VZCZCXYZ0004
OO RUEHWEB

DE RUEHBU #2636/01 3322053
ZNR UUUUU ZZH
O 282053Z NOV 06
FM AMEMBASSY BUENOS AIRES
TO RUEHMN/AMEMBASSY MONTEVIDEO IMMEDIATE 5964
RUEHC/SECSTATE WASHDC IMMEDIATE 6606
INFO RUEHBR/AMEMBASSY BRASILIA 5606
RUEHSO/AMCONSUL SAO PAULO 3047

UNCLAS BUENOS AIRES 002636 
 
SIPDIS 
 
CODEL 
SIPDIS 
 
MONTEVIDEO PLEASE PASS TO CODEL GOODLATTE 
 
E.O. 12958: N/A 
TAGS: PGOV PREL ECON PARM SNAR AR
SUBJECT: ARGENTINA SCENE-SETTER FOR CODEL GOODLATTE 
 
¶1. INTRODUCTION AND SUMMARY: On behalf of Embassy Buenos 
Aires, I warmly welcome your visit to Argentina November 
29-December 3.  As one of the world,s major agricultural 
producers and exporters, Argentina,s policies in this sector 
have an important impact on U.S. agriculture.  You will have 
the opportunity during your meetings to encourage your 
Argentine interlocutors to develop and implement a sound and 
long-term agricultural policy based on the principles of open 
and competitive markets.  You can also encourage GOA 
officials and congressional leaders to take a more active and 
constructive approach to the Doha Round trade negotiations. 
During your visit, you will hear from U.S. companies doing 
business in Argentina, including Monsanto and Cargill, and 
some of the problems and challenges they face. 
 
¶2. Your visit comes at a time of considerable ferment in the 
Argentine political and economic arenas.  In October 2005 
President Kirchner won a resounding victory in mid-term 
legislative elections.  Based on these results, Kirchner has 
further tightened his already firm control of political and 
economic policy.  Political interest is focusing increasingly 
on next year,s presidential elections.  The agricultural and 
livestock sectors, two of the mainstays of the Argentine 
economy (over 50 percent of total Argentine exports are 
represented by agricultural, livestock, and food shipments), 
have been a focus of GOA policies to maintain low domestic 
prices and increase government revenues.  These GoA policies, 
which include a menu of export tariffs, export quantity 
controls and explicit and implicit price controls have been 
criticized by agricultural and livestock players. 
Nevertheless, Argentina has sustained an impressive economic 
recovery since suffering the worst economic crisis in its 
history ) including the largest sovereign default in history 
and a devaluation of its currency ) in 2001-02.  Its 
agricultural export-led boom has triggered three consecutive 
years of 9 percent real GDP growth beginning in 2003.   END 
INTRODUCTION AND SUMMARY. 
 
Background 
---------- 
 
¶3. Argentina was once one of the richest countries of the 
hemisphere, achieving a GNP per capita that was among the 
highest in the world in the early 20th century.  However, the 
history of Argentina over the last 70 years has been one of 
economic decline and political instability.  Many Argentines 
are at a loss to explain how their country, blessed with rich 
natural resources, a fertile land and manageable population 
numbers, could have fallen so far.  Some blame the military 
dictatorships, which predominated between 1930-1983; others 
blame Peron and "Peronism;" and a significant number blame 
external factors: the IMF, the U.S., and, to a lesser extent, 
Europe, especially following the 2001-2002 economic crisis, 
the worst in Argentine history.  The election of left of 
center Peronist Nestor Kirchner in 2003 marked a significant 
shift in Argentine foreign policy, aligning the country more 
closely with its MERCOSUR partners and less closely to the 
U.S.  That said, Kirchner has cooperated closely with the 
U.S. on a number of issues, including counter-terrorism and 
narcotics, and regional problems like Bolivia and Haiti. 
 
Political Landscape 
------------------ 
 
¶4. Kirchner is widely perceived to be the strongest Argentine 
President since the return to democracy in 1983, and he faces 
a weak and divided opposition.  Argentines give Kirchner much 
of the credit for the country's Phoenix-like recovery from 
its 2001-2002 economic crisis, an event equivalent to our 
Great Depression.  Political interest is focusing 
increasingly on next year,s presidential elections. It is 
widely thought that, if he chooses to run, Kirchner will win 
reelection easily.  There has been some speculation, 
including from the president himself, that he will not be a 
candidate and that his wife, Senator Cristina Fernandez de 
Kirchner, will stand in his place.  Potential opposition 
candidates include former Finance Minister Roberto Lavagna, 
businessman and president of the Boca Juniors soccer team 
Mauricio Macri, and the counter-left national congresswoman 
Elisa Carrio. 
 
¶5. Argentina has played a positive role in promoting human 
rights and democratic institutions in the 
hemisphere,particularly in Haiti and Bolivia.  Along with a 
numbe of its neighbors, Argentina currently has 575 
peacekeeping troops in Haiti in support of MINUSTAH, 
reflecting its traditionally strong support of UN 
peacekeeping operations and commitment to Haiti. 
 
¶6. Kirchner's administration has strongly supported 
counter-terrorism policies, having been a victim itself twice 
in the early 1990's of international terrorist attacks.  The 
GOA has ratified all of the 12 international 
counter-terrorism conventions.  Argentina is a participant in 
the Three Plus One regional mechanism, which focuses on 
possible terrorist-related activity in the Tri-border region 
between Argentina, Brazil, and Paraguay. 
 
¶7. The GOA has been a strong international voice on arms 
control and nonproliferation issues.  On Iran, the GOA voted 
to refer Iran's noncompliance to the UNSC at the September 24 
IAEA Board of Governors meeting.  The GOA has also endorsed 
the Proliferation Security Initiative (PSI). 
 
Agriculture 
----------- 
 
¶8. The agricultural and livestock sectors, two of the 
mainstays of the Argentine economy (e.g., over 50 percent of 
total Argentine exports are represented by agricultural, 
livestock, and food shipments), have been negatively affected 
by GOA,s policies to contain inflation. This targeting is 
due to the fact that food items carry major weights in the 
determination of the Consumer Price Index (CPI).  The two 
principal policy initiatives which the GOA has chosen to curb 
inflation have been through price and export controls.  The 
chief agricultural and livestock products that have been 
affected by this policy are grains (wheat and corn), dairy, 
and meat.  The GOA has watched, with great concern, as the 
international price of wheat has sharply increased, due to a 
major drought in Australia, and lower than expected 
production in the U.S. and Argentina.  Argentine exporters, 
taking advantage of strong international prices, have rapidly 
registered export sales to the point where residual supplies 
for domestic consumption, especially for the milling 
industry, have become extremely tight.  Argentina is the 
number 5 exporter of wheat in the world.  In an attempt to 
maintain the price of bread at what it considers a 
&reasonable8 level, the GOA recently has mandated Argentine 
exporters to sell 4 million tons of wheat to the milling 
industry at a price (US$120 per ton), well below the 
international price. 
 
¶9. Corn prices have also caught the attention of the GOA. 
What with uncertainty in the U.S. over availability of 
supplies for ethanol and food and feed stocks, which has 
boosted prices, Argentine corn exporters (Argentina is the 
number 2 exporter of corn in the world) have registered 
export sales at a record pace (10.5 million tons have been 
registered on next year,s corn crop, estimated around 
17.6-18 million tons), taking advantage of favorable external 
conditions. The GOA has reacted by freezing further 
registrations, hoping to ensure sufficient corn for domestic 
use (the corn is used, in the main, as feed for livestock and 
poultry, and for food) without putting upward pressure on 
prices.  Earlier this year, as prices of dairy products rose, 
the GOA reacted by increasing export taxes on cheese and 
powdered milk. These taxes undercut previously strong growth 
by this industry, and have led one of the main dairy 
enterprises, which was suffering from heavy indebtedness and 
low profitability, to seek to merge with ADECOAGRO, a U.S. 
investment group led by George Soros. 
 
¶10. Since Argentina has the highest per capita beef 
consumption in the world (about 63 kilograms per capita), the 
GOA has been extremely concerned about the price of this 
commodity. Late last year, in the face of rising domestic 
prices, the GOA increased the export tax on fresh beef from 5 
to 15 percent, and the minimum slaughter weight to 280 
kilograms.  In March, it banned almost all fresh beef exports 
(except those destined to fulfill the European Union,s 
Hilton Quota, and those involved in country-to-country 
agreements).  The GOA hoped that a ban on beef exports would 
translate into increased domestic supply, which would put 
downward pressure on ascending domestic prices, fueled by the 
economic recovery, and the shortage of beef in international 
markets due to food-and-mouth disease outbreaks in Brazil. 
Over the last five months, the GOA has relaxed some of these 
restrictions, after it realized that market intervention had 
become counterproductive.  It is, however, again poised to 
intervene aggressively if it believes that beef prices are 
increasing at an &unreasonable8 rate. 
 
Economic Situation 
------------------ 
¶11. Argentina has had an impressive economic recovery since 
suffering the worst economic crisis in its history -- 
including the largest sovereign default in history and a 
devaluation of its currency -- in 2001-02.  An export-led 
boom triggered three consecutive years of 8.8-9.2% real GDP 
growth beginning in 2003, with GDP reaching $182 billion in 
2005, approximately $4,700 per capita.  The Kirchner 
Administration has ably managed the nation's public finances 
and achieved large budget surpluses.  Industrial and 
construction activity are growing rapidly, and tourism has 
boomed, with a record high of an estimated 3.7 million 
foreign tourists visiting in 2005.  Economic expansion is 
creating jobs and unemployment dropped from 20.4% in the 
first quarter of 2003 to 10.2% in the third quarter of 2006. 
Investment in real terms jumped 22.7% in 2005.  Poverty has 
also fallen from the post-crisis level of 60 percent, but 
remains stubbornly high.  During the first half of 2006, 31% 
of the population was living below the poverty line. 
Argentina negotiated a debt exchange with 76% of its 
creditors in 2005 (paying 30 cents on the dollar), and paid 
off its nearly $10 billion debt to the IMF on January 3, 2006. 
 
¶12. Argentina,s impressive recovery, which has led to 
improvements in key socio-economic indicators, can be 
attributed to a number of factors.  First, following a decade 
of market reforms, the economy was fundamentally sound except 
for the high level of indebtedness.  Second, the adoption of 
a market-based exchange rate regime in early 2002 and the 
combination of high commodity prices and low interest rates 
catalyzed Argentina,s export-led boom.  Exports are at 
record levels and Argentina,s trade surplus totaled $11.3 
billion in 2005.  Foreign trade equaled approximately 38% of 
GDP in 2005 (up from only 11% in 1990) and plays an 
increasingly important role in Argentina's economic 
development.  The government has maintained a primary fiscal 
surplus and continues to accumulate reserves, which exceeded 
$30 billion in October 2006.  Argentina should continue to 
perform well in 2007 with GDP growth projected at 7% and 
inflation in the 7-10% range.  Nevertheless, slowness in 
addressing public service contract renegotiations, capacity 
constraints, potential energy shortages in the face of high 
growth and distorted energy prices, inflation and the 
government's heterodox policies to contain it (including 
pressure on the private sector to maintain price controls), 
and a still-weak investment climate are potential obstacles 
to sustaining the recovery. 
 
¶13. U.S. agribusiness companies have invested heavily in the 
Argentine economy for many decades, and have made major 
contributions to the agricultural and livestock sectors.  You 
will be meeting with representatives of a number of these 
enterprises at an American Chamber of Commerce breakfast and 
will be hosted to lunches by two: Cargill and Monsanto. 
Cargill is making investments valued at $330 million in 
agricultural processing facilities (soybeans, malt), a 
packing house, and port facilities.  Over the last two years, 
business and profitability in this sector have been 
challenged by GOA intervention exemplified by the ban on 
exports of fresh meat, price controls imposed on wheat, and 
the freezing of export sales of corn.  Monsanto faces major 
challenges, in particular its inability to collect royalties 
on the Round-Up Ready soybean technology, which has 
revolutionized soybean production in Argentina.  It has 
attempted to negotiate a solution to this issue with seed 
companies, farm organizations, and other stakeholders and 
launched court cases in Europe.  Unfortunately, Monsanto and 
GOA authorities have not found a meeting of the minds to 
solve this important issue of intellectual property rights 
protection. 
WAYNE