ECUADOR: MIXED SIGNALS ON CHAVEZ DEAL

C O N F I D E N T I A L SECTION 01 OF 03 QUITO 001715

SIPDIS

E.O. 12958: DECL: 07/20/2015
TAGS: PGOV PREL EFIN ENRG EC
SUBJECT: ECUADOR: MIXED SIGNALS ON CHAVEZ DEAL

REF: A. SECSTATE 127251

B. QUITO 1663

Classified By: Charge d'Affaires AI Kevin Herbert, for reasons 1.4 (b&d
).


1. (C) Summary: Press reports suggest Ecuador is ready to
sign agreements with Venezuelan President Hugo Chavez on
financing and oil deals, despite President Alfredo Palacio's
public denials that any GOE decision has been taken.
Privately, however, Palacio administration officials are
telling us a different story. Unfortunately, the most public
advocate of cutting deals with Venezuela, Minister of Economy
and Finance Rafael Correa, has not been clearly refuted in
public or reined in by President Palacio, fueling
uncertainty. Since prospects for multilateral financing
appear dim, it is natural that Correa, already ideologically
committed to state-controlled economies and no fan of the
international financial institutions (IFIs),would welcome a
financing offer from Chavez. More rational members of the
Palacio administration are looking for viable alternatives to
Chavez. With the notable exceptions of Foreign Minister
Parra and Correa, we do not believe the GOE is eager for
closer relations with Chavez. Still, the GOE will want to
maintain cordial relations with its Andean neighbor.


2. (C) Given local sensitivities to USG pressure, we have
refrained from public comment on these developments.
Privately, we have expressed to GOE interlocutors USG
concerns about dealing with Chavez, drawing from existing
guidance (Ref A),and urged more definitive actions on
Ecuadorian-Venezuelan relations. We will have an opportunity
to meet directly with Palacio on July 27. Meanwhile, we will
work quietly with the anti-Chavez forces to blunt the effect
of Correa, until Palacio decides to jettison him, as he is
apparently considering doing to the Foreign Minister as early
as next week. End Summary.

IFI Financing Delayed, at Best
--------------


3. (C) Disbursements from the World Bank (WB) and
Inter-American Development Bank (IDB) have been put on hold,
pending an evaluation from the IMF. An IMF team is expected
to arrive in Ecuador August 22. However, Correa said he
intends to meet with the IMF to press Ecuador's case when he
is in Washington for the IDB meetings the week of July 25.


4. (C) We learned from IDB sources on July 19 that the
Ministry of Economy sent letters last week to the IDB, WB,
the Andean Community Development Bank (CAF) and the Spanish
Embassy announcing significant cuts in their programs (up to
50% in the case of the IDB). Apparently, Correa wants only
funds with no strings attached (i.e., neither loans or grants
with conditions). Given this posture and previous comments
critical of the IFIs, it is difficult to believe that Correa
is sincere about working with the IFIs.

Searching for Alternative Financing
--------------


5. (C) With dim prospects for financing from the IFIs and
virtually no chance at attracting private financing, given
the political and economic uncertainties in the country, it
is not surprising that Correa (a likely 2006 presidential
candidate) would seek funding elsewhere. His first stop was
Venezuela, but he has also mentioned China, Brazil and the
Latin American Reserve Fund as other possible financing
sources.


6. (C) An ideologue, with no political or government
experience, Correa tends to view things from an academic,
rather than political or practical perspective. Thus,
Chavez' offer for financing with no strings attached (at
least according to Correa) must look attractive to him.
Worse still, Correa identifies more with Chavez' statist
policies than with IFI positions and current generally
accepted economic policies. (See reftel A, Quito 1181,
regarding Correa's tendency to let his ideology override his
intelligence.)

Talking But No Deals Yet
--------------


7. (C) Correa sent six operatives July 19, including Vice
Minister of Finance Magdalena Barreiro, to Caracas to work on
technical aspects of the possible bond purchase. Correa said
he intends to replace expensive short-term internal debt
(CETES, with interest rates of 8.5%) with long-term (minimum
3 years) debt at lower interest rates. He has not provided
any other details on the proposal.


8. (C) When the possibility of Venezuelan financing first
hit the press, Correa denied it, stating he was in Caracas to
talk energy policy (Ref B). Subsequently, there were reports
about the possibility of Venezuela refining Ecuadorian oil.
Press reports from the July 18 meeting of Andean leaders
noted that Chavez made a similar unrealistic proposal to the
Andean leaders, the creation of "Petroandina," a regional oil
consortium. Following his meeting with Chavez, President
Palacio made no mention of the Venezuelan bond, refinery or
Petroandina proposals.


9. (C) EmbOffs met with Energy Minister Ivan Rodriguez on
July 20 to get his views on the Venezuela-related oil
proposals. Rodriguez took umbrage at Correa's messing in oil
policy. He added that Palacio had little in common with
Chavez and Rodriguez thought it unlikely that Palacio would
want closer relations with him. EmbOff's noted that the
public perception was much different. Rodriguez referred
EmbOffs to the July 20 "El Universo" front-page story where
Palacio said there was nothing agreed to with Chavez. That,
Rodriguez said, was the true story.


10. (C) As to Chavez' offer for assistance in the oil
sector, Rodriguez said that they would look at what Chavez
had to offer. Their first level of analysis would be to
"look at the numbers." Then, there were political
considerations to take into account, if the numbers made
sense. Rodriguez said that he had resisted Venezuelan
invitations to visit Caracas. He added that the GOE would
welcome alternatives to the Chavez proposals. EmbOffs agreed
to work with Rodriguez, particularly with respect to his
plans to modernize PetroEcuador's refinery in Esmeraldas.
(More on that meeting in SepTel.)

Palacio and Herreria Against the VZ Plan
--------------


11. (C) In a July 19 meeting with Charge and ADCM,
Presidential Advisor Herreria said that Correa was acting on
his own, without authorization from Palacio. Charge
acknowledged Ecuador's financing needs, but said the GOE
needed to carefully weigh the political and economic costs of
the financing. Charge also noted that recent GOE actions
made it appear that Ecuador was drawing itself closer to
Venezuela. Noting our concerns with Chavez' policies, he
called for the Palacio administration to clarify its position
with respect to Venezuela.


12. (C) Herreria said he would recommend that Palacio
demonstrate that he is not pro-Chavez by declining an
invitation to attend Bolivarian celebrations sponsored by the
Venezuelan Embassy on July 24. In addition, when in
Guayaquil next week, Palacio would make clear that Ecuador is
not subject to any country's influence, including Venezuela.
According to Herreria, Palacio realizes Correa has designs on
the presidency, but that in the end Palacio will not support
a bond deal with Chavez. He did not explain why Palacio has
not reined in the charismatic Correa.


13. (C) As to Foreign Minister Parra, Herreria said Palacio
was fed up with him. In a subsequent July 20 phone call to
ADCM, Herreria said Palacio intended to dump Parra, as soon
as next week, with a couple of other ministers. Curiously,
while Palacio, according to Herreria, described Correa as
"dangerously esoteric," Correa was not mentioned as one of
those to be dismissed from the cabinet. However, Palacio did
agree to invite Embassy leadership to a private meal on July
27 to hold frank discussions, with an open agenda.

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


14. (C) Correa is clearly a loose cannon that Palacio
eventually must come to terms with, but we are not the ones
to tell him so, at least directly. Still, despite press
reports, the GOE is not ready to enter into any agreement
with Chavez. However, any public statements from the USG to
pressure the GOE to stay away from Chavez could have the
opposite effect. A common theme throughout our conversations
and indeed much of the public rhetoric of this administration
is that Ecuador is a sovereign nation capable of running (or,
just as likely, ruining) its own affairs. We must also be
judicious in our private comments to GOE officials for the
same reason. This is still an administration and President
looking for acceptance and legitimacy, given its irregular
ascension to power.

15. (C) Energy Minister Rodriguez, with whom we believe we
can work, astutely noted that the GOE is looking for viable
alternatives to offers such as those from Chavez. That is
not to say that we should change our position that Ecuador
should adopt sound and sustainable economic policies as a
precondition to further IFI support. However, there are
other avenues to pursue. Facilitating interactions between
the GOE and the U.S. private sector, offering technical
assistance and visits by high-level USG officials or a
presidential emissary are among the actions we can take to
lend legitimacy to Palacio, which he clearly craves.


16. (C) Next month's arrival of Ambassador-designate Jewell
will provide new impetus to our bilateral relationship. In
the interim, the proposed July 27 meeting between Embassy
leadership and President Palacio presents another opportunity
to make our case directly with Palacio. We will also focus
on those within the administration with whom we can work,
including Minister of Trade Molestina, Minister of Energy
Rodriguez, and Presidential Advisor Herreria.
HERBERT