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Cablegate: China Cautiously Seeks to Expand Commercial Interests In

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SENSITIVE
SIPDIS

E.O. 12958: DECL: 2035/01/26
TAGS: ECON EFIN SENV ENRG EC CH
SUBJECT: China cautiously seeks to expand commercial interests in
Ecuador

REF: 09 QUITO 1059; QUITO 5; 09 QUITO 934 ...


id: 245644
date: 1/26/2010 22:21
refid: 10QUITO37
origin: Embassy Quito
classification: CONFIDENTIAL
destination: 09QUITO1059|09QUITO934|10QUITO5
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C O N F I D E N T I A L QUITO 000037

SENSITIVE
SIPDIS

E.O. 12958: DECL: 2035/01/26
TAGS: ECON EFIN SENV ENRG EC CH
SUBJECT: China cautiously seeks to expand commercial interests in
Ecuador

REF: 09 QUITO 1059; QUITO 5; 09 QUITO 934

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

Summary

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

1. (C) China's Ambassador to Ecuador, Cai Runguo, told Ambassador
January 15 that the PRC is moving forward with negotiations with
the GoE on financing various commercial projects, but that
Ecuadorian President Correa's criticisms of China's tough
negotiating position had caused some concern in Beijing. It
appears the GPRC-GoE negotiations over the $1.7 billion Coca Codo
hydro project are progressing, although it is still unclear whether
Correa will accept China's standard commercial loan conditions
(particularly access to international arbitration). Cai noted he
was confused by the GoE's efforts to strengthen ties with Iran,
asked whether Correa's frequent criticism of the U.S. was
ideological, and mentioned that China is maintaining good and
economically beneficial relations with Venezuela. Clear from Cai's
remarks and those of other Chinese officials, China believes it has
significant economic interests in Ecuador, but is moving cautiously
in talks with a GoE government that it does not seem to fully
trust. End Summary.

Correa's Comments Disconcerting

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

2. (C) Chinese Ambassador Cai Runguo called on the Ambassador in
her office on January 15, at Ambassador Cai's request. Ambassador
Cai was accompanied by his political officer, Tiefei Xu. Embassy
DCM also sat in. Ambassador Cai expressed interest in a range of
U.S.-Ecuadorian bilateral issues, as well as Obama administration
policy towards Latin America, but was open to discussing Chinese
issues in Ecuador and Venezuela.

3. (C) Ambassador Cai indicated that China was disconcerted by
Correa's verbal attack in December 2009 over China's negotiating
position for loans to Ecuador, in which Correa alleged that even
the IMF had not treated Ecuador as poorly as did China (Ref A).
According to local press reports, Ecuadorian Finance Minister
Viteri traveled to China in mid-January 2010 to negotiate various
credits with the PRC government. Cai confirmed that
Chinese-Ecuadorian loan/investment agreements were proceeding, but
argued that China was "substantially" maintaining insistence on the
guarantees that Correa found objectionable and had complained about
publicly during his December remarks. Later in the conversation
Cai also expressed China's unhappiness with Ecuador's continued
maintenance of safeguard tariffs, and concern over when they would
be lowered.

4. (C) The focus at the moment is a 1.7 billion dollar loan from
China's export-import bank to construct the Coca-Codo Sinclair
hydroelectric project. If terms can be agreed on that loan, Cai
said there is another one billion dollar loan from China's
development bank, for projects yet to be defined. As part of the
arrangement, the GoE has designated the Chinese firm Sinohydro as
the chief contractor on the Coca-Codo project. China's agreements
stipulate bilateral negotiations first in the event of disputes,
but then provide recourse to international arbitration. China is
"still negotiating" this clause with Ecuador. (Ecuador's new
constitution bars the GoE from entering into contracts that include
international arbitration, and the GoE has publicly announced its
intention to terminate most of its Bilateral Investment Treaties,
including with the U.S., mainly because they allow dispute
settlement via international arbitration mechanisms.)


5. (C) Ambassador Cai said that Correa does not seem to understand
that China is negotiating "commercial deals" with Ecuador, similar
to deals with other countries, and that China would not want to set
a concessionary precedent for other countries. In general, Cai
said Correa wants Chinese investment in Ecuador, in petroleum,
mining, telecommunications and infrastructure. China is "studying
the investment situation." Ecuadorian Press quoted Finance
Minister Viteri on January 13, from China, stating that the GoE had
signed a memorandum of understanding on a loan from China's
Export-Import Bank to finance Coca-Codo. Although she acknowledged
that talks were still ongoing, GoE sources commented that the MOU
represented the end of the difficult phase of the talks.

Interest in Exploiting Yasuni ITT oil reserves

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

6. (C) Prompted by the Ambassador's query, Cai stated that "all"
petroleum companies were interested in developing the Yasuni-ITT
petroleum field if conservation initiatives fell through. (See
Refs B and C for background on Yasuni ITT and the recent political
crisis it caused in Ecuador, including the resignation of Foreign
Minister Falconi.) Cai mentioned that Russia was interested in
Block 31 in Ecuador, which is in the Yasuni National Park and next
to the ITT block. (PetroBras previously held the Block 31
concession but returned it to the GoE.) According to local press
reports, PetroEcuador consulted with foreign oil companies,
including Chinese oil company SINOPEC, on the possible exploitation
of Yasuni ITT as recently as 2008.

7. (C) The Ecuadorian government had also solicited Chinese
involvement in building the Refinery of the Pacific, a joint
initiative of Venezuelan President Chavez and Correa. However,
Ambassador Cai pointed out that if Chavez goes from power, would a
subsequent government continue with crude deliveries? If
Yasuni-ITT were developed, Cai seemed to believe that could change
the calculus for the Pacific Refinery. (Ecuadorian press report
that the South Korean company SK Group is slated to build the $12.5
billion refinery, and that Deutsche Bank and China's Export-Import
Bank are considering providing up to $5 billion in financing
between them.)

Skepticism over GoE Interest in Developing Manta as Aviation Hub

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

8. (C) Ambassador Cai said that Correa had twice asked China to
look at investing in Manta (site of the former-U.S. Forward
Operating Location) as a transportation node, but Cai said that
Chinese companies were neither interested nor experienced in such
an overseas project. Cai evinced skepticism over Correa's concept
of a Manta-to-Manaus transportation link. When Cai suggested
Russia might be interested in Manta after Correa's Russia trip, the
Ambassador noted that Russian ambassador Yan Burliay had told her
that Russia's interest in Manta at this point was merely as an
aviation stop for airplanes picking up flowers at Latacunga in the
mountains, then proceeding to Manta on the coast to load shrimp and
bananas.

Ecuador's Relationship with Iran and the U.S.; China's Growing
Relationship with Venezuela

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

9. (C) Ambassador Cai asked what the U.S. thought of Ecuadorian


relations with Iran; what was the benefit to Ecuador? He said he
had asked this of the Ecuadorian Foreign Ministry, which replied
that "various economic projects" were the benefit. The Ambassador
noted our principal concern was Ecuador's budding relationship with
an Iranian Bank that had been designated by the USG for
facilitating proliferation of WMD.

10. (C) Ambassador Cai said that China's relations with Venezuela
were good, citing a joint development fund with two-thirds Chinese
capital. The fund originally was for $8 billion, but after Chavez
requested a doubling, was raised to $12 billion. Credits from the
fund are guaranteed by petroleum.

11. (C) Cai asked whether Correa's frequent criticism of the U.S.
stemmed from ideology, and the Ambassador answered, yes.
Ambassador Cai nodded and said, "but he is different from Chavez."
He opined that Correa has substantial support in Ecuador but
appears to be losing the middle class.

China's Rapidly Increasing Commercial and Investment Ties with
Ecuador

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

12. (C) China has already shown itself willing to make large deals
in Ecuador (as it also appears to be doing in other oil-producing
states in the region, particularly Venezuela). In July 2009, the
two countries announced a four-year oil sales deal, under which
China providing a $1 billion advance payment. The terms of the
deal reportedly favored China. Ecuadorian press reported that
during the November 2009 visit of Jia Qinglin, Chairman of the
Chinese People's Political Consultative conference (CPPCC) national
Committee, the two countries announced the signing of three
cooperation agreements, including an arrangement to buy Chinese
military planes for Ecuador's Air Force. This was on top of the
January 2009 $60 million deal to purchase an air defense radar
system from the China Electronics Technology Group Corporation.
During his visit, Jia reportedly emphasized the benefits that China
sees in enhancing economic cooperation between the two countries.
He encouraged Chinese companies to increase commercial and
investment ties with Ecuador, noting that Chinese investment in
Ecuador had reached $2.2 billion and also that two-way trade in
2008 was almost $2.5 billion, 50% above 2007 levels.

Comment

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

13. (C) Faced with a $3-4 billion (or higher) fiscal deficit in
2010, and with no ability to print money or issue debt, and no
intention of returning to the IMF or World Bank, the GoE is
desperate to find large-scale financing from non-traditional
sources. Its efforts to date with Russia and Iran have been a
bust, but China has proven a more willing, if demanding, source of
both financing and investment. Successful conclusion of the Coca
Codo talks would further increase the importance of China to
Ecuador. However, faced with the often counterproductive public
comments of President Correa and a complex investment climate
resulting from the new constitution and apparent GoE ambivalence
about attracting foreign investment, the GPRC is moving cautiously
and making sure to negotiate terms favorable to China.
HODGES

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

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