VZCZCXYZ0004
RR RUEHWEB

DE RUEHMN #0489/01 2331448
ZNY CCCCC ZZH
R 211448Z AUG 09
FM AMEMBASSY MONTEVIDEO
TO RUEHC/SECSTATE WASHDC 9307
INFO RUCNMER/MERCOSUR COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC

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) 
 
------- 
Summary 
------- 
 
¶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. 
 
--------------------------------------------- ---------- 
POLITICAL FRICTIONS OVER UNASUR,S PRESIDENCY AND BOTNIA 
--------------------------------------------- ---------- 
 
¶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. 
 
--------------------------------------------- ------------- 
POLITICAL FRICTION EXTENDS TO INFRASTRUCTURE FINANCING... 
--------------------------------------------- ------------- 
 
¶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. 
 
 
----------------- 
TRADE DISPUTES... 
----------------- 
 
¶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. 
 
--------------------------------------------- -------- 
...AND FRICTIONS OVER TAXES AND THE FINANCIAL SECTOR 
--------------------------------------------- -------- 
 
¶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. 
 
------------------------------------- 
POOR RELATIONS AFFECT A PRIVATE FIRM? 
------------------------------------- 
 
¶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. 
 
------------------- 
BILATERAL RELATIONS 
------------------- 
 
¶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