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Cablegate: Argentina-Uruguay Pulp Mill Dispute: No End in Sight


DE RUEHBU #1707/01 2411908
R 291908Z AUG 07





E.O. 12958: N/A

REF: Buenos Aires 57, Buenos Aires 126, Montevideo 376 and others

This cable contains sensitive information. Not for internet


1. (SBU) SUMMARY. Relations between Argentina and Uruguay have
deteriorated since early 2006 over the construction of the $1.2
billion Finnish-built "Botnia" pulp mill, now nearing completion on
the Uruguayan side of the Uruguay River. Some Argentine residents
across the river from the pulp mill have strongly objected to the
project, alleging it will cause environmental, olfactory, and visual
pollution in what they contend is a sensitive ecological and tourist
area. Residents and activists have conducted intermittent blockades
for the past year-and-a-half of the three bridges along this river
that connect the two nations, restricting the flow of people and
goods, and reducing Uruguayan trade and tourism. One bridge,
connecting Gualeguaychu to Fray Bentos, Uruguay, has been completely
closed since November 2006. Initially caught off-guard by the
protests, the GoA tacitly encouraged them, seeing apparent political
gain, but has since seen what was initially a local community
protest balloon into an international conflict.

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2. (SBU) Argentina resisted Uruguay's initial efforts at mediation
via Mercosur, and subsequent mediation through the good offices of
the King of Spain have to date been unsuccessful. Both governments
have filed cases with the International Court of Justice, and the
two governments seem to be at an impasse. The GOU has offered the
GOA joint Argentine-Uruguayan monitoring over the plant4s
construction and operations, but refuses to negotiate any such terms
while bridge blockades remain in place. Although the possibility of
serious violence is low, there could be trouble in October, when the
Botnia mill is scheduled to begin operations, and Argentina holds
presidential elections. The USG supported the World
Bank/International Finance Corporation (IFC) loan for the project,
but otherwise has avoided becoming entwined in what has been
described as a family feud. End Summary.

--------------------------------------------- ---
Deteriorating Bilateral Relations Over Pulp Mill
--------------------------------------------- ---

3. (SBU) This report provides a status report (from the Argentine
side of the river) on the Argentine-Uruguay dispute over the
construction of two pulp mills being constructed on the Uruguayan
side of the River Uruguay, which divides the two countries. The
paper mill being constructed in Fray Bentos, Uruguay by Finland's
Botnia company is now nearing completion, and is set to begin
production in October 2007, at roughly the same time as Argentine
national elections. The $1.2 billion mill represents the largest
foreign investment in Uruguay's history and will help the country
move up the value chain beyond the export of raw materials, while
reportedly generating some 2,500 local jobs (of which 300 will be at
the mill and about 2,200 in forestry and local transport).
According to local press, the plant is projected to generate value
added equivalent to 2.5% of Uruguay's entire GDP (based on 2006
figures) and slightly more than eight percent of the country's
exports for each year of full-capacity production. Argentine
protests were successful in moving another plant, to be constructed
by Spanish ENCE, to a new location (albeit still on the River
Uruguay). The Sweden-Finnish Stora-Enso company has also bought
significant amounts of land to set another plant in inner Uruguay.

4. (SBU). Relations between Argentina and Uruguay, nations with
close cultural, linguistic, and ethnic ties, have deteriorated
considerably as a result of the dispute. A protest movement,
centered in the Argentine town of Gualeguaychu, Entre Rios Province,
10 miles away from its Uruguay River border, which itself faces the
pulp mill, has strongly objected to the project, alleging it will
cause environmental, olfactory, and visual pollution in what they
contend is a sensitive ecological and tourist area. Argentine
protestors since November 2006 have completely blocked road and
bridge access to Uruguay near the town of Gualeguaychu. For the
past year, Argentine protestors have also occasionally blocked two
other bridges farther north on the River Uruguay, usually during
holidays and vacation periods. These actions have significantly
limited land access between Argentina and Uruguay. In early 2007,
te GOU estimated total economic losses of over US$500 million in
reduced trade and tourism due to the restricted flow of people and

Why the GOA Does Not Intercede

5. (SBU) The GOA has repeatedly insisted that it will not use force
to stop the blockades and continues to insist that Uruguay and the
Finnish company move the Botnia plant to a different location -
despite the fact that the enormous plant is nearly finished.
Argentine President Kirchner has complained of Uruguayan President
Vazquez's "stubbornness," and often linked the Finnish company to
"international interests" that want the region to be a "global waste

6. (SBU) The GOA's disinclination to take action against the
protestors for what seems to be clear violations of law reflects
Argentina's particular attitude towards authority. In fact,
blocking roads and staging illegal strikes are common practice in
Argentina, and the GOA almost never intervenes. In a country where,
according to polls, only one out of four people seeks police or
judicial recourse in the case of a dispute, these blockages and
strikes are accepted as an outlet for public anger. The Kirchner
administration has also shown itself reluctant to use force to
control or break up social protests. The previous president,
Eduardo Duhalde, was forced to call early elections as a result of
massive protests following the deaths of two demonstrators in an
incident with security forces. Thus, even though local media
confirms that a vast majority of Argentines do not have a strong
opinion on the pulp mill, and even many local businesspeople and
citizens oppose the blockades, they too have been largely powerless
against these protestors.

The Environmental Question, On the Merits

7. (SBU) Many Argentines and media commentators recognize that the
Botnia plant will not seriously harm the environment. Most analysts
agree with the IFC's comprehensive cumulative impact study, reviewed
by independent experts, which concludes that the mills "compare
favorably with best available technology and best environmental
practice for mills in Europe and North America" and that "there
should be no significant deterioration in the air and water quality
in the area." In late 2006, IFC and Multilateral Investment
Guarantee Agency (MIGA) approved a $170 million investment and a
guarantee of up to $350 million for Botnia. In fact, many observers
predict that the Botnia plant will have a net positive effect on the
cleanliness of the River Uruguay -- in addition to scrubbing its own
wastewater, the Botnia operator has reportedly offered to treat the
wastewater of the town of Fray Bentos, as well as waste products
emanating from an existing pulp plant located in the nearby town of

--------------------------------------------- ---------
Argentine Media Generally Balanced, But Also Fueling Conflict
--------------------------------------------- ---------

8. (SBU) Argentine media has generally pointed out inconsistencies
in the GOA and protesters' positions, Argentina's own spotty
environmental record, and highlighted the modern standards of
Botnia's technology. Media have also criticized Kirchner for what
they describe as his mishandling of diplomacy in this dispute, and a
major example of Kirchner's focus on domestic issues at the expense
of foreign policy. But it has also fueled the conflict by putting
protestors at the center of the story. There was one notorious
exception to the media's otherwise generally fair coverage: the
well-respected daily, La Nacion, published photos in October 2006
said to be from the Argentine side of the Uruguay River, showing
what appeared to be an enormous and ugly Botnia factory protruding
on the other side of the river, with beach-goers in the foreground.
Only later was it learned that the photo of the mill was taken with
a telescopic lens, and superimposed over a normal shot of the nearby
beach. This doctored photo likely contributed to the general
Argentine willingness to support the protestors, and many Argentines
are convinced that Botnia will dominate the beach's view. In fact,
Botnia is only barely visible on the horizon from the Argentine

Argentine Hypocrisy on Environment

9. (SBU) Argentina itself unsuccessfully competed for the same
investment, primarily at the Entre Rios Province level, but lost,
reportedly due to its problematic investment climate. There are
currently ten Argentine paper mills operating with older and more
polluting technology than that to be employed by Botnia. When
confronted with this fact, the GOA response has been to point out
that it has gone after Botnia and Uruguay for violating various
provisions of the Statute of the River Uruguay, the 1975 agreement
meant to govern the actions of Argentina and Uruguay on their shared
river. Nine of Argentina's paper mills are within the country's
borders, while one, in Misiones Province, shares water with Paraguay
but has not been the subject of controversy. Another issue is that
Argentina is home to perhaps the most polluted river in the
hemisphere, the Riachuelo River, which spills out toxic chemicals
into Buenos Aires, and later goes downstream by the Uruguayan
coastline. While the GOA has improved its record in regulating
mining and water pollution in recent years, its spotty environmental
record puts it in a weak position to criticize Uruguay.

Attempts at Resolution Unsuccessful So Far

10. (SBU) Uruguay first attempted to bring this case before a
Mercosur tribunal in June 2006, seeking damages from Argentina for
the blockades and noting that the founding Mercosur Treaty of
Asuncion guarantees the free circulation of goods and services
between members. The GOU calculated then that the blockades had
caused $400 million in losses, and that the GOA had failed to act to
prevent or lift them. The GOA countered that it did act to soften
the effects, and was able to demonstrate that bilateral trade during
this time had in fact increased. The tribunal, an ad hoc assembly
of three arbiters (one each from Argentina, Uruguay and Spain),
issued a non-committal ruling in September 2006 that was interpreted
as a victory by each side. The judges ruled that the GOA had acted
"in good faith" to dissuade road blocks, but its failure to remove
them was not compatible with its obligations under Mercosur, that
the GOA was not liable for reparations, the tribunal would not take
special measures to oblige the GOA to dissuade future roadblocks,
but that the blockades had caused "undeniable inconveniences to both
Uruguayan and Argentine trade." Both governments claimed victory -
but the conflict continued.

11. (SBU) During the late 2006 Ibero-American Summit in Montevideo,
Kirchner reportedly requested the assistance of King Juan Carlos of
Spain to facilitate negotiations. President Vazquez agreed, while
repeating the GOU's condition that it would not agree to substantive
negotiations while the blockades were in place. Argentine
protesters' response was that a sine qua non for them was that the
plant be moved. The King of Spain is currently mediating the
dispute, via his emissary, Spanish Ambassador Juan Yanez-Barnuevo,
who has conducted several negotiations in Uruguay, Argentina,
Madrid, and New York since late 2006, but as yet with no success.

12. (SBU) Different aspects of the case have already been through
two rounds of review by the International Court of Justice (ICJ) in
The Hague. Uruguay prevailed in the first round in July 2006 when
the ICJ rejected the GOA's request for an injunction to halt
construction while an environmental impact study was conducted.
Uruguay argued that the alleged peril to Argentina was not imminent
or immediate, and the Court concluded - by fourteen votes to one -
that "the circumstances are not such as to require the exercise of
its power to indicate provisional measures." This judgment did not
settle the question of whether Uruguay was ultimately breaching its
Treaty obligations to Argentina, a decision not expected until late
2007 at the very earliest. Argentina argues that Uruguay had
violated the Argentine-Uruguay bilateral 1975 River Uruguay treaty
by allegedly failing to consult the GOA before acting on any project
that might affect the river. The GOU said that it had held
discussions over the plants, with no GOA objections, and also argued
that the plants were to use the "best available technology," in this
case a chlorine-free bleaching method. The GOU also argued that an
independent World Bank study had supported their position. Uruguay
may still be liable to Argentina if it is later found to be in
breach of Treaty obligations. Argentina won round two in January
2007 when the ICJ denied Uruguay's request to hear its case for
forcing an end to the Argentine road and bridge blockages.

--------------------------------------------- ---------
Tensions likely to endure, but serious violence unlikely
--------------------------------------------- ---------

13. (SBU) Popular Argentine support for the Gualeguaychu
demonstrators has waned from its high point in May 2006, when a
bikini-clad Miss Gualeguaychu crashed the official photo session of
the Europe-Latin American summit of 60 European and Latin American
heads of state in Vienna, holding a sign that read "No Pulp Mill
Pollution" in English and Spanish, and gave the issue unusual
international exposure. Most observers, however, think that these
roadblocks - and nominal GoA support -- will last at least until the
October presidential elections, and likely longer. Although local
analysts, press and Post contacts largely discount the possibility
of serious violence, trouble could occur in October, when the mill
commences operations and Argentina holds presidential elections.
There is the possibility that some Argentine protestors could
attempt to take advantage of the heightened political tension to
escalate the conflict. There have also been occasional Argentine
media reports that the Uruguayan military has begun to prepare for
possible protests near the site after the plant begins operations.

14. (SBU) Recently, tensions have mounted. The GOU, responding to
some Gualeguaychu activists' placards depicting bombs and missiles
hitting the pulp mill, reportedly sent a strongly worded official
protest of this "terrorist" threat. In response, the GOA in turn
reportedly called in the Uruguayan Ambassador to protest the use of
the term, and noting that Argentina had twice been a victim of
terrorism in the 1990s. On August 14, a small amount of sodium
sulphide, a material with which Botnia employees routinely work, was
accidentally released in the air during a period of high wind.
According to a Botnia press release, two workers downwind showed
skin, eye and upper respiratory symptoms, but according to medical
professionals, there were no major clinical symptoms. Nonetheless,
this incident prompted more GOA and activists' complaints.

15. (SBU) Also recently, and for the first time, protestors have
extended their road blocks to territory completely within Argentine
territory, blocking Route 14, "Mercosur Highway," connecting
Argentina and Brazil, through which 7,000 vehicles pass daily. In
another first, a federal judge, reportedly responding to local
business formal complaints, recently ordered federal police to
prevent a regularly scheduled blockade of the northernmost of the
three bridges, in Concordia. On August 29, GOU President Vazquez
inaugurated a new port in Nueva Palmira, near the new Botnia plant,
that will handle all the wood and pulp shipments for the new pulp
mill. The GOA MFA sent a strongly worded protest note, noting its
"worry and despair" that Vazquez's appearance would "aggravate" this
dispute. At this port opening ceremony, a group of Argentine
protestors were also nearby, having approached in several boats,
remaining at the Argentine-Uruguay maritime border, several hundred
yards away. The GOU Coast Guard kept a watchful eye, and the
protest was reportedly peaceful.

USG Position

16. (SBU) The United States voted in favor of a November 2006 US$
170 million IFC loan and US$ 350 million MIGA risk insurance package
for the Botnia plant. The World Bank believes that this plant will
have a significant, positive effect on the Uruguayan and regional


17. (SBU) The Kirchner administration appears to have painted itself
into a corner by allowing the Gualeguaychu protests to become a
national cause celebre and by providing rhetorical and likely
financial support for the protesters. Given the positions staked
out by the two governments, any Argentine conciliation would be
viewed as treason by the Gualeguaychu hardcore and as an
embarrassing defeat for a GOA policy initiative by Kirchner
administration supporters. Uruguay has adapted to this situation,
as has Argentina: the occupancy rate of the existing ferry that
services connecting the two nations has reportedly grown sharply
since the dispute, and a new ferry line has opened business as well.

18. (SBU) Increasingly, it appears that the initial strong support
for this cause has faded. The Argentine press and motorists appear
to have less and less sympathy for these roadblocks. Even
Kirchner's decision to promote Romina Picolotti, the leading
Gualeguaychu protestor to the federal post of Secretary of
Environment - has now soured on him, as she now faces charges of
misappropriation of funds and nepotism. Some analysts believe that
the GoA, after the elections, will look for some face saving way to
de-escalate the situation, accept conditions Uruguay has offered,
and try to put this bilateral debacle behind it. End Comment.


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