Rowan Callick – Two years after guiding his country to independence, East Timor's Foreign Minister, Jose Ramos-Horta, is struggling to contain issues that threaten to set the impoverished nation at odds with both of its much bigger neighbours, Indonesia and Australia.

The row with Australia is over the sea boundary between the two and how to carve up the oil and gas fields that straddle it.

The potential dislocation with Indonesia has been over whether a warrant on war crimes charges will be issued against Wiranto, the former military chief who is one of three leading contenders for the Indonesian presidency on July 5.

But that issue appeared to be neutralised at the weekend by a meeting in Bali between East Timor's President, Xanana Gusmao, and Wiranto during which the two former enemies put on a public display of reconciliation.

Ramos-Horta says that before the weekend meeting the staff of Wiranto, the presidential candidate for leading party Golkar, had approached the office of President Gusmao seeking an informal meeting before the presidential election.

Ramos-Horta flew to Bali recently for two meetings with Indonesian leaders, President Megawati Soekarnoputri and Foreign Minister Hassan Wirajuda, during which he says the atmosphere was "very, very good at both".

The Indonesians were primarily concerned about the initiative of United Nations Secretary-General Kofi Annan to create an expert group of three people to evaluate the findings of the ad hoc tribunal on serious crime in East Timor – essentially war crimes – that was established by the UN when it administered the country from 1999-2002.

"The Indonesians are very much opposed to this. We also discussed our maritime boundary with Indonesia, but the expert group was their prime concern."

Ramos-Horta says: "The East Timor government does not wish to interfere in the judicial process. However, we have made clear we do not support the extension of the international tribunal, and I would refuse to lobby for it."

The serious crime tribunal has been absorbed, post independence, with two international prosecutors originally appointed by the UN, into the the Dili district court apparatus. One of the prosecutors, an American citizen, Philip Rapoza, recently issued a 20-page warrant for Wiranto's arrest, saying: "There are reasonable grounds to believe that the defendant, Wiranto, as a superior officer, bears command responsibility for the criminal actions of the military forces ... police and pro-autonomy militia under his authority."

However, the Attorney-General, who is responsible for endorsing the issue of such warrants, has declined to do so. And Ramos-Horta says that is how the situation will stay. "No warrant has been issued for Wiranto's arrest, nor will it be," he says.

But Ramos-Horta was less enthusiastic about the idea of a meeting between his President and Wiranto, arguing that: "Election time is sensitive in any country, and in Indonesia even more so.

"If Wiranto were elected president, East Timor would have to be realistic and pragmatic, and manage the relationship to the best of our ability. We are not going to be a Lilliputian judge of the wrongs of Indonesia or of the world."

Personally, Ramos-Horta says, he believes that Wiranto was ultimately responsible for the tragic events following the 1999 referendum. "But only a small minority of people here still clamour for international justice. The overwhelming majority prefer to let the past go by and concentrate on the day-to-day challenges of a new country."

What if Wiranto became president? "It would be very wise if East Timor were not to welcome him" if he wished to visit.

The other big issue is East Timor's maritime boundaries. Soon, he says, East Timor will make a comprehensive proposal to Indonesia about their common boundary. The problem for Australia, he says, is that the agreement made with Indonesia in 1972 "is now viewed in Jakarta as extremely disadvantageous to Indonesia. They say Australia essentially vacuum-cleaned Indonesia".

Canberra is worried, he says, that any boundary agreement struck with East Timor that is significantly different from the 1972 deal could lead Indonesia to demand renegotiation of the entire agreement.

In 1972, Ramos-Horta says, Indonesia accepted a boundary based on Australia's continental shelf claim, reaching in places up to 50 kilometres off its coast. "Today, Indonesians know it is a really bad deal for them. But East Timor is not prepared to repeat Indonesia's mistakes."

He says he asked Wirajuda why Indonesia accepted it, and he replied that Indonesia was politically very weak at that time, and was also especially concerned to gain recognition of its claim for an archipelagic concept, to treat the area between its islands as internal waters.

Australia supported this concept, says Ramos-Horta, in return for Indonesia's acceptance of Australia's continental shelf claims. "Now, the archipelagic concept is widely accepted, but the continental shelf claim receives less and less international validity."

He says: "We are sympathetic to Australia's dilemma. We have a very solid confidence in our legal claims, but we are also prepared to explore creative ideas to reach a satisfactory agreement. However, right now I absolutely have concerns about the poisoning of our relationship. I share the firm view of Prime Minister Mari Alkatiri, but I don't believe it is necessary for us to make such a drama of the situation."

The first round of talks has just concluded, he says, and "already some people are engaged in a hunger strike. I feel uneasy about our posturing that can inflame our youth, in particular against Australia".

"We leaders have to be careful about what we say in public. In private yes, we can be firm but polite, but without going to the point of really insulting the other side. I feel some unease about some comments of our own President about Australia.

"We may have fundamental disagreements, but at the end of the day we are two neighbours. We don't have too many more to choose from. We have to live with Australia, and Australians have been enormously generous to East Timor."

Is there a danger that East Timor, so determined to press its oil and gas claims, risks becoming too dependent on them? Ramos-Horta says East Timor is being advised by oil-rich Norway on how to set up a fund to quarantine resources flows, to sustain them and prevent their distorting the economy. "And if I had to choose between falling into an oil and gas trap or a poverty trap, I wouldn't mind the risks of the former."

He says he is also heavily involved in attempting to diversify the economy by attracting investors to a range of activities, including German giant Ferrostaal in agro-industry, intending to produce starch from cassava, and Kuwaiti interests.