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Cablegate: Ecuador Gradually Solidifies Relationship with Iran's Export

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C O N F I D E N T I A L QUITO 001053

SENSITIVE
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E.O. 12958: DECL: 2034/12/22
TAGS: ECON EFIN EC IR PREL MNUC PARM KNNP
SUBJECT: Ecuador Gradually Solidifies Relationship with Iran's Export
Development Bank

REF: STAT...


id: 241300
date: 12/22/2009 19:22
refid: 09QUITO1053
origin: Embassy Quito
classification: CONFIDENTIAL//NOFORN
destination: 09QUITO875|09QUITO943|09STATE120453
header:
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DE RUEHQT #1053/01 3561922
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TO RUEHC/SECSTATE WASHDC IMMEDIATE 0583
INFO RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
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C O N F I D E N T I A L QUITO 001053

SENSITIVE
SIPDIS
NOFORN

E.O. 12958: DECL: 2034/12/22
TAGS: ECON EFIN EC IR PREL MNUC PARM KNNP
SUBJECT: Ecuador Gradually Solidifies Relationship with Iran's Export
Development Bank

REF: STATE 120453; QUITO 943; QUITO 875

CLASSIFIED BY: Heather M. Hodges, Ambassador, U.S. Department of
State, EXEC; REASON: 1.4(B), (D)

Summary

----------

1. (C) The Export Development Bank of Iran (EDBI) continues to make
inroads in Ecuador, according to press reports, although it appears
to face resistance at mid-levels in the Ecuadoran government and
Central Bank - and even more so in the private sector. In
delivering Ref A demarche on EDBI, and following up on previous
such efforts (Refs B & C), EconCouns spoke with Central Bank,
Ministry of Finance, MFA, and private financial sector contacts.
Many of these individuals have tried and mostly failed to raise
awareness of the dangers of doing business with EDBI, and with Iran
in general. They argue that the only person who can make the
decision to walk back the EDBI arrangements is President Correa
himself. The Secretary's recent warning to Latin American
countries about Iran - and Venezuelan President Chavez's response
-- received significant coverage in local press, but the reality is
that there is general skepticism that Ecuador will actually face
any negative repercussions if it moves forward with implementing
its agreements with EDBI. End Summary.

Press Reports on EDBI Developments

---------------------------------------

2. (C) Local press reported extensively over the last month on
Ecuador's relationship with Iran, and particularly efforts to
implement the 2008 MOU between EDBI and Ecuador's Central Bank
(BCE). Much of this reporting was prompted by the November 18-20
visit of EDBI officials to Ecuador, during which they reportedly
discussed providing trade financing, investment in hydro and
thermal electricity projects, and other credits, as well as
accelerating the establishment of an EDBI branch in Quito. (This
visit was followed shortly by Iranian President Ahmadineyad's visit
to Brazil, Bolivia, and Venezuela. Ahmadineyad was rumored to also
visit Ecuador, but for unclear reasons this leg of the trip did not
materialize.) Iran's Ambassador to Ecuador, Majid Salehi, and the
BCE's ex-President, Carlos Vallejo, stoked the issue with separate
interviews, in which both dismissed concerns about EDBI and
highlighted the benefits of expanding commercial relationships
between the two countries. Over the last year, Vallejo has
consistently been the loudest public advocate for expanding
relations with Iran and with EDBI in particular.

Turmoil at Central Bank Linked to Concerns about Iran

--------------------------------------------- -----------

3. (C) To date, our main support on EDBI issues has come from a
surprising source: the BCE's now ex-General Manager, Karina Saenz.
Despite being personally recruited to the job by President Correa,
Saenz has become increasingly concerned about the BCE's
relationship with EDBI. During a meeting with EconCouns on
December 8, Saenz said that no management-level BCE officials
wanted anything to do with the EDBI MOU. She also said she had
sent a memo to the President bluntly laying out her concerns and
arguing that Ecuador, and specifically the BCE, should have no
contact with EDBI. She acknowledged this was risky, but expressed
frustration that increasingly in the GoE no high-level officials
seem willing to give the President bad news or disagree with
existing policy. She acknowledged that BCE President Vallejo was
her main opponent on this and many other sensitive issues, but
thought she retained continued support from Coordinating Minister
for Economic Policy Diego Borja. (As reported Ref B, Saenz
arranged a meeting for EconCouns with Borja, who agreed at the time
that the GoE should find ways to develop a commercial relationship
with Iran without resorting to EDBI.)


4. (C) Under pressure from President Correa on a separate issue
related to the local investment of official BCE reserves (septel),
Vallejo, Saenz, and the entire BCE management team resigned
December 9 (septel). So, in a single stroke, the Embassy lost both
its biggest supporter (Saenz) and one of its principal opponents
(Vallejo) on EDBI/Iran issues. A widespread rumor was that Saenz
and her management team resigned over concerns about Iran. This
was unfounded, although Saenz is not the only BCE official worried
about EDBI. Many of our BCE contacts erroneously believe they
could eventually end up in jail if they signed anything related to
EDBI. Emboffs have not corrected this misconception. Some BCE
officials also wonder whether the U.S. Department of Treasury will
try to go after BCE-owned Banco Pacifico, a U.S. bank based in
Miami.

5. (C) In an unexpected move, the President appointed Minister
Diego Borja as acting BCE President, and Borja's two top aides were
appointed as the BCE General Manager (Christian Ruiz) and Deputy
General Manager (Andres Arauz). Therefore, Borja, who rumor had it
was in the doghouse with the President because of his rowdy
behavior during Correa's October trip to Russia, has now basically
taken over the BCE and greatly expanded his control over GoE
economic policy.

Engaging the Finance Ministry

------------------------------

6. (C) After five tries to obtain a meeting with Finance Ministry
officials, EconCouns met December 10 with Undersecretary Carolina
Portaluppi to discuss ongoing reform efforts within the Ministry
and the status of the 2010 budget (septel). Ex-BCE GM Saenz
informed EconCouns that Finance officials were ducking meetings
with the Embassy in the past because of the Iran angle. When
Portaluppi admitted that Ecuador was finding it more difficult than
expected to obtain large-scale funding from its new "strategic
friends" China, Russia, and Iran, EconCouns briefly summarized USG
concerns with Iran and EDBI and left Ref A non-paper. Portaluppi
agreed to review the non-paper and meet again to discuss the issue.

MFA's North America Director Advises, "Take it up with Correa"

--------------------------------------------- ----------------------

7. (C) EconCouns delivered Ref A demarche and presented non-paper
on December 16 to Ambassador Juan Salazar, Director General of the
MFA's North America office. In strict confidence, Salazar
(PROTECT) presented the two-inch thick binder that his office had
put together on Iran, including press reports, readouts of USG
demarches in Washington and Quito, and details about the USG's
designation of EDBI and the UN and FATF's various warnings about
Iran. Salazar said he had prepared the binder for Foreign Minister
Falconi to review and send to the President, and he briefly showed
the letter drafted to President Correa for Falconi's signature,
summarizing the contents of the binder and explaining concerns.
Salazar said that Falconi's office returned the entire package to
the North America office unsigned and without comment, but with the
clear message that this was not an issue Falconi wanted to hear
about again from Salazar. When EconCouns described the often
difficult discussions EmbOffs have had on Iran with our main MFA
interlocutor on the issue, Multilateral Affairs Director General
Lourdes Puma Puma, Salazar agreed that raising Iran issues with her
was a completely useless exercise. He added that discussing it
with anyone in the MFA was unlikely to achieve positive results.
He concluded that if the U.S. really wanted Ecuador to reconsider
its relationship with Iran it would need to talk directly to
President Correa.


Private sector increasingly concerned, but confused about possible
repercussions

--------------------------------------------- ----------------------
--------------

8. (C) Citibank's local country manager Diana Torres (PROTECT) is
extremely concerned about Ecuador building connections to Iran and
EDBI. She told EconCouns December 17 that she also understood
Wachovia/Wells Fargo, which is the dominant player in providing
trade finance in Ecuador (through local banks), was worried about
how this was playing out locally. Torres said local bankers were
frightened by the possible implications of "U.S. Treasury
sanctions," and the private bank association was looking for ways
to support the USG position. If helpful, Torres said, the bank
association was prepared to start raising the issue with GoE and
BCE officials, but they were worried about undermining their
credibility if there was really nothing backing the U.S.
expressions of concern.

9. (C) Torres asked for details on what the possible consequences
could be for Ecuador, and noted that other countries with deeper
(Venezuela) or faster developing (Brazil) relations with Iran did
not seem to be facing negative repercussions beyond USG political
pressure. (Torres noted that Citi and most other major
international banks still do business in Venezuela, despite the USG
designation of EDBI-owned Banco Internacional de Desarrollo, a
financial institution operating in Venezuela.) Other private
sector contacts have reiterated this point, noting that Iran is a
frequent topic of conversation in financial and political circles,
but the general consensus is that the U.S. will not take any
serious action against Ecuador if it moves forward in its dealings
with EDBI. Despite these doubts, some bankers are beginning to
speak out publicly about their concerns over Ecuador's burgeoning
relationship with Iran and EDBI in particular. For example,
Abelardo Pachano, Executive President of ProduBanco, Ecuador's
fourth largest bank, noted December 21 during a popular morning
radio show the USG's recent, massive fine of CreditSuisse over its
dealings with Iran and other sanctioned countries. Pachano
highlighted this as evidence of the dangers of doing business with
Iran, and also commented that the Secretary's recent warning to
Latin American countries about doing business with Iran were
further proof of how serious the USG was taking this issue.

Comment

-----------

10. (C) Secretary Clinton's recent words of caution to Latin
America about dealing with Iran received significant local media
coverage, as did President Chavez and Bolivian President Morales'
critical responses. The Secretary's warning of potential
consequences was a useful message, supporting mission expressions
of concern. However, without more explicit details of consequences
our warnings appear unlikely to be acted upon. Furthermore,
despite the misgivings of many in the bureaucracy, President Correa
is clearly behind Ecuador's Iran policy and GoE Ministers seem
disinclined to try to dissuade him. Borja, especially with his new
role as BCE President, seems the best bet to steer Ecuador away
from EDBI. Considered by some a leftist hardliner, by others a
political opportunist, and by most corrupt, Borja appeared
approachable on this issue during our last meeting with him (Ref
B). Therefore, the Embassy will reengage with him and the BCE's
new General Manager - who reportedly studied in the U.S. - in early
January.
HODGES

=======================CABLE ENDS============================

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