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