VAZQUEZ'S DEALS IN CARACAS: A GOOD FIRESALE

UNCLAS MONTEVIDEO 000259 SIPDIS SIPDIS STATE FOR WHA/BSC AND EB DEPT PASS USTR NSC FOR CRONIN TREASURY FOR OASIA FOR DOUGLASS USDOC FOR ITA/MAC/WBASTIAN SOUTHCOM FOR POLAD SENSITIVE E.O. 12958: N/A TAGS: EFIN ECON EINV VZ UY SUBJECT: VAZQUEZ'S DEALS IN CARACAS: A GOOD FIRESALE ¶1. (SBU) Summary: On March 14-15, President Vazquez visited Venezuela as part of a six-day Latin American tour. Out of eleven bilateral agreements signed on a variety of issues, two stand out, with the remainder of a mostly cultural or technical nature. The GOU managed to dump on the GOV unprofitable or problematic businesses, as Venezuela agreed to buy half of Petrolera del Cono Sur, an unprofitable chain of gas stations owned by Uruguayan state oil monopoly ANCAP, and took further steps to buy COFAC, a troubled financial cooperative. The GOV also reportedly showed interest in buying half of Uruguay's unprofitable airline Pluna, currently in the hands of Brazilian airline Varig. All in all, there was one finalized deal for $15 million, another agreement in the making for $10 million, and a possible future deal for $13 million. Meanwhile, Venezuelan investment of hundreds of millions of dollars in an Uruguayan refinery and a much touted barter agreement of oil for goods, promised several months ago, have yet to materialize. The Uruguayans dumped on Chavez what they could this time around, knowing full well that much of his promises of largesse amount to much ado about nothing. End Summary. A two-day visit to Caracas -------------- ¶2. (U) On March 14-15, President Vazquez visited Venezuela as part of his six-day tour through Bolivia, Chile, Venezuela, Brazil and Paraguay. The tour was initially designed to garner support for Uruguay's position in its dispute with Argentina over paper mills. Chavez and Vazquez endorsed a joint document on the strengthening of Mercosur, entitled ""The Giant is the South"", and GOU and GOV officials signed eleven agreements. The agreements dealt with a wide variety of issues --from education to energy-- and have different scope, from business deals to letters of intent. The most relevant news was progress towards a deal in the purchase of troubled Uruguayan financial cooperative COFAC and the purchase of ANCAP's gas stations in Argentina by PDVSA. The visit also fueled press reports about the possible purchase of part of Uruguay's airline Pluna by Venezuela's Conviasa. GOV and GOU become partners in Argentinean Sol Petroleo -------------- -------------- ¶3. (U) During Vazquez's visit, PDVSA and ANCAP sealed the purchase of half of ANCAP's shares in Petrolera del Cono Sur, an Argentinean oil company, for $15 million. The deal allowed ANCAP to partially divest itself of a money-losing business hemorrhaging at the rate of $2 million a month. Accumulated losses since ANCAP's purchase of Petrolera in 1998 amount to $80 million, as Petrolera had to buy its oil at international prices but faced arbitrarily capped gasoline prices. This will not be the case now with PDVSA. For PDVSA, the deal provides the Venezuelan oil company access to an established network of gas stations within Argentina. Despite trumpeting, sale of COFAC is not effective yet -------------- -------------- ¶4. (U) Chavez announced with fanfare his decision to buy Uruguay's largest financial cooperative COFAC, whose operations were suspended on February 1 due to lack of liquidity to meet growing withdrawals. COFAC is a large player in the rural interior, which owns, entirely or partially, another four financial businesses. The February suspension was the final blow to the cooperative, which had been previously suspended in March 2004 and had frozen a major share of its deposits. While local press reports reported that COFAC had been effectively purchased by Venezuelan Development Bank BANDES, this is apparently not yet the case. The signed agreement merely prompts BANDES to deposit $10 million in a trust fund to somehow guarantee the fulfillment of the operation. In a recent press release, the president of BANDES stated that it will buy COFAC to create a non-profit ""firm of social production"". BANDES highlighted that this is a way to strengthen the bilateral relationship of both countries, help the small and medium businesses that cannot operate with traditional banks and maybe increase bilateral trade flows. Comment: While Chavez's announcement certainly gives impetus to the purchase, the deal has not been finalized, as BANDES and COFAC must still negotiate over numerous issues, including the price of the possible sale. End Comment. Venezuela's airline shows interest in Uruguay's -------------- -- ¶5. (U) According to press reports, Venezuelan airline Conviasa, which was founded by Chavez two-and-a-half years ago, has shown interest in purchasing Varig's shares in Pluna. (Note: Pluna is Uruguay's national flag airline, owned 49% by the GOU, 2% by the private sector and 49% by Brazilian airline Varig. End Note.) Conviasa would reportedly pay $12.4 million and inject $5 million in fresh capital. Uruguay's Ambassador to Venezuela reportedly stated that the strategic alliance would enable Pluna to strengthen Conviasa's operations in South America and Pluna's operations to the U.S. and Europe. However, on March 15 GOU Minister of Transportation Rossi brought down expectations by stating that both parties still needed to work out various issues. Conviasa and Pluna are said to have only signed a letter of intent so far. Eleven agreements of different scope on various issues -------------- -------------- ¶6. (U) On the sidelines of the Chavez-Vazquez meetings, GOU and GOV officers signed eleven bilateral agreements of different scope on various issues including: cooperation on science, technology and basic and mining industries cooperation on housing, health and medicine a MOU between the ministries of industry letters of intention concerning technical cooperation on communication and information technology and a commercial contract for supplying housing materials and technical assistance. Finally, Vazquez and Chavez committed to strengthening instruments for regional integration such as Petrosur and Petroamerica. GOU confirms commitment to Telesur -------------- ¶7. (U) Rebuffing previous press reports that announced that the GOU would leave Telesur, President Vazquez confirmed the GOU's participation in Telesur, the Latin American TV channel co-owned by Venezuela (51%), Argentina (20%),Cuba (19%) and Uruguay (10%). On March 13 --a day before Vazquez landed in Venezuela-- the Executive sent the bill to Parliament for ratification. Pending promises still unfulfilled -------------- ¶8. (U) While the GOU and the GOV could/could close three agreements in the near future for about $40 million (ranging from more to less certain: PDVESA-PCS $15 million BANDES-COFAC $10 million and Conviasa- Pluna $13 million),the GOV has so far failed to deliver on its largest promises relating to oil supply and the $600 million upgrading of Uruguay's oil refinery. Over a year after trumpeting the ""oil for goods program"", a key program for Uruguay which imports 100% of its oil, the initiative has hardly taken off. In turn, the private sector is disappointed about the convenience and seriousness of doing business with Venezuela. Comment: Not much more than business deals -------------- ¶9. (SBU) Comment: In spite of the media circus that surrounded the visit, and the expected announcements of Latin American brotherhood, the concrete results of Vazquez's visit to Venezuela ended up being plain business deals. The GOU managed to ""unload"" at least one and perhaps as many as three unprofitable businesses on Chavez. Little else of substance seems to have emerged from the visit. End Comment. NEALON C O N F I D E N T I A L MONTEVIDEO 000268 SIPDIS SIPDIS DEPT FOR WHA/AS SHANNON AND EB/AS WAYNE DEPT ALSO FOR WHA/BSC BARNES, CROFT AND MURRAY DEPT PLEASE PASS USTR TREASURY FOR OASIA FOR DOUGLAS COMMERCE FOR ITA/MAC BASTIAN NSC FOR FISK AND CRONIN SOUTHCOM FOR POLAD E.O. 12958: DECL: 03/20/2016 TAGS: EFIN ECON EINV VZ UY SUBJECT: PULP MILLS: VAZQUEZ' TRIP EXPOSES HARSH REALITIES REF: A. MONTEVIDEO 00259 ¶B. MONTEVIDEO 00256 ¶C. CARACAS 0720 ¶D. MONTEVIDEO 0230 ¶E. MONTEVIDEO 0229 Classified By: Charge D'Affaires James D. Nealon for reasons 1.4 (B) and (D) ¶1. (C) Summary: President Tabare Vazquez returned empty-handed from an erratic eight-day tour of regional countries designed to drum up support for Uruguay's position in the serious paper mill dispute with Argentina (ref A). From our point of view, the trip was a disaster, especially his confusing signals out of Venezuela (refs C&D) and his constant flip-flop of positions. More importantly, his inability to convince anyone that the Argentine blockades of the international bridges (now in their 43rd day) -- that violate international law and treaties -- is worrisome in terms of foreign policy capacity and domestic support. The Embassy notes that the loss of the paper mills would be truly catastrophic for this country. Vazquez also faces the stark possibility that Uruguay may be unable to attract massive foreign direct investment to wean it off of its traditional reliance on vulnerable beef exports by diversifying to renewable wood products. Embassy maintains its assessment that Vazquez is a capable and moderate leader who wants closer relations with the U.S. (refs D&E),but that Uruguay may be just too small and weak to stand up against anyone in this tough regional neighborhood. This is a defining moment for the GOU. Should the plants' construction actually be halted for any length of time, the consequences for this government could prove fatal. End Summary. Paper Mills are Vital for Uruguay's Vision of the Future -------------- -------------- ¶2. (C) Despite a seemingly innocuous issue, the pulp mills carry tremendous strategic importance ($ 1.7 billion equivalent to ten percent of GDP) for Uruguay. Already the dispute with Argentina has caused major harm to the country's national pride, economy (estimates range from $200-300 million),and relations with Argentina and Mercosur. Faced with high unemployment and brain drain, the GOU is eager to attract foreign investment, and prides itself on its ""green"" environmental image. ""Uruguay Natural"" is a popular slogan for selling both grass-fed beef and tourism here. This is why Vazquez and the GOU have become increasingly frustrated that no international organization or neighboring country has come to Uruguay's rescue in the ""economic war"" it perceives that Argentina is waging. ¶3. (C) Little wonder then, that Vazquez embarked on a tour of Mercosur and Mercosur-associate countries to drum up support for UrugQ's position in the paper mill dispute. From what we gather, he botched the trip entirely and only succeeded in dividing a previously united domestic constituency. On March 11, in Santiago he prematurely declared ""peace in our time"" after his brief meeting and misfired attempt at magnanimous statesmanship with Nestor Kirchner, and reversed his earlier adamant position that the plants' construction would not be halted. Flushed with ""success"", he then failed to transmit the urgency of the issue in his pull-aside meeting with Secretary Rice. Then in La Paz, after accepting a coca-leaf portrait of guerrilla icon Che Guevara (and learning that folks at home were angry) he reversed himself again, saying that the GOU would not negotiate under pressure. Despite a mini-love fest with Chavez, where he sold off a few ailing parastatals, he failed to garner support for the paper mills from the GOV. Later in Brasilia, Lula offered little visible support and Paraguay's Duarte's was reportedly unable to provide any relief. Ten days after Vazquez began his trip to garner support for Uruguay, nothing much has changed on the ground. The bridges remain blocked --for almost six weeks now-- though the media continues to report that a breakthrough is imminent. Consequences for Vazquez -------------- ¶4. (C) While we are still somewhat puzzled by Vazquez' behavior during the regional trip, we continue to believe that he is a capable and moderate leader who genuinely wants closer relations with the U.S. On March 18, Industry Minister Lepra told the Charge that Vazquez' position on U.S.-Uruguay relations and an eventual FTA remains unchanged. Embassy further believes that Uruguay can serve as a useful bridge to the region, indirectly advance U.S. interests, and that Vazquez can exert some moderating influence on his more radical regional counterparts, as he did during both of Chavez' visits to Montevideo. But we must recognize that the gentle doctor is something of a ""babe in the woods"" when he deals with ex-guerrillas, former union leaders, and golpistas."" While he might want a Chilean-style moderate socialism, they may not. Vazquez is also constrained by ideologues in his coalition government, such as ForMin Gargano and by the size of Uruguay vis-a-vis its powerful neighbors. Vazquez' trip was a disaster in many ways. He came across as prevaricating and raised doubts at home and abroad about his ability to conduct foreign policy, but his behavior is in some ways understandable. The Frente Amplio (FA) government has been overwhelmed by the paper mill dispute and paralyzing bridge blockades that threaten vital national interests. Vazquez is also hamstrung by an old-line Socialist foreign minister who lacks ability and vision in foreign affairs and does not believe in the kind of bipartisan foreign policy that was carried out professionally for generations by the Blancos and Colorados. Comment: Embattled Vazquez Has Few Options -------------- ¶5. Comment: Embassy stresses that the paper mill dispute is perceived here as a life-or-death struggle by this government. The GOU's feckless strategy of threatening (but not taking) Argentina to international or Argentine court rings hollow in the face of an opponent who holds all the cards. (Note: The Charge was privy to and obtained a copy of what is the likely GOU strategy: internationalize the issue, but avoid confrontation with Argentina at all costs. End Note.) What is next in the continuing saga of the paper mill dispute and attendant blockades is unknown, but we are by now convinced that the issue is the most serious challenge yet to face President Vazquez and his Frente Amplio government. Vazquez' failure to gather regional support for Uruguay's plight makes his outreach to the U.S. on trade issues all the more important. End Comment. Nealon