LULA ATTEMPTS TO REKINDLE RELATIONSHIP WITH

C O N F I D E N T I A L MONTEVIDEO 000216 SIPDIS SIPDIS STATE FOR WHA/BSC AND EB/TPP TREASURY FOR OASIA FOR JASPER HOEK COMMERCE FOR ITA/BASTIAN DEPT PLEASE PASS USTR NSC FOR CARDENAS E.O. 12958: DECL: 03/05/2017 TAGS: PREL ECON ETRD UY SUBJECT: LULA ATTEMPTS TO REKINDLE RELATIONSHIP WITH VAZQUEZ DURING SHORT VISIT TO URUGUAY Classified By: Ambassador Frank E. Baxter, for reasons 1.4 (b) and (d). ¶1. (U) Summary: Brazil's President Lula, accompanied by a high-level delegation, came to Uruguay on February 26 for a 6-hour visit to repair a strained relationship with President Vazquez. The two presidents met in a cordial atmosphere at the presidential retreat in Anchorena, the same venue where Vazquez will receive POTUS in a few days. They signed several agreements, notably on trade and investment and on biofuels. Lula is said to have reassured Vazquez that Brazil was reasserting its leadership of Mercosur. He pledged to work towards an "equilibrium" in the trade relationship and to "respect the sovereignty" of all member states. ¶2. (C) A Brazilian Embassy contact told us that Lula had mentioned to Vazquez the possibility of renewed Mercosur-U.S. trade talks and, in a call to the DCM, the Brazilian Ambassador intimated that "it may be time to revive the Mercosur-U.S. trade talks" (a prospect touched upon by Brazilian ForMin Amorim in an earlier interview.) The Uruguayan press described the meeting as Uruguay returning under Brazil's umbrella. Several editorials questioned whether Vazquez had given up its trade rapprochement with the U.S. in exchange for vague Brazilian promises, but there were no indications that he may have done so. Indeed, GOU EconMin Astori stressed that Uruguay,s demands for greater "flexibility" to develop its trade outside of Mercosur remained on the table. End Summary. ¶3. (U) While Lula's visit was well overdue, its timing, just 10 days prior to POTUS's trip to the region, is probably no accident. Lula had missed the Ibero-American Summit in Montevideo in early November and twice postponed a make-up trip to Uruguay. The POTUS trip and each country's relationship with the U.S. were high on the agenda. Lula said he knew that "Vazquez will discuss the interests of Uruguay with the U.S. and, as for me, I will discuss biofuels with Bush." Lula added that "each country should look after its own interests, taking into account that we have rules that oblige us, as Mercosur, to certain procedures, but without impeding each country's freedom to do business according to its own sovereign interests." Both Lula and Vazquez are reported to have deplored the timing of Chavez's visit to Argentina, to coincide with POTUS's stay in Uruguay. ¶4. (C) In a press interview prior to the trip, Brazilian ForMin Amorim had noted that Brazil's "relationship with the U.S. is, nowadays, intimate. They never valued us so much." Amorim obliquely called for a resumption of Mercosur trade negotiations with the U.S.: "Brazil has an interest in reaching agreements with the EU, with the U.S., but I believe we would all benefit more if these agreements were with Mercosur." A contact at the Brazilian Embassy told EconCouns that Lula had mentioned to Vazquez a possible resumption of Mercosur-U.S. trade talks. Also, as this cable went to press, the Brazilian Ambassador called the DCM to give him a read-out of the Lula visit. He said that "it may be time to revive the Mercosur-U.S. trade talks." The Ambassador said he had spoken to celso Amorim about this. The Ambassador said that, while there "was some hesitation, because now we are five (referring to Venezuela),I think I convinced him." The Ambassador added that "if we are going to do this we should do it fast. I think we are ready to go for something." ¶5. (U) For his part, Uruguayan EconMin Astori declared after Lula,s visit that Uruguay would continue to explore the possibilities to expand its trade with the U.S., in a form that is "compatible" with the rules of the trade bloc. "This is why we are asking for more flexibility when it comes to these rules," Astori added. Asked if Uruguay had managed to get more flexibility from Brazil in this respect, Astori replied that "we all need to keep working; there is still much to do." ¶6. (U) The two governments signed several agreements, notably on trade and investment, and on biofuels cooperation. Uruguay's trade deficit with Brazil is now averaging over $300 million a year, with Uruguayan exports to Brazil dropping from about $1 billion in 1998 to less than $600 million in 2006. Lula pledged to work to better integrate the two economies and to spur Brazilian investment. Major recent Brazilian investments include the purchase by Petrobras of the Shell network of service stations and of two gas companies (Conecta and Gaseba),a barley factory to supply serve Ambev's breweries and a number of large slaughterhouses. On the financial side, Banco Itau recently bought Bank Boston, BNDES has a framework agreement with Uruguay's state-owned Banco de la Republica, and Banco do Brasil has announced it will re-start operations shortly. ¶7. (C) The more important meaning of Lula,s visit was political. Editorials characterized its outcome as Uruguay "coming under Brazil,s wing." The GOU,s ongoing troubles with Argentina may have helped in this rapprochement with the GOB. Because of its small size, nestled between two giants, Uruguay has historically played a pendulum policy between its two neighbors. The GOU is quite frightened by the extent of Argentina's aggressive actions and is looking for support where it can find it. ¶8. (U) Vazquez called it "a historical time in which a deep turning point takes place in the relationship between our two countries". His speech was quite gentle towards Lula, considering the strain of the past few months. Vazquez expressed his "deep joy and gratefulness for the visit", which he considered a reflection of Brazil's "acknowledgement and amplest echo" of the issues the GOU had tabled in several Mercosur meetings (more flexibility for trade negotiations outside of Mercosur, and addressing asymmetries and the trade deficit). A few days after the visit, in a March 1 press interview, Vazquez )who had been extremely critical of Mercosur- stated that "Uruguay is not IN Mercosur, Uruguay IS Mercosur." ¶9. (U) The joint communique also highlighted the need to achieve swift progress in Doha's negotiations )with agricultural liberalization as a pre-requisite-, a commitment to continue working jointly in the G20 and the Cairns Group, and a reference to the South American Community of Nations. It also noted the need to strengthen multilateralism and UN reform, and a continuation of peacekeeping operations, especially in Haiti. Comment: No apparent backtracking by Vazquez -------------- ¶10. (C) Comment: As usual, there was lots of rhetoric about the need to address Mercosur's problems, but the agreements signed were minimal. Regarding Uruguay,s longstanding demands, the Joint Statement acknowledges "the importance that Mercosur%s external negotiations consider in a differentiated manner the particular traits of smaller economies." Still, much of the official statement is broad enough to be interpreted in many ways. There is widespread speculation that Lula's goal was to ensure Vazquez's commitment to Mercosur prior to POTUS visit. While Vazquez's friendly reception and words of support for Mercosur signaled a continued commitment to the trade bloc, he did not backtrack from his stated goal to explore bilateral trade negotiations outside of Mercosur. If Lula did mention the possibility of renewed Mercosur-U.S. trade talks, there was no indication that Vazquez took the bait. Astori was clear that the GOU's demands for greater flexibility remain on the table. End Comment. Baxter