Subject: AFR: Indonesia Cancels Russian Arms Contract

The Australian Financial Review

March 5, 2008

Indonesia Cancels Russian Arms Contract

by Angus Grigg in Jakarta

Indonesia's planned military build-up has faltered after the government said its $US1 billion ($1.1 billion) arms deal with Russia was on hold and that it could not afford to buy new F16 fighter jets from the United States.

Defence Minister Juwono Sudarsono said the Russian contract to buy 20 tanks, 22 helicopters and two submarines would not happen "any time soon".

Mr Sudarsono said the financing agreement stipulated all training must be conducted in Russia and that a flight simulator could not leave the country. The provisional arms deal, signed by outgoing President Vladimir Putin on a visit to Jakarta in September, was viewed as an effort to reassert Russian military influence in the Asia-Pacific region.

It also raised concerns about a potential power struggle between Russia, China and the US.

The deal's near collapse will help allay some of these fears but will further delay a much-needed modernisation of the Indonesian military.

Speaking to reporters outside parliament, Mr Sudarsono said Indonesia could not afford to buy new F16 jets from the US.

"We won't be able to buy new jets, they are too expensive," he said. "We can only upgrade six out of 10 F16s."

US Defence Secretary Robert Gates, on a trip to Jakarta last week, said his country was prepared to sell Indonesia new equipment and provide military aid.

Mr Gates was reportedly "positive" about selling Indonesia F16s, but any deal would require approval by Congress.

The US resumed full military aid to Indonesia in 2005 after cutting ties in 1992 following Jakarta's bloody crackdown on pro-independence protesters in East Timor.

Washington reopened defence ties, citing Indonesia's importance in the fight against terrorism.

But some in Jakarta remain concerned about another US embargo and in recent years the government has sought to broaden its defence ties.

In 2003 it ordered four Sukhoi jets from Russia and signalled a stronger relationship between the two countries.

Indonesia has nearly 1 million men in uniform but a defence budget of just $US4 billion, less than half Australia's.

Its director-general of defence facilities, Slamet Prihatino, said recently the military was still operating tanks and artillery produced in the 1950s and aircraft that had exceeded their flying hours.

A defence analyst with the Centre for Strategic and International Studies, Bantarto Bandoro, said the Indonesian military badly needed to upgrade its hardware.

"We can't solely rely on the US anymore. To maintain our defence capability we need to make significant investments."

But budget constraints, mainly a result of rising oil prices, have put these plans on hold.

The government ruled out cutting fuel subsidies last month and said it would spend more this year on maintaining cheap petrol than it does on health, education and defence.

It expects to double spending on subsidised fuel to nearly $US12 billion and increase electricity subsidies by 80 per cent to $US5.8 billion.

These two subsidies account for nearly 35 per cent of its entire budget and are expected to cause the deficit to blow out from 1.7 per cent of GDP to 2.1 per cent.

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