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C O N F I D E N T I A L KUALA LUMPUR 000705 
 
SIPDIS 
 
SIPDIS 
 
C O R R E C T E D COPY CLASSIFICATION 
 
E.O. 12958: DECL: 04/18/2016 
TAGS: PREL MASS MARR PTER ECON MY
SUBJECT: SCENESETTER FOR UNDER SECRETARY OF THE AIR FORCE DR. RONALD SEGA 
 
Classified By: DCM David B. Shear for reasons 1.4 b and d. 
 
¶1. (C) 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 and have encouraged Malaysians to increase 
support for moderation and progress in the Middle East. 
 
¶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.  His 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, contained little in the way of drama or new 
initiatives.  Abdullah has emphasized the need for fast 
implementation of 9MP (a tacit acknowledgement 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 3.8 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 
-------------------------------- 
 
¶6. (C) Malaysia currently is the chair of the Non-Aligned 
DR. RONALD SEGA 
 
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.  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.  Malaysia has 
actively supported peace efforts in the southern Philippines 
and Aceh in Indonesia. 
 
Counterterrorism 
---------------- 
 
¶7. (C) 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. 
 
¶8. (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 
tool in fighting terrorism and other forms of transnational 
crime. 
 
Maritime Security 
----------------- 
 
¶9. (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 
currently comprises separate flights by Malaysia and 
Singapore (Indonesia has "temporarily" dropped out for 
operational capacity reasons), with crews that 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.  Talks on establishing an EiS 
standard operating procedure continue, with a view towards 
reactivating Indonesian participation and bringing Thailand 
into the program. 
 
¶10. (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 
DR. RONALD SEGA 
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. 
 
¶11. (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 
--------------- 
 
¶12. (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, and has recruited about 1,000 
personnel from these and other existing agencies.  The navy 
vessels will transfer with their crews intact.  MMEA hopes to 
fill its 4,000 approved positions within a year. 
 
Mindanao Peace Talks, JI Presence 
--------------------------------- 
 
¶13. (C) 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 
----------------------------------- 
 
¶14. (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 
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 ... 
--------------------------------------------- - 
 
¶15. (C) 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. 
DR. RONALD SEGA 
 
¶16. (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. 
 
¶17. (C) 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 
--------------------------------- 
 
¶18. (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