Defending Trade


Economic News

22 Jul 2010
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While the $1bn arms deal between Russia and Indonesia stole the media limelight last week, a string of business deals in the energy and mining sectors marked a sea change in the bilateral economic relationship.

During Russian President Vladimir Putin's one-day visit to Indonesia, an arms deal valued at $1bn was signed with the Indonesian government. Indonesia purchased 20 amphibious tanks for close to $700m, as well as 10 transport helicopters, five assault helicopters and two Kilo-class submarines from Russia.

The Asian nation will use a $350m commercial loan to pay for the six Sukhoi fighter jets also supplied by the Russians. The soft loan will be repayable over 15 years.

Although the United States used to be Indonesia's largest arms supplier, an arms embargo was enforced from the late 1990s until 2005. Since then, the U.S. has primarily supplied spare parts and technical support.

"We are happy to reduce our dependence on the United States," Juwono Sudarsono, Indonesia's defence minister, said. The deal comes without the conditions associated with similar purchases from the US and Western Europe.

Despite the attention captured by the arms deal, several other sizeable deals were concluded alongside the defence contracts. These did not attract much media attention, but are important in increasing the level of economic integration between the two countries. Indeed bilateral trade has remained low compared to the size of the two economies.

"The trade relations are still very low at $680 million and that is minimal compared to the size of our economy," said Dino Pati Djalal, spokesman for the Indonesian president. "Russia is a 780-billion-dollar economy while Indonesia is about half of that. There is much more we can do in terms of trade relations."

Preliminary estimates for the amount of Russian investment in Indonesia in the energy and mining sector are $10bn. These deals mark a monumental change in relations between Indonesia and Russia. Total trade between Indonesia and Russia amounted to a mere $689.2m in 2006.

The first visit by a Russian president to Indonesia since 1960 brought about co-operation agreements in the fields of finance, foreign loans, investment protection, terrorism and tourism. Russian tourists will now be issued visas on arrival, marking a political will to expand economic and social ties between the two countries.

"The defence deal was important in bringing attention to this developing relationship," an insider in the Indonesian energy industry who did not wish to be identified, told OBG. "But the energy and mining deals, which were even larger and as important, flew under the radar screen. The energy industry in Indonesia is in need of foreign expertise and the Russians are important players in this market."

Forging forward his foreign economic policy, Putin's business delegation concluded two major energy and mining deals.

The most important deal came in the mining sector on September 6. Indonesian mining company Aneka Tambang signed a $1.5bn deal with Russia's United Company Rusal, the world's largest aluminium producer, to jointly exploit bauxite deposits in West Kalimantan.

The Indonesian mining giant will hold 49% of the joint venture. Although the initial cost of the project stands at $1.5bn, total costs could rise to $3bn over the medium term. The plant, due to be constructed between 2009 and 2011, will have an annual production capacity of 3.6m tonnes of bauxite and 1.2m tonnes of alumina.

Meanwhile a $1bn deal was concluded for joint deep sea oil exploration in three blocks, rumoured to contain around 150m tons of hydrocarbon reserves. The deal was concluded between LukOil, Russia's largest state-owned oil company, and Pertamina, Indonesia's state-owned oil company, although details of the split have not been made public.

With such important and high profile deals signed last week, Indonesia has reached a landmark in its foreign economic policy. For so long deeply integrated to the US market, Indonesia is now reaching out to other trading and investment partners in a bid to stimulate investment and trade.

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