ARGENTINA SCENESETTER FOR CODEL GRASSLEY

C O N F I D E N T I A L BUENOS AIRES 000611

SIPDIS
C O R R E C T E D COPY - ADDING CODEL CAPTION

SIPDIS

CODEL

WHA/BSC FOR DOUGLAS BARNES, H FOR CINDY CHANG
USSOUTHCOM FOR POLAD AND JUAN RENTA

E.O. 12958: DECL: 01/04/2016
TAGS: PGOV PREL ECON EAGR PARM SNAR AR
SUBJECT: ARGENTINA SCENESETTER FOR CODEL GRASSLEY


Classified By: Ambassador Lino Gutierrez for Reasons 1.4 (B) and (D).

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Introduction and Summary
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1. (C) On behalf of Embassy Buenos Aires, I warmly welcome
your visit to Argentina on March 23-26. Your visit comes as
President Nestor Kirchner continues to consolidate his
resounding victory in mid-term legislative elections last
October 23. Based on these results, Kirchner has tightened
his already firm personal control of political and economic
policy. However, Kirchner's performance at the Summit of the
Americas last November gained no new friends internationally
for Argentina. His explicit criticism of the United States
during his Summit speech, and his collaboration with Hugo
Chavez and the hard left complicated our bilateral
relationship, although recent visits by high-level
Congressional and executive branch officials have gone well.
Argentina is also seeking to consolidate its impressive
economic recovery from the 2001-2002 crises. Argentina will
need to lower its inflation rate and increase investment to
sustain high rates of growth, lower unemployment and reduce
poverty. The two most important issues that affect the
bilateral agricultural relationship are Monsanto's ongoing
struggle to collect royalties on the use of Round-Up Ready
soybean technology and the GOA's recent decision to prohibit
the export of fresh and cooked beef for 180 days. As a
member of the UN Security Council, Argentina has worked
closely with us on issues such as UN reform,
counterterrorism, non-proliferation, counternarcotics, and
regional issues such as peacekeeping in Haiti. End Summary.

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Background
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2. (C) Argentina was once one of the richest countries of the
Hemisphere, achieving a GNP per capita that was among the
highest in the world in the early 20th century. However, the
history of Argentina over the last 70 years has been one of
economic decline and political instability. Many Argentines
are at a loss to explain how their country, blessed with rich
natural resources, a fertile land and manageable population
numbers, could have fallen so far. Some blame the military
dictatorships, which controlled events from 1930-1983; others
blame Peron and "Peronism"; and a significant number blame
external factors: the IMF, the U.S., and, to a lesser extent,
Europe. Gone are the "carnal relations" with the U.S. when
Argentina stood out as one of the top U.S. allies in the
world during the administration of former President Carlos
Menem in the 1990s. The 2001-2002 economic crisis, the worst
in Argentine history, changed all that. The election of
left-wing Peronist Nestor Kirchner in 2003 marked a different
approach in Argentine foreign policy, aligning Argentina more
closely to Brazil, MERCOSUR, and Venezuela. That said,
Kirchner has cooperated closely with the U.S. on a number of
issues, including counterterrorism, non-proliferation and
counternarcotics, and regional issues like Bolivia and Haiti.

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Political Landscape
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3. (SBU) President Kirchner won a major victory in the
October 23 legislative and provincial elections, receiving a
strengthened mandate and beating out his rivals for control
of the ruling Peronist Party (PJ). Since then, he has
consolidated his political gains with new cabinet
appointments and with a controversial move that effectively
increased executive branch control over the judiciary.
Kirchner is politically strong at home and faces a weak and
divided opposition. Argentines give Kirchner much of the
credit for the country's Phoenix-like recovery from its
2001-2002 economic crisis, an event equivalent to our Great
Depression. His already high approval ratings climbed last
year after the conclusion of an audacious debt exchange offer.


4. (C) Kirchner revels in a confrontational style, and is
quick to pick public fights with business leaders, foreign
officials, the Catholic Church, his own military, and
political opponents. Two examples last year are
illustrative. In the aftermath of a drug scandal at the
international airport in Buenos Aires, Kirchner fired
virtually every senior general in the Air Force (which was
responsible for maintaining airport security) for failing to
inform him of the ongoing investigation until five months
after it had begun. Kirchner also called for a national
boycott of Shell Oil gas stations because of price hikes at
the pump. Groups of unemployed workers loyal to Kirchner
promptly blockaded Shell gas stations across the country,
causing a 70 percent drop in sales. Kirchner later called
Shell "among the worst companies in the world."

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Argentina Fumbles Summit of the Americas
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5. (C) President Kirchner's performance at the November 4-5
Mar del Plata Summit of the Americas gained no new friends
for Argentina. As chairman of the Summit deliberations, he
forged disunity where consensus might have been possible. On
the plus side, we reached our essential Summit goals in the
Declaration and Plan of Action and 29 of the 34 Heads of
State present voiced support for the launch of FTAA
negotiations. However, Kirchner's obsessive focus on the
International Monetary Fund in his meeting with President
Bush, his direct criticism of the United States during his
Summit speech, and his collaboration with Hugo Chavez and the
hard left complicated our bilateral relationship.
Nevertheless, we do not expect Kirchner's undiplomatic public
posturing in Mar del Plata to affect the excellent
cooperation we continue to receive from Argentina on the key
issues of counterterrorism, non-proliferation, and
counternarcotics. By January, Kirchner was attempting to
make amends. He met with A/S Tom Shannon and pledged
Argentina's continued cooperation, particularly on Bolivia
and Haiti. Shannon also had positive meetings with all of
the new cabinet appointments, restoring the bilateral
relationship and focusing on an active bilateral agenda in

2006.

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Economic Situation
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6. (U) Argentina has had an impressive economic recovery
since suffering the worst economic crisis in its history --
including the largest sovereign default in history and a
major devaluation of its currency -- in 2001-02. An
export-led boom triggered an 8.8 percent surge in real GDP in
2003, 9 percent in 2004, 9.1 percent in 2005, and a projected
6.9 percent in 2006. The Kirchner Administration has ably
managed the nation's public finances and achieved large
budget surpluses. Investment increased to 19.5 percent of
GDP in 2005, and is projected to increase to 20.8 percent in
2006, but still is below the GOA's target. Unemployment
declined to 10.1 percent in the fourth quarter of 2005, but
has not fallen as fast as the economy is growing, largely due
to a slower recovery in the services sector. Poverty has
also fallen from the post-crisis level of 54 percent, but
remains stubbornly high. During the first half of 2005, 38.5
percent of the population was living below the official
poverty line and 13.6 percent was considered destitute.


7. (U) Argentina's robust economic recovery is the result of
major economic reforms in the 1990s, the adoption of a
market-based exchange rate regime in early 2002, and the
combination of strong world economic growth, high commodity
prices and low interest rates. Argentina should continue to
perform well in 2006, but will need to lower its inflation
rate (6.1 percent in 2004, 12.3 percent in 2005, and a
projected 12.9 percent in 2006) and increase investment to
sustain high rates of growth, lower unemployment and reduce
poverty. The short-term success of the GOA's anti-inflation
efforts may have a long-term negative impact on the GOA's
ability to attract investment. Argentina negotiated a debt
exchange in 2005 with 76 percent of its private creditors
that offered just over thirty cents on the dollar. Argentina
canceled its debt with the IMF on January 3, 2006 by using 40
percent of its reserves to repay the nearly USD 10 billion it
owed to the Fund. The Central Bank is now in the process of
purchasing dollars to restore its international reserves to
earlier levels.


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Agricultural Issues
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8. (U) The agricultural, livestock, and food processing
sectors are mainstays of the Argentine economy. Over 50
percent of total export revenue is derived from these
sectors, and their direct and indirect contribution to Gross
Domestic Product (GDP) and total employment exceeds 25
percent, respectively. Rather than pursuing policies which
have fostered wealth creation, the GOA has historically
exploited these sectors to cross-subsidize industry, or to
support social programs. To that end, the Kirchner
administration taxes all agricultural and livestock exports.
As examples, the Kirchner Administration taxes soybean
exports at the rate of 23.5 percent, and 15 percent for fresh
and cooked beef exports.


9. (U) The two most important issues that affect the
bilateral agricultural relationship are Monsanto's ongoing
struggle to collect royalties on the use of Round-Up Ready
soybean technology and the GOA's recently implemented measure
to prohibit the export of fresh and cooked beef for 180 days.
The crux of the Monsanto issue is the sale of illegal
Round-Up Ready (RR) soybean seed by farmers (Monsanto
estimates that over 80 percent of the land planted to
soybeans is done so illegally by growers who have not paid
any royalties for the use of the technology. The GOA does
not appear to have the wherewithal nor the will to enforce
royalty collections. In the interim, Monsanto has been
stopping some shipments of Argentine soybeans in European
countries where it has patent protection (it does not have
patent protection in Argentina),and has been filing lawsuits
to collect the royalties. With the bulk of the soybean
harvest about to come on line, this issue will soon be coming
to a head.


10. (U) With regard to fresh and cooked beef, the GOA has
just implemented a resolution, which prohibits the export of
those products for 180 days with the exception of exports to
the European Union under the Hilton Quota (28,000 tons),and
those to several other countries with which formal bilateral
agreements have been established (e.g., Venezuela). This
measure has affected negatively at least two U.S. companies
that have operations or representation in Argentina, Cargill
and Conagra. The GOA believes that through this measure, it
will be able to increase the domestic beef supply, which
will, in turn, put downward pressure on domestic beef prices,
which have been rising rapidly. Given that Argentina's per
capita consumption of beef is the highest in the world (over
130 pounds),the price of beef carries significant weight in
the calculation of inflation, which the GOA currently deems
to be its number one economic concern (the GOA does not want
inflation to exceed the 2005 inflation rate of 12.3 percent).
The GOA does not seem to be concerned about the
international fallout from this prohibition (broken
contracts, market losses, etc.),nor the damage that it will
do to Argentina's image abroad. President Kirchner has
threatened to extend the ban to a full year if domestic beef
prices do not decline. The Embassy has also recently heard
reports that the GOA could extend its export ban to dairy
products.

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Regional Influence
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11. (C) Argentina has played a positive role in promoting
human rights and democratic institutions in the hemisphere,
particularly in Haiti and Bolivia. Along with a number of
its neighbors, Argentina currently has 575 peacekeeping
troops in Haiti in support of MINUSTAH, reflecting its
traditionally strong support of UN peacekeeping operations
and commitment to Haiti. President Kirchner continues to be
a strong supporter of constitutional democracy in Bolivia.
Argentina sent a group of election observers to the
presidential elections in Bolivia, headed by former Argentine
Vice President and current Mercosur President, Carlos
"Chacho" Alvarez. President Kirchner told A/S Shannon
January 12 that Argentina's
policy towards Bolivia mirrors the U.S. policy of
constructively engaging the new GOB and steering them in a
moderate direction.


12. (C) In Venezuela, President Kirchner also played a
constructive role in pressing Chavez to hold a recall
referendum in 2004 and met with the Venezuelan opposition on
two occasions in 2004. More recently, Argentina has sought
stronger economic ties with Venezuela. President Kirchner
traveled to Puerto Ordaz to meet with Chavez November 22 to
discuss a proposed gas pipeline. The GOV also purchased USD
2.8 billion of Argentine public bonds. In January 2005,
Argentina assumed a two-year seat on the UN Security Council.


13. (U) Argentina's ongoing dispute with Uruguay over the
latter's construction of paper mills on the Rio Plata may
seriously affect the bilateral relationship and the health of
the MERCOSUR customs union. The GOA has refused to remove
protestors who are blocking two of the three bridges linking
the two countries, interrupting overland transportation from
Chile. A recent attempt at a truce between Presidents
Kirchner and Vazquez collapsed almost immediately, and
opinions have polarized as the blockade enters its seventh
week.

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Strong on Counter-Terrorism
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14. (C) Kirchner's administration has strongly supported
counter-terrorism policies. The GOA has ratified all of the
12 international counterterrorism conventions. Argentina is
a participant in the Three Plus One regional mechanism, which
focuses on possible terrorist-related activity in the
Tri-border region between Argentina, Brazil, and Paraguay.
Its border police, federal police, coast guard, and
intelligence services provide excellent cooperation on
monitoring potential terrorist activity, especially in the
Tri-border area. The GOA continues to make efforts to
strengthen its Financial Intelligence Unit to combat money
launderin and to beef up its National Arms Control Registry
(RENAR) in order to get a handle on the production and sale
of explosives.

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Equally Strong on Non-Proliferation and WMD Interdiction
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15. (C) In numerous meetings with senior State Department
officials, the GOA has voiced strong agreement on almost all
of our arms control and nonproliferation objectives. On
Iran, the GOA favors a tough line. It voted with the United
States at the September 24 IAEA Board of Governors meeting to
refer Iran's noncompliance to the UNSC. The GOA is the only
South American country to have endorsed the Proliferation
Security Initiative (PSI) and has offered to host a PSI
exercise. On the IAEA Additional Protocol, the Argentines
traditionally have followed the Brazilians, but have
indicated that they will eventually sign the AP with or
without the Brazilians. Finally, the GOA has implemented the
Container Security Initiative (which scans containers for WMD
components) and is in the final stages of negotiating an MOU
on the Megaports Initiative -- which will passively detect
radioactive materials moving through the Buenos Aires seaport
-- the first such agreement in South America.

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Military-Military Cooperation
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16. (C) The U.S. military enjoys excellent relations with
their Argentine counterparts. Argentine forces participate
frequently in exercises with U.S. and regional forces
(outside of Argentina) and are currently contributing about
575 troops to the Haiti PKO as well as a significant number
of troops to the PKO's in Cyprus and Kosovo. We are stymied,
however, by the lack of a political-level agreement on
immunities, (i.e., administrative and technical immunities,
as defined in the Vienna Convention on Consular Relations,
which would be extended to U.S. service members on exercises
in Argentina). The lack of this type of agreement precludes
many bilateral exercises on Argentine territory. The
Argentines unfortunately confuse the immunities issue with
Article 98, which deals only with the International Criminal
Court. We are looking at a long-term Status of Forces
Agreement to resolve these issues.


17. (U) To see more Buenos Aires reporting, visit our
classified
website at: http://www.state.sgov.gov/p/wha/buenosaires.< /a>
GUTIERREZ