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Cablegate: Argentina and Brazil Pledge Increased Cooperation

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RR RUEHWEB

DE RUEHBU #1324/01 2671212
ZNR UUUUU ZZH
R 231212Z SEP 08
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 2087
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHINGTON DC
RUEKJCS/SECDEF WASHINGTON DC
RHEFDIA/DIA WASHINGTON DC
RUCNMER/MERCOSUR COLLECTIVE
RHMFIUU/HQ USSOUTHCOM MIAMI FL
RUEHLI/AMEMBASSY LISBON 0043
RUEHMD/AMEMBASSY MADRID 2129

UNCLAS BUENOS AIRES 001324

PASS NSC FOR MICHAEL SMART
US SOUTHCOM FOR POLAD

SENSITIVE
SIPDIS

E.O. 12958: N/A
TAGS: ECON PREL EINV ENRG EFIN EIND MARR MCAP SENV AR BR
SUBJECT: Argentina and Brazil Pledge Increased Cooperation

Reftel: (A) Buenos Aires 1279
(B) Buenos Aires 1277
(C) Buenos Aires 1116
(D) Buenos Aires 230

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Summary
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1. (SBU) Argentine President Cristina Fernandez de Kirchner (CFK)
and Brazilian President Luiz Inacio Lula Da Silva (Lula) pledged
increased cooperation and agreed on a number of economic and
infrastructure deals during a September 6-8 CFK state visit to
Brazil. The fact that the summit constituted CFK's first state
visit of her presidency and was timed to coincide with Brazil's
186th national day celebrations underscored the value that CFK
places on Argentina's relationship with Brazil. The most important
agreements signed and issues covered included: plans to replace the
U.S. dollar with local currencies in their bilateral trade; a pledge
to work together on global trade talks; discussion of digital TV
standards; further nuclear cooperation; creation of a joint
infrastructure investment fund by the nation's development banks;
increased military cooperation; the consideration to locate a Brazil
state-owned aircraft Embraer plant in Argentina, along with the
possible purchase of Embraer planes by Aerolineas Argentinas; and
increased electricity, gas, and rail interconnections. CFK also
inaugurated a wind energy production plant built by an Argentine
multinational. While most of these agreements are merely formal
expressions of support for plans already in development, the summit
underscored the close ties between these allies, Mercosur's two
biggest members. END SUMMARY.

--------------------------
Broad areas of cooperation
--------------------------

2. (SBU) Argentine President Cristina Fernandez de Kirchner (CFK)
and Brazilian President Luiz Inacio Lula Da Silva (Lula) pledged
increased bilateral cooperation and agreed on a number of economic
and infrastructure deals during a September 6-8 CFK state visit to
Brazil. According to a joint press release, the "meetings also
allowed the presidents to advance the Argentina-Brazil Integration
and Coordination Mechanism (the first was held in Buenos Aires in
February 2008 - ref D), and to review the broad spectrum of the
bilateral relationship."

3. (SBU) CFK was accompanied by senior GOA officials, including
Foreign Minister Jorge Taiana, Defense Minster Nilda Garre, Economy
Mininster Carlos Fernandez, Planning Minister Julio De Vido, and
Buenos Aires Provincial Governor Daniel Scioli. The GOB side was
similarly represented.

4. (SBU) The summit produced a 17-page "Joint Declaration" that
lists areas of current and potential cooperation. The Declaration
established four subcommittees to further expand cooperation:
macro-economic coordination and S&T; energy, transportation, and
infrastructure; defense and security; and health, education, social
development, culture, and movement of people. Among the
Declaration's highlights, the two sides reiterated their promise to
deepen Mercosur, "the principal path for regional integration for
both nations from the political, social and economic-commercial
point of view," and highlighted the "fundamental" importance of
addressing Mercosur member nations' imposition of secondary internal
tariffs above and beyond the bloc's common external tariff. The
declaration hailed the full implementation of Mercosur's Structural
Fund for Convergence (which compensates Uruguay and Paraguay for
investments lost to predominant members Argentina and Brazil) for
its "great importance in correcting asymmetries" between member
states, and reiterated their promise to facilitate a system of
financial guarantees as a first step towards the establishment of a
Mercosur fund to assist small and medium-sized firms. The
Declaration "reiterated Argentina and Brazil's disposition "to
continue extra-regional negotiations" and move forward on long
stalled Mercosur-EU FTA talks, as well as to "deepen South-South
trade negotiations." Finally, the Declaration established the date
of the Third Bilateral Integration and Coordination meeting for
April 23, 2009, in Buenos Aires.

--------------------------------------------- --------
First CFK state visit underscores strong GOA-GOB ties
--------------------------------------------- --------

5. (SBU) This was CFK's first state visit of her presidency, and was
timed to coincide with Brazil's 186th national day celebrations. It
also reciprocated a state visit by President Lula to Argentina
earlier in the year (ref D). Her visit included meetings with
President Lula, congressional and Supreme Court representatives, and
business leaders. According to a GOB press announcement, CFK made a
"state visit to Brazil to participate as the guest of honor of the
National Day commemorations."

6. (SBU) According to a high-level Argentine MFA official, the GOA
was very pleased with the visit and, while acknowledging that most
if not all of the agreements formalized initiatives already in
various stages of development, the visit represented an important
milestone and agenda-setter for CFK's presidency, strengthening what
is for Argentina its most important bilateral relationship.
According to an May 2008 State Department INR poll about which
bilateral relationship is the most important to Argentines, Brazil
was by far the number-one choice, at 58%, followed by Venezuela at
27%, and the United States at 23%. In a similar poll that gauged
regional leaders' appeal, Lula had the highest positive approval
ratings at 64%, followed by Bolivian President Morales at 50%, and
Chile's Michelle Bachelet at 45% (POTUS was at 4%). All new
Argentine Foreign Service Officers are required to learn Portuguese,
as well as English, and the Brazilian DCM told us recently that he
conducts many of his meetings at the Foreign Ministry in Portuguese.


---------------------------------------------
Replacing trade in dollars for local currency
---------------------------------------------

7. (SBU) Lula and CFK reiterated their support for an earlier
announced plan to replace the U.S. dollar with local currencies
(Argentine peso and Brazilian real) in settling their bilateral
trade accounts (ref C). The Declaration noted "satisfaction" with
the recent agreement between the Argentine and Brazilian central
banks to implement this system, and that it will come into force in
"as short a time as possible." GOA and GOB officials stated that
the move could significantly reduce financial costs and red tape on
bilateral trade, which will reach $30 billion in 2008 (with an
estimated $5 billion Brazilian surplus). It remains unclear when
this plan will come into operation: the GOA and GOB central banks
announced in June that they would implement this payment system in
September 2008. The plan calls for a unified "reference" exchange
rate between the real and peso, as a way to "deepen regional
integration and increase the exchange of goods." In June 2008,
Brazilian Finance Minister Guido Mantega said it would reduce
transaction costs and benefit small- and medium-size businesses, and
that "in the long run it's a path to a common currency." The first
stage of the plan includes only Brazil and Argentina, but could be
expanded to include Uruguay and Paraguay. Venezuela has also
expressed interest in this initiative.

--------------------------
Coordinating WTO positions
--------------------------

8. (SBU) The declaration called for each country's international
trade negotiating groups to "maintain permanent contacts and hold
periodic meetings to consult and coordinate positions on the issues
included in the WTO agenda and evaluation of international trade
with the objective of a common position." Local analysts believe
that the collapse of the WTO Doha Development Round talks and
end-game disagreements in Geneva between the GOA and GOB over
appropriate industrial tariff cuts have prompted Mercosur to seek a
common front as it pursues trade deals elsewhere, particularly with
the European Union. (Mercosur-EU FTA talks had stalled during
extended Doha round negotiations.) "It is fundamental that Mercosur
speak with a single voice in the world," President Lula said during
a luncheon in honor of CFK.

----------------------------------
Synchronizing digital TV standards
----------------------------------

9. (SBU) The declaration called for the GOA Ministry of Planning and
GOB Ministry of Communications "to hold regular meetings with the
objective of exchanging technical and institutional information and
exploring the mutually advantageous opportunities of a partnership
for both countries in the issues of investment, equipment
production, strengthening of the production integration,
technological development, promotion of research and cooperation in
the field of developing software, among other possibilities
associated with digital TV." Although the local media has portrayed
this chapter as a possible prelude to GOA formally accepting
Brazil's modified Japanese DTV standard, there have been no formal
GoA declarations to this effect. (Ref C details recent developments
in the competition between U.S.-, European- and Japanese-led groups
to have Argentina adopt their DTV standard as well as Embassy
advocacy efforts.)

-----------------------------
Expanding nuclear cooperation
-----------------------------

10. (SBU) The two sides expressed their satisfaction with the
GOA-GOB March 2008 bilateral Nuclear Energy Commission (COBEN), and
for the May 2008 Binational Seminar on Nuclear Cooperation. They
expressed their intention to create a joint state company (EBEN)
that will develop compact nuclear reactors and perform uranium
enrichment. They instructed each side's relevant authorities to
identify possible areas of financing that will permit the quick
implementation of specific joint projects, and set the next COBEN
meeting for October 22 in Buenos Aires.

----------------------------
Development bank cooperation
----------------------------

11. (SBU) Both sides agreed to create an investment fund to finance
joint infrastructure projects. The two sides signed an agreement
for Brazil's National Bank for Economic and Social Development
(BNDES), Argentina's (state-owned) National Bank (Banco de la
Nacion), and Argentina's state-owned mezzanine financing Bank of
Investment and Foreign Trade (BICE) to create a fund to finance up
to $30 billion in infrastructure projects and bilateral trade, and
to "work on new viable economic projects of strategic interest of
both governments."

-------------
Military ties
-------------

12. (SBU) In the area of "Defense and Security," the Declaration
highlighted the "Joint Defense Working Group" that has identified 16
projects related to Army, Navy and Air Force cooperation. These
include cooperation and information exchange on naval gas turbines
motor overhaul, sonar repairs, terminal missile homing systems,
diesel motor maintenance, submarine repair, the development of a
multipurpose naval patrol vessel, amphibious vehicle modernization,
and radar modernization. The Declaration also noted their intention
to continue joint development of a lightweight military vehicle
("Gaucho") whose full production could begin next year.

13. (SBU) Mil Group Comment: For the GOA Armed Forces and MOD, this
agreement appears to advance their objectives of maintaining and
modernizing their existing military systems and improving logistics
efficiency. The plan to cooperate on sonar operations speaks to the
GOA Navy's relatively stronger technical and operational experience
in Argentina's shallower ports. Overall, it appears Argentina is
offering its technical expertise in the hopes of gaining access to
Brazil's financial resources to repair and update their current
systems. End MilGroup comment.

--------------------------------------------- -
Possible EMBRAER aircraft production and sales
--------------------------------------------- -

14. (SBU) The declaration also noted the two sides' intention to
discuss the possibility that Brazilian aircraft and components be
produced in Argentina. Although the declaration did not name
Brazilian aircraft manufacturer Embraer by name, the agreement
appeared to confirm earlier press reports that the GoA is interested
in having Brazilian aircraft manufacturer Embraer set up an assembly
plant in Argentina. According to these same press reports, recently
renationalized flag carrier Aerolineas Argentinas (Ref B) could buy
up to 26 Embraer-190 narrow-body, twin-engine, medium-range
airliners.

15. (SBU) Comment: The possibility that Embraer could set up a
production facility in Argentina is also consistent with Embassy
Buenos Aires Milgroup's view that the GOA MOD would like to turn its
current aircraft facilities in Cordoba, now managed by Lockheed
Martin, into a regional center which would, among other things,
build and maintain both military and civilian airframes (the latter
for Aerolineas Argentinas). For this to be possible, the GOA MOD
knows that it needs an outside investor, with a business plan and
regional market. Embraer has long been the leading candidate, and
Milgroup understands that the MOD has approached the Brazilian firm
in the past about this prospect. End comment.

-----------------------------------------
Developing energy infrastructure projects
-----------------------------------------

16. (SBU) The two sides pledged to work together on joint energy
infrastructure projects, including accelerating development of the
long planned binational hydro-electric project on the Uruguay River.
The accord stipulates that the two will hold a bidding process
within 24 months for their first joint hydroelectric plant, to be
located in the city of Garabi, along their shared border on the
Uruguay River. The $2 billion plant will have a two GW electricity
generation capacity. President Lula also invited Argentina to help
build part of the infrastructure Brazil needs to develop massive
offshore oil and gas discoveries it made last year.

--------------------------------------------- --
Increased electricity, gas, and rail connections
--------------------------------------------- --

17. (SBU) The GOA and GOB pledged to investigate the possibility of
"increasing and expanding" their electricity and gas connections
already in existence. The Declaration called for continued
discussions to develop a plan for a possible
Brazil-Argentina-Paraguay-Chile transoceanic rail, to run from
Paranagua, Brazil, to Antofagasta, Chile. (This proposed rail link
has been raised in previous bilateral and regional discussions.) It
also called for greater rail links between the Argentina and Brazil.


----------------------------------
Inauguration of wind energy plant
----------------------------------

18. (SBU) In a separate trip to the northern Brazilian city of
Recife, CFK inaugurated what was reported to be the first wind
energy production plant in northeast Brazil, built by Argentina's
Pescarmona Group, Impsa Wind. The $79 million plant will assemble
wind generators from components manufactured in Argentina for the
Brazilian and regional markets. The company will directly generate
300 jobs in Brazil and is part of an announced four-year, $1.5
billion regional investment project expected to create as many as
24,000 direct and indirect jobs in Mercosur countries.

--------------------------
Other areas of cooperation
--------------------------

19. (SBU) The Declaration also called for future discussions related
to: economic policy coordination, bilateral trade and integration,
the development of an Argentine-Brazilian satellite for ocean
observation, nanotechnology cooperation, renewable energy, new
bridges on the Uruguay river, joint river boat production for use on
the Parana River border, agreements on civil and political rights
and harmonizing the laws of both countries to achieve this goal,
free circulation of people, and closer cooperation and
standardization in the areas of health care and medical standards.


-------
Comment
-------

20. (SBU) Although these agreements - or announcements of ongoing
and future cooperation - may appear at first glance to lack
substance or hard commitments, their breadth and scope underline the
very close relationship the two nations enjoy. The agreements also
allowed both governments to signal publicly their close relationship
and close cooperation. The GoA's message in the way it approached
this visit was clear: Brazil represents Argentina's most important,
strategic ally in all its foreign policy priority areas -- trade,
investment, energy, scientific and military cooperation.

KELLY

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