Cablegate: Scenesetter for Codel Goodlatte's Visit to Uruguay

DE RUEHMN #1111/01 3261544
O 221544Z NOV 06



E.O. 12958: N/A


B. STATE 187235
C. STATE 187531

1. (SBU) Summary: Embassy welcomes Codel Goodlatte to Uruguay
and greatly appreciates its contributions to US foreign
policy objectives. Your November 28-29 visit comes at an
auspicious time in our bilateral relationship and will
coincide with the arrival of the US Ambassador to Uruguay,
Frank E. Baxter and his wife Kathrine. Agriculture remains
the backbone of Uruguay's economy and the meetings with your
counterparts in the Uruguayan congress are likely to draw
wide public interest. This telegram supplements the
political and economic briefings that you received in
Washington by providing additional background information and
highlights of recent developments, including:

Presidential Chief of Staff Gonzalo Fernandez and Economy
Minister Danilo Astori to discuss progress made on a Trade
and Investment Framework Agreement (TIFA).

-- The November 21 decision by the International Finance
Corporation (IFC) to support a major loan for a controversial
giant pulp mill on a shared river with Argentina.

-- The November 20 ruling by a Florida judge to extradite
notorious fugitive Uruguayan banker Juan Peirano Basso so
that he can face charges related to the bilking of hundreds
of millions of dollars from banks here.

resonates here Uruguay is a member of the G-20 group calling
for the elimination of these subsidies.

End Summary.


2. (SBU) Uruguay's President: On May 4, President Vazquez met
with President Bush in the Oval Office. Both leaders
resolved to deepen the commercial relationship. Uruguay is
important to U.S. interests as an example of temperate,
long-standing democracy in a region that has, in many cases,
lurched to the populist left. Vazquez has publicly stated
that he seeks expanded trade ties with the US. While he is
sometimes hesitant to utter the words ""Free Trade Agreement""
in public, Vazquez and his administration have repeatedly
signaled their willingness to expand trade with the US.
Uruguay has also expressed general frustration with the
Mercosur trading bloc -- and in particular Mercosur's
unwillingness to resolve Uruguay's very serious paper mill
dispute with Argentina. Vazquez is a pragmatist, and what he
most wants for Uruguay is jobs, investment and growth. At
home and abroad he has been caught between the competing
demands of radicals and moderates and he is often challenged
to balance these opposing interests. His leadership style is
now predictable: he tends to stay above the fray and allow
competing factions in the FA to debate an issue to exhaustion
and then weighs in with a final decision.

3. (SBU) Domestic politics: Vazquez and his coalition Frente
Amplio (FA) Government have been in power for about a year
and a half and have generally received high marks, according
to polling data. Vazquez' adroit and pragmatic leadership
along with Uruguay's strong institutions and the basically
conservative nature of its society prevented the radical tilt
some observers predicted during the 2004 electoral campaign.
The President seems to prefer the term ""progressive"" rather
than ""leftist"" to describe his administration and some think
that he seeks to emulate Chile's center-left brand of
government. Looking back, Vazquez' campaign promise to
shake the trees to their roots"" has meant more in terms of
rejecting outdated rigid socialist thinking than anything
else. The moderates in his cabinet have generally enjoyed
the upper hand, and Vazquez has been more challenged by the

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radicals within his FA coalition than he has by the two
discredited opposition parties (Blancos and Colorados) who
ruled the country during the past century. In his efforts to
be practical, Vazquez relies on a relatively small cadre of
experienced officials to get things done. A key ally in
domestic politics has been Agriculture Minister and
ex-Tupamaro guerrilla leader Jose Mujica who, despite his
past, has often countered the extreme ideologues on the
far-left. Vazquez was also able to appease many radicals by
addressing the human rights abuses committed during the
dirty war"" period of the military dictatorship, by finding
the buried bones of disappeared persons and by arresting some
of the worst human rights abusers.

4. (SBU) This method has been tested in recent months as the
GOU attempts to reform taxes, education, and defense -- and
has faced several disputes involving the powerful
communist-dominated labor unions. Minister of Economy Danilo
Astori has tried to hold the line on government spending and
has so far rejected proposals to increase the wages of
government workers and medical personnel, opposed calls to
delay loan repayments to international monetary institutions
or to rescue indebted farmers. In fact, Astori recently
announced that Uruguay was repaying its entire debt with the
International Monetary Fund (IMF) early. President Vazquez
tacitly supports Astori's orthodox positions on the economy,
but both men have had to do so cautiously.

5. (SBU) Foreign policy: has been a formidable challenge,
compounded by the stubbornly ideological, anti-US Foreign
Minister Reinaldo Gargano. By far, the GOU's most serious
problem has been the severe bilateral dispute with Argentina
over the construction of paper mills on the shared Uruguay
river -- not only because of soured bilateral relations with
Uruguay's closest neighbor, but also because of the
implications to foreign investment, an independent foreign
policy, and Mercosur. Uruguay has a heavy debt burden and no
known hydrocarbon deposits, so that Venezuelan oil and money
provide considerable temptation for boosting the economy.
Uruguay's state oil monopoly ANCAP recently signed a deal
with Venezuela's state-owned PDVSA to help fund 24 percent of
the cost of oil exploration in the Orinoco region of
Venezuela in return for a proportionate share of the
resulting oil. Details of the agreement remain murky, and
observers are skeptical if ANCAP can fund its end of the
bargain or if the endeavor will result in significant gains
for Uruguay. Vazquez appears to style himself more after
Chile's ex-President Ricardo Lagos, and his mild leadership
image sharply contrasts with the populism of Venezuela's Hugo
Chavez, Argentina's Nestor Kirchner and Bolivia's Evo

Issues Likely to Surface

6. (SBU) In August, the GOU made it clear publicly that it
would have to define its position on trade with the United
States by the time of a critical October Joint Commission on
Trade and Investment (JCTI) meeting. Many sectors of the
GOU, including President Vazquez, expressed strong interest
in negotiating a Free Trade Agreement (FTA) with the U.S.
However, neither side could reach the clear consensus needed
to move forward. Instead, the U.S. and Uruguay will sign a
Trade and Investment Framework Agreement (TIFA), which
increases discussion of trade issues but falls short of
Uruguay's desired market access. Uruguayans will be keenly
interested to know if an FTA (and market access) is still
possible and what the political changes in the U.S. Congress
will mean for Uruguay, in particular the possibility of a
renewal of Trade Promotion Authority.

7. (SBU) On May 19, U.S. Immigration and Customs Enforcement
(ICE) agents arrested Juan Peirano Basso in the U.S., in
connection with an $800 million fraud scheme that is widely
thought as having worsened the 2002 financial crisis in
Uruguay. Peirano had entered the United States earlier and
had been able to obtain Legal Permanent Residence Status

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(LPR). On November 20, a Florida judge ruled to extradite
Peirano Basso back to Uruguay. News sources expect his
lawyers to appeal the ruling. The case has generated intense
media attention and goodwill from the GOU for U.S.
forward-leaning cooperation in this case. Many Uruguayans
feel personally offended by the bankers' actions because the
alleged fraud directly harmed the financial situation of the
nation and of many individuals. Peirano Basso's three
brothers, also implicated in the case, are currently under
arrest in Uruguay.

8. (SBU) The paper mill dispute with Argentina is Uruguay's
most pressing foreign policy problem. The dispute over one
Finnish paper mill under construction on the Uruguayan side
of the shared Uruguay River, is an issue of paramount
national interest. The plant's construction cost is
estimated at 8% of Uruguay's GDP and its operation is
expected to generate exports worth 2% of Uruguay's GDP. It
represents the largest Foreign Direct Investment in Uruguay's
history. Argentine government officials, some local
inhabitants and environmental activists claim the plant would
harm fishing, farming, and tourist areas along the
Uruguay-Argentina border. Protesters from Argentina have
blocked bridges between Argentina and Uruguay off and on
since December 2005 at great cost to Uruguay's trade and
tourism revenues. One of the bridges remains blocked. Four
independent reports concluded that these concerns were
exaggerated, since the plants use the latest technology
available. Uruguay has recently complained at the OAS and
pressed its case with the World Bank and the Mercosur
Tribunal. On May 4, Argentina filed an injunction with the
International Court of Justice to halt the construction of
the paper mills, and on July 13, the Court refused to grant
the injunction. There is still no date for a hearing on the
merits of the case. Originally, another the Spanish company
ENCE planned to build another plant nearby. Argentine
pressure and delays in the World Bank loan caused ENCE to
reconsider, and in September ENCE backed out of its plans.
On November 21, Uruguay scored a clear victory when the World
Bank approved the $170 million loan for the project by a vote
of 23-1.

9. (SBU) Uruguay is a major agricultural producer.
Agriculture and agro-industry account for 23% of GDP and over
75% of total exports. The major Uruguayan exports are meat
(over $1 billion this year), long-grain rice, dairy products,
wool and soybeans. Forestry has surged over the last decade,
due to favorable investment conditions and a a favorable
climate, where eucalyptus grows almost ten times as fast as
in the U.S. Uruguay does not import agricultural products
but does import processed foodstuff. Uruguay applies a 6.6%
average tariff on agricultural goods and does not impose any
kind of import quota. There are no subsidies on agricultural
production or exports. Given the importance of this sector
for the economy, Uruguay has been active in bilateral and
multilateral fora in pushing for trade liberalization.
Agricultural subsidies are a hot topic. The GOU's trade
policy on agriculture has generally been in line with
Mercosur's, and Uruguay is a member of the G-20 group of
countries calling for the elimination of agricultural
subsidies. The GOU threatened last year to file a case with
the WTO on U.S. rice subsidies. Embassy intervention allowed
for the opening of a bilateral dialogue instead, to attempt
to resolve the issue. Talks are ongoing, but the threat of
an impending WTO case still remains.


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