RESOURCE NATIONALISM IN BOLIVIA

C O N F I D E N T I A L SECTION 01 OF 03 LA PAZ 002981

SIPDIS

SIPDIS

PASS TO EEB/ESC/IEC/EPC GLENN GRIFFIN

E.O. 12958: DECL: 03/07/2017
TAGS: ECON PGOV EPET EMIN EINV EB BL
SUBJECT: RESOURCE NATIONALISM IN BOLIVIA

REF: SECSTATE 150999

Classified By: Ecopol Chief Mike Hammer for reasons 1.4 (b) and (d).

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Summary
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1. (C) The Morales administration believes that the state
should be more involved in all aspects of the Bolivian
economy. In that context, resource nationalism does not
stand alone; control of natural resources just happens to be
the most valuable for the administration both financially and
symbolically. The "nationalization' of Bolivia's gas remains
a very popular move by the government and is seen by the
majority of Bolivians as netting a large cash windfall for
the nation. At present, it is unclear if the reality of
falling production levels and lack of investments will push
the government to establish a more stable judicial and
economic environment or will only motivate them to take even
more radical steps toward greater state control over the
nation's resource wealth. End summary.

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Gas "Nationalization"
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2. (C) The Morales administration's May 2006
nationalization decree raised tax rates on production and
called for the state petroleum company (YPFB) to gain control
over "the entire hydrocarbons production chain" through
majority ownership in key companies. The result has been
additional revenue for the government (although most of the
trumpeted windfall is the result of price increases) and a
climate of judicial and regulatory insecurity. The most
glaring results of "nationalization" within the industry
itself are, perhaps, the lack of investment that followed,
the inability of Bolivia to meet its international contracts,
and an ominous (thought slight for now) drop in production.
(Note: Currently Bolivia is failing to deliver the minimum
levels of gas on three out of its four major international
contracts. End note.) The government now clearly realizes
that it needs to attract additional investments, but as one
industry expert put it "Bolivia is now akin to Lorena Bobbitt
and the first thing we need to do is drop the knife!".

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Winners and Losers
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3. (C) The main beneficiary of "nationalization" was the
Morales administration; the action was, and continues to be,
very popular with the majority of Bolivians. After "500
years of exploitation" there is a thirst for control over
national resources and even in the face of looming gas
shortages and distribution problems with diesel and gasoline,
the "nationalization" itself is still popular.


4. (C) The state has also benefited in the sense of
increasing its role within the economy. However, this
greater power and responsibility was not accompanied by any
increase in institutional capacity. The attempt to
centralize the entire production chain within the state has
resulted in judicial uncertainty, frustration with government

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partners, and a lack of significant investments in all areas
of the production chain. For example, despite a legal mandate
to gain control over the gas transport company, Transredes,
the state needs to acquire an additional 16% stake. Because
of this, Transredes is stuck in legal limbo, unable to raise
additional capital to carry out needed expansion projects.
To whom would a bank be lending the money, the state or
Transredes? Moreover, there is universal agreement in the
industry that YPFB lacks the technical capacity to do the job
assigned to it. Company executives complain that it is fine
for the national company to assume a greater role, but they
need someone competent to work with. The Norwegian Consul in
La Paz, who is initiating a cooperation program to improve
YPFB management, admitted that "the challenges are even
bigger than we imagined." (Note: Encouraging Bolivia to
work with third party governments like Norway and/or Spain
could be one avenue for the USG to take to help curb radical
resource nationalism in Bolivia. End note.)

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The Mining Sector
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5. (C) The Morales administration's February 9, 2007
nationalization of Glencore's Vinto tin smelter has yet to be
followed by other forced nationalizations in the mining
industry, although the state mining company (COMIBOL) has
also "regained control" of the formerly cooperativist Huanuni
mine. Vinto's nationalization may have been a special case
(Note: Some observers suggest that Vinto's past ties to Evo's
nemesis Gonzalo "Goni" Sanchez de Lozada prompted the
smelter's nationalization. End note.) Yet, despite record
prices, uncertainty in the mining sector has led to falling
production levels.


6. (C) Evo's May 1 2007 declaration that Bolivia's national
territory constituted a "state mineral reserve" has had
little real impact on international companies yet, since
subsequent decrees weakened the declaration and current
mining concessions are not affected. U.S. mining executives
inform us, however, that this decision has decreased their
interest in exploration and investment in Bolivia, since
increased national control over mining concessions could make
it difficult for companies to develop new projects in Bolivia.


7. (C) Of more concern to mining companies at the moment is
the pending mining law (or mining code) which could include
the requirement that all mining operations in Bolivia sign
fifty-fifty joint ventures with the state (cooperativist
mines may be exempted for political reasons.) Reportedly
companies will have only one year from the promulgation of
this law to sign joint venture contracts, and some observers
suggest that this will result in "de facto" nationalizations
if companies cannot make a profit giving up fifty percent
control to the state (or if they do not want to accept the
inefficiencies and potential liabilities of working closely
with Bolivia's overstretched and understaffed state mining
company.)

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What's Next?
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8. (C) Although our contacts in the mining ministry and

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COMIBOL insist that fifty-fifty joint partnerships are all
that the state wants at this time, it is important to note
that Evo's most popular action as president has been his
"nationalization" of the hydrocarbons sector. As domestic
issues such as rising inflation put pressure on his
administration and his popularity, Evo may be tempted to
initiate a propaganda power-play by sending troops onto mine
sites the way he did with gas fields in May 2006.


9. (C) If Evo decides to nationalize parts of the mining
sector, we expect to see graduated, "differentiated"
nationalization. For political reasons, Evo is unlikely to
nationalize deposits currently worked by cooperativist miners
(since they are likely to protest in the streets of La Paz
with dynamite.) Former Goni-properties (now owned by Swiss
company Glencore) may prove tempting. Of the three large
U.S. operations in Bolivia, Newmont's Inti Raymi mines are
probably safest from nationalization, as they are low-grade,
complex ore and are nearing the end of their mine life.
Coeur D'Alene's San Bartolome mine is counting on close
relations with cooperativist groups to deter government
interest in nationalization. Apex's San Cristobal mine is
most vulnerable, having just started production and facing
financial difficulties due to proposed tax increases and
potential changes to the import tax recovery system. San
Cristobal executives assure us that they do not anticipate a
forced nationalization. Other industry observers are less
sanguine, however, and the high level of uncertainty in the
sector as a whole is serving to limit exploration and
investment interest in Bolivia.

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Comment
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10. (C) It is difficult to predict where the lack of
investment and falling production levels across the natural
resource industries will push the Morales Administration.
They may see value in providing a clearer judicial operating
environment and be rewarded with additional investment
(recent Petrobras announcements of interest in further
investments may signal this is the case) or more radical
elements in the government may well blame the private sector
for economic failings and seek outright nationalization (the
October 2007 withdraw from the World Bank's International
Center for the Settlement of Investment Disputes may signal
this is the case). There is no love of the private sector in
this administration and a struggle between their leftist
ideology and the need to attract more investment is clearly
taking place. To date, ideology has had the upper hand and
while the long-term prospects for the economy have suffered,
Evo's popularity has not. It is also worth noting that
Morales may feel that countries such as Venezuela and Iran
offer him a viable alternative to private sector financing.


GOLDBERG