SCENESETTER FOR CODEL MEEKS - AUG 7-9

UNCLAS MONTEVIDEO 000444

SENSITIVE
SIPDIS

DEPT ALSO FOR H MACDERMOTT
DEPARTMENT ALSO FOR WHA/BSC READ

E.O. 12958: N/A
TAGS: OVIP PREL ECON UY
SUBJECT: SCENESETTER FOR CODEL MEEKS - AUG 7-9

REF: State 81141

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SUMMARY
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1. (SBU) Summary: Your visit on August 7-9 comes at a time of
strong and growing engagement between the U.S. and Uruguay's
left-leaning Frente Amplio (FA) coalition government, which won
elections for the first time at the end of 2004. President Vazquez
steers a moderate course which includes active trade discussions
with the USG. As Uruguayans look ahead to the 2009 Presidential and
legislative elections, we expect the GOU to seek to ensure its
legacy while simultaneously shore up its political base. During
your visit, you will meet with Ambassador Frank Baxter and key
Country Team members at the Embassy, as well as have meetings with
FM Gonzalo Fernandez and House and Senate leadership. End Summary.

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POLITICAL SITUATION
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2. (U) Uruguay is a 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 was one of Latin America's
wealthiest and most egalitarian countries. A four-year recession,
which ended in 2003, cut personal income 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 2007, in large part thanks to
continued orthodox economic policies. Today, GDP per capita is
approaching $7,000, and the GOU repaid its entire IMF debt early in
the past year; however, job creation is not keeping up with
expectations and many young people emigrate to seek their fortunes
abroad. 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.


3. (SBU) Despite the turn to the left with the FA's first ever
victory in October 2004, President Vazquez steers a moderate course
which includes active trade discussions with the USG. Until its
rise from opposition, the FA rallied its followers with considerable
anti-U.S. rhetoric, and both the USG and the FA were unsure how the
relationship would proceed when the FA came to power. Hard-left
segments of the coalition remain virulently anti-U.S., but the
Vasquez government has been open to cooperation with the U.S.,
especially on issues of security and trade.


4. (SBU) With national elections in October 2009, the Vasquez
administration is coming into the home stretch. The President has
successfully completed much of the programs he set out to, due in
large part to his own personal popularity and the Frente Amplio's
majority in the Congress. He is determined to ensure his legacy as
well as position his party for the 2009 elections. A March 2008
cabinet shake up eased out ideologues, put in technocrats, and put a
new emphasis on foreign policy. Vasquez' program has also cemented
social and labor policies, as well as sound macroeconomic policies.
Relations with the U.S. are cordial and productive, but
election-year politics are likely to limit the profile of our
cooperation over the next year.


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.
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2009 Presidential Candidates
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6. (SBU) The candidates for the upcoming elections are already
emerging for the June 2009 primaries. The following candidate list
is still in flux and in some cases candidates have not yet
officially declared their intent to run for the presidency.

--Frente Amplio
-Economy and Finance Minister Danilo Astori is known for his
prudent economic policies, including negotiating a three-year
agreement with the IMF in record time. He has been a leading
proponent of deepening economic ties with the U.S. He is a
pragmatic leftist but is generally not considered a charismatic
leader.
-Senator Jose Mujica is the leader of the Movimiento de
Participacion Popular (MPP, Popular Participation Movement),a far
left faction, and former guerrilla member. He defines himself as a
"social fighter." His charisma and unpretentious, straight-forward
message make him popular and a strong candidate within his party,
but not necessarily in the general elections.

--The National Party
-Senator Jorge Larranaga is the former mayor of one of the
most important provinces, Paysandu. He represents the center/left
movement which emphasizes a strong state. Larrranaga is a young,
hard working, strong leader who will try to attract National Party
votes which fled to the FA in 2004 as well as disenchanted FA
supporters.

-Luis Alberto Lacalle Herrera is a lawyer, rancher, former
President of the Republic (1990-95),former Congressman (1972-73),
and Senator (1984-89). His faction is considered the
right/liberal-wing faction of the Party, but employs a centrist
message.

--The Colorado Party
-Pedro Bordaberry is the current frontrunner and son of former
President of the Republic Juan Maria Bordaberry (1972-77). He is
regarded as a dynamic, hard working and successful leader.

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The Economy, Trade and Investment
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7. (SBU) Uruguay is a major agricultural producer relative to its
size. Agriculture and agro-industry account for 23% of GDP and over
75% of total exports. Major exports are meat (over $1 billion in
2006 and $885 million in 2007),long-grain rice, dairy products,
wool and soybeans. Forestry has surged over the last decade, due to
favorable investment conditions and an ideal 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 imported
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.
Uruguay was constructive in the latest Doha agricultural trade
talks.

8. (U) Economy Minister Astori has pursued orthodox macro-economic
policies to control inflation (6.4% in 2006) and promote growth and
investment. This has resulted in sustained strong growth over the
past couple of years, maintaining a 7% growth rate over the past two
years. The GOU has also paid off its debt to the IMF ahead of
schedule and has regularly issued bonds at favorable terms in the
international financial markets, lowering its debt service costs.
The debt to GDP ratio was down to 67% at the end of 2007, from over
101% in 2004. Unemployment is now in the single digits for the
first time in 6 years. The country risk stood at 277 points as of
late July. Uruguay is now better positioned to handle external
shocks, but challenges remain with the weakened dollar, political
volatility in Argentina, and rising oil prices.


9. (SBU) In 2006, the GOU considered initiating free trade
discussions with the U.S. In the end the two countries decided to
start dialogue within a Trade and Investment Framework Agreement
(TIFA),which was signed in January 2007. Working groups are in
constant communication under TIFA and their work has already yielded
concrete results, especially regarding sanitary and phytosanitary
issues. The opening of the $180 million blueberry market to Uruguay
was negotiated under the TIFA and the agriculture group is currently
working on certifying de-boned lamb. The GOU and USG are finalizing
three new agreements on environment, e-commerce and trade
facilitation, which may be signed later this year. Additionally,
the USG and the GOU signed a Science and Technology (S&T)
cooperation agreement in April. Uruguay's current level of
development, education, and infrastructure present an excellent
opportunity for cooperation with the USG on S&T issues. The
agreement strengthens the bilateral relationship in the spirit of
deepening economic ties between the two nations.


10. (U) Tax system reform and instituting a personal income tax were
central campaign themes for the FA. A comprehensive tax reform took
effect in July 2007. The reform simplified the tax system by
eliminating some taxes and consolidating others, cut the VAT from a
general rate of 23% to 22% and cut corporate income tax from 30% to
25%. The reform also instated an income tax on all incomes
generated in Uruguay. Incomes from capital gains are taxed with a
flat 10% rate, and other income, including pensions, are taxed with
progressive rates ranging from 10% to 25%. Even with the reform
Uruguay's tax system will continue to rely heavily on the VAT. The
National and Colorado opposition parties are very critical of the
income tax and argue that it imposes too much burden on the middle
class.

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Foreign Policy
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12. (SBU) The March 1, 2008 replacement of anti-American Foreign
Minister Gargano with the President's close advisor Gonzalo
Fernandez has strengthened opportunities for improved U.S.-Uruguayan
relations. Uruguay is also working to reestablish its traditional
role in international institutions. It played a moderating role in
the Colombia-Ecuador-Venezuela dispute, but has not condemned the
FARC to date. Uruguay is the largest contributor to peacekeeping
missions in the world, on a per capita basis, and currently has
substantial deployments in Haiti and the Congo. Uruguay is seeking
to expand economic ties outside of Mercosur to the rest of South
America and beyond, in part to reduce its reliance on sometimes
volatile neighbors. Chilean President Michelle Bachelet's July
visit demonstrated the countries' close relations and the desire to
strengthen partnerships.


13. (SBU) Uruguay receives assistance from Venezuela in the form of
subsidized oil, but chooses to stay relatively quiet on Venezuelan
issues; even when in disagreement with Venezuelan policy, the GOU
tends to keep a low profile. President Vasquez visited Cuba in
June. Cuba sends many doctors to work in Uruguayan hospitals, a
fact praised by supporters of the Castro regime but controversial to
others as issues such as medical accreditation and safety have been
raised. Iran maintains an active commercial section at its embassy,
with Uruguay exporting a significant amount of high-quality rice to
Iran.


14. (SBU) Relations with Argentina (and by extension Mercosur) have
been frosty, mainly as a result of a two-year dispute with Argentina
over a paper pulp mill on the Uruguayan side of the Uruguay River.
The USD 1.2 billion mill, owned by Finnish Botnia, employs 2,500
persons at the plant or in related industries and significantly
boosts Uruguayan GDP. The plant began production in November 2007
and boasts the highest level of pulp production in the world and the
latest environmental protection technology. Argentina sued Uruguay
in the International Court of Justice (ICJ) in 2006 (a verdict is
expected around the end of 2008) and Argentine protesters have
blockaded bridges between the two countries for more than two-years.
The GOA and the protesters claim that the mill environmentally
damages the Uruguay River which borders both countries; Uruguay and
Botnia are confident the court will rule otherwise.

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VULNERABLE GROUPS
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15. (U) A 2007 National Bureau of Statistics study states that
Afro-Uruguayans comprise 9.1 percent of the population
(approximately 164,000) and indigenous descendents constitute
another 2.9 percent. The report concludes that 50 percent of
Afro-Uruguayans are poor and suffer discrimination.


16. (U) Founded in 1988, Mundo Afro (MA) joined the Network of Afro
American organizations in 1994. It has representatives in the
Ministries of Social Development, Labor and Social Security, Public
Health, Education and Culture, the State Pension/Retirement Bank and
the Montevideo municipality. At a regional level MA maintains
contacts with NGOs in Bolivia, Peru, Brazil, Paraguay, and Ecuador.
MA and the US Embassy have had a longtime institutional relationship
programming events on discrimination and racial issues.


17. (U) Afro-Uruguayans are practically unrepresented in the
legislature (only one Frente Amplio Party Congressman, Edgardo
Ortuno of the moderate Vertiente Artiguista faction) or the cabinet,
the bureaucratic and academic sectors, or the mid and upper echelons
of private-sector firms. The Frente Amplio Administration opened an
office under the Ministry of Social Development to deal with women
issues of the Afro-Uruguayan minority.


18. (U) Afro-Uruguayan and indigenous NGOs, as well as Jewish
organizations, are represented at the Honorary Commission Against
Racism, Xenophobia and all forms of Discrimination presided by the
Bureau of Human Rights under the Ministry of Education and Culture.
The Commission was created by law on September 6, 2004, to develop a
national plan and propose specific measures to prevent and combat
racism, xenophobia and discrimination in Uruguay.

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YOUR MEETINGS WITH URUGUAYANS
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19. (SBU) You will meet with the Foreign Minister, Gonzalo Fernandez
on August 7. Formerly President Vazquez's closest advisor,
Fernandez has an insider's perspective and remains the President's
closest advisor. Under his leadership, the Foreign Ministry has
opened up to U.S. dialogue and partnership.


20. (SBU) You are also scheduled to meet with leadership from the
upper and lower houses, including: Vice President and President of
the Senate Rodolfo Nin Novoa, President of the Uruguayan Congress
Alberto Perdomo, and members of the House and Senate Foreign Affairs
committees. Perdomo, who is in the middle of his one year tenure as
Speaker, is interested in a continuing relationship with the U.S.
House of Representatives and in particular will welcome information
on the way the U.S. Congress conducts government oversight. [O1]

BAXTER


[O1]Actual meetings will be confirmed before we send the cable.