Indonesia

Indonesia’s president recently visited Russia to meet with Vladimir Putin. But this is not a matter of choosing sides — Jakarta continues to uphold and even reinforce its policy of non-alignment.

By Francesco Mattogno

From June 18 to 20, Indonesian President Prabowo Subianto was hosted by Russian President Vladimir Putin in St. Petersburg, where the annual St. Petersburg International Economic Forum (SPIEF) was concurrently taking place. Prabowo was one of the forum’s most high-profile guests. Every year, the SPIEF attracts tens of thousands of politicians and representatives from major international companies to discuss business, investment, economic policy, and more. Essentially, the SPIEF is a platform to do business with Moscow, and the Indonesian president’s visit falls squarely into this category of interests. Although this was Prabowo’s first trip to Russia since taking office in October, the former general has previously visited the country and met with Putin several times during his tenure as Defense Minister in the previous administration. His most recent visit to Russia had been in July 2024, when he was president-elect. Since then, relations between Jakarta and Moscow have only continued to strengthen.

In November, the Indonesian and Russian navies held their first joint naval exercises in the Java Sea. In January, Indonesia joined the BRICS group, an event celebrated by Putin himself. Then in February, Prabowo hosted the Secretary of Russia’s Security Council (and former Defense Minister) Sergei Shoigu to further enhance defense and security ties — a topic also discussed during the recent meetings in St. Petersburg. On June 16, ahead of Prabowo’s visit, Indonesian Foreign Minister Sugiono met with his Russian counterpart, Sergei Lavrov, where both sides "committed to strengthening relations and partnerships for the mutual prosperity of our peoples," Sugiono stated.

In short, relations between Indonesia and Russia are going very well, and Prabowo’s visit to St. Petersburg was part of an already well-oiled relationship — not particularly surprising. Yet it stirred more debate than usual.

To make this trip to Russia, Prabowo declined an invitation from the G7 countries to attend their summit in Kananaskis, Canada, which took place from June 15 to 17. This displeased some observers, while others interpreted the move as a sign of Indonesia’s strategic realignment. Jakarta quickly rejected such geopolitical interpretations, explaining that it simply wanted to honor pre-existing commitments with Singapore (where Prabowo was on June 15–16) and with Moscow.

In his SPIEF speech, Prabowo rejected the idea of dividing the world into “power blocs” and reiterated the core principle of Jakarta’s foreign policy: “Indonesia has always been non-aligned. We respect all nations. Our foreign policy is simple: a thousand friends are too few, a single enemy is too many.” Prabowo and Putin signed several memoranda of understanding to strengthen cooperation in various areas — with a strong focus on economic and commercial matters, but also touching on military and space collaboration.

The most concrete agreements involve education, infrastructure, and transportation, as well as civilian nuclear technology — Indonesia hopes to use Russian technology to build its first nuclear reactor by 2032 — and cooperation in internet and information sectors. Both parties also pledged to resume discussions on the development of a long-stalled refinery in Tuban, East Java. Most notably, they announced the creation of a joint investment platform worth €2 billion between their respective sovereign wealth funds. Meanwhile, negotiations are still ongoing for a bilateral trade agreement, though Putin stated that he is happy to sell Russian gas and oil to Indonesia to help meet its domestic energy needs.

The desire of countries like Indonesia or Malaysia to deepen ties with Moscow does not mean they are choosing sides — quite the opposite. Jakarta’s non-alignment — and that of Southeast Asia more broadly — can be understood as a strategy to maintain good relations with all sides, thereby reducing dependence on any single one. Diversifying trade and security partnerships serves both domestic and diplomatic purposes: in recent months, Indonesia has also strengthened its bilateral and defense ties with the United States, Australia, Japan, Turkey, and Gulf countries, among others.

Often, geopolitics has little to do with it. Prabowo has heavily increased the national budget to fund a series of expensive populist projects, which he must reconcile with his ambitious target of 8% GDP growth by 2029. To fulfill his promises, he also needs Russian investments, fuel, and technology.

Article by Luca Menghini

Indonesia's Path to Growth and Stability

Since October 20, 2024, Prabowo Subianto is the new president of Indonesia, following a highly contested election that brings both continuity and change. Building on the foundation laid by his predecessor, Joko Widodo, better known as Jokowi, Prabowo aims to boost Indonesia’s economic growth while introducing new strategies to address the long-standing structural challenges that have always characterized the country. His administration arrives at a crucial moment for Indonesia, which, as the largest economy in Southeast Asia, positions itself at the center of the global trade, especially given its wealth of natural resources.

Prabowo has emphasized that his commitment will be to continue many of Jokowi's policies, particularly concerning infrastructure development and resource management. Jokowi's administration saw Indonesia become a significant player in the electric vehicle supply chain, capitalizing on and leveraging its vast reserves of nickel, one of the key components used to manufacture EV batteries. Various foreign companies, including Hyundai and LG, have made significant investments in Indonesia, attracted by the opportunity to access these resources. Prabowo has promised to pay particular attention to developing the domestic downstream sector, which involves refining raw materials into high-value products. This is to ensure that Indonesia gains more benefits beyond the mere extraction of resources, allowing the country to better capitalize on the wealth present within its territory.

Prabowo's promises of continuity are reassuring for many people; however, compared to his predecessor, he faces an economy with new challenges. Under Jokowi, Indonesia experienced stable growth of around 5% per year. However, Prabowo has set an even more ambitious goal, aiming for growth of 8% during his presidency. Achieving this will not only require a continuous flow of investments in infrastructure but also reforms in other sectors, particularly in boosting the level of innovation and addressing the ongoing issue of informal employment in the country. Indonesia's economy, heavily reliant on exports of raw materials such as nickel and palm oil, needs to be diversified to ensure sustainable growth and avoid falling into what economists call the "middle-income trap." This is the point at which a country's economy begins to stagnate before reaching the status of a developed economy.

One of Prabowo's most ambitious plans is to significantly increase government spending, particularly on social programs such as free meals for school-aged children, one of his campaign promises. His administration is aiming to raise Indonesia's debt-to-GDP ratio from the current 39% to 50%, a move that is sparking a heated debate among economists and investors. While Prabowo's team argues that increasing the country's debt is necessary to provide the funds deemed essential for the various programs the government wants to implement, critics claim that such a move could destabilize Indonesia's long-standing fiscal discipline. Under Jokowi, Indonesia maintained conservative fiscal policies, with strict limits on budget deficits and debt issuance, which helped protect the economy from external shocks.

Prabowo's administration has reassured the markets by stating that the increase in borrowing will be accompanied by efforts to raise revenues. His team has proposed various measures to boost government income, including raising taxes and royalties from the mining sector, as well as enhancing the mechanisms for tax collection. However, the challenges are significant. The tax-to-GDP ratio remains low compared to other Southeast Asian nations, and many of the country's workers are employed informally, making it difficult to expand the tax base.

Energy and energy security are other key pillars of Prabowo's economic agenda. Indonesia is the largest producer of palm oil, and Prabowo is planning to expand its use in biofuel production, with the goal of reducing the country's dependence on diesel imports. Under the B35 policy introduced last year, a blend containing 35% palm oil is now legally required in biodiesel, and Prabowo has decided to increase this percentage to 50% by 2029. By reducing dependency on fuel imports, Prabowo hopes to improve the country’s trade balance and give a significant boost to domestic production. 

Regarding the issue of food security, Prabowo has emphasized the need for agricultural reforms to increase productivity and reduce Indonesia’s dependence on food imports. He has highlighted plans to invest in modernizing the agricultural sector, improving irrigation systems, and expanding access to credit for small-scale farmers. These measures aim to ensure that Indonesia meets the food needs of its population while also creating new opportunities in rural areas.

Prabowo's leadership will also be shaped by Indonesia's geopolitical position between the two global powers, the United States and China. Indonesia has maintained a neutral stance, carefully balancing its relations with both countries, and Prabowo is expected to continue this approach. China is Indonesia's largest trading partner, and economic ties between the two countries have strengthened in recent years, particularly in terms of infrastructure investments. At the same time, Indonesia remains a key partner of the United States in Southeast Asia, particularly in the security sector. Prabowo, a former general, is expected to continue developing Indonesia's defense capabilities while maintaining a neutral approach in the broader geopolitical competition between the United States and China.

Foreign investments will continue to play a key role in Prabowo's economic strategies. Under Jokowi, Indonesia saw significant growth in foreign direct investment (FDI), particularly in the mining and manufacturing sectors. Prabowo has indicated that he will maintain the incentives introduced under the previous administration to attract foreign investors, including tax breaks and streamlined regulations. However, the market reaction to Prabowo's economic policies has been mixed, with some investors concerned about the potential risks of increased borrowing. Recent downgrades by investment banks like Morgan Stanley reflect these concerns, although rating agencies such as Fitch and Moody's have maintained a stable outlook for Indonesia, citing the country's strong economic fundamentals.

Despite these challenges, Prabowo's presidency represents an opportunity for Indonesia to solidify its position as a regional economic leader. His administration is focused on industrial development, energy independence, and food security, which should lead to the goal of achieving long-term stability and growth. However, everything will depend on how effectively his government can balance the need for fiscal prudence with the demands of an ambitious economic agenda. Investors and international partners will be closely watching how Prabowo navigates these challenges in the early years of his presidency.

The inauguration of Prabowo's presidency marks the beginning of a new chapter for Indonesia. It is hoped that this chapter will be defined by efforts to accelerate growth while ensuring that its benefits are distributed equitably among the population. His ambitious targets, while challenging, signal a clear intention to transform Indonesia into a high-income country by 2045. If successful, his policies will not only lift millions of people out of poverty but also solidify Indonesia's role as a global economic power in the years to come.

The foreign policy approach of Indonesia's newly elected president will help determine the balance in the region.

By Alessia Caruso

In February 2024, Indonesia's Defence Minister Prabowo Subianto won the presidential election in South-East Asia's largest democracy. He will formally assume office from October, taking over from his long-time rival Joko Widodo. 

Prabowo's presidency opens against a backdrop of rising regional tensions, presenting him with a significant challenge in positioning himself within the political chessboard. At 72 years of age, the newly elected President will have to skilfully navigate this complex geopolitical landscape. It will be crucial to understand what foreign policy approach Prabowo will adopt. Indeed, his decisions will have inevitable repercussions on the role and balance of power within ASEAN. 

Tension in the South China Sea area has been drastically increasing in recent years. According to available data, the total military expenditure of the countries in the region has grown by 6.2% in recent years, reflecting the desire of these states to strengthen their presence and projection capabilities in the area. In parallel, there has been an intensification of regional strategic alliances. In particular, the US has become more actively engaged, strengthening political and military ties with allies such as Japan, the Philippines. The combination of clashes, increases in defence spending and alliances in the region highlights how the South China Sea has become one of the main theatres of geopolitical competition between the great powers in the Indo-Pacific.

As the most populous country and largest democracy in Southeast Asia, Indonesia plays a major role in the complex geopolitical context of the South China Sea. As tensions and conflicts in the area continue to escalate, all eyes are on how President Prabowo's administration will approach the increasingly tense regional environment.

During Widodo's tenure, Indonesia's approach towards China has evolved considerably from a proactive attitude aimed at promoting regional peace, to a passive, non-antagonistic one, while maintaining a firm defence of national borders in the Natuna Islands area, Indonesian territory claimed by China within its controversial ‘Dash line’. Under Widodo, the interest in redeeming a role in the regional balance of power has made way for the desire to develop local infrastructure, financed largely by China.

Although it is still too early to define how Prabowo will present himself in the international scenario, a clear indication was given by his visit to China, from 31 March to 2 April, at the personal invitation of President Xi Jinping. On this occasion, the President of the People's Republic extolled the development of bilateral relations between the two states, while Prabowo renewed his intention to pursue Widodo's cooperative policies. The intention is to strengthen economic, trade and anti-poverty relations. This is Prabowo's first trip as President-elect, and he thus decides to set the priorities of his term of office from the outset. This decision is reflected in the economic ties that have been built over the past decades between the two powers. The People's Republic has become Indonesia's main trading partner, accounting for 40% of its exports and 55% of its imports, thus creating an undoubted link of economic dependence. The visit thus testifies to the importance Prabowo intends to place on the domestic and economic dimension within his agenda, continuing his predecessor's policy of appeasement. The relationship established between the two states appears to all intents and purposes to be a mutual exchange agreement, such that Indonesia secures its economic interests, while China secures the tacit consent of the South China Sea's most populous nation, in a context where bilateral relations are becoming increasingly decisive. In describing his security and defence relationship with China, Prabowo describes the People's Republic as a key partner in ensuring stability and peace in the region. In doing so, the Indonesian general seems well prepared to cede control of the regional security and defence line to China, consciously abdicating his condemnation of military incursions into the territorial waters of other ASEAN member states. However, the risk of this strategy of security passivism is that Indonesia will abdicate altogether the political role it is entitled to within the region's balance of power. A role that, prior to Widodo's presidency, Indonesia was largely committed to redeeming.

The implications for ASEAN's resilience are important. Indeed, the risk is that the inability, as well as the lack of will, to take a stand within the regional debate will contribute to the fragmentation of political will, with the result that the region will increasingly become a playground for US-China rivalry. The lack of strategic positioning of the leading ASEAN democracy, in a tense context such as the South China Sea, is in itself a stance in favour of increasing fragmentation.

In conclusion, how the new Indonesian president will balance domestic, regional and global interests will be crucial in defining Indonesia's future positioning in the Asian arena and the consequent repercussions on the cohesion of ASEAN.

The Indonesian economy is growing at a rapid pace, following a model that combines free market principles with State planning. During Jokowi's administration, state-owned companies have gained even more prominence. How will his successor Prabowo wield this tool?

Over the next twenty years, Indonesia could become the world's fourth-largest economy. Currently, it ranks seventh when measuring its GDP at purchasing power parity. The archipelago is endowed with abundant natural resources and a young, sizable workforce—two key factors for growth, albeit insufficient on their own. It also requires foreign investments and facilitating business activities. The Jokowi administration attempted to accomplish this in one fell and decisive swoop. In 2020, the Omnibus Law, a massive piece of legislation spanning about a thousand pages and touching many sectors, was passed. Even the trade policy follows the path of economic liberalization. Jakarta has intensified its diplomatic efforts to conclude an ambitious free trade agreement with the European Union and strongly opposes any foreign measure that may have protectionist effects on its exports, such as those from Brussels regarding palm oil.

Yet, despite the determined liberalizing push, State-Owned Enterprises (SOEs) continue to play a central role in the Indonesian economy, a role that has further strengthened in the last decade. Jokowism, as his government's economic doctrine is called, is a fusion of free market principles and robust State intervention. In Europe or the United States, where the market is deemed more efficient than the State by principle, such a mix would appear contradictory and even economically irrational. Not to Indonesians, nor to other Southeast Asian countries. This economic model, rewarded in recent decades by stable and vigorous GDP growth, predates Widodo and, as mentioned, is also present elsewhere in the region. In different forms, as described by Dr Gianmatteo Sabatino, a researcher at Zhongnan University of Economics and Law in Wuhan, in the excellent article The emerging trends of the modernization of state-controlled economy in the ASEAN space. The case of Indonesian State-Owned Enterprises (published on Rivista di Diritti Comparati, 1/2023).

Sabatino reconstructs how the Indonesian model of state-owned enterprise has evolved, starting from the commercial law of the Netherlands, which was transplanted into Indonesia during the colonial period, then passing through the regimes of Sukarno and Suharto. The independence process, officially sanctioned by the Indonesian Constitution of 1945, also involved the nationalization of Dutch public and private properties. Article 33 of the Constitution, still in force, states that ‘sectors of production which are important for the country and affect the life of the people shall be under the powers of the State’, as well as ‘the land, the waters and the natural resources’, which must be ‘shall be used to the greatest benefit of the people’. Article 33 also sets ‘economic democracy’ as the lodestar of the Indonesian economy. To implement these principles, Sukarno looked to the socialist economic planning model, also in line with his foreign policy of gradual rapprochement with the Soviet Union. This course was abruptly interrupted by Suharto's coup, supported by the United States to prevent Indonesia from definitively entering the Soviet orbit.

After brutally eliminating any socialist (or suspected socialist) elements, Suharto reversed course by promoting a liberalist economic model, albeit without much success. His reforms introduced corporate governance legal frameworks closer to those of Europe and America but clashed with the corporatism rooted in Indonesian society. Suharto's fall ushered in Indonesia's era of political-economic Reformasi, with the constitutional principle of economic democracy resurfacing and the emergence of a new ‘national’ development model. Despite demands from various sides, particularly from the International Monetary Fund, to continue with liberalizations and privatizations, Jakarta prefers to maintain the State's role in the economy. A well-administered public company can stimulate development and even facilitate the emergence of new private enterprises. Jokowi knows this well. His entrepreneurial career began as a manager of a State-owned cellulose factory and, after starting his own private business, the future president was repeatedly aided by SOEs in times of need.

However, Indonesian state capitalism is exposed to two serious risks. Private enterprises need personal and political contacts in the government to conduct business and cooperate with their State counterparts. A good network of contacts can keep a company afloat that would otherwise be destined to fail. This dynamic then produces the second problem: the risk of interest coalitions forming between ministries and companies that degenerate into corruption or paralyze decision-making processes. This is a significant problem, as a corrupt and unstable political system can deter the much-sought foreign investment. A ministry may put aside more important political goals to prioritize protecting the companies it owns, even at the expense of clashing with other ministries. For example, negotiations with the EU for the free trade agreement were greatly hindered by internal divisions within Widodo's cabinet, with each ministry taking sides for or against certain issues. Perhaps the Ministry of Agriculture would want to reject every European request regarding palm oil, even at the cost of completely blocking the negotiations, to appease a core constituency of the minister. The Ministry of Industry, on the other hand, would be eager to conclude the agreement as soon as possible, to gain greater access to the European market for (its own) manufacturing companies. 

Widodo's successor, former general Prabowo Subianto, may rely on SOEs to promote his policies, unless he intends to change this economic doctrine. It is unlikely that he will, considering that Jokowism is extremely popular and allows for mobilizing the country's growing economic resources for other purposes. It is more difficult to anticipate what these purposes will be. Fulfilling the constitutional principle of economic democracy? Growing the economy, fairly and sustainably, or just focusing on the GDP growth percentage? Or perhaps strengthening his own power system? The proliferation of SOEs under Jokowi recalls a similar trend observed in Xi Jinping's China. The key difference is that in Indonesia, the actions of ministries, and thus their enterprises, can be subject to political debate and change from one legislature to another. As Sabatino points out, the timing of development planning is appropriately synchronized by Indonesian law with elections. Electoral results impact the business choices of SOEs. Borrowing a famous expression associated with China, the ‘capitalism with Indonesian characteristics’ presents unique and undoubtedly interesting elements, as it is an alternative and almost opposite to Western capitalist practices, destined to lead the archipelago to the podium of world economies.