URUGUAY'S RELATIONSHIP WITH ARGENTINA: NOT THE

C O N F I D E N T I A L MONTEVIDEO 000489

SIPDIS

FOR WHA/BSC
TREASURY FOR BLINDQUIST

E.O. 12958: DECL: 08/18/2019
TAGS: PREL ETRD EFIN EINV ARG UY
SUBJECT: URUGUAY'S RELATIONSHIP WITH ARGENTINA: NOT THE
BEST OF TIMES

REF: A) MONTEVIDEO 0455 B) MONTEVIDEO 0187 C) BUENOS
AIRES 0366

Classified By: CDA ROBIN MATTHEWMAN, FOR REASON 1.4 (D)

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Summary
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1. (C) The relationship between Uruguay and Argentina, which
has been strained since early 2006 by a dispute over the
installation of a cellulose pulp plant on the Uruguayan shore
of the Uruguay River, has continued to deteriorate.
Political tensions, which range from the three-year long
blockade of a bridge between Uruguay and Argentina by
Argentine picketers to Uruguay,s veto of Nestor Kirchner,s
proposed UNASUR presidency, have extended to other areas. On
infrastructure, the GOA has not cleared the way for joint
maintenance and dredging of a vital canal in the River Plate
and has blocked Mercosur funding for the construction of an
electricity connection between Brazil and Uruguay. Both
projects are key for Uruguay,s port infrastructure and
electricity supply over the mid-term. Trade issues also
represent a continued irritant, with the GOU particularly
critical of Argentina,s protectionist policies, including
taxes on exports of raw materials and non-automatic import
licenses. On the financial side, the GOU adamantly rejects
perceived GOA accusations of Uruguay being a tax haven.
Frictions have extended to the private sector and have
reportedly affected Uruguay,s national-flag airline Pluna,
which was denied landing rights in an Argentine province.
END SUMMARY.

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POLITICAL FRICTIONS OVER UNASUR,S PRESIDENCY AND BOTNIA
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2. (SBU) The Vazquez administration expected to have an
extremely fluid relationship with the Kirchners' Argentina.
Almost immediately after taking office, however, things
changed for the worse as both administrations involved
themselves in a harsh dispute over the installation of a
cellulose pulp plant (Finnish Botnia) on the Uruguayan shore
of the Uruguay River. In addition to legal actions between
the two countries (the GOA filed a case against the GOU
before the International Court of Justice in The Hague, which
is pending, and the GOU filed a case against the GOA in
Mercosur, which ruled in Uruguay's favor in 2006),a group of
Argentine picketers have blocked a bridge that connects
Argentina and Uruguay at the Uruguayan town of Fray Bentos
for three years. That blockade has caused significant damage
to Uruguay's economy. As a consequence, the GOU refused to
support former Argentine President Nestor Kirchner,s
candidacy to preside over UNASUR, which operates via
consensus, as long as the bridge remains blocked.

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POLITICAL FRICTION EXTENDS TO INFRASTRUCTURE FINANCING...
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3. (SBU) In turn, the GOA has blocked Mercosur's structural
convergence fund (FOCEM) from funding the construction of an
electricity frequency converter in the Uruguay-Brazil border.
(Note: FOCEM is a $100 million/year fund created in 2005 to
finance development and infrastructure projects in Mercosur's
smaller member countries as a way of reducing the
oft-lamented "asymmetries" between the bloc's larger and
smaller members. End Note.) Such a converter would enable
Uruguay to import electricity from Brazil, which has become
particularly critical in the face of periodic electricity
shortages in recent years. Uruguay,s Foreign Minister
Gonzalo Fernandez specifically raised this issue during the
July Mercosur Summit in Asuncion. Frente Amplio presidential
candidate Jose Mujica also raised it in his August 4-6 trip
to Brasilia where he met President Lula.


4. (SBU) The GOA has also blocked joint dredging operations
to maintain the Martin Garcia canal in the Rio de la Plata.
The maintenance, due to be performed and financed jointly by
Argentina and Uruguay, is vital for the Uruguayan port of
Nueva Palmira, a transshipment point from where most of
Uruguay's pulp, paper, grains and oilseed exports are
shipped. This has led the GOU to consider dredging the canal
unilaterally, with a USD 60-80 million cost. Despite the
GOU,s intentions, it is unclear if the Treaty on the Joint
Administration of the Rio de la Plata allows it to do so.
The two sides have made no recent progress on this major
irritant to the relationship.


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TRADE DISPUTES...
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5. (SBU) Argentina remains Uruguay,s third most important
export destination, after Brazil and China. However, sales
to Argentina have fallen by 33 percent in the first seven
months of 2009 over the same period of 2008, with the top ten
export products declining between 24 percent and 100 percent.
Consequently, Argentina,s share in Uruguay,s exports fell
from 8 percent to 6 percent. After the recent Mercosur
Summit, Minister of Economy Alvaro Garcia and Foreign
Minister Gonzalo Fernandez accused the GOA of implementing
protectionist policies. The GOU is most concerned about two
main GOA trade measures: the imposition of non-automatic
licenses and Argentina,s export taxes.


6. (SBU) Argentina imposed non-automatic licenses on about
200 goods in November 2008, including imports from Mercosur
members (Ref C). While not specifically targeted at Uruguay,
the GOU has been critical of the measure. Licensing
requirements only affect six percent of Uruguay,s total
exports to Argentina, but have a strong impact on specific
sectors (e.g. textiles, apparel and plastic furniture) for
which Argentina is Uruguay,s principal export market.
Sources in the textile industry recently told emboffs that
the GOA is explicitly deterring importers from purchasing in
Uruguay. However, Alvaro Ons, Director of Trade Policy in
Uruguay,s Ministry of Economy, told emboffs that, except for
plastic furniture and wool suits, the GOA is being more
expeditious in approving licenses to Uruguay than to other
countries. Ons also said that Uruguay is not retaliating and
has refrained from imposing protectionist measures.


7. (SBU) The GOU is also critical of the GOA,s export taxes,
which it maintains are prohibited by Mercosur rules. Export
taxes reduce the price of raw materials in Argentina,
increasing the competitiveness of Argentine industry. This
has a three-pronged impact on Uruguay: it hurts Uruguay,s
competitiveness in Argentina, it curbs Uruguayan
competitiveness vis--vis Argentina in third markets and it
increases Argentina,s competitiveness locally. Argentina's
new inward trade policy is also perceived as a drag on
Uruguay's efforts, through Mercosur, to gain more market
access in Europe, by bogging down the Mercosur-EU trade
talks.

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...AND FRICTIONS OVER TAXES AND THE FINANCIAL SECTOR
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8. (SBU) Uruguay and Argentina are also at loggerheads over
the exchange of information on taxes and capital markets
issues. The GOA considers Uruguay a tax haven, a
characterization that Uruguay adamantly rejects. During the
Summit of Progressive Leaders held in Chile in March,
President Vazquez publicly decried what he labeled as
"rumors" suggesting Uruguay is a tax haven and explained the
measures that his administration had taken to combat
organized crime, drugs and money laundering. Regarding SAFIs
(Uruguay,s Societies for Financial Investment, which are
thought by some to be conduits for illegal money transactions
and tax evasion),Vazquez explained that the GOU prohibited
the creation of new SAFIs in 2007 and that it will eliminate
them entirely on January 1, 2010.


9. (C) The GOU believes that the GOA was behind the OECD,s
April 2009 decision to include Uruguay in the group of
"non-cooperative jurisdictions with no commitment to
implement the internationally agreed tax standard" (Ref B).
Former Ministers of Economy Ignacio de Posadas (National
Party) and Danilo Astori (ruling Frente Amplio) were quoted
as saying that Argentina was attempting to provoke a crisis
of confidence in the Uruguayan financial system. At that
time, the GOU reacted swiftly and endorsed OECD,s standards
on transparency and exchange of information.


10. (SBU) In May 2009, in order to discourage capital flight
from Argentina, the Argentine National Securities Commission
prohibited stockbrokers and investment and trust-fund
companies from operating financial instruments from a list of
eighty tax havens, including Uruguay. In an unusual move,
Uruguay,s Central Bank issued a press release May 29
explaining that the Argentine delegation before the Mercosur
Capital Markets Commission had refused to approve a Mercosur
Framework Agreement on the "Exchange of Information and
Reciprocal Assistance Among Mercosur,s Capital Markets
BEST OF TIMES

(##)the agreement in place, to provide information

to any of the three Mercosur members -- and especially
Argentina -- in the framework established by the agreement."
The press release stated that the Central Bank &has not
received any information request from Argentina related to
capital market operations in which Uruguayan firms
participated.


11. (C) NOTE: In a conversation with emboffs on August 6
Daniel Espinosa, head of the Financial Unit at Uruguay,s
Central Bank, played down the conflict over financial issues.
He said he understood that the GOA has a &real problem8
with capital outflows, and acknowledged that Argentines were
using Uruguayan-sourced companies to take capital out from
the country. He also explained that the proposed Mercosur
agreement is good from a capital market standpoint, but falls
short on tax and capital outflow issues, which is what
Argentina is really after. He thought the GOA opted not to
sign the agreement in order to avoid weakening its bargaining
position vis--vis Uruguay. Concerning Uruguay's inclusion
in the OECD,s list, Espinoza said he doubted that Argentina
had enough leverage to get Uruguay on the list. END NOTE.

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POOR RELATIONS AFFECT A PRIVATE FIRM?
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12. (SBU) In June 2009, Argentina,s Transport Secretariat
unexpectedly denied Uruguay,s national flag airline, Pluna,
rights to land in the southern Argentine province of Chubut.
Pluna had requested seasonal international landing rights,
which were eventually granted to GOA-owned Aerolineas
Argentinas.

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BILATERAL RELATIONS
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13. (C) There is a widespread perception in Uruguay that the
relationship with Argentina is at its worst point in recent
memory. Anibal Cabral, Director of Mercosur at Uruguay,s
MFA, told us that there is a personal dislike between Vazquez
and former Argentine President Kirchner. As Cabral put it,
the Kirchners see President Vazquez as &a traitor8 for
failing to appropriately accommodate Argentine concerns and
build a better relationship despite the problems described
herein. As a graphic demonstration, the Argentine government
instructed its ambassador to forego the usual national day
reception at Mercosur headquarters on May 25. At a small
wreath-laying ceremony, the Argentine ambassador made an
impassioned personal speech, emphasizing the importance of
both sides finding a way to overcome the current tensions.


14. (SBU) And finally, the issue has touched the current
presidential campaign as well. Ruling FA presidential
candidate Mujica has been harshly criticized for having met
the Kirchners in an October 2008 trip to Buenos Aires. Since
then, Mujica has tried to disassociate himself from the GOA,
acting with redoubled vigor after former President Nestor
Kirchner publicly supported his candidacy on April 22.
Matthewman