SCENESETTER FOR A/S VALENZUELA'S VISIT TO PARAGUAY

C O N F I D E N T I A L ASUNCION 000675

SIPDIS
WHA/FO CMCMULLEN, WHA/BSC MDRUCKER, BFRIEDMAN, MDASCHBACH

E.O. 12958: DECL: 2034/12/07
TAGS: PGOV PREL ECON SNAR PA
SUBJECT: SCENESETTER FOR A/S VALENZUELA'S VISIT TO PARAGUAY

CLASSIFIED BY: Perry Holloway, DCM; REASON: 1.4(B),(D)

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SUMMARY

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1. (C) Embassy Asuncion warmly welcomes WHA Assistant Secretary
Arturo Valenzuela December 17-18. Your visit will serve as a boost
to Paraguay's nascent democracy. An inexperienced President
Fernando Lugo promised the electorate he would deliver change, but
he has dashed expectations by failing to define or execute a
national agenda. At this point, Lugo is his own worst enemy,
mostly due to his weak leadership style. Because Lugo has not
reached out to Congress or the political parties for support, his
initial reform attempts have failed (or have never even gotten off
the ground). Now, with declining popularity, growing concerns
about the country's security situation and never-ending paternity
scandals, the pressure is on Lugo to deliver concrete results.
Your visit will reaffirm U.S. support for Paraguay's democratic
institutions and economic growth, and can serve to encourage
Paraguay to continue playing a helpful, neutral role in the region.
The inclusion of Paraguay in your first trip to the region will
give Paraguayans the validation they seek from the United States,
and might keep them focused on solving the country's problems and
developing democratic institutions. END SUMMARY.



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LOCAL AND REGIONAL POLITICS

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2. (C) Fernando Lugo's administration represents the first
interruption in Colorado Party rule in 61 years. By voting
overwhelmingly for change, the Paraguayan people gave the former
Catholic bishop a mandate for political, economic, and social
reform. That mandate, however, came with high expectations, and
the widespread perception is that Lugo has failed to deliver.
Lugo's biggest obstacles: virtually no political support in a
divided Congress; endemic corruption throughout government (which
Lugo inherited); a dysfunctional judicial system; and a weak inner
circle of advisors who constantly jockey for influence and personal
gain. Lugo has strained relations with both the Liberal Party
(which is the largest party in his loose political coalition),as
well as with his ambitious Liberal Party Vice President, Federico
Franco. Lugo's goals of strengthening democratic institutions,
promoting economic growth, and bringing about reform seem
increasingly out of reach. As frustration grows, so do rumors that
Lugo could be impeached (via constitutional means) before
completing his term. So far, Lugo has weathered the storms he has
faced (including several paternity scandals),and we do not believe
that impeachment is imminent for several reasons. Paraguay is a
conservative country that resists change. Moreover, there is
virtually a political deadlock over what would happen if Lugo were
to be impeached and Vice Presidential elections were called, which
lends itself to a certain political stability in which the status
quo continues.




3. (C) Lugo is a leftist at heart, but a pragmatist of mind. He
maintains close relations with Venezuela, Bolivia, and Ecuador, but
also with the United States, Chile, Brazil, and Colombia. He said
in late July that Paraguay's "first circle" is MERCOSUR, and that
Paraguay does not seek to join the Bolivarian revolution, as
evidenced by Paraguay not becoming a member of Bolivarian
Alternative for the Americas (ALBA). Lugo is sensitive to
interference in Paraguayan internal affairs, and resents Chavez'
heavy hand in the region. However, Lugo certainly feels pressure
(from within the region and from his own leftist advisors) not to
get too cozy with the United States. Lugo met with President Bush
in Washington in October 2008; he saw President Obama as well as a
congressional delegation led by Congressman Engel at the Summit of
the Americas in Trinidad and Tobago. To date, he has ensured that
Paraguay plays a fairly neutral role in regional politics, shying
away from either extreme.




4. (C) Regional tensions over the Colombia-U.S. Defense Cooperation
Agreement (DCA) manifested in Paraguay's decision to decline the

DOD-sponsored New Horizons humanitarian exercise planned for 2010.
(NOTE: However, at a September UNASUR meeting, Lugo defended
Colombia's right to sign a base access agreement with the U.S. and
said the DCA was a bilateral issue between Colombia and the U.S.
END NOTE). The Paraguayan congressional response to the
cancellation of New Horizons was overwhelmingly pro-U.S., and the
Chamber of Deputies passed a resolution lamenting Lugo's decision.
On Honduras, the Paraguayan government has officially refused to
recognize election results and insists on Zelaya's restitution.
(COMMENT: With a little bit of time, Paraguay, like Brazil, might
back away from this position, but U.S. pressure regarding Honduras
could easily be counterproductive. It will be difficult to
construct good will with the Lugo government on this issue. END
COMMENT).



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THE ECONOMIC REALITY

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5. (U) Paraguay's macroeconomic indicators show the country is
weathering the financial crisis, and the economy is expected to
grow by about four percent by the end of 2009. Exports markedly
slowed in the first half of 2009 as a result of lower prices and
weaker external demand for Paraguay's main export commodities (soy,
grains, cattle),but recovered in the second half of the year.
Unemployment is over 20 percent, and with a population growth rate
above two percent per annum, the economy is not creating enough
jobs to meet demand. Paraguay boasts vast hydroelectric resources,
including the massive Itaipu hydroelectric dam built and operated
jointly with Brazil, but fails to capitalize on those resources.
The Lugo government purports to welcome foreign investment, but
widespread corruption and a weak judicial system are deterrents.
There is significant commercial activity involving the import of
goods from Asia and to a lesser extent the United States for
re-export to neighboring countries, mainly Brazil. The underground
economy, which is not included in the national accounts, is
probably twice the formal economy in size. Many private sector
representatives worry that Lugo is undermining the business
environment.




6. (U) Bilateral trade with the United States has increased over
the last six years. The U.S. imported from Paraguay about USD 78.4
million in 2008, and exported over USD 1.6 billion, up from USD 1.2
million in 2007. U.S. Representative Engel introduced trade
preference legislation (ATPA) in the U.S. Congress in April which
would give Paraguay increased access to U.S. markets. Paraguay's
lower house recently passed a resolution expressing its support for
Engel's bill, and the private sector is lobbying heavily for trade
preferences. More than a dozen U.S. multinational firms have
subsidiaries in Paraguay, and some 75 U.S. businesses have agents
or representatives in Paraguay. Cargill, ADM, Coca Cola, and Exxon
Mobile are the largest U.S. companies operating in country. With
around USD 400 million in private investment stock, the U.S. is
Paraguay's largest foreign investor.



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PUBLIC SECURITY ISSUES

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7. (SBU) Security and social issues are top concerns of Lugo's
constituents. Violent crime is increasing in urban and rural areas,
and the public generally believes that Paraguayan security forces
(particularly the corrupt police) do not meet their security needs.
The "landless" farmer movement -- active for many years in Paraguay
- has organized protests and land invasions, calling for reform by
illegally occupying large, privately-held ranches. However, the
protests have been small in number, and have had a minimal impact
at best.




8. (C) Kidnappers claiming to be members of the Paraguayan
People's Army (EPP) seized wealthy rancher Fidel Zavala October 15

causing a national clamor. Individuals are hanging white ribbons on
cars and houses demanding Zavala's release and highlighting
national insecurity under President Lugo. Amidst security concerns
and following several months of rumored changes, Lugo removed the
Military Service Commanders and Commander of Military Forces (Chief
of Defense) from their positions in early November. Many political
analysts believe that Lugo's fate is tied to that of Zavala, and
that Zavala's death could trigger impeachment proceedings against
Lugo for not managing security issues well.




9. (SBU) The Tri-Border Area (TBA) of Paraguay, Argentina and
Brazil is a hub for transnational criminal activity including drug
trafficking, trafficking in persons (TIP),arms trafficking,
intellectual piracy, and money laundering, including terrorist
financing. Paraguay is a major transshipment point for cocaine from
Bolivia to Brazil; it is the second largest marijuana producer in
the region. Paraguay remains a regional haven for money laundering.
Paraguayan authorities often experience difficulties enforcing the
law because of hostile geography, corruption, chronic
understaffing, and the political and judicial power some drug
traffickers wield. Paraguay took a giant step forward on money
laundering, intellectual property violations, and trafficking in
persons by passing a tougher penal code that went into effect in
July.




10. (SBU) The DEA works closely with Paraguay's underfunded
Anti-Narcotics Secretariat (SENAD) on counternarcotics issues, with
support from State's International Narcotics and Law Enforcement
(INL) program. DEA efforts focus on SENAD's Sensitive
Investigative Unit (SIU),and intensified this year via an
increased presence in country after Bolivia expelled the DEA. In
addition to counternarcotics, the INL program (USD 253,000 in
FY2009; USD 500,000 requested for FY2010) also supports other
Paraguayan institutions in combating narcotics trafficking, money
laundering, IPR violations, and trafficking in persons.



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OTHER U.S. ASSISTANCE TO PARAGUAY

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11. (SBU) U.S. assistance in Paraguay is consistent with many of
Lugo's goals. The centerpiece of our assistance is Phase Two of the
Millennium Challenge Corporation's Threshold Program (Umbral in
Spanish),which the Paraguayan Congress approved July 31. The
Threshold Program, worth USD 30 million, focuses on
anti-corruption. USAID/Paraguay's FY09 budget is USD 17.15 million
and focuses on Economic Growth; Health Care; Sustainable Management
of Natural Resources and Protected Areas; and Democratic
Strengthening. A USD 6.6 million 1207 program will begin early
next year, focusing on municipal government, economic development,
and security issues in eastern Paraguay. USG support for the
Paraguay Military Forces is limited but robust. One highlight is
the U.S. Armed Forces' USD 4.1 million donation of Global Peace
Operations Initiative (GPOI) funds and technical assistance to
Paraguay's United Nations Global Peace Keeping Operations Program
(UNPKO). Another highlight is US Special Forces training for
Paraguay's Joint Special Forces Battalion (BCFE),which 1208 monies
equipped at a cost of well over USD 5.7 million.



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COMMENT

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12. (C) While Lugo's impeachment is not (now) imminent, his
popularity has dropped to 25%. With growing concerns about the
country's security situation and never-ending paternity scandals,
the pressure is on Lugo to deliver concrete results. Our programs
are designed to help him do just that, should Lugo provide the
necessary political will to carry them through. In this
increasingly sensitive environment, our approach must be measured.
Political actors across the spectrum look to us for cues, and our

influence is much greater than our footprint here. We have been
careful to express public support for Paraguay's democratic
institutions-not for Lugo personally-and to make sure Lugo
understands the benefits of a close relationship with the United
States-without allowing him to use Embassy support as a political
life preserver when it serves him. With all sides eager for Embassy
signals about "whither Lugo," we must be careful to steer clear of
domestic politics or we will influence them to our detriment. Your
visit will reaffirm U.S. support for Paraguay's democratic
institutions and economic growth, and can serve to encourage
Paraguay to continue playing a helpful, neutral role in the region.
Under Lugo, Paraguay has demonstrated that it is not a would-be
Venezuela or Bolivia. Likewise, it is not the next Honduras, as we
do not think a coup is a realistic possibility in this conservative
country, given its weak but institutional military and aversion to
that part of its recent history. But Paraguay does merit our
attention, and the significance of your visit to Asuncion on your
first trip to the region will not be missed. END COMMENT.
AYALDE