NICARAGUA: GOVERNMENT CLAIMS ALBA FUNDS AS MUCH AS

C O N F I D E N T I A L SECTION 01 OF 04 MANAGUA 001437 SENSITIVE SIPDIS E.O. 12958: DECL: 12/03/2028 TAGS: EFIN ECON PREL NU SUBJECT: NICARAGUA: GOVERNMENT CLAIMS ALBA FUNDS AS MUCH AS $368 MILLION FOR 2008 Classified By: CDA Richard M. Sanders, reasons 1.4 b and d. Summary -------------- ¶1. (C) FSLN officials claim that from January to September 2008, Nicaragua imported $600 million worth of petroleum products through Venezuelan - Nicaraguan joint venture ALBANISA, providing $300 million for development funds. During the last quarter of 2008, the scheme may have earned Nicaragua an additional $68 million, bringing potential total funding to $368 for the year. Funds have purportedly been directed to FSLN programs such as "Houses for the People," "Zero Hunger," "Zero Usury," and "Roads for the People." All told, government officials and state media claim ALBANISA has provided $247 million in funds to these and other programs. Some part of the $121 million balance likely goes toward administrative costs, freight, and insurance. Other discretionary uses of these off-budget funds are likely to be billboards featuring President Ortega, wages and other support for "Prayer" groups in traffic circles, buses to mobilize FSLN supporters following municipal elections, real estate investment, support for FSLN candidates in the elections, and other political machinations. ¶2. (C) Venezuelan funds come with no stated conditions, permitting President Ortega to distribute them at his discretion. That makes these funds far more useful from a political point of view than traditional donor funds that come with conditions, oversight, and review. Ortega can pay patronage to his followers and bribes to his detractors as he moves to consolidate political power. In 2009, Ortega is likely to have less to work with -- perhaps less than $200 million as a result of lower oil prices. At the same time, the demand on theses funds is likely to be greater, as donors continue to pull out one at a time as a consequence of Ortega's autocratic policies and extensive electoral fraud surrounding municipal elections held November 9. End summary. The ALBA Energy Agreement -------------- ¶3. (SBU) When Nicaragua joined Venezuela's Bolivarian Alternative for the Americas (ALBA) on January 11, 2007, President Ortega also signed on to Venezuela's Petrocaribe initiative, which provides concessional financing for petroleum products purchased from Venezuela. Initially, state-owned oil company PETRONIC handled imports from Petroleos de Venezuela, S.A. (PDVSA) on an ad hoc basis. On April 29, 2007, at the Fifth ALBA Summit, President Ortega and President Chavez went a step further and signed the "Nicaragua - Venezuela ALBA Energy Agreement" to replace Petrocaribe. ¶4. (SBU) In June 2007, Nicaragua and Venezuela established a joint venture, ALBA Nicaragua, S.A. (ALBANISA),giving PETRONIC a 45% share and PDVSA a 55% share. This arrangement allows FSLN officials to import and monetize Venezuelan petroleum products, off-budget, under the firm control of the FSLN, and without legislative oversight. Essentially, ALBANISA buys oil from Venezuela's PDVSA and pays 50% of the bill within 90 days to PDVSA. Of the balance, ALBANISA pays 25% into a local development fund and 25% into the Venezuelan Government's ALBA Fund. PETRONIC sells the imported petroleum products through its distribution network to wholesalers and final consumers but makes most of its money by being the go-between for PDVSA crude oil and ExxonMobil's Nicaraguan refinery. CARUNA: The Administrator -------------- ¶5. (SBU) The National Rural Fund (Caja Rural Nacional, CARUNA),a private financial cooperative whose board of directors is composed of prominent FSLN officials, functions as the primary administrator for both the local development fund and the ALBA Fund. Until 2006, CARUNA functioned as medium-sized, national credit union, lending to small farmers and accepting deposits at 17 branch offices throughout the country. In 2006, the last year for which CARUNA published an annual report, the cooperative's total lending portfolio MANAGUA 00001437 002 OF 004 was $5.7 million. ¶6. (SBU) CARUNA President Jorge Martinez has told FSLN-friendly media that his financial cooperative manages the 25% set aside by ALBANISA for the local development fund and has an agreement with PDVSA to repay these funds over 25 years, including a 2-year grace period and at an interest rate of 2%. According to Martinez, CARUNA also manages the 25% that is paid to the ALBA Fund. Reportedly, this amount is treated as a grant rather than a loan, although the ALBA Energy Agreement stipulates that it should be treated as a long-term loan from PDVSA, also payable in 25 years at an interest rate of 2%. Patronage for the People: $247 Million in 2008 -------------- - ¶7. (SBU) In a November 2008 interview published in the recently launched FSLN tabloid "El 19," PETRONIC General Manager and FSLN Treasurer Francisco "Chico" Lopez reported that Venezuelan assistance for the year through the ALBA Energy Agreement, including the local development fund and the ALBA Fund, "easily surpassed $210 million." As mentioned above, CARUNA serves as the administrator for both these funds, but program implementation appears ad hoc, carried out by various government agencies, directly by CARUNA, or by FSLN-favored businesses. Further confusing lines of authority and responsibility, local Citizens, Power Councils (CPCs) participate in many of the programs to identify beneficiaries. According to government sources and post estimates, funding is an estimated $247 million for 2008, which breaks down as follows: --$84 million (post estimate) in diesel and bunker power generation units with a total output of 60 megawatts (post estimate) in 2008. --$50 million for the Ministry of Agriculture's "Zero Hunger," which provides livestock, seeds, and farm tools to rural poor. --$30 million to ENABAS, the government-owned agricultural commodity company, to subsidize the sale of basic grains at CPC-designated stores. --$25 million for &Streets for the People," which has reportedly paved 100 kilometers of local roads. --$22.8 million in fuel subsidies for bus operators and taxi drivers, implemented in May 2008 to quell a transportation strike. --$20 million for "Zero Usury," a program administered directly by CARUNA that provides loans with 5% annual interest. --$6 million for "Houses for the People," which seeks to construct 6,000 low income houses. (Comment: About 400 houses have been built, many of them along the geological fault line that crosses Managua from east to west. End comment.) --$5.5 million in subsidies for the importation of 60,000 tons of urea through the Rural Development Institute's "Fertilizer for the People" program, providing a subsidy of $0.20/pound. --$3 million (post estimate) for 200,000 cooktops and gas tanks. --$1 million in new tires and other vehicle parts for buses. Patronage for the Party -------------- ¶8. (C) In the same "El 19" interview, Lopez claimed that from January to September 2008, ALBANISA had imported 6 million barrels of petroleum products, valued at around $600 million. According to the ALBA Energy Agreement, $150 million should have gone toward the local development fund and $150 million MANAGUA 00001437 003 OF 004 toward the ALBA Fund -- $300 million total -- of which $247 million is accounted for publicly. That leaves $53 million for discretional or possibly political purposes. ¶9. (C) During October to November 2008, oil prices have fallen -- on November 28 Venezuelan crude averaged less than $40/barrel. Unlike PetroCaribe, however, assistance funneled through ALBANISA does phase out should oil prices fall below certain trigger prices. Assuming that the volume of oil imports from Venezuela remained similar to what they were from January to September 2008, ALBANISA may have passed an additional $68 million to Nicaragua during the last three months of the year (2 million barrels at an average price of $68/barrel, with 50% of proceeds remaining in Nicaragua). ¶10. (C) This amount, plus $53 million identified in paragraph 8, means that the difference between ALBANISA funding and programs announced by the government could be as much as $118 million. Some percentage of this sum would go to pay for administrative, insurance, and freight costs. In addition, some may be committed to other projects, such as power generation units or the feasibility study for "Bolivar's Supreme Dream," Hugo Chavez' promised oil refinery that is on hold. Other expenses likely paid for with off-budget FSLN funds are: --Hundreds of billboards throughout Nicaragua featuring President Ortega with slogans such as "Fulfilling the People's Will is God's Will" and extolling the achievements of the party. (Comment: Now that municipal elections have passed and Venezuelan crude is less than $50/barrel, many of these billboards are rapidly disappearing. End comment.) --Thousands of FSLN red and black flags that dot the countryside. --"Prayer" groups in traffic circles throughout Managua at a cost of $180,000 a month (post estimate) to block access to these rallying points for opposition groups. --The rental of hundreds of buses to mobilize FSLN supporters following municipal elections. --Other election expenses associated with funding local candidates and elections officials who participated in widespread fraud. --The purchase of the Seminole Tribe's assets in Nicaragua, including a three-star hotel, Brahman cattle ranch, and cattle breeding facility. This acquisition has advanced to the "due diligence" stage. --Concessional financing to public electricity generators for fuel purchases. Under this scheme, CARUNA lent funds to state-owned National Electricity Company (ENEL) for the purchase of fuel from Petronic for its generating units. One transaction in particular, in which CARUNA provided ENEL $20 million in financing to pay its full bill, came under public scrutiny in October 2008. Opposition legislators complained that ENEL used public funds to pay CARUNA the principal and $400,000 in interest on the loan. Comment -------------- ¶11. (C) We rely on information provided by FSLN officials for these estimates of Venezuelan assistance, so it is possible that they are exaggerated in some instances and understated in others. Whatever the actual amount, Venezuelan funds come with no stated conditions, permitting President Ortega to distribute them at his discretion. That makes these funds far more useful from a political point of view than traditional donor funds that come with conditions, oversight, and review. With this discretionary spending, the line between state and party is blurred. Ortega can pay patronage to his followers and bribes to his detractors as he moves to consolidate political power. In 2009, Ortega is likely to have less to work with -- perhaps less than $200 million due to lower oil prices -- unless Chavez is prepared to top off MANAGUA 00001437 004 OF 004 the funding by adjusting the terms of the agreement or creating some other vehicle to subsidize Nicaragua. At the same time, the demand on theses funds is likely to be greater, as donors continue to pull out one at a time as a consequence of Ortega's autocratic policies and extensive electoral fraud surrounding municipal elections held November ¶9. SANDERS