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SENSITIVE

E.O. 12958: N/A
TAGS: EFIN ECON EINV VZ UY
SUBJECT:  VAZQUEZ'S DEALS IN CARACAS: A GOOD FIRESALE

¶1. (SBU) Summary: On March 14-15, President Vazquez
visited Venezuela as part of a six-day Latin American
tour.  Out of eleven bilateral agreements signed on a
variety of issues, two stand out, with the remainder of a
mostly cultural or technical nature.  The GOU managed to
dump on the GOV unprofitable or problematic businesses, as
Venezuela agreed to buy half of Petrolera del Cono Sur, an
unprofitable chain of gas stations owned by Uruguayan
state oil monopoly ANCAP, and took further steps to buy
COFAC, a troubled financial cooperative.  The GOV also
reportedly showed interest in buying half of Uruguay's
unprofitable airline Pluna, currently in the hands of
Brazilian airline Varig.  All in all, there was one
finalized deal for $15 million, another agreement in the
making for $10 million, and a possible future deal for $13
million.  Meanwhile, Venezuelan investment of hundreds of
millions of dollars in an Uruguayan refinery and a much
touted barter agreement of oil for goods, promised several
months ago, have yet to materialize.  The Uruguayans
dumped on Chavez what they could this time around, knowing
full well that much of his promises of largesse amount to
much ado about nothing.  End Summary.

A two-day visit to Caracas
--------------------------

¶2. (U) On March 14-15, President Vazquez visited Venezuela
as part of his six-day tour through Bolivia, Chile,
Venezuela, Brazil and Paraguay.  The tour was initially
designed to garner support for Uruguay's position in its
dispute with Argentina over paper mills.  Chavez and
Vazquez endorsed a joint document on the strengthening of
Mercosur, entitled ""The Giant is the South"", and GOU and
GOV officials signed eleven agreements.  The agreements
dealt with a wide variety of issues --from education to
energy-- and have different scope, from business deals to
letters of intent.  The most relevant news was progress
towards a deal in the purchase of troubled Uruguayan
financial cooperative COFAC and the purchase of ANCAP's
gas stations in Argentina by PDVSA.  The visit also fueled
press reports about the possible purchase of part of
Uruguay's airline Pluna by Venezuela's Conviasa.

GOV and GOU become partners in Argentinean Sol Petroleo
--------------------------------------------- ----------

¶3. (U) During Vazquez's visit, PDVSA and ANCAP sealed
the purchase of half of ANCAP's shares in Petrolera del
Cono Sur, an Argentinean oil company, for $15 million.
The deal allowed ANCAP to partially divest itself of a
money-losing business hemorrhaging at the rate of $2
million a month.  Accumulated losses since ANCAP's
purchase of Petrolera in 1998 amount to $80 million, as
Petrolera had to buy its oil at international prices
but faced arbitrarily capped gasoline prices.  This
will not be the case now with PDVSA.  For PDVSA, the
deal provides the Venezuelan oil company access to an
established network of gas stations within Argentina.

Despite trumpeting, sale of COFAC is not effective yet
--------------------------------------------- ---------

¶4. (U) Chavez announced with fanfare his decision to buy
Uruguay's largest financial cooperative COFAC, whose
operations were suspended on February 1 due to lack of
liquidity to meet growing withdrawals.  COFAC is a large
player in the rural interior, which owns, entirely or
partially, another four financial businesses.  The
February suspension was the final blow to the cooperative,
which had been previously suspended in March 2004 and had
frozen a major share of its deposits.  While local press
reports reported that COFAC had been effectively purchased
by Venezuelan Development Bank BANDES, this is apparently
not yet the case.  The signed agreement merely prompts
BANDES to deposit $10 million in a trust fund to somehow
guarantee the fulfillment of the operation.  In a recent
press release, the president of BANDES stated that it will
buy COFAC to create a non-profit ""firm of social
production"".  BANDES highlighted that this is a way to
strengthen the bilateral relationship of both countries,
help the small and medium businesses that cannot operate
with traditional banks and maybe increase bilateral trade
flows.  Comment: While Chavez's announcement certainly
gives impetus to the purchase, the deal has not been
finalized, as BANDES and COFAC must still negotiate over
numerous issues, including the price of the possible sale.
End Comment.

Venezuela's airline shows interest in Uruguay's
--------------------------------------------- --

¶5. (U) According to press reports, Venezuelan airline
Conviasa, which was founded by Chavez two-and-a-half
years ago, has shown interest in purchasing Varig's
shares in Pluna. (Note: Pluna is Uruguay's national
flag airline, owned 49% by the GOU, 2% by the private
sector and 49% by Brazilian airline Varig.  End Note.)
Conviasa would reportedly pay $12.4 million and inject
$5 million in fresh capital.  Uruguay's Ambassador to
Venezuela reportedly stated that the strategic alliance
would enable Pluna to strengthen Conviasa's operations
in South America and Pluna's operations to the U.S. and
Europe.  However, on March 15 GOU Minister of
Transportation Rossi brought down expectations by
stating that both parties still needed to work out
various issues.  Conviasa and Pluna are said to have
only signed a letter of intent so far.

Eleven agreements of different scope on various issues
--------------------------------------------- ---------

¶6. (U) On the sidelines of the Chavez-Vazquez meetings,
GOU and GOV officers signed eleven bilateral agreements
of different scope on various issues including:
cooperation on science, technology and basic and mining
industries	 cooperation on housing, health and
medicine	 a MOU between the ministries of industry
letters of intention concerning technical cooperation
on communication and information technology	 and a
commercial contract for supplying housing materials and
technical assistance.  Finally, Vazquez and Chavez
committed to strengthening instruments for regional
integration such as Petrosur and Petroamerica.

GOU confirms commitment to Telesur
----------------------------------

¶7. (U) Rebuffing previous press reports that announced
that the GOU would leave Telesur, President Vazquez
confirmed the GOU's participation in Telesur, the Latin
American TV channel co-owned by Venezuela (51%),
Argentina (20%), Cuba (19%) and Uruguay (10%).  On
March 13 --a day before Vazquez landed in Venezuela--
the Executive sent the bill to Parliament for
ratification.

Pending promises still unfulfilled
----------------------------------

¶8. (U) While the GOU and the GOV could/could close
three agreements in the near future for about $40
million (ranging from more to less certain: PDVESA-PCS
$15 million	 BANDES-COFAC $10 million	 and Conviasa-
Pluna $13 million), the GOV has so far failed to
deliver on its largest promises relating to oil supply
and the $600 million upgrading of Uruguay's oil
refinery.  Over a year after trumpeting the ""oil for
goods program"", a key program for Uruguay which imports
100% of its oil, the initiative has hardly taken off.
In turn, the private sector is disappointed about the
convenience and seriousness of doing business with
Venezuela.

Comment:  Not much more than business deals
-------------------------------------------

¶9. (SBU) Comment:  In spite of the media circus that
surrounded the visit, and the expected announcements of
Latin American brotherhood, the concrete results of
Vazquez's visit to Venezuela ended up being plain business
deals.  The GOU managed to ""unload"" at least one and
perhaps as many as three unprofitable businesses on
Chavez.  Little else of substance seems to have emerged
from the visit.  End Comment.

NEALON

C O N F I D E N T I A L MONTEVIDEO 000268

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E.O. 12958: DECL: 03/20/2016
TAGS: EFIN ECON EINV VZ UY
SUBJECT: PULP MILLS: VAZQUEZ' TRIP EXPOSES HARSH REALITIES

REF: A. MONTEVIDEO 00259
     ¶B. MONTEVIDEO 00256
     ¶C. CARACAS 0720
     ¶D. MONTEVIDEO 0230
     ¶E. MONTEVIDEO 0229

Classified By: Charge D'Affaires James D. Nealon
for reasons 1.4 (B) and (D)

¶1. (C) Summary:  President Tabare Vazquez returned
empty-handed from an erratic eight-day tour of regional
countries designed to drum up support for Uruguay's position
in the serious paper mill dispute with Argentina (ref A).
From our point of view, the trip was a disaster, especially
his confusing signals out of Venezuela (refs C&D) and his
constant flip-flop of positions.  More importantly, his
inability to convince anyone that the Argentine blockades of
the international bridges (now in their 43rd day) -- that
violate international law and treaties -- is worrisome in
terms of foreign policy capacity and domestic support.  The
Embassy notes that the loss of the paper mills would be truly
catastrophic for this country.  Vazquez also faces the stark
possibility that Uruguay may be unable to attract massive
foreign direct investment to wean it off of its traditional
reliance on vulnerable beef exports by diversifying to
renewable wood products.  Embassy maintains its assessment
that Vazquez is a capable and moderate leader who wants
closer relations with the U.S. (refs D&E), but that Uruguay
may be just too small and weak to stand up against anyone in
this tough regional neighborhood.  This is a defining moment
for the GOU.  Should the plants' construction actually be
halted for any length of time, the consequences for this
government could prove fatal.  End Summary.

Paper Mills are Vital for Uruguay's Vision of the Future
--------------------------------------------- -----------

¶2. (C) Despite a seemingly innocuous issue, the pulp mills
carry tremendous strategic importance ($ 1.7 billion
equivalent to ten percent of GDP) for Uruguay.  Already the
dispute with Argentina has caused major harm to the country's
national pride, economy (estimates range from $200-300
million), and relations with Argentina and Mercosur.  Faced
with high unemployment and brain drain, the GOU is eager to
attract foreign investment, and prides itself on its ""green""
environmental image. ""Uruguay Natural"" is a popular slogan
for selling both grass-fed beef and tourism here. This is why
Vazquez and the GOU have become increasingly frustrated that
no international organization or neighboring country has come
to Uruguay's rescue in the ""economic war"" it perceives that
Argentina is waging.

¶3. (C) Little wonder then, that Vazquez embarked on a tour of
Mercosur and Mercosur-associate countries to drum up support
for UrugQ's position in the paper mill dispute.  From what
we gather, he botched the trip entirely and only succeeded in
dividing a previously united domestic constituency.  On March
11, in Santiago he prematurely declared ""peace in our time""
after his brief meeting and misfired attempt at magnanimous
statesmanship with Nestor Kirchner, and reversed his earlier
adamant position that the plants' construction would not be
halted.  Flushed with ""success"", he then failed to transmit
the urgency of the issue in his pull-aside meeting with
Secretary Rice.  Then in La Paz, after accepting a coca-leaf
portrait of guerrilla icon Che Guevara (and learning that
folks at home were angry) he reversed himself again, saying
that the GOU would not negotiate under pressure.  Despite a
mini-love fest with Chavez, where he sold off a few ailing
parastatals, he failed to garner support for the paper mills
from the GOV.  Later in Brasilia, Lula offered little visible
support and Paraguay's Duarte's was reportedly unable to
provide any relief.  Ten days after Vazquez began his trip to
garner support for Uruguay, nothing much has changed on the
ground. The bridges remain blocked --for almost six weeks
now--  though the media continues to report that a
breakthrough is imminent.

Consequences for Vazquez
------------------------

¶4. (C) While we are still somewhat puzzled by Vazquez'
behavior during the regional trip, we continue to believe
that he is a capable and moderate leader who genuinely wants
closer relations with the U.S.  On March 18, Industry
Minister Lepra told the Charge that Vazquez' position on
U.S.-Uruguay relations and an eventual FTA remains unchanged.
 Embassy further believes that Uruguay can serve as a useful
bridge to the region, indirectly advance U.S. interests, and
that Vazquez can exert some moderating influence on his more
radical regional counterparts, as he did during both of
Chavez' visits to Montevideo.  But we must recognize that the
gentle doctor is something of a ""babe in the woods"" when he
deals with ex-guerrillas, former union leaders, and
golpistas.""  While he might want a Chilean-style moderate
socialism, they may not.  Vazquez is also constrained by
ideologues in his coalition government, such as ForMin
Gargano and by the size of Uruguay vis-a-vis its powerful
neighbors.  Vazquez' trip was a disaster in many ways.  He
came across as prevaricating and raised doubts at home and
abroad about his ability to conduct foreign policy, but his
behavior is in some ways understandable.  The Frente Amplio
(FA) government has been overwhelmed by the paper mill
dispute and paralyzing bridge blockades that threaten vital
national interests.  Vazquez is also hamstrung by an old-line
Socialist foreign minister who lacks ability and vision in
foreign affairs and does not believe in the kind of
bipartisan foreign policy that was carried out professionally
for generations by the Blancos and Colorados.

Comment: Embattled Vazquez Has Few Options
------------------------------------------

¶5. Comment: Embassy stresses that the paper mill dispute is
perceived here as a life-or-death struggle by this
government. The GOU's feckless strategy of threatening (but
not taking) Argentina to international or Argentine court
rings hollow in the face of an opponent who holds all the
cards. (Note: The Charge was privy to and obtained a copy of
what is the likely GOU strategy: internationalize the issue,
but avoid confrontation with Argentina at all costs.  End
Note.)  What is next in the continuing saga of the paper mill
dispute and attendant blockades is unknown, but we are by now
convinced that the issue is the most serious challenge yet to
face President Vazquez and his Frente Amplio government.
Vazquez' failure to gather regional support for Uruguay's
plight makes his outreach to the U.S. on trade issues all the
more important.  End Comment.
Nealon