URUGUAY: SCENESETTER FOR SECRETARY RICE

C O N F I D E N T I A L SECTION 01 OF 05 MONTEVIDEO 000189

SIPDIS

SIPDIS

DEPT ALSO FOR S/ES AND WHA A/S TOM SHANNON
NSC FOR DFISK AND JCARDENAS
SOUTHCOM FOR POLAD

E.O. 12958: DECL: 02/27/2017
TAGS: OVIP RICE CONDOLEEZZA PREL PGOV ECON UY
SUBJECT: URUGUAY: SCENESETTER FOR SECRETARY RICE

REF: STATE 022878

Classified By: Ambassador Frank E. Baxter
for reasons 1.4 (B) and (D)


1. (C) Summary and Introduction: American Embassy Montevideo
and I warmly welcome your participation in President Bush's
historic visit to Uruguay. Though led by a left-leaning
government, Uruguay shares many of our values and remains an
island of democratic stability and good governance in a
turbulent region. The presidential visit sends a powerful
signal to the region that we favor good relations with
sensible, pragmatic governments which respect democracy,
human rights, and the rule of law, regardless of political
label. The visit is also an opportunity to advance our
improving bilateral relationship beyond trade and to
highlight U.S. policy priorities in the region: consolidating
democracy, promoting prosperity, investing in people, and
enhancing security. This is also a chance to listen to the
Uruguayan perspective on challenges, problems and threats in
the Western Hemisphere.


2. (C) The POTUS visit may help Uruguay resolve its
philosophical quandary between economic dynamism and
socialist egalitarianism. Many elements for strong economic
growth are in place. The traditional pillars of its economy
-- farming, tourism and finance -- are all doing well, and
foreigners are increasingly investing here. But three things
hold Uruguay back. The first is that Uruguay is part of
Mercosur, which now includes Venezuela. Mercosur has
increasingly devolved from an imperfect customs union into a
more restrictive and anti-American political organization.
Uruguay might need the consent of its Mercosur partners to
negotiate an FTA with the United States. Second, the current
Frente Amplio (FA) government still harbors hard-line
Socialists, Communists, ex-guerrillas and powerful trade
unionists. While in the minority, these groups are
nevertheless quite vocal. Many ordinary Uruguayans seem
content to leave large segments of their economy, including
telecoms, power generation, oil imports and several banks, in
state hands. The culture still values professions which are
not particularly useful in the global economy. Still, an
educated population, strong respect for the rule of law, and
a good infrastructure make Uruguay one of the most attractive
destinations in the region for foreign investment.


3. (C) Uruguay punches above its weight in foreign affairs,
but ideological divisions within the FA also explain its
sometimes ambiguous foreign policy. For example, the
anti-American Foreign Minister has been virtually absent from
the substantive bilateral trade discussions with the U.S. He
has also been a non-player in Uruguay's number one foreign
policy concern: the long-running, serious dispute with
Argentina over pulp mills. While the GOU does not agree with
the U.S. on many international issues ranging from Kyoto to
Cuba to the War in Iraq, both countries value freedom and
independence. Uruguay's vibrant democracy highlights the
fallacy of populist regimes such as those in Venezuela,
Bolivia, Cuba and Ecuador -- and to a lesser extent
Argentina. The Economist magazine recently rated Uruguay as
the only country in South America to enjoy "full democracy."
The GOU seeks more U.S. trade and investment, but is
vulnerable on energy supplies and is very frightened about
its dispute with Argentina. Uruguay also faces a long-term
demographic problem: a low birth rate (except among the poor)
is exacerbated by the brain drain of young people who are
emigrating abroad in search of jobs. To the extent that we
can, we need to re-assure the Uruguayans that we are their
friends, increase our cultural exchanges and try to encourage
them to cooperate more assertively on issues of regional
stability and security -- including counter-terrorism,
counter-narcotics and mil-to-mil cooperation. End Summary
and Introduction.

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Observations and Developments
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4. (C) The last POTUS to visit Uruguay was President George

H. W. Bush on December 4, 1990, when then-mayor Tabare
Vazquez presented him the keys to Montevideo. Most Uruguayans
will be delighted at the recognition and prestige the visit
offers, but some observers might conclude that this visit is
designed to counter Hugo Chavez' growing influence in the
region. We understand that Hugo Chavez plans to travel to
Buenos Aires on March 9 to address a rally there, and that he
is bound to fire his usual diatribes at President Bush, in a
replay reminiscent of Mar del Plata. Close Uruguayan contacts
recommend that we do not take Chavez' bait or respond to his
remarks. Brazil's President Lula visited President Vazquez on
February 26 in an attempt to rekindle Uruguay's interest in
Mercosur. On March 1, President Vazquez will deliver his
second State of the Union address.

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Background
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5. (U) Uruguay is a small, stable democratic nation of 3.3
million people, almost half of them residing in its capital,
Montevideo. Once known as "the Switzerland of South
America," it has long been one of Latin America's wealthiest
and most egalitarian countries, with per capita GDP exceeding
$6,000 during periods of growth. However, a four-year
recession, which ended in 2003, cut this figure nearly in
half and lowered Uruguay's historically excellent
socio-economic indicators. Uruguay's economy has been
recovering well over the past three years, with GDP growth of
7 percent in 2006, in large part thanks to continued orthodox
economic policies. GDP per capita is back to $5,700, and the
GOU recently repaid its entire IMF debt early. Some observers
believe that Uruguay seeks to emulate Chile's economic model.



6. (C) Many Uruguayans were traumatized by the 1973-85 period
of military dictatorship, when security forces committed
serious human rights violations in the campaign against
insurgents and their sympathizers. Some people blame the U.S.
for indirectly supporting the region's military governments
during the Cold War. Slick propaganda and declassified U.S.
documents from the period are frequently used by our
detractors as "proof" of our involvement. The complex history
of the dictatorship created heroes and villains for both the
left and right. Some of the persons involved -- including
former Tupamaro guerrillas -- are still active in politics.
The real and imagined lessons from the period continue to
influence modern politics, including Uruguayans' perceptions
of the U.S., especially where the Global war on Terrorism,
Iraq and Afghanistan are concerned.

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Bilateral Relations: Key Issues
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7. (C) Expanding the trade relationship has been the
foundation of our engagement with the GOU. On May 4,
President Tabare Vazquez met with President Bush in the Oval
Office where both leaders agreed to deepen our trade
relationship. After this meeting, a series of visits by USTR
officials examined the possibility of FTA negotiations, but
the discussions did not immediately bear fruit. Instead,
DUSTR John Veroneau traveled to Uruguay to sign a Trade and
Investment Framework Agreement (TIFA) on January 25, 2007.
Aside from trade, we also need to intensify bilateral
cooperation in areas such as counter-terrorism,
counter-narcotics, mil-to-mil cooperation, container
security, bio-fuels, the upgrade of Uruguay's civil aviation
authority to Category 1, alternative sources of energy
(especially wind, bio-diesel and ethanol),phytosanitary
issues, science and technology, English language teaching,
and cultural exchanges.

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Uruguay's President
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8. (C) A practicing physician, President Vazquez is a
cautious and prudent man who is sometimes shy in

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international settings. We believe he proposed meetings at
the Anchorena ranch, in part because of this personal
preference. He appears to style himself after Chile's
ex-President Ricardo Lagos, and his mild leadership style
sharply contrasts with the populism of Venezuela's Hugo
Chavez, Argentina's Nestor Kirchner and Bolivia's Evo
Morales. While he is sometimes hesitant to utter the words
"Free Trade Agreement" in public, Vazquez and his
administration have repeatedly stressed their eagerness to
maximize trade with the U.S. In private, they have made it
clear that their objective is to negotiate an FTA with the
U.S.


9. (C) Vazquez is a pragmatist, and what he most wants for
Uruguay is jobs, investment and growth. At home and abroad
he has been caught between the competing demands of radicals
and moderates, and he often faces a tremendous challenge to
balance these opposing forces. His leadership style is
predictable: he tends to stay above the fray and allow
competing factions in the FA to debate an issue to exhaustion
and then weighs in with a final decision. Vazquez' adroit and
pragmatic leadership along with Uruguay's strong institutions
and the basically conservative nature of its society
prevented the radical tilt some observers predicted during
the 2004 electoral campaign. The contradictions between the
radicals and moderates will probably have to be resolved if
the FA is to win the 2009 national elections, since in the
last elections the FA won only 50.1 percent of the vote.

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Domestic Politics
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10. (C) On March 1, Vazquez and his coalition Frente Amplio
(FA) Government will have been in power for two years and
have generally received high marks from the public, according
to polling data. The moderates in his cabinet, especially
Econ Minister Danilo Astori and Energy Minister Jorge Lepra,
have generally enjoyed high approval and therefore exercise
considerable sway in foreign policy and the economy. The
radicals within his FA coalition have challenged Vazquez much
more than the two discredited opposition parties (Blancos and
Colorados) who ruled the country during the past century. In
his efforts to be practical, Vazquez relies on a relatively
small cadre of experienced officials to get things done. A
key ally in domestic politics has been Agriculture Minister
and ex-Tupamaro guerrilla leader Jose Mujica who, despite his
violent past, has often countered the extreme ideologues on
the far-left. Vazquez was also able to appease many of the
far-left radicals when he addressed the human rights abuses
committed during the "dirty war" period of the military
dictatorship, uncovered the buried bones of disappeared
persons, and prosecuted some of the perceived worst human
rights abusers.

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Foreign Policy
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11. (C) The country's foreign relations have historically
reflected the efforts of a small nation to advocate
self-determination, respect for human rights and the rule of
law, the pacific settlement of disputes, and economic
cooperation. For example, Uruguay's robust participation in
international peacekeeping operations can be partly explained
by its dedication to and faith in international
organizations. However, foreign policy under the Vazquez
administration has been a formidable challenge, compounded by
the stubbornly ideological, anti-US Foreign Minister Reinaldo
Gargano.


12. (C) By far, the GOU's most serious problem has been the
severe bilateral dispute with Argentina over the construction
of a Finnish-owned paper mill on a shared river -- not only
because of soured bilateral relations with Uruguay's closest
neighbor, but also because of the implications to foreign
investment, an independent foreign policy, the power of
radical NGOs and relations with Mercosur. At $1.2 billion,
the plant's construction cost represents 8% of Uruguay's GDP

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and its operation is expected to generate exports worth 2% of
Uruguay's GDP. It represents the largest Foreign Direct
Investment in Uruguay's history. Argentine government
officials, some inhabitants of the Province of Entre-Rios
across the river, and environmental activists claim the plant
would harm fishing, farming, and tourist areas along the
Uruguay-Argentina border. Argentina also claims that Uruguay
violated the 1975 Uruguay River Treaty. Aspects of the case
have gone before the International Court of Justice in The
Hague and a Mercosur Tribunal, but Uruguay has sought little
redress with the OAS. The U.S. voted to support the World
Bank's IFC loan to the project. Protesters from Argentina
have blocked bridges between Argentina and Uruguay off and on
since December 2005 at great cost to Uruguay's trade and
tourism revenues. The Uruguayans have felt bullied by
Argentina's treatment and disappointed by Brazil's
indifference. The paper mill dispute has indirectly
contributed to closer ties with the U.S.


13. (C) Uruguay has a heavy debt burden and no known
hydrocarbon deposits, so that Venezuelan oil and money
provide considerable temptation to boost the economy.
Uruguay's state oil monopoly ANCAP recently signed a deal
with Venezuela's state-owned PDVSA to help fund 24 percent of
the cost of oil exploration in the Orinoco region of
Venezuela in return for a proportional share of the resulting
oil. Details of the agreement remain murky, and observers
are skeptical if ANCAP can fund its end of the bargain or if
the endeavor will result in significant gains for Uruguay. As
for PDVSA's pledge, a year and a half ago, to fund a $600
million refurbishing of Uruguay's refinery to allow it to
process Venezuela's heavy oil, it still remains to be
implemented. There is also much interest in natural gas from
Bolivia, but delivery through the existing pipelines would
necessarily have to pass through Argentina, and thus be
subject to the vagaries of Argentine power needs.

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The Economy, Trade and Investment
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14. (U) Uruguay is a major agricultural producer.
Agriculture and agro-industry account for 23% of GDP and over
75% of total exports. The major Uruguayan exports are meat
(over $1 billion this year),long-grain rice, dairy products,
wool and soybeans. Forestry has surged over the last decade,
due to favorable investment conditions and a favorable
climate, where eucalyptus grows almost ten times as fast as
in the U.S. Uruguay does not import agricultural products
but does import processed foodstuff. Uruguay applies a 6.6%
average tariff on agricultural goods and does not impose any
kind of import quota. There are no subsidies to agricultural
production or exports. Given the importance of this sector
for the economy, Uruguay has been active in bilateral and
multilateral fora to push for trade liberalization, and U.S.
agricultural subsidies are a hot topic. The GOU's trade
policy on agriculture has generally been in line with
Mercosur's policies, and Uruguay is a member of the G-20
group of countries calling for the elimination of
agricultural subsidies. The GOU threatened last year to file
a case with the WTO on U.S. rice subsidies, but Embassy
intervention allowed for the opening of a bilateral dialogue
instead, in an attempt to resolve the issue. Talks are
ongoing, but the threat of an impending WTO case still
remains on the horizon.

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Comment: A Valuable Friend Worth Cultivating
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15. (C) Uruguay is unlikely to become a strategic partner of
the U.S., but it can be a valuable friend in a region that
has significantly distanced itself from us in many instances.
Over the last two years, we have been able to build a
remarkable level of confidence with President Vazquez through
enhanced trade initiatives and other confidence-building
measures. Now is the time to clearly define where we want
our trade dialogue to lead us and if an FTA is our shared
ultimate goal. Two ex-Presidents of Uruguay recently asked

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that I ensure that POTUS specifically engage Vazquez in
discussing the path to an FTA. Another one advised against
doing so in public. In any case, now is also the time to
engage Uruguay beyond trade to other areas of bilateral
cooperation, especially regional stability and security. I
believe that this can be done, but it will take time.
Meanwhile, the POTUS visit serves as an important building
block for deepening our overall engagement with Uruguay. End
Comment.
Baxter