CHAVEZ WELCOMES KIRCHNER TO VENEZUELA'S OIL BELT:

UNCLAS SECTION 01 OF 04 CARACAS 000387

SIPDIS

SENSITIVE
SIPDIS

TREASURY FOR KLINGENSMITH AND NGRANT
COMMERCE FOR 4431/MAC/WH/MCAMERON
NSC FOR DTOMLINSON
ENERGY FOR CDAY, DPUMPHERY, AND ALOCKWOOD

E.O. 12958: N/A
TAGS: ECON ENRG PGOV
SUBJECT: CHAVEZ WELCOMES KIRCHNER TO VENEZUELA'S OIL BELT:
HOW TO BUY FRIENDS AND INFLUENCE

REF: A. 05 CARACAS 3375


B. BUENOS AIRES 311


1. (SBU) Summary: During a 24 hour trip to Venezuela's Faja
oil belt, February 21-22, Presidents Kirchner and Chavez
announced a new USD 1.5 billion joint "Bond of the South"
offering, and the creation of the "Bank of the South" within
120 days. The two presidents also inaugurated Argentina's
(largely symbolic) participation in a heavy oil project, and
announced both a debt-relief plan to "save" an emblematic
Argentine milk company and Venezuela's purchase of 15 tons of
beef and chicken from Argentina. The two presidents signed a
reported 17 agreements/MOUs in a variety of sectors --
ranging from agriculture to technology -- partnering
Venezuelan cash and Argentine know-how, and further
solidifying a strategic economic relationship which has seen
bilateral trade grow from USD 100 million to USD 1 billion
since 2003. While rejecting calls to contain Chavez,
Kirchner took jabs at the IMF and World Bank, proclaimed that
Latin American integration should not upset anyone, and
declared "paternalism" dead. End Summary.

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Petroleum
--------------


2. (SBU) Kirchner arrived in Puerto Ordaz, the gateway to
the oil producing Faja district in western Venezuela, the
afternoon of February 21 for a 24 hour official visit.
Kirchner was received by Vice President Jorge Rodriguez and
Minister for Energy and Petroleum Rafael Ramirez. Bilateral
trade between the two countries has grown dramatically since
2003, reportedly growing from USD 100 million in 2003 to USD
1 billion in 2007.


3. (SBU) On February 22, Chavez and Kirchner traveled deep
into the Faja, Venezuela's heavy oil belt, to sign a MOU
inaugurating the largely symbolic participation of
Argentina's state-owned petroleum company Enarsa in the
quantification of petroleum reserves in the Magna Reserve
project. Enarsa brings little to the table as its only
assets consist of survey/concession rights in unawarded
offshore oil fields (Reftel B). PDVSA has divided the Magna
Reserve project into 27 units, or "blocks," which it has
parceled out to Spanish, Vietnamese, Iranian, Malaysian,
Indian, Byelorussian, and now Argentine, national petroleum
companies. Enarsa will operate in Block Number 6 with
Uruguay's national petroleum company, ANCAP.

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Bonos del Sur
--------------


4. (SBU) Chavez and Kirchner announced a second issuance of
dollar-denominated Argentine-Venezuelan "Bonos del Sur" bonds
in Venezuela, a re-packaged mix of Argentine and Venezuelan
debt, in the principal amount of USD 1.5 billion. Chavez
announced the bonds would be offered in Venezuela on February

26. As well as offering a quick source of cash for its
Argentine ally, the BRV expects that the bonds will absorb
excess bolivars to drive down the price of the parallel
exchange rate dollar and curb inflation. Venezuelan
investors will welcome the chance to buy the
dollar-denominated assets with bolivars as a hedge against
inflation and to diversify out of the increasingly volatile
local currency. The two governments initially issued USD 1
billion of Bonos del Sur in November 2006 which were
massively oversubscribed by eager Venezuelan investors
(Reftel A). Argentina's economy minister, Felisa Miceli,
said the Argentine mix would consist of USD 750 million worth
of 2015 Boden bonds recently purchased by Venezuela while her
Venezuelan counterpart, Rodrigo Cabezas, did not specify the
composition of Venezuela's debt that would be packaged.

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The Bank of the South
--------------

5 (SBU) Chavez and Kirchner signed an MOU to establish a
"Banco del Sur," an autonomous Latin American credit lending
institution, within 120 days. Chavez referred to the
creation of the "Banco del Sur" as "historic," and added that
out of the 17 accords reached during Kirchner's 24 hour visit

CARACAS 00000387 002 OF 004


to Venezuela, the Banco del Sur was the most important.
Chavez added that the bank would be headquartered in Caracas,
with another office in Buenos Aires. He expected that
Bolivia and Ecuador would be the first nations to join
Argentina and Venezuela, and possibly Brazil. Chavez opined
that the first project the bank might finance could be the
Bolivia-Argentina leg of the "Gas Pipeline of the South."


6. (SBU) Both Chavez and Kirchner encouraged other countries
of the region to participate in the Banco del Sur project to
reduce reliance on the World Bank and IMF. "We have depended
for a long time on the architecture of international finance.
The hegemony that dominates the world created these
institutions such as the IMF and World Bank. With this
(Banco del Sur),we are freeing ourselves," proclaimed
Chavez. Kirchner, normally more reserved than his Venezuelan
counterpart, chimed, "In Argentina, there are still themes we
are trying to support...we are still trying to get out of
hell, trying to get out of the World Bank..." An angry
Kirchner concluded "These banks (World Bank and IMF) have
totally lost their purpose and we hope at some time they
recover it."

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Protecting SanCor from Soros
--------------


7. (SBU) Chavez announced a 135 million investment in
SanCor, an Argentine milk cooperative. One of Argentina's
principal milk producers, SanCor's debt reportedly reached
USD 167 million at the end of 2006 and was reportedly
approached by an entity controlled by George Soros to sell 62
percent controlling interest in the company. The BRV will
maintain an equity stake in the company and SanCor will
install factories in Venezuela. Sancor will supply Venezuela
with 15 million tons of powdered milk over 12 years.

-------------- ---
Accords from Argentine Beef to Natural Gas Buses
-------------- ---


8. (U) Argentina has agreed sell PDVSA buses powered by
natural gas engines. Venezuela's Energy Minister Ramirez has
announced a plan to migrate motor vehicles to natural gas,
starting with public transportation. The petroleum saved by
using gas-powered buses will be exported. The first 40 buses
are expected to arrive in Venezuela in 2007 and, in the
future, will be produced domestically in Venezuela.


9. (U) Argentina and Venezuela also signed an agreement to
mitigate Venezuela's food shortages. Argentina will supply
Venezuela with 10 thousand tons of beef and 5 thousand tons
of chicken. Argentina's National Agricultural Technology
Institute announced plans to construct two research
laboratories in Venezuela, and Argentine engineers will help
construct low-income housing in Venezuela. Kirchner stressed
that Argentine technical know-how would partner with PDVSA
cash in Venezuela, "Argentine investors are going to come and
invest technology to associate with PDVSA's agricultural
development."

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Kirchner: No to Paternalism
--------------


10. (SBU) During their joint statements in the Faja, Chavez
hailed Kirchner's visit as an example of South American
"solidarity." He continued that the agreements reached
between Venezuela and Argentina were part of a grand South
American national project. "Not Venezuelan, not Argentine,
not Brazilian, Bolivian, or Uruguayan. South American,
national! We are creating a solid, cohesive area," affirmed
Chavez.


11. (SBU) Kirchner echoed Chavez' remarks and criticized
"paternalism." Kirchner noted that "no one should be
bothered by the integration of our peoples, and we need to
finish with these paternalistic theories from the
institutional and political point of view. Much has been
said in recent times that there have to be countries to
contain other countries or in the case of President Lula, or
in my case, we need to contain Chavez, an absolute mistake,
we are building with our brother, President Chavez, a South

CARACAS 00000387 003 OF 004


American area to build dignity for our peoples."

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Chavez Takes a Shot at Arias
--------------


12. (SBU) Chavez also took a shot at Costa Rican President
Oscar Arias, after the Costa Rican president suggested
Venezuela's plans to close an aluminum plant in Costa Rica
were politically motivated. Chavez said that Arias could not
expect good bilateral relations if he referred to Venezuela
as a dictatorship and that the Costa Rican President should
not involve himself in things that don't concern him. "Some
talk so that they get applauded in Washington," said Chavez.

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


13. (SBU) The second issuance of joint Venezuelan-Argentine
"Bonos del Sur" worth USD 1.5 billion, provides Argentina
access to capital markets for its debt, and enables the BRV
to soak up excess liquidity, fight inflation and reduce
pressure on the bolivar. It also offers Venezuelan investors
a hedge against inflation. Chavez' vision of
institutionalizing the BRV's underwriting of regional debt by
creating the "Banco del Sur" within three months seems
far-fetched. While Chavez may open a token office and claim
to holding negotiations with regional leaders, Venezuelan
financing will likely continue on an ad-hoc basis.


14. (SBU) Most of the accords signed during Kirchner's
lightning visit to Venezuela are symbolic. Kirchner's visit
to Venezuela may have been timed to balance President Bush's
upcoming travel to Latin America. Kirchner's parroting of
Chavez' rhetoric, just two weeks after welcoming Under
Secretary Burns and Assistant Secretary Shannon to Argentina,

SIPDIS
shows that Chavez can still buy friends and influence with
the right price. End Comment.



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Addendum: List of Agreements
--------------


15. (U) The following is a list of the 17 agreements signed
during Kirchner's visit to Venezuela:

-- Cooperation Agreement on Science and Technology between
BRV Ministry of Agriculture and Argentina's Ministry of
Economy and Production

-- Letter of Intent to establish scientific cooperation to
strengthen meat distribution in Venezuela

-- MOU in field of health and medicine between BRV Ministry
of Health and Argentine Ministry of Health

-- MOU on communication between BRV Ministry of
Communications and Argentine Cabinet of Ministers

-- MOU on cooperation in diplomatic training between
respective Ministries of Foreign Affairs

-- MOU in habitat and housing between BRV Ministry of Housing
and Argentine Ministry of Planning

-- MOU on electrical equipment between BRV Ministry of Energy
and Petroleum and Argentine Ministry of Planning

-- MOU on acquisition of gas-powered buses between BRV
Ministry of Energy and Petroleum and Argentine Ministry of
Planning

-- MOU on cooperation in natural gas between BRV Ministry of
Energy and Petroleum and Argentine Ministry of Planning

-- MOU on natural gas between PDVSA and Argentine Association
of Natural Gas

-- MOU on equipment related to natural gas between PDVSA and
Argentine TATSA

CARACAS 00000387 004 OF 004



-- MOU on natural gas-powered buses between PDVSA and
Tomasetto Achile

-- Fuel Oil Supply Contract between PDVSA and Enara

-- MOU on electrical equipment between CADAFE and FARADY, SA

-- Financing Agreement between BANDES and SANCOR

-- Industrial Cooperation Agreement between BRV and Argentina

-- MOU for construction of Banco del Sur (Bank of the South)



BROWNFIELD