SCENESETTER FOR U/S NICHOLAS R. BURNS' VISIT TO

C O N F I D E N T I A L MONTEVIDEO 000611

SIPDIS

SIPDIS

DEPT ALSO FOR P (HBRONKE) AND WHA/FO (SWILLIAMS)
DEPT ALSO FOR WHA/PD (JRUSSO) AND WHA/BSC (KREAD)
TREASURY FOR OASIA FOR DDOUGLAS
COMMERCE FOR ITAITA/MAC/WBASTIAN
NSC FOR DFISK AND JCARDENAS
SOUTHCOM FOR POLAD

E.O. 12958: DECL: 06/26/2017
TAGS: PREL PGOV ETRD MARR PHUM ECON OVIP OTRA UY
SUBJECT: SCENESETTER FOR U/S NICHOLAS R. BURNS' VISIT TO
URUGUAY

REF: VARIOUS DEPARTMENT EMAILS

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

--------------
Summary and Introduction
--------------

1. (C) American Embassy Montevideo and I warmly welcome you,
WHA A/S Thomas A. Shannon and the other members of your
distinguished delegation to Uruguay. Your July 10-11 visit
comes at an especially auspicious time: only three months
after the historic POTUS visit and right on the eve of
Secretary of the Treasury Paulson's economic and financial

SIPDIS
mission. The Uruguayans will be keen to learn your
perspectives on U.S. foreign policy for the region and the
rest of the world. Your presence will also offer an
important opportunity to advance the bilateral agenda with
Uruguay beyond trade by highlighting other key U.S. policy
objectives. Uruguay's democracy remains strong and its
economic recovery from the 1999-2003 financial crises seems
generally assured. But Uruguay needs to invest more in its
people and be persuaded to change the prevailing statist,
commodity-based mind set so that it can face the global
challenges ahead and become a knowledge-based society.
Uruguay also needs to do more to enhance its security --
including closer cooperation with us -- and to take more
decisive action on security issues in international fora.
Many Uruguayans simply doubt that a major terrorist incident
could ever occur here.


2. (C) Though led by a leftist government, Uruguay continues
to share many of our basic values, and it remains an island
of democratic stability and good governance in a frequently
turbulent region. Uruguay also plays a pivotal role in Latin
America, where a number of countries have perilously
distanced themselves from the U.S. After Uruguay's historic
political shift to the left in the October 2004 elections,
the USG focused on engaging the initially wary Frente Amplio
(FA) government through a dialogue on trade. In large
measure, this approach was successful and helped to produce
our presently healthy bilateral relationship. The May 2006
visit by President Tabare Vazquez to the White House and
President Bush's reciprocal visit to Uruguay in March 2007
symbolized mutual understanding at the highest levels. Almost
unimaginable just two years ago, the visits also sent a
powerful message to the region that the U.S. is less
concerned with ideological labels than it is in working with
governments who respect democracy, human rights and the rule
of law.


3. (C) The contrast of Uruguay's solid democracy helps to
highlight the fallacies of the populist regimes in countries
such as Venezuela, Bolivia, Cuba, Nicaragua and Ecuador --
and to some extent Argentina. Vazquez's model appears to be
Chile and he enjoys a privileged relationship with Chilean
President Bachelet. A few months ago, a survey by the
magazine "the Economist" rated Uruguay as the only country in
South America to enjoy "full democracy." The GOU is seeking
U.S. market access and investment, but it is vulnerable on
energy supplies (to Venezuela) and remains very preoccupied
about its pulp mill 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
mostly young people who emigrate abroad in search of jobs. To
the extent that we can, we need to re-assure the Uruguayans
that we are their friends, expose them to more modern
economic and commercial ideas 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. Lastly,
Embassy Montevideo recently completed its rightsizing
exercise for the Department. By any objective measure, it is
short on the "substantive" personnel needed to carry out USG
policies through the kind of personal diplomacy and contact
that this culture requires. In the same way, Uruguay receives

very little in terms of U.S. assistance. I would welcome any
thoughts you may have regarding such resources issues,
especially against the backdrop of Hugo Chavez' increasing
assistance to Uruguay and other countries in the region. End
Introduction and Summary.

--------------
Background
--------------

4. (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 around $5,800,
and the GOU recently repaid its entire IMF debt early. Most
observers believe that Uruguay seeks to emulate Chile's
economic model. Vazquez and Bachelet, both physicians, enjoy
a close relationship and common views on economic and social
goals and the means to achieve them.


5. (SBU) Many Uruguayans were traumatized by the 1973-85
period of military dictatorship, when security forces
committed serious human rights violations in their campaign
against violent 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 touted 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 today. The real and imagined
lessons from the dictatorship period continue to haunt modern
politics, including the Uruguayans' perceptions of the U.S.,
especially where the Global War on Terrorism, Iraq,
Afghanistan and Guantanamo are concerned.

--------------
Social Factors in Economic Development
--------------

6. (C) Uruguay still needs to 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 four 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 political organization, with anti-American overtones.
Uruguay might need the consent of its Mercosur partners if it
were to negotiate a Free Trade Agreement (FTA) with the
United States, though many here argue that no authorization
is needed. Second, the current Frente Amplio government
still harbors hard-line Socialists, Communists, ex-guerrillas
and powerful trade unionists. While in the minority, these
groups are nevertheless quite vocal and influential. Third,
many ordinary Uruguayans seem content to leave large segments
of their economy, including telecoms, power generation, oil
imports and several banks, in state hands. Finally, Uruguayan
culture still values professions that are not particularly
useful or marketable in the global economy. Universities here
graduate too many architects and lawyers and not enough IT
experts, entrepreneurs and engineers. As with the labor
unions, the Communists have considerable influence among the
teachers and in education. Still, an educated population,
strong respect for the rule of law, a comparatively low crime
rate, and a good infrastructure make Uruguay one of the more
attractive destinations in the region for foreign investment.



--------------
Bilateral Relations: Key Issues
--------------

7. (C) Expanding the trade relationship and encouraging
investment have been the foundation of our engagement with
the moderate segment of the GOU. On May 4, 2006, 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.
An FTA and Trade Promotion Authority (TPA) issues were
discussed again during President Bush's visit to Uruguay in
March 2007. While President Vazquez is sometimes hesitant to
utter the words "Free Trade Agreement" in public, he and his
administration have repeatedly stressed their eagerness to
maximize bilateral trade. In private, they have made it
clear that their objective is to negotiate an FTA with the
U.S. You may wish to broach the subject of an FTA in your
private meeting with President Vazquez. We advise against
raising it with Foreign Minister Gargano, however, because he
is clearly opposed to an FTA with the United States.


8. (C) Aside from trade, we also need to intensify bilateral
cooperation in areas such as counter-terrorism,
counter-narcotics, mil-to-mil cooperation, container
security, border controls, the upgrade of Uruguay's civil
aviation authority to Category 1, alternative sources of
energy (especially wind, bio-diesel and ethanol),
phytosanitary issues and science and technology cooperation.
We also believe that investing in people, through more
cultural exchanges and support to English language training
programs can make a difference towards changing the socialist
mindset in Uruguay.


9. (C) Following the POTUS visit last March, the NSC sent
taskers to various agencies and bureaus for the purpose of
strengthening our bilateral ties. We have made progress in
several areas, notably bio-fuels cooperation, promoting
entrepreneurship and innovation, and phytosanitary issues.
On June 10-13, Industry Minister Lepra and a group of leading
entrepreneurs from Uruguay were invited by Commerce Secretary
Gutierrez to the first Americas Competitiveness Forum in
Atlanta. The GOU has offered to host a follow-up symposium
on innovation, to be held in Punta del Este in April 2008.
We also arranged for a visit by a high-level Uruguayan
delegation to Texas A&M and North Carolina State University,
two leading universities at the forefront of biofuels
research. Promising cooperation agreements and work plans
were reached with both universities, and with the University
of Minnesota, to develop biofuels in Uruguay. As for
phytosanitary issues, Uruguayan blueberries are close to
being certified for export to the U.S., and there is progress
on the certification of lamb and citrus.

--------------
President Vazquez
--------------

10. (C) A practicing physician (every Tuesday),President
Vazquez is a cautious and prudent man who is sometimes shy in
international settings. He appears to style himself after
Chile's ex-President Ricardo Lagos, and his mild leadership
style sharply contrasts with the bombast of Venezuela's Hugo
Chavez, Argentina's Nestor Kirchner and Bolivia's Evo
Morales. Vazquez is also 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 in his own coalition, 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 Uruguayan society prevented the
radical tilt some observers predicted during the 2004
electoral campaign. The contradictions between the radicals
and moderates inside the Frente Amplio will probably have to
be resolved if it is to win the 2009 national elections,
since in the last elections the FA won only 50.1 percent of
the vote. President Vazquez recently declared that he would
not seek to modify the Constitution in order to run for a
second term as President.

--------------
Domestic Politics
--------------

11. (C) Vazquez and his coalition Frente Amplio (FA)
government have been in power for over two years and have
continued to receive high ratings. (June 18, 2007
"Interconsult" poll shows Vazquez with a 59 percent approval
rating.) The moderates in his cabinet, especially Econ
Minister Danilo Astori and Energy Minister Jorge Lepra, have
also enjoyed favorable approval ratings and the President's
confidence, and therefore they exercise considerable sway in
foreign policy and the economy. The radicals within the FA
coalition have challenged Vazquez more seriously than the two
debilitated opposition parties (Blancos and Colorados) who
ruled the country during the past century. Vazquez still
relies on a relatively small cadre of experienced officials
to get things done, including his cabinet-level Chief of
Staff Gonzalo Fernandez. 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. (Note:
Mujica is a possible Presidential candidate. His MPP faction
represents about 38% of the Frente Amplio, but many
Uruguayan's distrust his Tupamaro past. A recent poll shows a
38% approval rating for him among the Frente Amplio and 13%
among non-FA respondents. End Note.)


12. (C) Vazquez has also been 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. EconMinister Danilo Astori is another
probable Presidential candidate. Because of his orthodox
economic policies and his past rivalry with Vazquez, he is
not well liked within the Frente Amplio, though his appeal
outside it with swing voters is much greater than Mujica's.
Astori's latest poll figures show a 28% approval rating among
the Frente Amplio and 61% among non-Frente respondents.


13. (C) The opposition Blanco (Nacional) and Colorado parties
are still recovering from their historic defeats suffered
during the 2004 elections, when they received only 34% and
10% of the vote respectively. The likely presidential
candidates in the next (2009) election for the Blanco Party
are Senator Jorge Larranaga ("Alianza Nacional" faction) and
former President Luis Alberto Lacalle ("Herrerismo" faction),
though the latter has recently said that he will not run. For
the Colorado party, Pedro Bordaberry ("Vamos Uruguay" group),
son of incarcerated ex-President Juan Bordaberry seems to be
the only viable candidate at this time, though former
Presidents Julio Maria Sanguinetti ("Foro Batllista") and
Jorge Batlle (Lista 15) cannot entirely be ruled out. Both
opposition parties are betting on swing voters and that the
Frente Amplio will remain vulnerable on high taxes and soft
on crime.

--------------
Foreign Policy
--------------

14. (C) Uruguay's foreign relations have historically
reflected the efforts of a small nation wedged between two
powerful neighbors to advocate self-determination, respect
for human rights and the rule of law, the pacific settlement

of disputes, and economic cooperation. While Uruguay does
not see eye-to-eye 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 has always punched
above its weight in foreign affairs, but the ideological
divisions within the Frente Amplio also explain its sometimes
ambiguous foreign policy over the last two years. For
example, the anti-American, pro-Venezuelan Foreign Minister
Reinaldo Gargano was virtually absent from all 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 the construction of a giant pulp mill on a shared river.


15. (C) By far, the GOU's most serious foreign policy 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 influence of radical NGOs and relations with
Mercosur. At $1.2 billion, the plant's construction cost
represents 6% of Uruguay's GDP 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.


16. (C) On the other hand, 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 pulp mill dispute is part of a
schizophrenic relationship with Argentina, as Uruguay
explores possible cooperation on an LNG facility and perhaps
even nuclear power in the long term. The pulp mill dispute
has indirectly (some would say ironically) contributed to
Uruguay's tilt towards the U.S.


17. (C) Uruguay's robust participation in international
peacekeeping operations (PKO) can be partly explained by its
dedication to and faith in international organizations.
(Uruguay has the highest per capita contribution PKO among
participants). Uruguay has also recently submitted a $20
million democracy-building proposal to the State Department
for a project in Haiti, where Uruguay has stationed over
1,000 of its peace keepers. We note that some senior GOU
officials (Deputy Foreign Minister Maria "Belela" Herrera and
Director General For International Cooperation Ambassador
Raquel Rodriguez) have told us that they have discussed this
project proposal with you and A/S Tom Shannon on separate
occasions. The full text of the project has been sent to BSC
and to the Haiti desk and has been translated into English.


18. (C) Unfortunately, Uruguay's enthusiasm for international
PKO is not matched in other areas of security cooperation.
For example, the GOU still does not wish to engage in UNITAS
naval exercises and its borders are porous and unpatrolled in
many areas. Uruguay's military enjoys good relations with
ours, but the 1973-85 military dictatorship's human rights
abuses still casts a long shadow on its reputation and
budget. Equally disconcerting is the Foreign Ministry's
apparent lack of interest in security-related demarches on UN
Security Council resolutions, Iran, WMD proliferation,
counterterrorism and the like. Embassy expects that so long
as the Socialist Foreign Minister remains at his post, we
will continue to experience minimal cooperation on these
types of issues. Uruguay has a growing drug problem and would

like more counter-narcotics cooperation with the U.S., but
past INL funding has ranged from minimal to none.

--------------
The Economy, Trade and Investment
--------------

19. (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 twice 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.


20. (U) Economy Minister Astori has been pursuing orthodox
macro-economic policies on controlling inflation (6.4% in
2006) and promoting growth and investment. This has resulted
in continued strong growth over the past couple of years, at
6.6% in 2005 and 7.% in 2006. The GOU has also paid off its
debt to the IMF early and has regularly issued bonds on
favorable terms in the international financial markets, thus
lowering its debt service costs. The debt to GDP ratio was
down to 71% at the end of 2006, from over 101% in 2004.
Unemployment is now in the single digits for the first time
in 5 years. The country risk stood at 159 points in May

2007.


21. (C) Still, 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. Venezuela
has also invested in several failing firms in Uruguay and has
promised to do more. So far, except for oil at preferential
prices, much of Chavez's promises to Uruguay remain
unfulfilled. The GOU has also been the most wary of the
Mercosur countries regarding Venezuela's Banco del Sur
project, though in late June, Uruguay decided to join in on
the project, over the objections of Minister Astori.

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

22. (C) Though Uruguay is unlikely to ever become a strategic
partner of the U.S., 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. It is also the time to
engage Uruguay beyond trade to other areas of bilateral
cooperation including, regional stability, security
cooperation, incentives to private enterprise and investing
in people. I believe that we can help Uruguay to make
progress in these areas, but it will take time and resources.
Meanwhile, your visit serves as a very important building
block for deepening our overall engagement with Uruguay. End
Comment.
Baxter