ARGENTINA: SCENESETTER FOR CODEL PETERSON

UNCLAS BUENOS AIRES 001205

FOR REPRESENTATIVE PETERSON FROM AMBASSADOR E. ANTHONY
WAYNE

DEPARTMENT FOR H AND RM/F/DFS/FO/AA/CAA
USDA FOR FAS/OA/OCRA/OFSO

SIPDIS
SENSITIVE

E.O. 12958: N/A
TAGS: OVIP CODEL EAGR ECON PREL BEXP AR
SUBJECT: ARGENTINA: SCENESETTER FOR CODEL PETERSON


1. (U) This telegram is sensitive but unclassified, and not for
Internet distribution.

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Introduction
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2. (SBU) On behalf of Embassy Buenos Aires, I warmly welcome your
September 3-6 visit to Argentina. The agricultural and political
situation in Argentina has changed significantly since your visit
here last year. Previous optimism about the growing potential of
the agricultural sector and the new administration of President
Cristina Fernandez de Kirchner (CFK) changed after the government
substantially increased export taxes for soybeans and other products
on March 11. Agricultural producers responded to the export tax
increase by staging a series of farm strikes and protests that
culminated in July with the Argentine Senate (previously dominated
by government supporters) narrowly rejecting the tax increase. In a
split Senate, the tie-breaking vote against the tax was cast by Vice
President Cobos. The popularity of CFK plunged during the dispute
from close to 50 percent to around 20 percent at the height of the
dispute. (It now stands at 29%.) While repeal of the tax increase
ended the crisis, the dispute between producers and the government
continues, with agricultural producers recently threatening to
resume protests over government restrictions on exports of beef,
dairy products, wheat, corn and other products.


3. (SBU) Rising inflation and the government's evident
under-reporting of it further eroded popular support for the
government, although the most recent polls indicate the President
has recovered some of the popularity lost at the height of the
agricultural conflict. Her husband, former president Nestor
Kirchner, has lowered his profile since the July 17 defeat of the
export tax in the Senate, and the President has made some
conciliatory gestures, including by holding her first-ever press
conference on August 2. The President appointed new Agricultural
Secretary Carlos Cheppi in July following the defeat in the Senate.
While Cheppi has made some efforts to improve relations with the
agricultural sector, he got off to a rocky start when no farm leader
was invited to his inauguration and Cheppi, along with other
government leaders, boycotted the traditional Palermo farm show at
the end of July.

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A Government Against the Ropes
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4. (SBU) On March 11, the GOA unexpectedly issued a decree that
increased export taxes on soybeans, sunflower, corn, and wheat.
That precipitated the worst political crisis of either Kirchner
administration. Argentina's four principal agricultural
organizations showed rare unity in organizing production stoppages,
roadblocks, and public demonstrations to protest the new tax,
leading to nationwide shortages of such staples as beef, chicken,
dairy products, and vegetables. The farm protest also enjoyed
widespread urban support. Efforts to negotiate a viable compromise
failed, in part due to opposition from hard-line members of the
government, and the GOA increased controls on major exports by
suspending most beef exports and limiting exports of other products.



5. (SBU) When the President announced June 17 that she was
submitting the tax hike to the Congress for its approval, farm
groups suspended the farm strike and focused on the congressional
vote. Former president Nestor Kirchner quickly turned the issue
into a vote of confidence for the government. Although it appeared
that the Kirchners had two-thirds support in both houses of Congress
after the October 2007 presidential elections, they lost support on
this issue within the Congress and within their own ruling
coalition. In the Chamber of Deputies, the GOA proposal barely
squeaked by July 5 with a 129-122 vote. On July 17, after 18 hours
of debate, the Senate tied early in the morning at 36 to 36, forcing
Vice President Julio Cobos to break the stalemate with his vote
against the government proposal. Senator Urquia, who you will meet
on Friday, also broke with the government and voted against the
export tax. A few days later, the government announced repeal of
the tax increase, returning the export tax on soybeans to 35 percent
and ending debate over the export tax regime.

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Ongoing Dispute with Agricultural Sector
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6. (SBU) Relations between the government and farm sector continue
to be strained. While repeal of the increase in the export tax
resolved a major issue with the farm sector, agricultural producers
are now pressing for a reduced export tax rate for small and medium
producers. Producers are also pressing for removal of export
restrictions put in place to keep down domestic food prices. The
government limits exports of beef and dairy products, and also
places restrictions on wheat and corn exports to ensure domestic
supplies. The government recently announced that it will provide
additional subsidies for the farm sector, but farm producers tend to
be skeptical that they will ever receive the promised payments.


7. (SBU) The government has also increased pressure on agricultural
exporters, including Cargill. The government is alleging that
exporters took illegal action to avoid increases in export taxes in
late 2007 and in March 2008. Under longstanding regulations,
exporters were allowed to register exports in advance of actual
shipment of products and lock in the export tax in place at the time
of export registration. In the face of widespread reports that the
government would increase export taxes after the 2007 elections,
exporters registered exports for a significant portion of the 2008
crop. While legal under the existing legislation, the Congress
subsequently passed a new law making the export tax increase
retroactive. The government is now seeking to collect export taxes
from the exporters at the higher tax rates. On the positive side,
there are some signs of progress on the longstanding dispute between
the government and Monsanto on the collection of royalties for
Monsanto's seed varieties. Monsanto is now in discussions with the
government on the introduction of new seed varieties and payment for
the technology, a significant departure from the previous government
policy of refusing to negotiate over the issue.

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Background: Political Landscape
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8. (SBU) CFK took office on December 10, 2007, receiving the
presidential sash from her husband, Nestor Kirchner. CFK has a
decades-long history in politics, having served in the Chamber of
Deputies and most recently in the Senate. She won the October 28
election with 45% of the vote over a divided and largely ineffective
opposition. Having campaigned on the seemingly contradictory themes
of change and continuity, she has retained most of her husband's
cabinet. Apart from the agricultural dispute, CFK's major policy
challenges will be to contain inflation, attract and boost
investment -- particularly in Argentina's energy sector -- and to
restore a sense of law and order to an electorate increasingly
concerned about crime and security.

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Background: Economic and Commercial Landscape
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9. (U) Argentina benefits from rich natural resources, a highly
literate population, and export-oriented agricultural sector, and a
diversified industrial base. Following the 2001-2002 economic
crisis, 2003-2006 real GDP growth averaged over 8%, and Argentina's
GDP in 2007 grew at an estimated rate of 8.5% to $255 billion,
roughly $6,500 per capita. This impressive economic recovery has
also led to improvements in key socio-economic indicators, with
unemployment down from a peak of over 20% in 2002 to 8% during 2008
and poverty levels down from a post-crisis high of over 50% to a
(still-worrisome) 20% range (independent estimates put poverty
levels closer to the 30% range). The five-year-long economic
recovery can be attributed to a number of factors, including a
post-crisis move to a flexible exchange rate regime, sustained
global and regional growth during this period, the government's
efforts to boost domestic aggregate demand via monetary, fiscal, and
income distribution policies, and favorable international commodity
price trends. GDP growth in 2008 is expected to slow to around
6.5%.


10. (SBU) While the accumulation of a substantial foreign exchange
reserve cushion (roughly $48 billion as of July 2008) and expanded
tax collections have helped insulate Argentina's economy from
external shocks, the Central Bank's policy of maintaining an
undervalued exchange rate and negative real interest rates has
contributed to substantial inflationary pressures. Private sector
analysts estimate that inflation was in the 17-20% range for 2007,
while the government's official 2007 inflation number was 8.5%.
Inflation levels in the first four months of 2008 are estimated by
independent economists in the 25% range but are reported as much
lower by the government. There is ongoing public debate about
measures to control inflation as well as the reliability of the
government's statistics.


11. (SBU) The government largely froze key public utility tariff
rates since 2002 and, since 2005, has negotiated price stabilization
agreements on a sizable basket of essential consumer goods. The
combination of Argentina's undervalued currency and high global
commodity prices have lifted Argentine exports to a record $55.4
billion in 2007. Major 2007 Argentine export markets were Mercosur
(22%),the EU (18%) and NAFTA (11%). Argentine 2007 imports totaled
$44.8 billion, with the major suppliers Mercosur (36%),the EU (17%)
and NAFTA (16%). Total U.S.-Argentina two-way trade in 2007 totaled
$9.5 billion. Imports from the U.S. largely comprise intermediate
capital goods which have contributed to improvements in domestic
productive capacity.


12. (U) Over 500 U.S. companies are currently operating in Argentina
and employ over 150,000 Argentine workers. U.S. investment in
Argentina is widely diversified, but heavy investment is found in
the manufacturing, information, and financial sectors. Other major
sources of investment include Spain, Chile, Italy, France, Canada,
Japan, and Brazil. A range of economic experts have identified
challenges to sustaining high levels of economic growth in the
future, including: capacity constraints; the need for substantial
new investment in primary infrastructure; potential energy shortages
in the face of high growth and domestic energy prices kept below
international market levels; increasing scarcity of highly skilled
labor; inflation and the government's heterodox policies to contain
it, including price controls. Continuing Argentine arrears to
international creditors (including over $20 billion in default
claims by international bondholders, including U.S. citizens, and
over $7 billion owed to official creditors, approximately $360
million of which is owed to the U.S. government) and a large number
of arbitration claims filed by foreign companies, including U.S.
companies, are legacies of the 2001/2002 economic crisis that remain
to be resolved and adversely affect Argentina's investment climate.

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Anti-Americanism, Bilateral Relations, Strategic Goals
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13. (SBU) The greatest overall challenge we face in Argentina is the
high level of anti-Americanism in the Argentine public. Argentina
consistently registers the highest levels of anti-Americanism in the
hemisphere in public opinion polls. Working to change these
perceptions is the Embassy's highest priority. Argentina maintains
positive political relations with the United States, but there is
room for further improvement. One of the major tasks facing the
Embassy is forging relationships of trust with a government that has
been largely inward-focused and intent on maintaining an image as
independent from our country. In lobbying the GOA, it can be
counter-productive to push an issue too aggressively and especially
in public. Argentine officials react very negatively to perceived
affronts their sovereignty, often winning public support for their
strong reactions. Shut off from other sources of
international financing, the GOA has turned to Hugo Chavez to place
large bond issues.


14. (SBU) Argentina, nevertheless, holds Major Non-NATO Ally status
and cooperates in regional security, counter-terrorism, drug
interdiction, nonproliferation and in contributing troops to U.N.
peacekeeping missions. The GoA
has been a strong international voice on arms control and
nonproliferation issues. In the IAEA, the GoA has voted to
refer Iran's noncompliance to the UNSC. The GoA has also endorsed
the Proliferation Security Initiative (PSI) and the Global Threat
Reduction Initiative (GTRI). Just this month, Argentina and the
U.S. co-hosted in Buenos Aires a gathering of all OAS States to look
for ways to better implement UN resolution 1540, which is aimed at
keeping WMD from terrorists. It is under the banner of science that
the USG and Argentina have realized some of the best examples of
bilateral cooperation, and we have a long history of aerospace
cooperation with Argentina.

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Promoting U.S. Economic/Commercial Interests
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15. (SBU) In support of U.S. companies operating in
Argentina, we are encouraging the GoA to support a more
welcoming investment climate, with greater regulatory, legal, and
tax regime consistency. We expend a good deal of effort supporting
and working with U.S. companies. We are working closely with the
GoA and the Paris Club of sovereign creditors to resolve
longstanding arrears to the USG and are encouraging the GoA to
resolve claims of U.S. holders of defaulted Argentine bonds.
Regarding ongoing WTO trade negotiations, Argentina has staked out a
hard-line position that links acceptance of developed economy
agricultural sector proposals with more developing nation
flexibility on industrial tariff cuts. We have been urging them to
adopt a more constructive approach.

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Trafficking in Persons (TIP)
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16. (SBU) Argentina is on the USG's Tier-2 Watchlist for lack of
progress in providing greater assistance to victims and curbing
official complicity in trafficking at the provincial level.
However, the legislature recently passed fairly comprehensive
anti-TIP legislation that makes TIP-related violations a federal
crime. Argentina is a source, transit, and destination country for
men, women, and children trafficked for the purposes of commercial
sexual exploitation and forced labor. According to the
International Organization for Migration, 80 percent of trafficking
victims in Argentina are Argentine, most of whom are trafficked for
the purpose of sexual exploitation. Bolivians and Peruvians are
trafficked into the country for forced labor in sweatshops and
agriculture. Argentine efforts to combat trafficking have focused
on prevention and training of security and government officials.
One of our key goals this year is to support a vigorous GoA
implementation of the new federal law and promote the prosecution of
human traffickers. However, a number of NGOs have criticized this
new law as weak on the issue of adult "consent."

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Democracy and Rule of Law
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17. (SBU) We work with the GoA, media, and civil society to
strengthen democratic institutions, fight corruption, and
reinforce civilian control of the military. We promote key
reform efforts such as ending the election of representatives by
party slate lists, increasing governmental transparency, and
limiting public corruption and strengthening the political
independence of the judicial branch. While we do not succeed on
every issue, we continue to cultivate the GoA as a cooperative
partner in multilateral fora, and seek Argentina's cooperation in
the defense of democracy and the observance of human rights in
countries like Cuba, Venezuela, and Bolivia, as well as UN
peacekeeping in Haiti.

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Human Rights
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18. (SBU) The Government of Argentina generally respects the human
rights and fundamental freedoms of its citizens. The Kirchner
government's human rights policy focuses on seeking justice for the
human rights violations committed during the 1976-83 military
dictatorship, which resulted in the disappearance of between
11,000-30,000 leftist guerrillas and political dissidents. It does
not, however, focus on bringing to justice armed guerrilla groups
who also committed human rights abuses during the same period
(known as "the Dirty War"),albeit on a much smaller scale. To
date, the courts have convicted three former officials of the
military regime, including a military chaplain. We recently
returned one person sought here for human rights violations and
another individual wanted by the GoA remains in Florida. Argentines
are also concerned about one particular citizen on death row in
Texas. Argentina is a strong international advocate for human
rights and the USG and GOA generally cooperate on human rights
issues in international and regional fora.

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International Crime and Drugs
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19. (SBU) Argentina is a transshipment and destination point for
narcotics emanating largely from Colombia, Peru, Bolivia, and
Paraguay. With its large chemical and pharmaceutical industries,
Argentina is also a major source and destination for precursor
chemicals. Argentine law enforcement agencies cooperate closely
with their USG counterparts on drug interdiction efforts, fugitive
arrests, and information sharing, which has resulted in increased
enforcement. This Mission is focused on institutional
capacity-building and expanding training opportunities for law
enforcement officials, prosecutors and judges in order to improve
internal security and decrease international drug and criminal
activity in Argentina. Justice Minister Fernandez has repeatedly
stated that he wants to put top priority on attacking drug
traffickers and less priority on arresting individual users. The
Supreme Court President is working hard to increase judicial
independence and efficiency.

Terrorism
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20. (SBU) Former President Nestor Kirchner's administration
strongly supported counter-terrorism policies during his time in
office, and his wife and successor CFK has continued the
cooperation. Argentina was itself a victim of international
terrorist attacks in the 1990s and has been a cooperative partner in
countering terrorism, especially in the Tri-border Area. On
November 7, 2007, Argentina succeeded in getting Interpol's General
Assembly vote to issue international capture notices for five
current and former Iranian officials and one Lebanese Hizballah
member (who was reportedly killed in Syria February 13) wanted in
connection with the 1994 terrorist bombing of the Buenos Aires
Jewish Community Center (AMIA).


21. (SBU) Argentina cooperates with the United Nations, the
OAS, its neighbors, and the United States on a number of
counterterrorism initiatives. We assist the GoA in
capacity-building, within the restraints created by Brooke
Amendment sanctions, to strengthen Argentine law enforcement forces.
We also work closely with the Argentine military on modernization,
increasing interoperability, and training and education focused on
civilian control, respect for human rights, defense resource
management, strategic planning, and science and technology.
Argentina has a leading role in the OAS Inter-American Committee
Against Terrorism (CICTE),established on Argentina's initiative in
the 1990s. Argentina has ratified all of the 12 international
counter-terrorism conventions and has been an active participant in
the 3 plus 1 tri-border area counterterrorism mechanism, which met
most recently in Asuncion, Paraguay in January. The GOA and the USG
have a Mutual Legal Assistance Treaty that entered into force in
1993, and an extradition treaty that entered into force in 2000.

Money Laundering, Terrorism Finance, Legal Reform
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22. (SBU) The Embassy and USG agencies worked with the GoA to pass
comprehensive antiterrorism, money laundering, and
terrorism finance legislation to strengthen local enforcement
efforts. Since 2005, and largely in response to pressure from the
Financial Action Task Force (FATF),the GoA and Argentine Central
Bank have acted to fortify the anti-money laundering and
counter-terrorism finance legal and regulatory regime, passing new
legislation, amending existing laws, and establishing stricter
financial sector regulations. The result is that Argentina
currently has an adequate legal/regulatory structure that provides
the legal foundation for the Central Bank and other law enforcement
and regulatory bodies to investigate and prosecute money laundering
and terrorism finance. The challenge now is for Argentine law
enforcement and regulatory agencies and institutions to enforce
aggressively the newly strengthened and expanded legal, regulatory,
and administrative measures available to them to combat financial
crimes.

WAYNE