VZCZCXYZ0004
PP RUEHWEB

DE RUEHMN #0298/01 0871504
ZNY CCCCC ZZH
P 281504Z MAR 06
FM AMEMBASSY MONTEVIDEO
TO SECSTATE WASHDC PRIORITY 5602

C O N F I D E N T I A L MONTEVIDEO 000298

SIPDIS

NOFORN
SIPDIS

DEPT ALSO FOR INR/I AND WHA/BSC

E.O. 12958: DECL: 03/27/2016
TAGS: PINR ETRD UY
SUBJECT: URUGUAY: ECONOMIC AND POLITICAL TOPICS (C-AL6-00402)

REF: A. STATE 47567
     ¶B. MONTEVIDEO 000254
     ¶C. MONTEVIDEO 000011
     ¶D. 05 MONTEVIDEO 001429
     ¶E. 05 MONTEVIDEO 001428
     ¶F. MONTEVIDEO 000229
     ¶G. MONTEVIDEO 000230
     ¶H. MONTEVIDEO 000268

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

¶1. (C/NF) This telegram responds to Washington analysts' request for information, per ref A.

¶2. (C/NF) Summary: Though a small country, Uruguay is important to U.S. national interests as an example of long-standing democracy in a region that has largely lurched to the populist left. Policy makers were thus alarmed when the left-leaning Frente Amplio (FA) coalition was swept into power last year after defeating the two traditional parties who had ruled the country for over a century. We believe that constructive engagement with Uruguay through enhanced trade relations is a worthwhile endeavor. By this means, we may be able to help construct a viable alternative to the more radical recipes being promoted in the region. Chile's example provides some precedence. We also have a reservoir of goodwill since the U.S. rescued Uruguay from the financial abyss when we provided a $1.5 billion bridge loan in 2002. Our appraisal of President Vazquez is based partly on the assumptions of Uruguay's inherently conservative society and its relatively high per capita income. The country's strong institutions also bear on our analysis. Vazquez clearly wants stronger trade relations with the U.S. -- the fact that the U.S. is now Uruguay's foremost trade partner, absorbing a quarter of its exports, is inescapable. The President acts more as a pragmatist than an ideologue, but his room for maneuver is restricted by the radical elements in his own coalition and by the self-interest of Uruguay's powerful neighbors in Mercosur. Whether for reasons of weakness or calculation, Vazquez has frequently sent conflicting signals, leaving the impression that he modifies his discourse to suit his audience. For example, he went out of his way to disparage a Free Trade Agreement (FTA) during his March 14 visit to Caracas -- but he was also clearly behind the FA's internal party resolution on March 25 to keep that option open. Below, the analysts' questions appear in upper case and the Embassy's answers are in lower case. End Summary.

¶A. (C/NF) SENIOR URUGUAYAN OFFICIALS HAVE DISCUSSED FORGING CLOSER ECONOMIC RELATIONS WITH THE UNITED STATES, BUT PRESIDENT VAZQUEZ RECENTLY STATED IN CARACAS THAT HE IS NOT SEEKING A FREE TRADE AGREEMENT (FTA). WHAT FACTORS ARE DRIVING URUGUAY'S RECENT TALK OF A MORE OPEN TRADE POLICY, AND WHAT FACTORS ARE LEADING VAZQUEZ TO PUBLICLY DISCOUNT AN FTA?

XXXXXXXXXXXX displayed during his March 11-19 trip to Mercosur and Mercosur-associate countries, including Venezuela, were disturbing in terms of his ability to coherently conduct foreign policy while traveling abroad, we believe that the serious bilateral dispute with Argentina over paper mills was a significant factor in explaining his erratic behavior. The dispute has overwhelmed the GOU, and an attempt to gain support for Uruguay was the primary mission on his trip (ref H). What Vazquez stated in Caracas regarding an FTA with the U.S. was that it was not on the GOU,s agenda. While transcripts of Vazquez' Caracas remarks show that he went too far in disparaging an FTA, GOU ministers later explained to us that they were essentially no different than what A/S Shannon had publicly stated in an interview a week earlier, i.e. that an FTA with Uruguay was not on the U.S. agenda. Both statements are true, in that they reflect the current situation.

XXXXXXXXXXXX expanding trade with the U.S. (ref G) He has instructed his ambassador in Washington to push for the resumption of our Joint Commission on Trade and Investment (JCTI) in order to discuss market access. The JCTI will meet in Washington April 3-4. Vazquez has privately told the Charge that he wants an FTA, is not opposed to joining the Free Trade Area of the Americas (FTAA) under ""the right circumstances,"" and that is why he signed a Bilateral Investment Treaty (BIT) during the polemical Summit of the Americas (SOA, ref F).

-- From the beginning of his administration, Vazquez has sought closer trade relations with the U.S. The driving factor is the growing importance of the U.S. as a market for Uruguayan exports. The U.S. is Uruguay's largest export market, at 24% of total exports, and growing. At the same time, exports to Mercosur have dropped (from 55% of total exports in 1998 to 22% last year). Uruguay now sells more to the U.S., NAFTA, EU and China and needs to open up these markets through further trade agreements.

XXXXXXXXXXXX wants with the U.S. without an FTA, he would probably do so. On the other hand, he probably realizes that only an FTA will allow him to obtain the market access he seeks. Vazquez needs trade and investment to bolster the economy, reduce unemployment and stem the hemorrhaging ""brain drain"" of 15 percent of the population (mostly young people) who have emigrated abroad in search of jobs.

XXXXXXXXXXXX Brazil, but it still remains dependent on them. The more tied to out-of-region markets the country is, the less dependent Uruguay will be on the vagaries of its unreliable, powerful neighbors (ref B). Agreement on the necessity of expanding markets outside of Mercosur appears to be extremely broad and to cut through the entire political spectrum. Two issues in particular have driven Uruguay's quest for a more open trade policy: (a) The paper mill dispute with Argentina in which Argentine protesters blocked international bridges for six weeks during the tourist season, and (b) Brazil's refusal to allow the entry of Uruguayan rice until its own growers had sold all their rice.

¶B. (C/NF) HOW SINCERE IS VAZQUEZ IN PURSUING AN ECONOMIC AND FOREIGN POLICY THAT MIGHT DISTANCE HIM FROM DOMESTIC SUPPORTERS AND LEFTIST REGIONAL PARTNERS SUCH AS VENEZUELA, ARGENTINA, AND BRAZIL? FOR EXAMPLE, IS THIS AN EFFORT TO EXTRACT ECONOMIC AND POLITICAL CONCESSIONS FROM REGIONAL NEIGHBORS OR A GENUINE EFFORT TO MOVE CLOSER TO THE UNITED STATES?

XXXXXXXXXXXX policy, even though it distances him from radicals within his FA coalition and from the powerful labor unions. Irritating his leftist regional partners is a different, riskier proposition. The macroeconomic policy Vazquez' economic team is pursuing is not much different than Brazil's, but the trade policy may be. We can imagine that Brazil would view Uruguay's (unlikely) departure from Mercosur as a hostile act. Thus, the GOU is navigating a fine line in trying to expand trade relations with the rest of the world, while reassuring his partners that to do so is not a threat to Mercosur unity and that Uruguay intends to remain within the bloc. The moderate sector of the FA has supported him in this, and Danilo Astori, the Economy Minister, is a leading figure for the moderates. Vazquez cannot manage without Astori -- a fact made evident when the FA experienced its first crisis with Astori's threat to resign last year over the budget. It is very likely that economic policies will remain as they are for the foreseeable future, since they are the only ones that can realistically promote growth, attract investment and reduce unemployment.

XXXXXXXXXXXX for Vazquez. It does not mean he wants to align his foreign policy with us. He is likely to continue to follow the lead of Brazil, Mercosur and GRULAC when it comes to general issues of foreign policy. We do not believe he is using trade negotiations with the U.S. as a way to extract concessions from his Mercosur neighbors. The need for expanded trade with the U.S. and the crucial importance of the U.S. as a market for Uruguayan exports are simply inescapable realities.

XXXXXXXXXXXX highlighted Uruguay's vulnerabilities and re-ignited fear of this close neighbor. The brinkmanship exhibited by Argentine President Kirchner in this serious conflict is foreign to the more conservative, low-key approach typical of the Uruguayans. It stridently contrasts with Vazquez' more tempered approach.

¶C. (C/NF) HOW IS VAZQUEZ DEALING WITH RADICALS IN HIS LEFT-OF-CENTER COALITION? HOW INFLUENTIAL ARE THEY IN OPPOSING EFFORTS BY MODERATE URUGUAYAN OFFICIALS TO MOVE ECONOMICALLY CLOSER TO THE UNITED STATES ON TRADE? WHO ARE VAZQUEZ' MAIN SUPPORTERS AND OPPONENTS IN SEEKING CLOSER ECONOMIC TIES WITH THE UNITED STATES?

XXXXXXXXXXXX radicals in his coalition. Rather, he keeps them close for control purposes, but he knows he will not change them. Overall, the center of gravity of the FA has moved to the center, thanks to ex-Tupamaro guerrilla Jose Mujica and other FA politicians who have validated Vazquez, centrist approach. Vazquez, main supporters are Economy Minister Astori, Industry Minister Lepra, Tourism Minister Lezcano, Agriculture Minister Mujica, and Vice-President Nin Novoa. His main opponents are the Communists, Foreign Minister Gargano's wing of the Socialists and the ultra-radicals (26 de Marzo and other small groups). The PIT/CNT (unions) can be with him (paper mills) or against him, depending on the issue.

XXXXXXXXXXXX enhanced trade relations with the U.S., with the exception of the Communists and the far-left radicals. When it comes specifically to the issue of an FTA with the U.S., Nin Novoa, Astori, Lepra, Lezcano, and even Mujica have identified themselves in favor, while ForMin Gargano, his wing of the Socialist Party, the PIT/CNT umbrella trade union and the Communists have declared their opposition. The latest vote of the General Assembly of the Frente Amplio clearly portrayed this fault line, when the General Assembly overwhelmingly rejected a Communist motion to specifically include in the Frente's program a rejection of FTA negotiations with the U.S. In the end, Vazquez is likely to sell the concept of an FTA in much the same way he won passage for the BIT and last year's approval of participation in UNITAS naval exercises.

¶D. (C/NF) WHAT TIES--IF ANY--DOES VAZQUEZ HAVE TO OTHER LEFTISTS IN THE REGION, SUCH AS CUBA'S FIDEL CASTRO, VENEZUELA'S HUGO CHAVEZ, BOLIVIA'S EVO MORALES, ARGENTINA'S NESTOR KIRCHNER, AND BRAZIL'S LULA DA SILVA? WHAT IS THE NATURE OF AND BASIS FOR THESE TIES (FOR EXAMPLE, ECONOMIC, POLITICAL, REGIONAL BALANCE OF POWER)?

-- As President, one of Vazquez' first acts was to reestablish diplomatic relations with Cuba. Though he does not appear to talk to Castro, he said in Caracas recently that he will visit Cuba. There have been a few exchanges of doctors and eye operations and the like with Cuba, but little else has materialized. Trade between the two countries is minimal.

XXXXXXXXXXXX visited Caracas. Vazquez appears to exert some moderating influence on Chavez, but we doubt that he likes him. Vazquez helped welcome Venezuela into Mercosur. He also appears to realize that many of Chavez, promises have generally come to naught, except that Chavez keeps bailing ailing Uruguayan companies. The GOU probably understands that the GOV's vaunted proposal of a super gas pipeline stretching from Venezuela to the Southern Cone, is just a pipe dream.

XXXXXXXXXXXX paper mills issue has destroyed any trust that may have existed in the past.

-- Vazquez does not speak often to Lula da Silva (he told this to the Charge) but he respects him and probably wishes that Brazil would take a more prominent leadership role in Mercosur.

-- Vazquez may have patched up relations with Evo Morales, though the two share little in common. He was miffed at Morales for not stopping in Uruguay during the Bolivian President-elect's world tour, especially after Uruguay had offered port facilities for Bolivia at Nueva Palmira. Uruguay needs Bolivia's gas and would prefer to access it through Brazil rather than Argentina. The GOU supports Bolivia's aspiration for access to the Pacific Ocean.

¶E. (C/NF) WHAT IS THE RESPONSE OF THE OTHER MERCOSUR MEMBERS AND REGIONAL LEFTISTS TO VAZQUEZ' EXPLORATION OF CLOSER TIES TO THE UNITED STATES? WOULD THEY TRY TO DISSUADE VAZQUEZ THROUGH THREATS, PROMISES, OR CONCESSIONS? DID DISCUSSIONS WITH VENEZUELAN PRESIDENT CHAVEZ OR ARGENTINE PRESIDENT KIRCHNER INFLUENCE VAZQUEZ' DECISION TO DISCOUNT FTA TALKS WITH THE UNITED STATES?

-- A couple of months ago in Brasilia, after meetings with Brazilian President Lula da Silva, Argentine President Kirchner declared that, ""Uruguay is free to negotiate an FTA with the U.S. if it wants to."" Prior to this declaration, the Brazilian Foreign Ministry (Itamaraty) had been somewhat threatening, saying that Uruguay would have to leave Mercosur if it wanted to negotiate an FTA without prior Mercosur approval. However, given the currently strong negative opinion of Mercosur within Uruguay, the earlier threat does not seem to have had much effect. Our understanding is that Uruguay is very unlikely to ever leave the trading bloc, but it will do what it can to diversify its export markets. The Frente Amplio's recent vote on its program of government gives Vazquez a freer hand to negotiate bilaterally with the U.S. and other trade partners outside of Mercosur.

-- As for Venezuela, Vazquez displayed a moderating influence on Chavez during both visits by the Venezuelan leader visits to Uruguay last year. Chavez even lent his support to an Uruguayan Bilateral Investment Treaty (BIT) with the U.S., pointing to Venezuela's sizable investments in CITGO's downstream oil industry in the U.S. Since that time, many of the Venezuelan promises of largesse (made during last December's induction of Venezuela into Mercosur) have not materialized in Uruguay. Vazquez' mid-March trip to Caracas was a disaster from our point of view -- especially the optics. While in Caracas, Vazquez disparaged an FTA and FTAA, said he would visit Cuba and completed his voyage on a GOV-provided airplane. We have no evidence that Chavez interceded on Uruguay's behalf in the serious paper mill dispute with Argentina, but we can imagine that it is possible, since Chavez wields considerable influence with Argentine President Kirchner. We can also imagine that Chavez has the ability to fund and influence radicals (including the labor unions) in Uruguay, and could easily cause domestic problems for Vazquez if he wanted to.

-- Argentina's behavior towards FTAA was painfully obvious during the Mar del Plata Summit of the Americas (SOA). We understand that Kirchner gave Vazquez the unpleasant task of presenting Mercosur's anti-FTAA position to the SOA plenum. There is some circumstantial evidence suggesting collusion between the two big Mercosur countries, whereby Argentina manages"" Uruguay and Brazil keeps Paraguay in its sphere of influence. The paper mill dispute with Argentina has soured UY/ARG bilateral relations, but we have no indication that Argentina used it as a threat to keep Uruguay in line.

-- Paraguay also chafes under the Mercosur yoke. (Brazil reportedly withholds or delays its electricity payments to the GOP when it strays from the GOB's strategic objectives.) Paraguayan President Duarte publicly expressed sympathy for Uruguay's plight in Mercosur and support for it on the paper mill dispute, without much effect, however.
Nealon