DISPUTE OVER PULP MILLS DEEPENS

C O N F I D E N T I A L MONTEVIDEO 000149

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E.O. 12958: DECL: 02/09/2016
TAGS: PREL PGOV SENV SOCI EAGR AR UY
SUBJECT: DISPUTE OVER PULP MILLS DEEPENS

REF: MONTEVIDEO 00004

Classified By: Charge D'Affaires James D. Nealon
for reasons 1.4 (B) and (D)


1. (C) Summary: The pulp mill dispute between Argentina and
Uruguay (reftel) has only intensified in the past month, and
the dispute, which until recently had been a provincial issue
for Argentina, has become a national cause in Uruguay for
which vital interests are at stake. Uruguay contends that
the protesters' blockades on the border have already
inflicted considerable economic damage and fear worse to
come. Bilateral relations continue to deteriorate between
the two nations and several of our official contacts have
speculated that the dispute may cause permanent damage. The
dispute may already be having an impact on Mercosur's unity
and investment climate. We can see no easy way for either
country to back down or for a resolution to this dispute any
time soon. End Summary.

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RECENT EVENTS
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2. (SBU) Argentine protesters have sporatically blocked
tourist traffic since late December, and in early February,
they began to block trucks laden with construction materials
for the wood pulp (cellulose) mills in Fray Bentos. The
resulting backlog of traffic has hurt tourism and commerce in
Uruguay. According to Uruguay's most influential newspaper,
El Pais, President Kirchner sanctioned the blockade on
February 9 as a "national cause." Newspapers reported as
many as 400 trucks backlogged at the main bridge to Uruguay
with waits as long as three days. One account stated that a
truck full Chilean fish rotted during the stand still, and
other reports stated that multiple trucks returned to their
points of origin. The stoppage has also ensnared Argentine
tourists traveling to and from the popular Uruguayan beaches.


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EMOTION
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3. (SBU) Public resentment against the GOA is running deep.
Uruguayans have threatened retaliation for the bridge
blockages with some of their own measures, including a
boycott of Argentine resorts such as Bariloche. The media has
been fond of referring to Argentina's Governor of Entre Rios
Jorge Busti as "Busti-Laden." During his cabinet meeting
last week, President Vazquez recalled the lyrics of an old
tango as a way of criticizing the Argentines by saying that
that they "were like a man who beats his wife because she may
cheat on him four or five years from now." (Note: Vazquez has
promised a regional tour next month to drum up support for
Uruguay's position on the pulp mills, but has been unable to
meet with President Kirchner on the issue. End Note.)

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ECONOMIC NECESSITY
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3. (SBU) Local analysts have estimated that the Uruguayan
tourist industry may have lost as much as $20 million in
tourist income from Argentina. While some of this shortfall
has been replaced by an increase in Brazilian tourists,
officials predict a significant net loss to the tourism
industry this austral summer. In addition, Uruguay's
Minister of Foreign Affairs Reinaldo Gargano stated that 90
million tons of goods normally cross the blocked bridge each
year. In addition to Uruguay, shipments destined for
Paraguay and Bolivia have also been affected. Press reports
indicated that several Chilean, Brazilian and Paraguayan
companies were initiating lawsuits against the Government of
Argentina for failing to guarantee the free circulation of
road traffic.


4. (SBU) The economic stakes for Uruguay are high. The $1.9
billion foreign investments for the paper mill projects
equate to more than 10% of GDP. According to the Cumulative
Impact Study (CIS),commissioned by the World Bank,
construction and operation of the mills would directly or
indirectly employ between 7 and 15 thousand persons. Uruguay
also hopes to diversify its export base which currently
relies heavily on the beef industry and sees the growing
international market for pulp and wood products as a way to
do this.

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DETERIORATING RELATIONS
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5. (SBU) The MFA's America's Desk Director and other
officials told us that the dispute with Argentina is
Uruguay's "number one foreign policy headache." On February
8, the MFA sent an official letter of protest to Buenos Aires
about the blockade and demanded that the GOA take action
against the protesters. Argentina declared its intent to
take Uruguay before the World Court in The Hague, and Uruguay
promised to take Argentina to Mercosur's tribunal. (Comment:
We expect none of these measures will have much effect. End
Comment.) The Hague process is long, and local commentators
expect that Argentina would ignore a ruling in Uruguay's
favor. Uruguay has twice previously complained to Mercosur's
tribunal about Argentina, but in the one case where Uruguay
prevailed, Argentina has not yet made restitution. One
commentator worried that the dispute "hurts the world's
confidence in Latin America and Latin America's confidence in
itself."


6. (SBU) Recent attempts at reconciliation have failed.
Vazquez and Kirchner have spoken by telephone, there has been
talk of Vatican intervention, and members of an international
leftist coalition from Argentina have visited their
counterparts in Uruguay, but none of these efforts has
produced a reliable forum, let alone results. Uruguay, for
its part, feels confident of the mills' low environmental
impact, betrayed by Argentina, and unwilling to compromise an
industry which will bring thousands of jobs annually and
start Uruguayan exports down a new, lucrative path. The
perception is also one of a double-standard by the
environmentalists and by Argentina, where 11 aging paper
mills are located on rivers bordering Paraguay and Uruguay,
most of them --according to the Uruguayans-- with outdated
and polluting technology.

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COMMENT
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7. (C) Uruguay's economic recovery heavily depends on wood
and meat exports. From its perspective, both vital
commodities are currently being threatened by Argentina. MFA
officials told us that bilateral relations with Argentina are
at their lowest point in decades because of the dispute over
the pulp mills. In addition, the recent outbreak of
hoof-and-mouth disease in Argentina's Corrientes province has
further tensed relations and fueled public fears that Uruguay
could once more wind up as an economic victim of its larger
neighbor. Uruguayans assert that Argentina was responsible
for the last outbreak of hoof-and-mouth here in 2001 and
recall that the financial crisis of 2002 was the result of
the financial meltdown in Argentina. President Vazquez,
bolstered by widespread public support and the backing of the
entire political spectrum, has vowed that nothing will stop
the construction of the pulp mills in Fray Bentos. The
soured bilateral relationship bears watching in case it
produces further, unforeseen negative consequences. End
Comment.
Nealon