INTERNAL POWER STRUGGLE SLOWS PROGRESS ON REFORM,

C O N F I D E N T I A L SECTION 01 OF 02 JAKARTA 000256

SIPDIS

DEPT FOR EAP, EAP/MTS, EAP/MLS, EAP/RSP, EEB/IPD/OMA
NSC FOR D. WALTON
TREASURY FOR IA T. RAND
SINGAPORE FOR S. BLEIWEIS

E.O. 12958: DECL: 02/25/2020
TAGS: PGOV PREL ECON KDEM ID
SUBJECT: INTERNAL POWER STRUGGLE SLOWS PROGRESS ON REFORM,
INDONESIA-U.S. PARTNERSHIP

REF: JAKARTA 00222 AND PREVIOUS

Classified By: DCM Ted Osius for reasons 1.4(b+d)


1. (C) SUMMARY: President Yudhoyono's reform efforts are
slowing as he grapples with elements of his own government
who seek to preserve Suharto-era patronage norms. Golkar and
a cluster of other parties seek to undermine Yudhoyono's
reforms by pinning responsibility for a controversial 2008
bank bailout on the government, and principally on key
reformers Finance Minister Sri Mulyani Indrawati and Vice
President Boediono. A legislative inquiry cast as an effort
to promote transparency and good governance has served as a
vehicle for parties, particularly Golkar -- the coalition
party led by Aburizal Bakrie -- to jockey for influence in
the current administration and to enhance their prospects for
the 2014 election. Given serious domestic political fallout
resulting from the inquiry, the President is unwilling to use
any political capital to press forward with potentially
unpopular reforms or take on any controversial issues,
including some elements of the Indonesia-United States
Comprehensive Partnership. END SUMMARY.

BAKRIE FIRES THE FIRST SHOT


2. (C) The Bank Century scandal has its roots in Finance
Minister Indrawati and Vice President Boediono's push for
bureaucratic and economic reform. A special parliamentary
inquiry committee concluded that there was apparent
malfeasance in the decision to bail out the Bank, and will
likely refer the case to law enforcement authorities. These
reforms threaten the Suharto-era patronage norms embodied by
wealthy businessman and Golkar party chair Aburizal Bakrie.
Bakrie, a key fundraiser for both of President Yudhoyono's
campaigns, was Coordinating Minister for the People's Welfare
in Yudhoyono's last administration. From that position
Bakrie maneuvered to avoid blame for the Lapindo mudflow
disaster and to gain an inside track to acquire a stake in
Newmont's Batu Hijau mine. Bakrie's companies have also
reportedly evaded taxes and circumvented other government
regulations.


3. (C) Bakrie has repeatedly clashed with reformers in
Yudhoyono's government. For example, in October 2008 Bakrie
persuaded authorities to close Indonesia's stock market to
halt the falling price of shares in his family's Bumi
Resources. Finance Minister Mulyani told Yudhoyono that she
would resign if trading did not resume. She eventually
prevailed. However, Bakrie, still bitter about this episode,
aimed to take her and VP Boediono down through a Golkar-led
parliamentary inquiry into the government's 2008 bailout of
Bank Century. Mulyani and
Boediono, then BI governor, were key decision makers behind
the bailout.

YUDHOYONO FIRES BACK


4. (C) Bakrie's attacks on Yudhoyono's two most respected
cabinet members and other actions have led the usually
cautious President to respond. Returning to the Lapindo
incident, Yudhoyono's government has re-opened an
investigation into the cause of the mudflow. Most observers
agree this was a direct attempt to rein in Bakrie.


5. (C) Yudhoyono's recent remarks that he would "clean up
tax evaders" and discourage unhealthy relations between
business and politics were aimed at Bakrie and his family
business. Yudhoyono's Democratic Party (PD) members have
suggested the possibility of a cabinet reshuffle of Golkar
and PKS ministers if these coalition partners continue to
agree with the opposition that the Bank Century bailout was
illegal and continue to press for Mulyani and Boediono's
removal. As Yudhoyono distances himself from Bakrie, this
could cause investors lured by Bakrie's well-known access to
the palace to lose confidence in his businesses.

BAKRIE,S NEXT MOVE?


6. (C) Despite the attacks on Yudhoyono,s trusted advisors,
Bakrie has reiterated that Golkar wants to participate in the
ruling coalition until 2014. His expressed desire to bring
charges against Indrawati and Boediono to legal authorities
demonstrates his desire to draw out the controversy and erode

JAKARTA 00000256 002 OF 002


Yudhoyono,s standing, however. Since Bakrie became the head
of Golkar several months ago, he has pursued this strategy
with success, as Yudhoyono,s plunging poll figures show.

GRIDLOCKED GOVERNMENT SLOWS PROGRESS ON REFORM, PARTNERSHIP


7. (C) President Yudhoyono started his second term with
sixty percent of the vote and a seventy percent approval
rating while his Democratic Party holds the largest share of
parliamentary seats. This strong mandate for reform has
prompted a sharp defensive reaction from Bakrie and his
allies who see an increasing threat to their traditional
power. The ongoing parliamentary inquiry, extensive media
commentary and frequent but small street protests have kept
the pressure on the Palace. The issuance of the
parliamentary faction opinions on February 23 placed added
pressure on Yudhoyono,s fractious coalition Cabinet.


8. (C) This struggle has paralyzed Yudhoyono and his
government. Unwilling to risk alienating segments of the
parliament, media, bureaucracy and civil society, Yudhoyono
has slowed reforms. He is also unwilling to cross any
constituencies who oppose potentially controversial elements
of the U.S.-Indonesia Comprehensive Partnership, such as
expanded health cooperation. Until he is satisfied that he
has shored up his political position, Yudhoyono is unlikely
to spend any political capital to move his reform agenda, or
controversial aspects of U.S.-Indonesia relations, forward.
HUME