SCENESETTER FOR PACFLEET COMMANDER ADMIRAL ROUGHEAD

S E C R E T SECTION 01 OF 04 KUALA LUMPUR 000832

SIPDIS

SIPDIS

E.O. 12958: DECL: 05/08/2016
TAGS: PREL MARR MASS PTER ECON MY
SUBJECT: SCENESETTER FOR PACFLEET COMMANDER ADMIRAL ROUGHEAD

Classified By: Deputy Chief of Mission David Shear for reasons 1.4 (b,
d)


1. (S) SUMMARY: Malaysian-American relations are good and
improving; on March 8 we notified Congress of our intention
to conclude a Free Trade Agreement with Malaysia. This
moderate, Muslim-majority state is our tenth-largest trading
partner worldwide, and we have robust military-military
cooperation. While moving slowly away from the anti-Western
rhetoric of former Prime Minister Mahathir Mohamad, Malaysia
continues to oppose us on some key international issues.
Counterterrorism cooperation is largely good, but we remain
concerned about the release of certain suspects and the level
of surveillance of those suspects. Malaysia and its
neighbors increasingly realize the importance of maritime
security, but enforcement efforts are hampered by sovereignty
concerns and a lack of resources. A new Malaysian coast
guard is slowly getting its sea legs. Malaysia supports the
Mindanao peace talks but has differed sharply with Thailand
over separatist violence. The Malaysian government is making
progress in implementing a non-proliferation regime, but is
no closer to signing an Article 98 agreement with the U.S.
End Summary.

Political Landscape
--------------


2. (C) While Malaysia has plenty of warts, it remains a rare
example of an Islamic-majority country that is stable,
civilian-led and prosperous. Malaysia has also maintained a
largely tolerant social system and a tightly managed
democracy, with the same multi-racial coalition in power
since independence in 1957. While we continue to urge the
government of Malaysia to improve its own governance, we also
recognize the constructive role Malaysia can play in the
Islamic world.


3. (C) Prime Minister Abdullah Badawi is a breath of fresh
air after the long-serving and vituperative Mahathir Mohamad,
who retired in late 2003. Abdullah promotes a tolerant,
progressive approach to religion that he calls "Islam
Hadhari" (civilizational Islam). He is publicly committed to
fighting corruption and reining in costly mega-projects,
though his government's follow-through has been
disappointing. Corruption in government procurement,
including defense contracts, remains a problem. Abdullah's
mild-mannered and cautious approach has also led critics to
question his leadership and effectiveness, but his ruling
coalition remains secure. Abdullah's chief potential rival,
Deputy Prime Minister (and Defense Minister) Najib Razak,
plays the role of a loyal bulwark. After two years in power,
Abdullah has appealed to the public for patience in
delivering reform. As long as the economy continues to grow
healthily, the public will grant him that.

Economic Situation
--------------


4. (C) In his early days, PM Abdullah made rural development
and control of government spending, partly as a means to
encourage private sector led growth, his top economic
priorities. So far, only his reduction of the government's
deficit -- now down to 3.8 percent of GDP -- can be chalked
up as a clear success. Abdullah's partisans say that the
Ninth Malaysia Plan (9MP; a five year plan for economic
policy and development spending) will be the vehicle for
advancing his other economic goals, but the 9MP, unveiled on
March 31, seemed more like "business as usual." 35% of the
funding in 9MP is earmarked for completing projects started
in 8MP. Abdullah has emphasized the need for fast
implementation of 9MP (a tacit acknowledgment of the
perceptions weak follow through by his government) and
created a new government agency to focus on the problem.


5. (C) Meanwhile cuts in government subsidies for gasoline
and diesel fuel -- one of the tools used to rein in the
deficit -- have proved highly unpopular, and raised concerns
about inflation. Increases in prices of other
government-managed commodities, such as electricity, may be
in the works. For now, the economy is in reasonably good
shape, with projected growth of around 5.0 percent in 2005
and official inflation of around 4.8 percent (although
private analysts believe the real rate of price increases is
much higher). However, the government may be facing a tough
choice in the coming year between stimulating the economy to
get back on a higher growth track, or raising interest rates
to control inflation.

Malaysia's International Posture
--------------


KUALA LUMP 00000832 002 OF 004



6. (C) Malaysia currently is the chair of the Non-Aligned
Movement (NAM),the Organization of the Islamic Conference
(OIC) and of ASEAN. Malaysia hosted the ASEAN Summit and the
East Asia Summit last December, and will host the ASEAN
Regional Forum ministerial this summer. Secretary of State
Rice has told the ASEAN foreign ministers of her plans to
attend the ARF meetings in July. Malaysia backs the
six-party DPRK nuclear talks and supports Iraqi
reconstruction efforts, but has been overeager to embrace
Hamas and defend the Iranian nuclear program. The foreign
ministry seems to be moving slowly away from some of
Mahathir's anti-Western rhetoric and policies, but retains
friendships with troublesome states like Cuba, Zimbabwe,
Sudan, Syria and Uzbekistan.


7. (C) The Malaysian government is publicly supportive of
China's "peaceful rise" and recently signed a defense
cooperation MOU with China, despite lingering suspicions
among senior Malaysian military officials of China's
long-term intentions. An April visit by China's defense
minister received very little coverage in the local press.
While Malaysia and Singapore quarrel frequently over issues
like water pricing, land reclamation, and whether to replace
a causeway linking the two countries with a bridge, the two
retain a loose defense relationship under the aegis of the
Five Power Defense Arrangement (FPDA),along with the United
Kingdom, Australia and New Zealand. Malaysia has actively
supported peace efforts in the southern Philippines and Aceh
in Indonesia. While a maritime boundary dispute with
Indonesia in the Sulawesi Sea remains unresolved, Malaysia
maintains generally good relations with all its ASEAN
neighbors. Malaysia also enjoys good relations with India,
and held their first navy-to-navy staff talks with India
earlier this year.

Counterterrorism
--------------


8. (S) Malaysia has generally been a reliable and
constructive partner on counterterrorism. In 2003, Malaysia
established the Southeast Asia Regional Center for
Counterterrorism (SEARCCT),which now runs a full schedule of
multilateral training courses, many conducted with U.S.
support. Early round-ups in 2001 and 2002 of scores of
Jemaah Islamiyah (JI) suspects crippled that organization's
activities in Malaysia. Over 70 suspected terrorists remain
in custody under the Internal Security Act (ISA),a
"preventive" measure that has also been used to jail
political opponents of the government in the past. To our
knowledge, prosecutions and trials of the terrorist suspects
are not planned. Drawing on their experience in defeating a
communist insurgency, the Malaysians take a "rehabilitative"
approach for some terrorists, keeping them under police
supervision in "restricted residence." Several leading
figures (such as JI financier Wan Min) have been released
from ISA detention without warning. We remain concerned that
surveillance of released terrorist suspects may be inadequate
and their "rehabilitation" may be incomplete or insincere.
JI, while weakened, still has the capability to strike here,
and the Malaysians need to remain vigilant.


9. (C) While the Malaysian leadership firmly opposes
terrorist organizations at home, it is deeply uncomfortable
with any association of Islam with terrorism, and frequently
lectures us on the need to eschew terms such as "Islamic
terrorists" or "jihadists." Reflecting the broad support for
the Palestinian cause among the majority here, the Malaysian
government has no relations with Israel and often argues for
the need to address the "root causes" of terrorism in the
Middle East. In February, negotiators from the United States
succeeded in reaching an agreement here on a text for a
bilateral Mutual Legal Assistance Treaty (MLAT). We are
hoping the treaty will be ready for signature in time for the
Secretary of State's July visit. The treaty will be a good

SIPDIS
tool in fighting terrorism and other forms of transnational
crime.

Maritime Security
--------------


10. (C) In July 2005, the insurer Lloyd's of London
designated the Strait of Malacca (SOM) as a "war-risk zone,"
raising premiums for shippers transiting these waters. This
prompted a flurry of public cooperation among the littoral
states -- Malaysia, Singapore and Indonesia, plus neighboring
Thailand -- including conferences of foreign ministers and
military chiefs. On September 13, 2005, the three littoral
countries launched an "Eyes in the Sky" (EiS) program to
conduct international aerial surveillance of the Strait. EiS
originally comprised separate but coordinated flights by
Malaysia and Singapore with observers from each of the three

KUALA LUMP 00000832 003 OF 004


countries onboard each flight. Resource-strapped Indonesia
did not contribute flights until the three countries signed
an Agreement on 21 April 2006 that firmly set terms of
reference and standard operating procedures. This Agreement
states that "hot pursuit", which is a sensitive issue with
the neighboring littorals, must be guided by bilateral
agreements. Malaysia does not have a working bilateral hot
pursuit agreement with either Singapore or Indonesia. Crews
use binoculars to survey shipping traffic and make non-secure
radio transmissions to shore and ship facilities of the three
littoral states. Malaysia has also committed a single
Beechcraft B-200 with infrared capability, to enable some
night-time surveillance. Thailand continues to participate
in discussions but the government has not given the military
approval to join EiS.


11. (C) EiS represents an important symbolic step forward for
the littoral states' cooperation on SOM security, but could
be difficult to sustain without international support. DPM
Najib has told the media on several occasions that Malaysia
would welcome international involvement in Eyes in the Sky.
Our working-level contacts remain vague, however, on what
sort of American assistance might be accepted in this
sovereignty-conscious region. Malaysia will host a meeting
this summer sponsored by the International Maritime
Organization (IMO) in which the littoral states are to
identify and prioritize their needs for assistance in
enhancing SOM security. On February 15-17, the USG hosted a
meeting of key SOM user states at Coast Guard Island,
Alameda, California, to discuss the possible range and scope
of such assistance.


12. (C) Meanwhile, the Sulu Sea remains an under-monitored
passageway for terrorist elements in transit between
Indonesia and Mindanao. Terror groups have also carried out
a number of kidnappings for ransom in the area. While the
region has little value for international shipping compared
to the Malacca Strait, it is tremendously important to the
travel and fundraising operations of groups like JI and Abu
Sayyaf. Together with Embassies Jakarta and Manila, we have
focused on this region as a specific theater for building
capacity and cooperation between the governments of Malaysia,
Indonesia and the Philippines.
Significant new resources, which we are in the process of
identifying and prioritizing, will be required to make these
efforts successful.

New Coast Guard
--------------


13. (C) Malaysia's new coast guard began limited operations
on November 30, 2005. The government's goal is to reduce
overlap and turf battles among the 11 Malaysian agencies
tasked with patrolling the country's seas and waterways. The
coast guard, officially named the Malaysian Maritime
Enforcement Agency (MMEA),will possess 72 vessels
transferred from the navy, marine police, marine department,
and fisheries department. MMEA has recruited about 1,300
personnel from these agencies, although the vast majority
came from the Royal Malaysian Navy (RMN). The impact of the
large, mid-grade officer exodus from the RMN to MMEA, in
fact, has caused the RMN to halt any further transfers. RMN
vessels transfer with their crews intact. MMEA hopes to fill
its 4,000 approved positions within a year.

Mindanao Peace Talks, JI Presence
--------------


14. (S) Malaysia has facilitated peace talks between the
Philippine government and the Moro Islamic Liberation Front
(MILF),and the negotiations have had some success with the
sticky issue of "ancestral domain." The talks are hosted by
the Malaysian External Intelligence Organization, which in
the past covertly supported separatist activities in
Mindanao. JI presence at MILF training camps remains a
concern, though the MILF has publicly disavowed any
connection to JI. We continue to press the Malaysians to
make clear to the MILF that it must sever its connections to
JI and Abu Sayyaf.

Southern Thailand Strains Relations
--------------


15. (C) Separatist violence in southern Thailand has killed
over 1,000 people since January 2004, and attacks continue
almost daily. The Malaysian government has repeatedly denied
Thai accusations that it supports the separatist groups,
though the people on both sides of the porous border share
Malay ethnicity and the Muslim religion. Families and
business interests straddle the border as well. In August
2005 Malaysia offered temporary refuge to 131 Thai citizens

KUALA LUMP 00000832 004 OF 004


who said they were fleeing their government's crackdown in
the south. The issue, which has also involved the UN refugee
agency, rubbed raw nerves in Kuala Lumpur and Bangkok, as
government officials abandoned the usual neighborly ASEAN
rhetoric for sharp verbal attacks on each other. The
rhetoric toned down somewhat after the Malaysians returned
one of the 131 asylum seekers, who was wanted on criminal
charges in Thailand.

Slow Progress on Non-proliferation and PSI ...
-------------- -


16. (S) In 2003, a private Malaysian company (partly owned by
PM Abdullah's son) was found to have manufactured and shipped
nuclear centrifuge parts to Libya. The company pleaded
ignorance, but the case underscored the need for Malaysia to
adopt effective export controls. The government is moving
ahead with plans to adopt such controls, including the
conclusion of an Additional Protocol (AP) with the
International Atomic Energy Agency (IAEA) on November 22,

2005. The AP provides a sound policy framework for the
implementation of nuclear-related export controls.


17. (C) We continue to urge Malaysia to participate in
Proliferation Security Initiative (PSI) meetings and
exercises. Malaysia sent two observers in August 2005 to a
PSI exercise in Singapore, and three observers in April 2006
to a PSI exercise in Australia. The government has said it
supports PSI "in principle," and that it would take part in
PSI operations on a case-by-case basis. We have been told
that the government is considering an endorsement of the PSI
Statement of Interdiction Principles, which would allow full
participation in PSI events. However, elements within the
foreign ministry remain adamantly opposed, perceiving that
the PSI is targeted against "friends" of Malaysia, like Iran,
Pakistan and China.


18. (S) As the chair of the Non-Aligned Movement (NAM),
Malaysia has been too supportive of Iranian claims that its
nuclear program is a peaceful one. More recently, the GOM
has moved somewhat away from behavior that bordered on
"coaching" the Iranians. The EU-3 made considerable efforts
to get Malaysia to exert a restraining influence on Iran.
While it appears the Malaysians have privately counseled Iran
to exercise restraint, it does not seem these words had much
influence on the Iranians. Malaysia failed to condemn
Ahmadinejad's threat to "wipe Israel off the map" and gave
President Ahmedinejad a red carpet welcome in Kuala Lumpur as
the IAEA was referring his repeated violations to the United
Nations Security Council.

... But No Progress on Article 98
--------------


19. (C) Malaysia has steadfastly rebuffed our efforts to
conclude an Article 98 agreement, citing unspecified "policy
reasons." Though Malaysia is "studying" the Rome Treaty that
created the International Criminal Court (ICC),we believe
they are unlikely to sign the treaty because of their own
concerns over sovereignty. The Malaysians have told us that
since they are not party to the Rome Treaty, they see little
reason to conclude an Article 98 agreement with us.
LAFLEUR