MILL DISPUTE TROUBLES RELATIONS WITH ARGENTINA

UNCLAS MONTEVIDEO 000004 SIPDIS STATE ALSO FOR WHA/BSC SENSITIVE SIPDIS E.O. 12958: N/A TAGS: PREL PGOV ECON EINV SENV AR UY SUBJECT: MILL DISPUTE TROUBLES RELATIONS WITH ARGENTINA REF: MONTEVIDEO 1429 ¶1. (SBU) Summary: The dispute over Uruguay's planned construction of cellulose (wood pulp) processing mills on a shared river has led to strained relations with Argentina. After a World Bank report cleared European investors to begin construction, Argentine environmental groups attempted to block tourists from entering Uruguay. Moreover, harsh sound bytes from Argentina continue to rankle bilateral relations, and the current dispute comes on the heels of recent intra- MERCOSUR friction. While the protests will likely cause negligible economic damage, the political damage to bilateral relations bears watching. End Summary. BACKGROUND -------------- ¶2. (U) Since 2000, Uruguay courted the construction of one Spanish (ENCE) and one Finnish (Botnia) cellulose processing mill because of considerable economic advantages. The two mills combined will bring USD 1.7 billion in foreign direct investment, the largest such investment in Uruguayan history. The leader of a local environmental group told us that Uruguayan environmental groups support the mills because they utilize adequate environmental safeguards. After the World Bank tentatively approved loans for the projects in 2004, Argentina appealed the decision on environmental grounds. In November, however, a World Bank committee agreed with Uruguay that the mills met reasonable environmental standards and gave final approval to the loans. A DISPUTE THAT WON'T DIE -------------- ¶3. (U) During two recent weekends, Argentine protesters blocked the most heavily trafficked bridge into Uruguay in an attempt to turn away Argentine tourists and economically pressure the GOU. Over a quarter million Argentines visited Uruguay's resorts last summer (December through March),and Uruguay's economy depends heavily on tourism. Local press reported that an attempt to block a total of three bridges during the New Year's weekend failed after large numbers of tourists eluded the blockade and the GOA ordered police to hold the bridges open. ¶4. (U) Argentine posturing, however, has done far more damage to bilateral relations. In November, both sides recalled their ambassadors over harsh words aimed at Uruguayan President Vazquez. In December, Argentina declared its intention to bring the matter before the World Court. During the period of the blockades, many local news articles stated or implied GOA complicity in the protests. Most alarming for the GOU, the director of environmental policy for the Argentine chancery called for an international boycott of Uruguay. Uruguayans believe that Argentina, which also courted the mills, is acting more out of jealousy than genuine environmental concern. SALT ON A WOUND -------------- ¶5. (U) Recent discontent with MERCOSUR has further amplified the dispute. In November, Vazquez publicly criticized MERCOSUR, saying it should not be a "gilded cage," and GOU officials groused about Uruguay's seeming "second tier" status as Brazil and Argentina met bilaterally on two occasions. Since the outbreak of the dispute, the opposition in Congress has derided the administration's pro-MERCOSUR bent, and January 2, Foreign Minister Gargano declared that Argentina's call for a boycott was "anti-MERCOSUR." This is tough language from Gargano, who is usually understated, pro- Argentine, and pro-MERCOSUR. COMMENT -------------- ¶6. (SBU) While the Vazquez administration has made much of its close ties with other MERCOSUR countries, the dispute further complicates relations with Uruguay's closest partner. While we don't anticipate a radical reordering of foreign policy, the dispute gives pause to local MERCOSUR fans. In the past, some GOU leftist argued against additional international economic openness, preferring relations within MERCOSUR. Recent developments, however, may make this alternative less attractive and may embolden GOU moderates to seek wider engagement. We anticipate that the GOU will continue to quietly resist Argentine pressure and depend on multilateral fora to prevail. In private, however, we sense a nationalist fury in Uruguay which may not soon subside. GONZALEZ