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

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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

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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

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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