Indonesian President Susilo Bambang Yudhoyono yesterday suspended intelligence exchanges, military exercises and naval cooperation with Australia, including coordination on intercepting refugee boats. It is a further demonstration of the damaging fallout for Australia and its chief strategic ally, the US, from the diplomatic row over US-Australian spying operations in Indonesia.

By freezing military and intelligence collaboration, Jakarta is hitting the Australian government of Prime Minister Tony Abbott at one of its most sensitive spots. Abbott has made Indonesia central to his regional diplomacy and to his election vows to “stop the boats” carrying desperate asylum seekers to Australia. Moreover, Indonesia is geo-strategically critical to the entire US “pivot” to Asia, directed against China.

Key military links and preparations are already being affected. Overnight, Indonesia cancelled the annual counter-hijack exercise, known as Dawn Komodo, which was scheduled to continue in West Java until November 29. The exercise involves the two countries’ elite units, Australia’s SAS and Indonesia’s Kopassus. The biannual joint air combat exercise Elang Ausindo, which was underway in Darwin, was also halted.

Yudhoyono said the decision, announced after a meeting of senior security ministers, was in response to the Australian government’s failure to satisfactorily explain its surveillance activity in Indonesia, primarily the tapping of the mobile phones of Yudhoyono, his wife and eight members of his inner circle. These operations were conducted by the Australian Signals Directorate (ASD), as part of the US-led “Five Eyes” global surveillance network, which also includes Britain, Canada and New Zealand.

Leaked documents from former US National Security Agency (NSA) contractor Edward Snowden, published by the Australian ABC and the Guardian on Monday, show that the ASD, the direct Australian partner of the NSA, closely monitored the highly sensitive phones during 2009. This followed earlier revelations of electronic spying operations from “listening posts” inside Australian diplomatic missions in Jakarta and other Asian capitals, targeting all phone and Internet communications, as part of the NSA’s global surveillance.

While Yudhoyono expressed personal outrage—asking “why spy on a friend?”—he noted that the surveillance had angered many Indonesians. This points to wider popular hostility toward the blanket US-Australian monitoring of telecommunications, which affects millions of ordinary people. Protesters burned Australian flags in Jogjakarta yesterday and Indonesian police warned that demonstrations were likely outside the Australian embassy in Jakarta today.

Indonesian Foreign Minister Marty Natalegawa indicated that relations could worsen. “We have downgraded the level of relations between Indonesia and Australia,” he said. “Like a faucet, it is turned down one by one.” Notably, however, Yudhoyono issued no call for an apology from Canberra. Instead, he said that in order to restore trust, both countries should agree to a code of conduct to prevent such spying from happening again.

Nor did the Indonesian president refer to the US, having a day earlier declared via Twitter: “These US & Australian actions have certainly damaged the strategic partnership with Indonesia.” For some years, Yudhoyono, a general under the former Suharto dictatorship, has sought to balance his administration’s improved military links to Washington and Indonesia’s increasing economic ties with China.

Behind the scenes, discussions are reportedly underway to try to repair the relations between the US, Australia and Indonesia. Indonesia’s intelligence agency chief, Norman Marciano, told the media yesterday he had been assured by Australian intelligence officials that the phone tapping had stopped and would not resume. His comments were consistent with a claim by Indonesian analyst Wawan Purwanto, who told the Australian that a three-way agreement had been struck between the US, Australia and Indonesia to “not repeat such actions in the future.”

The Obama administration last night joined the Australian government in refusing to confirm or deny, let alone apologise for, the surveillance. US Secretary of State John Kerry, speaking at the conclusion of annual US-Australia ministerial (AUSMIN) talks in Washington, told reporters: “We just don’t talk about intelligence matters in public and we’re not going to begin now.”

Kerry was responding to an obvious question—had the US asked Australia to tap the phones of Yudhoyono and his associates? He sought to play down the diplomatic crisis, emphasising that the US had an “unbreakable and critical working relationship” with Australia, but also “great respect and affection for Indonesia.”

However, the AUSMIN meeting itself underscored the central role being played by Canberra in Washington’s aggressive military, intelligence and strategic “pivot” to Asia, aimed at countering the growing influence of China. The AUSMIN communiqué declared: “The United States and Australia are committed to modernising our Alliance by working together to support the US rebalance to the Asia-Pacific region.”

A souring of relations with Indonesia would have far reaching implications for the US “pivot” or rebalance. One component of the Pentagon’s strategy in a war with China is to impose an economic blockade through the control of key “choke points”—the Malacca, Sunda and Lombok straits—all of which pass through Indonesia.

Last night, in a move to bolster Washington’s position in Asia, the White House announced that Obama would visit the region in April. It was clearly a bid to overcome the damage done to the standing of the US by Obama’s inability to make such a tour—which would have included Indonesia—in October, because of the 16-day government shutdown over slashing social spending.

In Canberra yesterday, Prime Minister Abbott told parliament he would do “everything reasonably I can” to try to repair relations with Indonesia, but did not “propose to overreact now.” He regretted the “embarrassment” to Yudhoyono, who was “a very good friend of Australia, perhaps one of the very best friends that Australia has anywhere in the world.”

Labor opposition leader Bill Shorten fell into line with Abbott and Kerry yesterday, dropping his call, issued in parliament the day before, for Abbott to emulate Obama by apologising to Yudhoyono and assuring him of no further surveillance, as Obama previously did with German Chancellor Angela Merkel over similar spying, also revealed by Snowden’s leaks.

Shorten, who was shown by WikiLeaks documents to be an informant of the US embassy, said Labor would support the Abbott government in its efforts. It would be a “team Australia moment,” he said. “What the government and the opposition must continue to do is to unite in our commitment to improving and repairing this relationship in a timely way.”

The bipartisan unity underscores that a great deal is at stake for Australian imperialism which has cultivated close relations with successive Indonesian governments, including the Suharto dictatorship, for decades. In today’s Australian, Paul Kelly wrote: “There are distinct dangers in Indonesia’s suspension of military cooperation and intelligence exchanges … it is vital that Abbott realise this is not just a security crisis. It is a political crisis. That demands a new form of words and procedures to try to break the cycle of decline.”

The source of the escalating political crisis, however, is not problematic “words and procedures,” but the revelation of the illegal surveillance on rival governments and ordinary citizens around the world by US imperialism and its closest allies. More Snowden-sourced documents from the NSA and its ASD partners will be released in the next period, further fuelling diplomatic and strategic tensions in the Asian region.