attract downstream industries. These
constraints usually swamp any benefits from
government financial incentives.
Return to civilian government has probably delayed
implementation of many economic reforms. Prime
Minister Junejo still supports "deregulation" but, in
the view of US Embassy officials, prefers to avoid
contentious decisions. As political activity increases,
Junejo will probably become increasingly reluctant to
lower administered prices for key commodities, expose
existing businesses to competition, or approve
investments that could be portrayed as a sellout to
foreign interests.
Junejo's caution is evident in the recent handling of
Shell's efforts to expand in Pakistan by acquiring
Burma Oil assets. The transaction, prompted by
Burma's worldwide move out of oil and gas
exploration, would have given Shell a dominant
interest in Pakistan's major gasfields as well as
substantial holdings in petroleum refining and
marketing. According to press reports, Junejo sought
to mollify critics by holding Shell's equity below 50
percent-even though it would cost Islamabad
$10-20 million to buy Shell shares. Delay in obtaining
Pakistani approval has jeopardized not only the
change in ownership but also $200 million in proposed
investments by Shell.
Prospects for internal political stability trouble some
foreign bankers and potential investors. Domestic
businessmen, whose cooperation is essential for most
projects, are more sanguine, according to US
Embassy reports, but they too are reluctant to make
long-term commitments. Mounting ethnic conflict-
such as severe riots in Karachi, where many industries
and the major port are located-increase the risk that
plant operations will be disrupted. In addition, some
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country risk analysts downgrade Pakistan because of
the proximity of the insurgency in Afghanistan and a
history of repeated wars with India.
The most severe risk for foreign investors, however, is
probably Pakistan's vulnerability to a sharp and
sudden deterioration in its foreign payments position.
Exports are concentrated in a few commodities, such
as cotton and textiles, that are subject to wide
international price fluctuations or market barriers.
Remittances are likely to decline as workers return
from the Middle East. Commercial bank deposits and
private funds, now attracted by high interest rates,
could be withdrawn rapidly. Policy adjustments, such
as intensified import barriers or currency devaluation,
that might be used to cope with increased strains
would jeopardize profits from import-intensive
investments.
Prospects
We expect a modest flow of direct investment will
continue from foreign companies that hope to sell
goods and services to Pakistan. For some foreign
suppliers, joint ventures may become necessary to
preserve their share of the Pakistani market, lest
competitors obtain tariff and licensing protection for
import-substitution ventures. Other companies will
probably offer equity to stimulate interest by potential
Pakistani partners or government officials in projects
that will use foreign equipment. Foreign ownership
can make a project more attractive because it
presages long-term technological support and helps
bring in supplementary funds from international
bankers or the Pakistani stock market. We believe
equity offers from foreign equipment suppliers are
most likely when:
? A proposed project will be partly owned by a
Pakistani public-sector corporation or will by
financed and monitored by aid donors. This reduces
the risk of adverse shifts in government price
controls, import licensing, or subsidies.
? The foreign investor has experience coping with
difficult bureaucracies or has a local partner with
excellent political connections.
? The investment is in sectors of primary interest to
the Pakistani Government.
Some major projects in oil and gas exploration,
electricity generation, telecommunications, and
pesticides meet these criteria. Press reports of
preliminary investment proposals suggest that
Japanese and European companies are more likely to
enhance their marketing efforts with a small equity
contribution than are US businesses.
Modest new investment in company shares is also
likely from Pakistanis resident abroad who have no
interest in management. Islamabad has stalled but
not yet abandoned plans to sell a $126 million
package of minority shares in public-sector
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attract some accumulated savings from professional
and skilled workers returning from overseas
employment. In addition, Pakistan's shift to interest-
free Islamic banking, even though not mandatory for
foreign transactions, may lead a few domestic
companies to seek some form of equity, such as a
specified share of profits, rather than interest-bearing
loans from their suppliers.
At best, foreign investment is likely to make only a
marginal contribution to the financial resources
Pakistan needs for its development over the next
several years. In our judgment, risks of economic
deterioration and adverse policy shifts are too great to
attract substantial capital from those investors who
are primarily interested in repatriating profits.
Simplified, less restrictive bureaucratic procedures for
approving investments-which US officials have
urged Islamabad to adopt-could probably stimulate
additional foreign interest in licensing some types of
technology but would not be sufficient to turn around
the overall climate for equity investment.
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Secret
India: Impact of
Military Spending
India's long-term program to modernize its defense
forces has not, in our judgment, unduly strained its
economy or hampered its development programs so
far. The defense buildup has enabled India to
maintain a clear edge over Pakistan in terms of
military manpower and quality of equipment.
Nonetheless, the large-scale purchases of weapons
from foreign suppliers and the associated debt
servicing costs, combined with oil imports and other
debts, are likely to strain India's fragile foreign
payments position in the next few years. India
probably will try to cope with growing defense costs
by turning more to cheaper Soviet weaponry and
increasing the use of domestically produced arms.
Only selective technology and component systems will
be purchased from the West. Within the next several
years, military imports will probably become an
increasingly sensitive political issue as pressure on
India's foreign currency reserves increases and
competition for funds between military and civilian
programs becomes more acute.
Defense Expenditures
New Delhi's growing defense expenditures have been
prompted largely by perceived external threats from
longtime enemies, such as Pakistan and China. Other
factors include a greater superpower presence in the
region since the late 1970s and New Delhi's desire for
a greater military role in the Indian Ocean. More
recently, internal security threats from continuing
communal violence have prompted New Delhi to
improve its paramilitary and police forces.
India has steadily expanded its military spending over
the past 15 years to strengthen and modernize its
defense forces. We estimate annual defense
expenditures have more than quadrupled in nominal
terms since FY 1970, reaching an estimated $7 billion
in FY 1986. ' Since FY 1970 defense expenditures
have risen in real terms at an average annual rate of
India: Defense Expenditures, 1970-87 a
I I I I
0 1970 75 80 85 87 b
a Fiscal period beginning I April of the stated year.
b Projected.
government documents.
3.4 percent-keeping pace with India's yearly average
GNP growth rate. Between FY 1970 and FY 1986,
defense expenditures averaged about 4 percent of
GNP and have ranged from 12 to 19 percent of
central government budget expenditures, according to
The recently proposed FY 1987 budget calls for a
36-percent increase in defense spending and reflects
India's desire to continue its modernization program.
Under the new budget, military spending will be
about 4.3 percent of GNP and account for over 21
Secret
NESA NESAR 87-006
27 February 1987
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Secret
Value of Military Deliveries, 1980-86
percent of government budgetary expenditures. The
proposed budget is being debated in Parliament with a
final decision expected in early March. We believe
that defense allocations will not be significantly
reduced. The increase over FY 1986 is due in part to
the rising debt servicing cost of weapons imports.
New Delhi's reported defense budgets understate
actual defense spending. They do not include loans
and grants to India's large defense industries and
research institutes, maintenance expenses for the
country's large paramilitary forces, or military
pensions
aggregate defense outlays could be as much as 20
percent higher than official defense spending
estimates.
Where the Money Is Spent
capital expenditures
account for over half of India's defense spending, and
we estimate that purchases of foreign military
equipment account for about 20 percent of capital
expenditure allocations. Arms deliveries from foreign
suppliers have totaled more than $9.6 billion since
FY 1980 compared with $2.4 billion from FY 1970 to
FY 1979.
Before 1984, about 75 percent of India's purchases-
not deliveries-were from the USSR and Eastern
Europe. Over the last two years, about 45 percent-
$1.7 billion-of India's weapons purchases were
contracted from the West. Unlike the Soviet Union,
Western suppliers require repayment in hard
currency. Additional weapons purchases from the
West will increase the burden on India's foreign
reserves.
Each of the Indian military services has been able to
expand and upgrade its weapons inventories, thanks to
steadily increasing defense expenditures. The Army
recorded a 33-percent increase in the number of tanks
since 1980, including the acquisition of 450 T72 tanks
from the USSR and 600 indigenously produced
Vijayanta tanks. The Air Force has acquired some
400 new fighter aircraft, including advanced Mirage
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2000 and MIG-29 interceptors. The Navy,
meanwhile, has received 12 new major warships 2 and
enhanced its air arm with additional Harrier aircraft,
antisubmarine helicopters, and maritime
the Air Force's allocations have increased from 19
percent to about 22 percent, and the Navy's share has
increased from 5 percent to 13 percent.'
reconnaissance aircraft.
Slightly less than 10 percent of the defense budget is
spent on enhancing and diversifying India's defense
industries-its second-largest manufacturing sector.
India's domestic arms industry consists of 36
ordnance factories and nine public-sector research
and development firms that together produced nearly
$2.5 billion worth of goods last year and provided
employment for more than 290,000 people. During
the past three decades New Delhi has undertaken
several costly programs in which India assembles or
produces under license sophisticated foreign-designed
arms, such as the Vijayanta tank and the Jaguar
fighter-bomber aircraft, with a view toward using the
production experience to assist in developing India's
indigenously designed and produced tank and light
attack aircraft.
Although India has a substantial industrial capacity
to support its defense factories, it is deficient in many
areas of high technology. As a result, India still
depends heavily on imported defense industry
components and designs and will remain so at least for
the next 10 years and probably much longer.
Operational expenditures-principally pay and
allowances, transportation, land, and storage-
amount to about 40 percent of the military budget.
Pav and allowances for India's 1-million-man Army
account for the largest share of operational
expenditures. Most operational expenditures are made
More recently, budget priorities within each of the
services appear to be moving away from the early
1980s emphasis on purchasing new weapon systems to
improving support and acquiring advanced
technology. Slightly less than half of the Army's FY
1986 budget-about $2 billion-will be used to
modernize ordnance factories, build munitions
inventories, and further defense research and
development. A significant portion of the Navy's
funds will be used to expand port facilities, increase
naval and armament stores, and acquire spare parts.
The Air Force spends its allocations differently.
Although its budgetary allocations will go mainly
toward the purchase of stores, special projects, such as
producing India's first instrument landing system and
installing modern air defense radar, and research and
development, a significant portion of its resources will
be used to purchase new weapon systems.
Is India's Defense Spending a Burden?
The growth in defense spending and the military
buildup over the last decade have encountered little
popular opposition in India because of the widely
shared concern about Pakistan and China. Political
observers note that debates in Parliament on defense
spending are usually free of rancor. The US Embassy
reports that the opposition parties often prod the
government to increase defense outlays. Although
India has one of Asia's freest presses, journalists
seldom criticize defense spending or its impact on
economic development.
within India and do not require hard currency. Academics analyzing the impact of military spending
Shifting Priorities
Indian defense budgets over the last decade have
reflected a shift in priorities away from the Army
toward the Air Force and Navy. Although the Army
has consistently received the bulk of defense funds, its
share has declined from 63 percent in FY 1974 to an
estimated 53 percent in FY 1986. At the same time,
Since 1980 India has received one aircraft carrier, four
destroyers, four frigates, and three submarines
on economic growth in India are split over whether
defense spending has been a burden on the economy.
Most studies suggest that higher defense expenditures
have stimulated the economy by using funds that
would otherwise be idle. India would have had
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difficulty administratively and technically using these
funds in the civilian sector to establish new industries
and employment opportunities. Other analyses have
argued, however, that higher defense spending has
siphoned resources from development, and the long-
run effect has been to lower potential GNP growth by
as much as 1 percentage point annually. According to
some Indian studies, spinoffs to the civilian sector
from defense research and production have been
minimal because of secrecy and lack of
communication between public and private firms.
Defense spending has not noticeably crowded out
expenditures for development programs during the
1980s. Over the last six years government spending on
development activities-agriculture, industry, public
health, and education-grew 24 percentage points
faster than defense allocations. Spending on these
items amounted to about $8.5 billion-over 20
percent of the 1986 budget-compared with $7 billion
for defense spending.
The overall impact of spending for imports of military
equipment has been tempered by the easy terms
offered by the Soviet Union, India's main arms
supplier. Beginning in the 1970s, New Delhi won
increasingly generous concessionary financing,
payable in rupees or through barter arrangements, for
its military purchases. Whereas in the early 1960s 40-
percent downpayments and 10-percent interest rates
for 10-year loans were common in Indo-Soviet
military agreements, by the late 1970s the Soviets
were making available 15-to-20-year loans at 2.5- to
3-percent interest rates with no downpayment on most
items.
Outlook
Because of the threats New Delhi sees posed by
Pakistan and China, it will continue to allocate
significant financial resources to defense. Large US
security assistance programs for Pakistan have
compelled New Delhi to acquire additional
sophisticated arms. The protracted border dispute
with China and the growing US-China military
relationship also motivate New Delhi to seek
advanced weapons and technology.
The savings from lower oil prices will help New Delhi
cope with its debt to Moscow and the West for
military purchases at least temporarily. The drop in
the average price of imported oil from $28 per barrel
in 1985 to $15 per barrel in 1986 saved New Delhi
approximately $2 billion last year.
A combination of payments due for military weapons
purchases, growing oil imports, and large commercial
and IMF loan payments that will begin to come due
in 1988 will strain New Delhi's fragile foreign
payments position in the coming years. As a result, we
believe India will continue to rely on the Soviet
Union-because of the concessional terms Moscow
offers-for most of its arms while selectively
purchasing US and Western technology and defense
equipment.
We judge that New Delhi's program to import
modern weaponry will become an increasingly
contentious political issue as pressures on India's
foreign currency reserves increase. As larger shares of
India's financial resources are devoted to military and
civilian loan repayment obligations, competition for
government financial resources will increase. Progress
on India's development plans will also require a larger
share of scarce domestic resources if, as seems very
likely, New Delhi's access to concessional aid
diminishes over the coming years.
Implications for the United States
India's continued emphasis on acquiring sophisticated
weaponry and support gear provides US and other
Western arms exporters with opportunities for new
sales and loosening Soviet influence, even given the
financial constraints we foresee. We believe New
Delhi will selectively buy Western radars,
communications and logistic support equipment, and
component parts for its indigenously made weapons
that are superior to Soviet goods. Bilateral talks have
identified India's light combat aircraft program As
one area for possible major military cooperation. At
the same time, foreign payments problems make it
unlikely that India will look to the West for large
orders of expensive items unless highly concessionary
financing is offered.
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Secret
India: Succession Implications
of Cabinet and
Congress Party Changes
Prime Minister Rajiv Gandhi's shakeups of his
Cabinet and the ruling Congress Party-which he
heads-have resulted in a lack of second-echelon
leaders with broad political support in either
organization. Should Gandhi die suddenly, the
remaining weak party and Cabinet leadership
suggests a successor will come from a pool of senior
compromise candidates with strong party credentials
but without the power of a consensus leader like
Gandhi. P. V. Narisimha Rao, the senior Congress
Party Cabinet Minister, has emerged from the
shakeups with the requisite party ties and Cabinet
experience to head the list of candidates in the event
of a succession struggle.
Gandhi's Cabinet Reorganizations
Gandhi's removal of independently powerful
politicians from Cabinet posts suggests that he may
fear political threats to his hold on the prime
ministership. We do not believe, however, that Gandhi
faces a significant challenge to his leadership. His
personal popularity is greater than that of the
Congress Party itself, according to the US Embassy in
New Delhi. We believe that he retains much of the
support that won him the biggest margin of victory in
Indian electoral history. No Congress Party or
regional politician comes close to matching his
national appeal.
Gandhi has shuffled his Cabinet six times in his 27
months as Prime Minister primarily, in our view, to
select ministers who effectively and unobtrusively
implement his policy line. He also has been careful to
remove cabinet ministers suspected of harboring
leadership aspirations and to include representatives
from key minorities and constituencies.
Gandhi came to power promising to move India into
the 21st century and improve government
effectiveness. Many of his Cabinet appointments have
been designed, in our judgment, to promote people
who he believes can loyally and efficiently follow his
policy lead. P. Chidambaram, for example, quickly
moved up in the Home Affairs Ministry after proving
his merit mediating between Sri Lanka and Tamil
guerrillas. Gandhi has chosen V. P. Singh, regarded
as his best Cabinet administrator, for several key
senior posts, including Finance Minister and now
Defense Minister. At the same time, Gandhi
occasionally ousts key officials who overstep their
responsibilities. Foreign Secretary A. P.
Venkateswaran, for example, lost his post in part
because he prematurely suggested during a visit to
Pakistan that Gandhi would visit Islamabad in 1987.
At the same time, we believe Gandhi has used the
shuffles to demonstrate to Cabinet members that their
political ambitions must remain subservient to loyalty
to his policies. In our view, Gandhi's insistence on
loyalty-coupled with his charisma-has precluded
the major politicians in his Cabinet from grabbing
either the public limelight or enough party support to
establish themselves as clear succession contenders.
Arun Nehru, Gandhi's distant cousin and onetime
strong succession candidate, lost his Cabinet post
ostensibly because he was recuperating from a heart
attack, but Indian observers widely regard Nehru's
fall as Gandhi's response to his well-publicized
designs on the prime ministership.
Finally, Gandhi has shown that he sometimes follows
the Indian political tradition of using Cabinet
appointments for political expediency. He often gives
minorities Cabinet positions to reward regional,
religious, and caste groups loyal to the party. Several
Cabinet members-Muslim Transport Minister
Mohsina Kidwai and Sikh Agriculture Minister G. S.
Dhillon, for example-clearly were selected because
they come from key ethnic groups or from states
underrepresented in the Cabinet. Rajiv has also
chosen several members in response to pressure and
criticism from the Congress Party old guard who
claimed that his penchant for youth had led to a lack
of experience in the Cabinet.
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Stagnation in the Congress Party Organization
Gandhi also tried to shake up the ruling Congress
Party-much as he did with the Cabinet-to promote
officials who would revitalize the party without using
their positions to gain personal support. But, like
Gandhi's Cabinet, the Congress Party hierarchy
offers few leadership options beyond Gandhi. The
Congress Party remains a largely stagnant
organization administered from the top down. Gandhi
was left holding the party reins after his efforts failed
last year to sponsor internal Congress Party elections.
The seniormost party administrators-those who
would have played a role in party and succession
decision making-have either been co-opted into the
Cabinet, lost their posts for disagreeing with Gandhi's
party leadership, or resigned to give Gandhi a free
hand in reorganizing the party.
Rajiv's premium on loyalty to his agenda has resulted
in the dismissal of several Congress Party politicians
who were prominent under his mother and the ouster
of well-known party members-many of whom were
Cabinet members-who suffered from widespread
reports of their overblown political ambitions. Pranab
Mukherjee, the number-two man under Indira, is a
prime example. In April 1986, Gandhi expelled him
from the Congress Party for six years after he
strongly criticized Gandhi's management of the party.
Mukherjee and several other fading Indira loyalists
formed a splinter party last-fall, emphasizing their ties
to Indira in an effort to appeal to Rajiv's detractors.
Despite Gandhi's promises of and efforts at grassroots
Congress Party reform, the continued delay of
internal party elections has atrophied the party at its
lower levels and probably will prevent the emergence
of local leaders with strong constituent support,
according to press and Embassy sources. Early in his
administration, Gandhi pledged to sponsor local party
elections (none have been held since 1972) to revitalize
the party. But, after former Congress Party Vice
President Arjun Singh failed last year to clear the
party rolls of bogus members in Uttar Pradesh state-
India's most populous state and the cornerstone of
Congress Party support-Gandhi has shown little
enthusiasm for the project. Although such elections
would infuse the party with new blood, some of the
old guard resisted change because it could severely
The Indian Constitution calls for the President tofiill
a vacancy in the Prime Minister's office by appointing
the senior Cabinet member representing the majority
party or coalition in Parliament. The President can
delegate the responsibility for choosing a candidate to
the majority party's parliamentary committee, which
would then be subject to intense lobbying from the
succession contenders. In practice, however, Congress
Party politics have usually dictated the selection of
the Prime Minister, and the President plays only a
ceremonial role. With national opposition to the
Congress Party fragmented and the party holding a
large majority in Parliament, Congress Party
members are the only credible succession candidates.
At the time of Indira Gandhi's assassination in 1984,
the succession question did not arise because Rajiv
was widely accepted as her heir. He was sworn in
within hours after the assassination. His mother's
appointment in 1966, however, offers parallels to the
current succession picture. Indira was chosen by
Congress Party bosses-called the Syndicate-after
the sudden death of Prime Minister Lal Bahadur
Shastri largely because she was regarded as a
noncontroversial compromise candidate who could be
manipulated by senior party members. Unlike Rao,
she had the powerful Gandhi name, and the
Syndicate chose her in part because they calculated
that her parentage (her father, Jawaharlal Nehru,
was India's first Prime Minister) would pull in votes.
disrupt the entrenched party hierarchy. Gandhi may
calculate that, with crucial state elections slated for
1987, he can ill afford to destabilize what party
organization remains by shifting its focus to internal
reform.
How the Changes Affect the Succession Question
In our judgment, Gandhi's management of his
Cabinet and the Congress Party has resulted in a
dearth of popular second-echelon political leaders who
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could effectively succeed the Prime Minister.
Longtime politician P. V. Narisimha Rao, Minister of
Health and Human Resources and the senior
Congress Party Minister, is the leading candidate to
move up to the prime ministership but he lacks a
political following. Rao's experience and seniority are
his most powerful qualifications. No politician with
comparable experience has survived the first two
years of Rajiv's administration. At the same time, the
Nehru family offers no credible dynastic candidates.
Gandhi's son is only 16, and Gandhi's third cousin
Arun Nehru has been politically inactive since his
heart attack last year.
We expect Congress Party officials would weigh
seniority heavily in their choice of a prime ministerial
candidate. Rao ranks second only to Gandhi in the
Cabinet and chairs its meetings in Gandhi's absence.
He has been a Cabinet Minister since 1980, holding
key portfolios-Home Affairs, Defense, Foreign
Affairs, and now Health and Human Resources-and
gaining experience under both Rajiv and Indira
Gandhi. According to the Embassy, Delhi politicians
respect Rao for his experience and intellect. We
believe Rao's conservative, consensus style also makes
him acceptable to senior Cabinet leaders.
We believe Rao would be an especially attractive
candidate in the event of Rajiv's sudden death, when
the President and Congress officials would want to
calm a panicky public by appointing a successor with
minimum delay. In our view, Rao, like Rajiv, would
appeal to Indian leaders seeking to avoid time-
consuming and divisive controversy by making the
conservative choice for Prime Minister. Indian leaders
might also calculate-much as they did with Indira-
that, by selecting an inoffensive compromise
candidate such as Rao, they could manipulate him to
further their own views and policies.
Defense Minister V. P. Singh would probably lead
any group challenging Rao for the prime ministership.
Indian observers regard him as one of Gandhi's most
efficient and honest Cabinet ministers, and his several
Cabinet posts have given him broad experience. Like
Rao, his limited political following would probably
appeal to Congress Party officials seeking to avoid a
strong, independent Prime Minister.
Rao's Drawbacks: South Indian Heritage
and Lackluster Record
Although Rao is the clearest succession candidate,
several weaknesses keep him from outdistancing the
pack of potential successors. Rao's South Indian
Brahmin heritage and his weak record in Cabinet-
and state-level posts are his most damaging
drawbacks:
? Congress Party powerbrokers would prefer to look
to India's northern Hindi heartland-the base of
Congress Party support-for a Prime Minister, but
they lack candidates.
Implications of a Rao Succession
Without Gandhi's public appeal and massive voter
mandate, no succeeding Prime Minister would have
as much freedom to fashion foreign policy-especially
India's relations with the superpowers and with
Pakistan-as does Rajiv. We believe Rao would be
less able than Gandhi to cultivate warmer Indo-US
relations. His unsure political footing and his
consensus decisionmaking style would make him more
vulnerable to pressure from opposition parties,
disaffected Congress Party members, and the
conservative senior party members who would play a
role in his appointment. Like any compromise
candidate, Rao's lack of strong support would weaken
him in his dealings with the party. He would probably
set policy cautiously because he would be susceptible
to party dissidents waiting to use his perceived
weaknesses to wrest power from him.
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Rao has traditional Indian views on key international
and regional issues. He appeared frustrated, both as
Foreign Minister and later Defense Minister, with US
policies on technology transfer and Pakistan, and he
strongly defended India's record against technology
diversion. On the other hand, as Home Affairs
Minister he supported Indo-US cooperation on
antiterrorism and antinarcotics trafficking efforts.
Afghanistan. Echoing Indian policy, Rao has
espoused a compromise political solution to end the
Soviet occupation. He claims that the Nonaligned
Movement has adopted the substance of India's
position, adding that India would have little leverage
with the Soviets if it had not taken such a
"constructive" position and instead "joined the
chorus" condemning the invasion.
In 1982 he
characterized Indo-Soviet relations as having a
mutually beneficial character over a period of
decades. He has privately opposed foreign bases-
specifically including both the United States and the
USSR-in the Indian Ocean, according to Western
diplomats. During his tenure as Defense Minister,
Rao was involved in the eventually successful
negotiations for MIG-29s.
Pakistan. We believe Rao, like most Indian
politicians, is suspicious of Pakistani intentions in
South Asia. In meetings with US officials over the
past five years, Rao has repeatedly voiced concern
about Pakistan's military purchases. He has argued
that the lack of democracy in Pakistan could increase
pressure on the Pakistani regime and force military
"adventurism" against India.
25X1
25X1
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Sri Lanka: Democracy
Feeling the Pinch
The Tamil insurgency has placed serious strains on
Sri Lanka's democratic institutions. Before the
insurgency Sri Lanka had a strong record of
upholding democratic principles. Many measures
undertaken by President Jayewardene over the past
several years to combat the Tamil insurgency, such as
arbitrary arrests and postponing elections, have
eroded traditional Sri Lankan freedoms. Anti-
insurgent legislation has been used by the government
to restrict activities of opposition political parties and
to entrench in power Jayewardene's ruling United
National Party (UNP). Despite the controversial
measures undertaken by the government, we believe
that in the long run Sri Lanka's basic democratic
institutions will remain largely intact.
Background
Sri Lanka is one of the longest functioning
democracies in the Third World. Upon gaining
independence from Great Britain in 1948, Sri Lanka
established a Westminster-style parliamentary system
headed by a Prime Minister, with a unicameral
legislature and an independent judiciary. The original
1947 Constitution has been amended several times,
most recently in 1978 following the electoral victory
of the United National Party under J. R.
Jayewardene. In that year, the government was
reconfigured along the Gaullist
presidential/parliamentary model, centralizing the
essential powers of the executive branch in the office
of the President, while retaining the one-house
Parliament, which shares power with the President.
Colombo has held generally free and fair national
elections and has carried out smooth transitions of
power, even following the assassination of the Prime
Minister in 1958. Numerous political parties have
formed in Sri Lanka, many along ethnic lines, and
have often played decisive roles in forming ruling
coalitions. Since 1948, primary control of the
government has alternated between the two political
parties of the majority Sinhalese ethnic group: the
United National Party and the Sri Lankan Freedom
Party (SLFP). The chief executives have been drawn
from just three Sinhalese upper-caste families.
Cause for Concern
Prevention of Terrorism Act, 1979. In the first two
years of Jayewardene's term, the Tamil insurgency
consisted of sporadic attacks by small bands of Tamil
militants against government troops and installations
in the north. By late 1979, however, the security
situation had deteriorated so severely in the north that
the Jayewardene administration enacted the
Prevention of Terrorism Act, granting the government
special powers to arrest without warrant and to detain
those suspected of antistate activity for up to 18
months without bail or charges. This law, enacted as a
temporary measure in 1979, became permanent in
1982.
Under the provisions of the act the government has
carried out large-scale roundups with hundreds of
mostly Tamil youth arrested and jailed on suspicion of
involvement with the Tamil separatist movement,
according to the US Embassy. The Sri Lankan
Government says there are about 2,300 persons jailed
under the act, but other human rights organizations
estimate the number at between 3,000 and 5,000,
according to the US Embassy in Colombo. The
Embassy also reports that about 80 members of a
radical Sinhalese leftist group have been detained
under the act.
Beginning in 1983 and lasting through July 1985,
press censorship was enforced under the provisions of
the Prevention of Terrorism Act and the Emergency
Regulations. The restrictions held that all documents,
photos, and films relating to terrorist activity or
security operations for publication in Sri Lanka or in
foreign media must be submitted to the government's
official censor. After a brief relaxation in mid-1984,
the restrictions were officially lifted in 1985, but
editors are expected to exercise self-censorship with
regard to reporting terrorism and security operations.
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National Referendum, 1982. The second major abuse
of the democratic process occurred in 1982, over a
year before President Jayewardene's first term was to
expire, and was directed primarily at opposition
political parties. Sensing waning popular support in
the fall of 1982, Jayewardene called, in quick
succession, an early presidential election-which he
won, guaranteeing himself a further six years in
power-followed by a national referendum to ratify
postponing parliamentary elections for six years,
thereby extending the life of the UNP-dominated
Parliament. The referendum motion passed, and the
President-who possessed signed resignations from all
UNP Ministers and members of Parliament-forced
18 members to resign and called new byelections to
fill their seats. The byelections resulted in a very
small increase in seats held by the opposition SLFP,
which won three of 14 that they contested, but overall
the outcome was regarded as a landslide victory for
the President and the UNP.
Although the referendum and subsequent byelections
were carried out successfully, their legality is still
debated in Sri Lankan circles:
? Open sources point out that there was widespread
voter fraud and impersonation as well as many
reports of voter intimidation at the polling booths.
? Because the referendum was held under a limited
State of Emergency, important opposition presses
were shut down and several publications were
banned
? The opposition SLFP was substantially handicapped
since the UNP-dominated Parliament had revoked
the civil rights of its leader, former Prime Minister
Sirimavo Bandaranaike, in 1980 for misuse of
power during her rule in 1970-77.
Sixth Amendment to the Constitution, 1983. The
enactment of the Sixth Amendment is another case
where government action has eroded Sri Lankan
democracy. Following the massive communal riots of
July 1983, Parliament passed an amendment
requiring all members of Parliament to swear
allegiance to the Sri Lankan unitary state. The Tamil
representatives from the north and east-who
belonged to the moderate Tamil United Liberation
Front (TULF)-refused and consequently lost their
seats. New elections to fill these seats have been
postponed indefinitely because of the security
situation in the north and east, so those persons living
in areas formerly represented by the TULF have been
without parliamentary representation since late 1983.
The TULF and the Tamil minority parties that
preceded it have supported the establishment of a
semiautonomous Tamil state since the early 1970s.
Emergency Regulations, 1983. A State of Emergency
has been in effect continuously since May 1983-
imposed several times previously on an ad hoc basis-
and is extended monthly by the UNP-dominated
Parliament. Emergency regulations overlap to some
degree with the Prevention of Terrorism Act and
include provisions for press censorship, imposition of
curfews, and special police power for preventive
detention. In 1984, under the emergency regulations,
a security and surveillance zone was established in
coastal areas of the north, putting them off limits to
boats other than fishing vessels or those engaged in
"other lawful occupation." Security forces are
empowered to detain vessels and may arrest on
suspicion of illegal or insurgent-related activity.
Under the regulations-intended to restrict insurgent
movement between southern India and Tamil
strongholds in northern Sri Lanka-an officer may
halt a vessel by opening fire or using any other force
he deems necessary. This provision has resulted in the
death of many Tamil fishermen and civilians working
in the coastal area around Jaffna and the Palk Strait.
Democracy Hanging On
Although the fabric of Sri Lankan democracy is
fraying at the edges, some of its democratic
institutions-particularly the independent judiciary
and press-continue to function well despite
Colombo's controversial measures. The best example
of this is Sri Lanka's judiciary, which demonstrated
its independence last year in two widely publicized
trials of individuals charged under the Emergency
and Prevention of Terrorism regulations. In the first
case a Tamil Catholic priest was acquitted in March
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of charges that he withheld information from the
police on a 1982 bank robbery, according to the
Embassy in Colombo. The case was the first real
opportunity for judicial interpretation of the
Prevention of Terrorism Act, according to the
Embassy, and the priest's acquittal indicates that Sri
Lanka's judges are not constrained in their rulings by
the central government.
The second example of judicial independence-and
one of the first cases ever tried for an offense under
the emergency regulations-involved a Sri
Lankan-born Canadian citizen who was acquitted of
sedition charges in July 1986. He was chairman of an
influential east coast Citizens' Committee, and his
case received considerable attention from
international human rights groups, according to the
US Embassy in Colombo. The case was seen as an
attempt by Colombo to intimidate the Citizens'
Committees, which had been effective and credible
sources of information on insurgent and security
forces activity. The defendent was accused of sedition
in 1985 after he told foreign correspondents about
security force involvement in three attacks on local
civilians that spring; the committee had also given the
information to the police. In an 82-page ruling, the
judge found the accused not guilty of spreading
rumors or false statements and included in the ruling
an unusual commendation of the work of the Citizens'
Committees, according to the Embassy.
The Sri Lankan press also has been active in
criticizing the government and Jayewardene's
leadership since official censorship was lifted in 1985.
Most of the Sinhalese and English-language papers
are biased toward either the ruling UNP or the
opposition SLFP and tend to skew reporting
accordingly. These biases are well known to Sri
Lanka's largely literate public. The most worrisome
development regarding freedom of the media was last
year's formation of the national Media Center, run by
the National Security Ministry. This center serves as
the sole source of information on "terrorist
activities"-Tamil insurgent activity-for both
domestic and foreign media, according to Sri Lankan
press reports. With the independent Tamil press gone
and the Sinhalese press dependent on the government
for information, distorted or partial information about
the status of the insurgency is probably being
presented as fact.
The credibility of the electoral process-which
suffered a blow in the 1982 referendum-received a
boost in April last year when the opposition SLFP
won a parliamentary byelection in Akmeemana
District. Although the opposition has won other
byelection victories since 1982, it is important to note
that, despite election irregularities by both sides in the
past, the opposition party can still win in a free
election. Islandwide local elections for municipal
councils are scheduled to be held later this year.
Colombo's ability to guarantee that these elections are
open and unprejudiced, in our judgment, will be an
important test of Sri Lanka's democratic tradition.
The Sri Lankan democratic system has some
institutions that act as a watchdog to limit
presidential powers. One such institution is the
independent Election Commission. Its independence
was highlighted in December 1986 when the
commission presented a finding to Parliament on the
legality of the 1982 referendum. According to Indian
press articles, the commission's report cited serious
official malpractices during the referendum, but no
further details were provided.
Outlook
We believe that the viability of democratic
institutions in Sri Lanka is tied primarily to the future
of the insurgency. Jayewardene views the insurgency
as a direct threat to Sri Lankan stability. If Colombo
can negotiate a workable peace agreement with the
insurgents or, less likely, weaken them significantly,
we expect Jayewardene will rescind most of the
restrictive legislation. During last summer's round of
peace negotiations, the Embassy reported that
Jayewardene planned to suspend the Prevention of
Terrorism Act as a sign of his commitment to the
peace process and also intended to repeal the Sixth
Amendment. Although neither move was
implemented-due to increased fighting and civilian
casualties-we believe they provide significant insight
into Jayewardene's intentions.
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Conversely, another motivation that may have
prompted Jayewardene to implement the measures
detailed above is his longtime effort to ensure that the
UNP remains a dominant player in Sri Lankan
politics. A US scholar says that, despite the UNP
election victory in 1977, Jayewardene is plagued by
the memory of the defeat delivered to the UNP by the
SLFP in the mid-1950s. That defeat almost destroyed
the UNP, and the US scholar believes Jayewardene
will make every effort to ensure it never happens
again, even if it means undermining some of Sri
Lanka's traditional democratic freedoms.
Secret 64
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Portrait of a Fictional
Sri Lankan
Drug Trafficker
Sri Lanka's Tamil militants have been involved in a
four-year-long struggle for independence from the
Sinhalese-dominated central government in Colombo.
More than 150,000 Sri Lankan Tamils have fled the
island since 1983 in the face of rising ethnic violence,
and most now live in refugee camps in the South
Indian state of Tamil Nadu. Militant Tamil leaders
from several competing factions have established
recruiting and training centers in India and maintain
a complex support system that stretches through the
overseas Tamil community.
Increasingly, Tamil militants have turned to high-
risk, high-profit international crime-particularly
drug trafficking-to maintain their war chests. Sri
Larikan Tamils annually account for a large
proportion of the Asian drug couriers apprehended in
European and North American drug arrests. On the
basis of documents and other materials collected
during these seizures, we believe Sri Lankan Tamil
dissidents are becoming:
? More actively involved in directing drug rings.
? More willing to make contact with other forms of
international crime, particularly the gray arms
market.
? Readier to remain active in drug trafficking
regardless of the political outcome of the autonomy
struggle in Sri Lanka.
In late December 1986 customs authorities at Berlin's
Tempeihof Airport pulled Ramaswamy Krishnapillai
from the line of travelers arriving on a Sabena flight
from Brussels. Although he had no goods to declare at
customs and his flight originated in a European
capital, officials had received an Interpol message
revising previous drug courier profiles and alerting all
European services to increased narcotics activity by
young Sri Lankan Tamils. A physical examination
revealed that Krishnapillai had taped several small
balloons containing a white powder to the insides of
his legs and in the small of his back. Authorities
remanded the man to a local hospital, where full-body
X-rays revealed several small capsules in his digestive
tract which later proved to be filled with heroin. In
all, Krishnapillai was carrying nearly .75 kg of pure
heroin hydrochloride, or injectable heroin.
Comment. Tamil traffickers have been apprehended
by Western authorities carrying several sorts of illicit
drugs. Heroin from South and Southeast Asia offers
the greatest profit per courier per trip. Tamils, like
other Asian and African traffickers, have explored
numerous ways to conceal the drug, including
wrapping small amounts of heroin in condoms. The
drug-filled condoms are then either swallowed or
placed in other body cavities unlikely to be noticed
during a cursory customs search. More than a
kilogram can be carried in this manner.
A Trafficker's Life
The following is a fictional presentation of a Tamil
trafficker's history of insurgent and drug activities.
Although it is a fabrication, the general relationships
and activities it illustrates can be substantiated. By
creating this fictional account, we hope to graphically
demonstrate:
? The complex web of international contacts that
dissident groups enter into when they turn to drug
trafficking.
? How traffickers manipulate this web of
relationships to meet group and personal goals.
? The seductive effects of narcotics profits on Tamil
traffickers.
The suspect was carrying appropriate travel
documents: an Indian passport made out in the name
Rajasundaram Swaminathan with a West German
visa issued in Bombay. Under questioning, the man
declared he was not carrying the heroin for anyone
else, that he knew no one in Germany, that he had
never been to Europe before, and that he was an
Indian national of the Tamil ethnic group and a
longtime resident of Bombay. He said he had no
future plans but had hoped to sell his return trip ticket
in Berlin, then live on the proceeds of his heroin sales
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Item 1. Diary of Ramaswamy Krishnapillai-entries
made in various hands over the period 5 May 1983 to
20 November 1986.
Item 2. Passport A: issued New Delhi, found on
Ramaswamy Krishnapillai on day of his arrest, West
Berlin. Name: Rajasundaram Swaminathan; visas:
Italy, France, West Germany.
Item 3. Passports B, C, D, found in apartment
allegedly rented in the name R. Krishnapillai,
Zurich, Switzerland.
? Passport B: name: R. Swaminathan, issued:
Colombo, Sri Lanka, visas: India, United Kingdom,
West Germany.
? Passport C: name: Gamini Francis Perera; issued:
Colombo, Sri Lanka, visas: United States, Canada,
France, Italy.
? Passport D: name: Martin Fernando; issued:
London, United Kingdom, visa: India.
Item 4. Tamil insurgent literature found in subject's
Zurich apartment:
? Tamil Eelam Now, published by the Eelam
Revolutionary Organization of Students-500
copies.
? Student identity card for the Peoples' Liberation
Organization of Tamil Eelam, in the name R.
Swaminathan.
? Pamphlet: History of the Oppression of the Tamil
Peoples of Eelam, with articles by A. Balasingham
and V. Prabhakaran.
Item 5. Pocket litter found on R. Krishnapillai on
day of his arrest, including:
? Canceled international airlines vouchers for return
trip flight Bombay-Dubai-Rome in the name R.
Swaminathan.
? Canceled airlines voucher for return flight Rome-
Paris-Brussels-Berlin.
? Folded sheet of paper with instructions and key for
railroad station locker, Rome. Contact telephone
number found on paper later shown to be for the
residence of Antony Fortunato, currently under
investigation by Interpol on charges of international
drug and arms running. Fortunato also sought by
Swiss authorities in connection with several money-
laundering investigations.
? Letters from Mrs. Ida Krishnapillai of Montreal,
Canada.
? Letter from Nimal Perera, New York.
? $420 (US).
? DM 325.
? Sealed packet condoms (1 dozen).
Item 6. Testimony taken during interrogation by
West German authorities at time of arrest.
Item 7. Interpol reports with numerous name-check
hits and cross-references to Krishnapillai/
Swaminathan/Perera.
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on the street until he "could get something together."
Swaminathan demonstrated a more than casual
understanding of German immigration law,
mentioning that he anticipated remaining at large
while the Berlin courts ruled on his application for
political asylum as a member of a persecuted
minority.
Comment. Western customs and drug enforcement
authorities became aware in 1984 that Sri Lankan
Tamils were increasingly the couriers of choice for
international drug traffickers, because they rarely
appeared on enforcement officials' trafficker profiles.
Tamils displaced Nigerians as customs and antidrug
services began closer screening of African passengers
transiting South and Southeast Asia.
Closer examination of the subject's personal effects
revealed that Swaminathan was probably not the
subject's real name; that he had traveled extensively
in Europe; that he had in his papers the names and
addresses of major European drug and gray arms
dealers; and that he was in contact with one or more
Sri Lankan Tamil insurgent groups. Name checks
through Interpol and inquiries to other West
European criminal investigation services confirmed he
had transited Italy, France, Switzerland, Belgium,
and the United Kingdom at least once but had not
been previously charged with drug trafficking.
Comment. Sri Lankan Tamil militants abroad are
predominantly male, young, and poorly educated.
The leaders of the militant groups generally remain
with the parent organization in Madras or northern
Sri Lanka. Established overseas Tamil communities
such as those in Singapore, Canada, the United
Kingdom, Australia, and the United States often
provide sympathy, support, and a ready-made
organizational infrastructure for militant groups to
work through. US Drug Enforcement Agency officials
theorize that Tamil militants carry literature and
false identity papers suggesting membership in
opposing insurgent factions to incriminate rival
groups in the event they are charged with drug
trafficking.
West German police could not fully exploit the
suspect's Tamil diary and correspondence, but they
recognized many of the international contacts whose
names and addresses were sprinkled throughout the
materials. US authorities confirmed that N. Perera
maintained a Manhattan apartment; Scotland Yard
confirmed that M. Fernando was listed on the lease of
a London flat apparently shared with a number of
other Sri Lankans. Interpol's files contained extensive
cross-references on the name Antony Fortunato.
Fernando and Perera had several joint Swiss
accounts, some of which also bore Fortunato's name.
Canadian authorities confirmed the address and legal
immigration status of Mrs. I. Krishnapillai.
Comment. We believe Tamil traffickers regularly use
multiple passports, often with Western or Sinhalese
names, to confuse drug enforcement authorities.
Similarly, stopping in several countries en route to
their final destination with multiple sets of papers is
an easy way to prevent immigration and customs
authorities from devising a standard profile to
identify Tamil traffickers. As Tamils grow more
sophisticated and take a more active role in designing
and carrying out drug deliveries, we believe they have
created a system of sa ehouses and other forms of
shared facilities with Tamil and other international
dissident groups.
After continued investigations failed to reveal further
reason to charge Krishnapillai, West German
authorities remanded him to police custody and
charged him with "trafficking a significant amount of
proscribed substance" through the country. Under
German law, he is likely to be released from jail
within 18 months, at which time he could exercise his
right to apply for political asylum. If granted, he will
receive full legal resident alien status.
The Reality Behind the Fiction
We believe that most Sri Lankan Tamils arrested in
the West as drug couriers have been individuals
working for themselves, rather than as members of
sophisticated, Tamil-dominated trafficking
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Secret
Main Events in the Sri Lankan Tamil Insurgency
and in Ramaswamy Krishnapillai's Life
1982 Localized violence in
Jaffna; demonstrations,
some police violence.
Krishnapillai living with his
family in Mannar;
fisherman of LTTE leader
Prabhakaran's karaiyyar
caste.
1983 July riots in Colombo;
Tamil refugee exodus to
South India.
1984 Insurgent activity grows in
the Northern Province.
1985 Insurgent violence spreads
to Eastern Province and
Sinhalese areas.
Anuradhapura massacre of
Buddhist pilgrims.
1986 Alternating violence and
peace initiatives backed by
New Delhi. Insurgent
leadership shifts from
India to northern Sri
Lanka.
Krishnapillai and family
flee to refugee camp in
Tamil Nadu in November;
Krishnapillai joins Tamil
militant group in December.
Krishnapillai part of Tamil
group running weapons to
camps in Sri Lanka's
Eastern Province.
May-Krishnapillai goes to
Singapore with group to buy
weapons.
Nov-Krishnapillai makes
first drug delivery, Bombay
to Rome.
Apr-Krishnapillai makes
second drug delivery,
Madras-Bombay-Dubai-
London.
Dec-Krishnapillai
arrested, Berlin, during
third drug delivery.
syndicates. Most are opportunists, hoping to use the
income of one or two good runs to establish
themselves in the West and to avoid returning to Sri
Lanka.
International investigations of Tamil drug traffickers
rarely get past this point. Interpol and the other
relevant agencies are not well prepared to handle the
sort of complex interactions that characterize the
drugs-weapons-false documents network that
underlies the activities of Tamil and other Asian
insurgent groups involved in international narcotics
trafficking. Furthermore, nontraditional smuggling
groups such as Sri Lankan Tamils fit few of the
standard profiles used to recognize and analyze
international drug syndicates.
A personal interview with our fictional drug runner,
Krishnapillai, would perhaps have revealed a story
that parallels that of many other young Sri Lankan
Tamils whose lives have been disrupted by the ethnic
violence in that country. His education has been
interrupted for several years, making it unlikely he
will ever finish school or be prepared to compete for
university entrance. During that period, he has lived
and traveled extensively abroad, taking advantage of
the relatively large earnings he has made in the
narcotics trade. In the event a durable political
solution is hammered out between Tamil militants
and Colombo, Krishnapillai and the thousands like
him are unlikely to be satisfied returning to their
former lives as fishermen living in huts on the shore of
Sri Lanka's Northern Province. For such people, the
insurgency's greatest effect on their lives has been to
project them into the world beyond the narrow
confines of the traditional culture they have
abandoned.
Several factors suggest that at least a core of
ideologically committed Tamil insurgents are using
the proceeds of narcotics trafficking to subsidize the
separatist violence:
? Increased involvement of other parts of the overseas
Tamil community-specifically, overseas shipping
interests that have been identified with weapons and
drug shipments.
? Reduced remittances from overseas Tamils to the
militant groups. Militant leaders have publicly
admitted that the drug trade has become an
essential part of making up this shortfall.
? Indian Government pressure on the Tamil militant
groups based in southern India to moderate their
growing criminal activity, particularly drug
trafficking.
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Secret
Near East and
South Asia Briefs
A number of Sudanese who recently completed military training in Cuba have
returned to Ethiopia to join the Sudanese People's Liberation Army (SPLA)-a
rebel group operating in southern Sudan. perhaps 25X1
as many as 60 of these newly commissioned SPLA officers were honored at a
ceremony attended by SPLA chief Colonel Garang and Ethiopian Chairman
Mengistu. Although some of these trainees undoubtedly will be assigned political
rather than military duties, that this 25X1
group apparently is the first contingent of Cuban-trained southern Sudanese
returning to join the SPLA.
Most Cuban training for the SPLA probably is still carried out at bases inside
Ethiopia, but it appears likely that limited numbers of SPLA personnel are also
undergoing military training in Cuba
International Atomic Energy Agency (IAEA) officials who visited Libya last
December have found that research at Libya's Tajura Nuclear Center is being cut
back significantly, mainly because of a lack of trained scientists.
Libyan nuclear activities, with the exception of medical facilities,
are confined to the well-equipped Tajura Nuclear Center. The Libyans made no
mention of their other nuclear activities, such as laser and centrifuge research, to
the IAEA team. The Tajura Center is underutilized, and the reactor operates only
for limited periods because of a lack of experienced Libyan operators and a
significant reduction in Soviet and other foreign experts. The Organization of
Atomic Energy, which oversees all Libyan nuclear activities, has also been
downgraded from a secretariat to a commission, and a new chairman has been
appointed
Secret
NESA NESAR 87-006
27 February 1987
25X1
25X1
25X1
25X1
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commitment to the Nuclear Non-Proliferation Treaty.
Although Libyan nuclear research has suffered an obvious setback, we believe
Qadhafi still views the program as important not only for its prestige value but also
for possible weapons development in the future. Libya continues to send scientists
abroad for training and is constantly trying to recruit foreign experts. It probably
will be years, however, before Libya has the trained personnel to develop an
indigenous nuclear power or weapons program. Many countries are reluctant to
engage in nuclear cooperation with Libya because of concerns about the long-term
stability and radical nature of the Qadhafi regime, as well as pressure from the
United States and other major nuclear suppliers who question Libya's
New Atomic Energy Commission Chairman
increasing nuclear power output.
M. R. Srinivasan will replace Raja Ramanna in March as chairman of India's
Atomic Energy Commission and secretary of the Department of Atomic Energy.
The US Embassy in New Delhi reported that his appointment, originally intended
to take effect on 1 February, was delayed because the other leading candidate,
P. K. Iyengar, and some key nuclear scientists threatened to resign if Iyengar was
not chosen. Iyengar, who is director of the Bhabha Atomic Research Center, has
since announced he will retire. Srinivasan announced his first priority will be
advisers.
Although Srinivasan has said he is against developing nuclear weapons and
Iyengar favors them, the controversy over Ramanna's replacement probably was
due more to disagreements over the future of the nuclear power program. The
engineers in India's nuclear establishment favor a technologist, such as Srinivasan,
who wants to push power projects, while the scientists want more emphasis on
basic research. There is also disagreement over whether to import foreign nuclear
technology. India's indigenous nuclear power program has suffered a number of
setbacks in the past year, mainly because of design problems, and Srinivasan
probably is more willing than Iyengar to consider such imports. He is unlikely to
play an extensive role in decisionmaking about nuclear weapons development-an
issue reserved for Prime Minister Gandhi and his senior political and military
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Secret
Kuwait's labor movement is increasingly pursuing political issues-often at odds
with government policy-because high wages and good working conditions have
all but eliminated traditional union concerns. Since its inception in 1961, Kuwait's
labor movement has demonstrated a leftist, antigovernment outlook on domestic
matters and a pro-Soviet orientation internationally, according to the US Embassy
in Kuwait. Government intervention to quash a protest against the US strike
against Libya last April and to remove a key union official in August has added to
conflict between progovernment union leaders and the rank and file. Currently,
Kuwait's labor movement lacks sufficient organization or freedom of action to pose
a significant threat to the regime. Unless the union changes its focus to more
traditional economic issues, labor's political ambitions almost certainly will lead to
additional restrictions on union activity and increase prospects for strife.
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Iq
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Secret
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