Bill Guerin, Jakarta – Despite the World Bank's recent official criticism of counter-trade policies, last week Indonesian Trade and Industry Minister Rini M Soewandi promised that Jakarta will continue to maximize such deals to expand the country's export markets.
Counter-trade, officially defined as a practice whereby a supplier commits contractually to reciprocate and undertake certain specified commercial initiatives that compensate and benefit the buyer, is being increasingly viewed by producers and nations as an excellent mechanism to gain entry into new markets. But in a statement this month, the World Bank said such policies might have an adverse effect on trade competition.
Soewandi, however, pointed out that amid slow global economic growth and tighter global trade competition, creativity and innovation in opening new markets is vital for Indonesia, a country that recognized the opportunities surrounding counter-trade long ago, becoming the first country to mandate this form of trade in 1982. Now, an estimated 130 countries are doing almost US$500 billion worth of global trade under counter-trade-related schemes, an indication of how substantial a part counter-trade plays in international political and commercial transactions, which helps explain further why Indonesia's interest in counter-trade is taking off.
Counter-trade per se actually offers five possibilities: barter; buy-back; counter-purchase; tolling; and offset, the biggest, which includes direct and indirect offsets and which are particularly important in regard to the trading of arms.
Companies in countries such as the United States have to comply with offset demands when selling arms abroad, mainly to more developed countries. In direct offset, the supplier agrees to incorporate materials, components or sub-assemblies procured from the importer – an unlikely scenario for weaponry deals with Indonesia, where the US has an arms embargo – though there is an active offset program relating to state-owned aerospace manufacturer IPTN and state-owned railways manufacturer INKA.
And although bilateral relations between Indonesia and the United States have improved since Indonesia joined the US-led global war against terrorism, there have been no indications that the US will ease its arms embargo, including the supply of spare parts, on Indonesia. Despite US officials' promises to lift it, Congress has refused to budge until Jakarta admits to the military's role in the East Timor carnage and resolves the murders of two American schoolteachers that occurred at the Freeport gold mine in Papua in 2002.
As a result, Indonesia has been forced to look elsewhere in its quest for arms, in particular Washington's former Cold War arch enemy and foe Russia. And by procuring Russian jets, helicopters and armored vehicles from the former communist giant to modernize Indonesia's obsolescent armed forces, Megawati has caught US President George W Bush and the powerful US arms brokers wrong-footed.
Washington foe becomes Indonesian friend
By seeking military support from countries more ready to barter with Jakarta, President Megawati Sukarnoputri has not only manifestly increased the country's trade prospects but pleased her military top brass as well.
Backed by military chiefs, Megawati has pressed ahead with a new foreign-policy paradigm geared at reducing the country's dependence on Western weaponry. Less than 40 percent of Indonesia's fleet of 90 military aircraft, most of them US- and British-made, are reportedly grounded due to shortages of weaponry and spare parts.
The US continues to prohibit the sale of spare parts to Indonesia, and the United Kingdom has protested against the use of its British Aerospace Hawk jets in the ongoing war against separatist rebels in Aceh, pointing out that it had sold the jets to Indonesia on condition that they would be used for defensive measures.
But during a historic visit to Russia last April, Megawati and President Vladimir Putin inked a deal worth nearly $200 million that saw Jakarta take delivery of four Russian-made Sukhoi fighter jets and two Mi-35 assault helicopters, with 14 more ordered.
Indonesia relied heavily on Russian military assistance in the early 1950s, when Russia was a part of the Soviet Union, and ministers and military top brass have often conveyed their enthusiasm for buying jet fighters and weapons from the former members of the Warsaw Pact because of the prolonged US arms embargo on Indonesia.
Furthermore, in retaliation against an earlier US decision to link sales of nine F-16 fighters with human-rights abuses in Indonesia, former president Suharto canceled a planned deal at the start of the economic crisis in 1997 and switched to Russia. The latter agreed to a counter-trade deal because it could not offer export credit facilities or offset deals like the US. Suharto said Jakarta would buy 12 Su-30K fighters and eight Mi-17-IV helicopters from Russia, and several French Mirage 2000 fighters. The aircraft were to have been delivered in 2000.
More recently Jakarta had bought Russian weapons, including 10,000 Kalashnikov assault rifles, a squadron of naval Mil-2 helicopters and 12 BTR-80A amphibious carriers for the marines.
And on October 5, the first two Mi-35 helicopters were air-freighted to Jakarta in a Russian Antonov-124 plane in good time to take part in the parade on the occasion of the 58th anniversary of the Indonesian army. Military chief Endriartono Sutarto told a press conference that the latest purchase was "just the beginning".
The air force wants several squadrons of Sukhoi Su-27 interceptors, long-range S-300 missiles and shorter-range systems such as the SA-15 Gauntlet or shoulder-fired Igla.
"We are seeking alternatives for getting new equipment to avoid being dictated to over something that we purchase but cannot fully use," Sutarto said.
On Wednesday, navy chief of staff Admiral Bernard Kent Sandakh was reported as saying that an earlier delay in deliveries of further helicopters because of "payment problems" had now been resolved.
Though the Pentagon had sought to stop the purchase of the Russian military hardware and undermine Jakarta-Moscow ties, fearing a lessening of US domination in Southeast Asia, Megawati and Putin revived a Soviet-era relationship between the two countries in the face of growing distance from Washington.
A Putin spokesman said at the time that the Indonesia-Russia relationship would become a foundation of policy direction for Russian foreign policy, and a key factor to stability in the Asia-Pacific region.
Megawati faces rough seas
It was hardly smooth sailing for Megawati, however. Jakarta's new trade in arms is being funded largely through counter-trade mechanisms, and the Sukhoi deal, funded with 12.5 percent cash and the remainder through a counter-trade scheme, involving Soewandi's ministry and state-logistics agency Bulog, caused great consternation among some legislators who claimed the scheme had bypassed the Defense Ministry.
The ruling Indonesian Democratic Party of Struggle (PDI-P) successfully foiled attempts to destabilize the government and impeach Megawati over the issue. The trading benefits inherent in the purchase helped stifle dissent in parliament.
As a result of Indonesia's counter-trade moves, exports were up 6.76 percent to $61.02 billion in 2003, with non-oil and gas exports rising 5.18 percent to $47.38 billion. The export of $57.2 million in crude palm oil to Russia as part of the military-hardware deal also helped toward an 8.09 percent increase in animal and plant oil exports to $2.91 million last year. A total of 300,000 tons of palm oil valued at $108 million is to be delivered to Russia by next October.
By resorting to counter-trade, Indonesia also saves precious foreign exchange, sells its agricultural commodities abroad and frees itself up from the restrictive policies of developed nations in protecting their own farm products.
Indonesia was the first country ever to mandate counter-trade when in 1982 a new government policy required all offshore public procurement valued above a certain minimum level and financed from the national budgets to be balanced by counter-purchase contracts involving the sale of non-oil-and-gas products abroad.
By 1985 counter-trade agreements worth $1.5 billion had been signed with 22 countries for the supply of non-oil commodities. Though counter-trade later declined and almost stopped because of the dearth of public tendering during the financial crisis, it has been on the up under Megawati and her able lieutenant, Soewandi.
There are many more non-aligned relationships being signed, sealed and delivered in the remaining few months of the Megawati administration.
Focus shifts to alternative markets
Commenting on the collapse of the World Trade Organization summit at Cancun in Mexico last year, Soewandi promised that Indonesia would focus more on developing countries as alternative markets. Before heading for Libya from Cancun, she visited Pakistan, where she and counterpart Humayun Akhtar Khan signed an agreement to work on a closer economic partnership (CEP). A counter-trade deal is also in place with Pakistan.
From Pakistan Soewandi flew to Tripoli to prepare for Megawati's visit there last September. The latter was the second world leader, after Spanish Prime Minister Jose Maria Arnaz, to welcome Libya back into the fold after the lifting of United Nations Security Council-imposed economic sanctions on Libya.
The resulting new initiative with Libya had spawned a counter-trade deal involving Libyan crude oil in exchange for commodities and military accessories, such as uniforms and shoes. The deal covered 5,000 barrels of Libyan crude a day and delivery of the oil, worth about $40 million per month, will start this month.
Soewandi's own Cancun stance, where she spiritedly defended the interests of developing-world farmers, arguing that they needed a world trading system that would help them eat three meals a day, followed by the Tripoli initiative was yet another slap in the face for the United States.
And despite Indonesian legislator's concerns, counter-trade deals have continued. Last year Poland offered tanks to Indonesia in exchange for receiving part payment in palm oil. Jakarta had expressed interest in old post-Soviet equipment from Poland but the standard tanks of the era, weighing some 45-50 tons, were deemed too heavy, and talks are focusing on armored personnel carriers instead.
A $100 million counter-trade deal with Hanoi for investments in Vietnam's fertilizer industry in return for rice and sugar imports is in the cards. It will allow Indonesia to invest in fertilizer projects in Vietnam and benefit from the lower costs of liquefied natural gas (LPG) in the country. LNG is a raw material used in the manufacture of fertilizers. Indonesia will in turn import rice and sugar of equal value. Megawati is scheduled to visit Hanoi this month.
Aside from trade deals made to boost weaponry, Jakarta, led from the front by Soewandi, has been singularly aggressive in entering non-traditional markets that have the potential of becoming important trade partners. Currently, the country's exports to non-traditional markets account for about 8 percent of total exports. Exports to Middle Eastern countries such as the United Arab Emirates, Iran, Jordan and Yemen totaled some $1.8 billion last year and exports to African markets, mainly Nigeria, Egypt, South Africa, Sudan and Algeria, reached $1.2 billion.
Though the barter process used to buy the Russian hardware is somewhat more sophisticated than when Javanese cavemen swapped chickens for goats, Jakarta is, at least so far, still making use of the concept in its very simplest form.
But, as Soewandi pointed out last week, the government expects between 30 and 50 percent of imports for its projects to be obtained through counter-trade, and those chunks of the state budget set aside every year to import equipment for the armed forces, police, customs and other state institutions could well be made via counter-trade.