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C O N F I D E N T I A L SECTION 01 OF 05 MONTEVIDEO 000189 
 
SIPDIS 
 
SIPDIS 
 
DEPT ALSO FOR S/ES AND WHA A/S TOM SHANNON 
NSC FOR DFISK AND JCARDENAS 
SOUTHCOM FOR POLAD 
 
E.O. 12958: DECL: 02/27/2017 
TAGS: OVIP RICE CONDOLEEZZA PREL PGOV ECON UY
SUBJECT: URUGUAY: SCENESETTER FOR SECRETARY RICE 
 
REF: STATE 022878 
 
Classified By: Ambassador Frank E. Baxter 
for reasons 1.4 (B) and (D) 
 
¶1. (C) Summary and Introduction: American Embassy Montevideo 
and I warmly welcome your participation in President Bush's 
historic visit to Uruguay.  Though led by a left-leaning 
government, Uruguay shares many of our values and remains an 
island of democratic stability and good governance in a 
turbulent region. The presidential visit sends a powerful 
signal to the region that we favor good relations with 
sensible, pragmatic governments which respect democracy, 
human rights, and the rule of law, regardless of political 
label. The visit is also an opportunity to advance our 
improving bilateral relationship beyond trade and to 
highlight U.S. policy priorities in the region: consolidating 
democracy, promoting prosperity, investing in people, and 
enhancing security. This is also a chance to listen to the 
Uruguayan perspective on challenges, problems and threats in 
the Western Hemisphere. 
 
¶2. (C) The POTUS visit may help Uruguay resolve its 
philosophical quandary between economic dynamism and 
socialist egalitarianism. Many elements for strong economic 
growth are in place. The traditional pillars of its economy 
-- farming, tourism and finance -- are all doing well, and 
foreigners are increasingly investing here. But three things 
hold Uruguay back. The first is that Uruguay is part of 
Mercosur, which now includes Venezuela. Mercosur has 
increasingly devolved from an imperfect customs union into a 
more restrictive and anti-American political organization. 
Uruguay might need the consent of its Mercosur partners to 
negotiate an FTA with the United States. Second, the current 
Frente Amplio (FA) government still harbors hard-line 
Socialists, Communists, ex-guerrillas and powerful trade 
unionists. While in the minority, these groups are 
nevertheless quite vocal. Many ordinary Uruguayans seem 
content to leave large segments of their economy, including 
telecoms, power generation, oil imports and several banks, in 
state hands. The culture still values professions which are 
not particularly useful in the global economy. Still, an 
educated population, strong respect for the rule of law, and 
a good infrastructure make Uruguay one of the most attractive 
destinations in the region for foreign investment. 
 
¶3. (C) Uruguay punches above its weight in foreign affairs, 
but ideological divisions within the FA also explain its 
sometimes ambiguous foreign policy. For example, the 
anti-American Foreign Minister has been virtually absent from 
the substantive bilateral trade discussions with the U.S.  He 
has also been a non-player in Uruguay's number one foreign 
policy concern: the long-running, serious dispute with 
Argentina over pulp mills.  While the GOU does not agree with 
the U.S. on many international issues ranging from Kyoto to 
Cuba to the War in Iraq, both countries value freedom and 
independence.  Uruguay's vibrant democracy highlights the 
fallacy of populist regimes such as those in Venezuela, 
Bolivia, Cuba and Ecuador -- and to a lesser extent 
Argentina. The Economist magazine recently rated Uruguay as 
the only country in South America to enjoy "full democracy." 
The GOU seeks more U.S. trade and investment, but is 
vulnerable on energy supplies and is very frightened about 
its dispute with Argentina.  Uruguay also faces a long-term 
demographic problem: a low birth rate (except among the poor) 
is exacerbated by the brain drain of young people who are 
emigrating abroad in search of jobs. To the extent that we 
can, we need to re-assure the Uruguayans that we are their 
friends, increase our cultural exchanges and try to encourage 
them to cooperate more assertively on issues of regional 
stability and security -- including counter-terrorism, 
counter-narcotics and mil-to-mil cooperation.  End Summary 
and Introduction. 
 
----------------------------- 
Observations and Developments 
----------------------------- 
 
MONTEVIDEO 00000189  002 OF 005 
 
 
¶4. (C)  The last POTUS to visit Uruguay was President George 
¶H. W. Bush on December 4, 1990, when then-mayor Tabare 
Vazquez presented him the keys to Montevideo. Most Uruguayans 
will be delighted at the recognition and prestige the visit 
offers, but some observers might conclude that this visit is 
designed to counter Hugo Chavez' growing influence in the 
region. We understand that Hugo Chavez plans to travel to 
Buenos Aires on March 9 to address a rally there, and that he 
is bound to fire his usual diatribes at President Bush, in a 
replay reminiscent of Mar del Plata. Close Uruguayan contacts 
recommend that we do not take Chavez' bait or respond to his 
remarks. Brazil's President Lula visited President Vazquez on 
February 26 in an attempt to rekindle Uruguay's interest in 
Mercosur. On March 1, President Vazquez will deliver his 
second State of the Union address. 
 
---------- 
Background 
---------- 
¶5. (U) Uruguay is a small, stable democratic nation of 3.3 
million people, almost half of them residing in its capital, 
Montevideo.  Once known as "the Switzerland of South 
America," it has long been one of Latin America's wealthiest 
and most egalitarian countries, with per capita GDP exceeding 
$6,000 during periods of growth.  However, a four-year 
recession, which ended in 2003, cut this figure nearly in 
half and lowered Uruguay's historically excellent 
socio-economic indicators. Uruguay's economy has been 
recovering well over the past three years, with GDP growth of 
7 percent in 2006, in large part thanks to continued orthodox 
economic policies.  GDP per capita is back to $5,700, and the 
GOU recently repaid its entire IMF debt early. Some observers 
believe that Uruguay seeks to emulate Chile's economic model. 
 
 
¶6. (C) Many Uruguayans were traumatized by the 1973-85 period 
of military dictatorship, when security forces committed 
serious human rights violations in the campaign against 
insurgents and their sympathizers. Some people blame the U.S. 
for indirectly supporting the region's military governments 
during the Cold War. Slick propaganda and declassified U.S. 
documents from the period are frequently used by our 
detractors as "proof" of our involvement. The complex history 
of the dictatorship created heroes and villains for both the 
left and right.  Some of the persons involved -- including 
former Tupamaro guerrillas --  are still active in politics. 
The real and imagined lessons from the period continue to 
influence modern politics, including Uruguayans' perceptions 
of the U.S., especially where the Global war on Terrorism, 
Iraq and Afghanistan are concerned. 
 
------------------------------- 
Bilateral Relations: Key Issues 
------------------------------- 
¶7. (C) Expanding the trade relationship has been the 
foundation of our engagement with the GOU. On May 4, 
President Tabare Vazquez met with President Bush in the Oval 
Office where both leaders agreed to deepen our trade 
relationship. After this meeting, a series of visits by USTR 
officials examined the possibility of FTA negotiations, but 
the discussions did not immediately bear fruit. Instead, 
DUSTR John Veroneau traveled to Uruguay to sign a Trade and 
Investment Framework Agreement (TIFA) on January 25, 2007. 
Aside from trade, we also need to intensify bilateral 
cooperation in areas such as counter-terrorism, 
counter-narcotics, mil-to-mil cooperation, container 
security, bio-fuels, the upgrade of Uruguay's civil aviation 
authority to Category 1, alternative sources of energy 
(especially wind, bio-diesel and ethanol), phytosanitary 
issues, science and technology, English language teaching, 
and cultural exchanges. 
 
------------------- 
Uruguay's President 
------------------- 
¶8. (C) A practicing physician, President Vazquez is a 
cautious and prudent man who is sometimes shy in 
 
MONTEVIDEO 00000189  003 OF 005 
 
 
international settings. We believe he proposed meetings at 
the Anchorena ranch, in part because of this personal 
preference. He appears to style himself after Chile's 
ex-President Ricardo Lagos, and his mild leadership style 
sharply contrasts with the populism of Venezuela's Hugo 
Chavez, Argentina's Nestor Kirchner and Bolivia's Evo 
Morales. While he is sometimes hesitant to utter the words 
"Free Trade Agreement" in public, Vazquez and his 
administration have repeatedly stressed their eagerness to 
maximize trade with the U.S. In private, they have made it 
clear that their objective is to negotiate an FTA with the 
U.S. 
 
¶9. (C) Vazquez is a pragmatist, and what he most wants for 
Uruguay is jobs, investment and growth.  At home and abroad 
he has been caught between the competing demands of radicals 
and moderates, and he often faces a tremendous challenge to 
balance these opposing forces. His leadership style is 
predictable: he tends to stay above the fray and allow 
competing factions in the FA to debate an issue to exhaustion 
and then weighs in with a final decision. Vazquez' adroit and 
pragmatic leadership along with Uruguay's strong institutions 
and the basically conservative nature of its society 
prevented the radical tilt some observers predicted during 
the 2004 electoral campaign. The contradictions between the 
radicals and moderates will probably have to be resolved if 
the FA is to win the 2009 national elections, since in the 
last elections the FA won only 50.1 percent of the vote. 
 
----------------- 
Domestic Politics 
----------------- 
¶10. (C) On March 1, Vazquez and his coalition Frente Amplio 
(FA) Government will have been in power for two years and 
have generally received high marks from the public, according 
to polling data.  The moderates in his cabinet, especially 
Econ Minister Danilo Astori and Energy Minister Jorge Lepra, 
have generally enjoyed high approval and therefore exercise 
considerable sway in foreign policy and the economy.  The 
radicals within his FA coalition have challenged Vazquez much 
more than the two discredited opposition parties (Blancos and 
Colorados) who ruled the country during the past century.  In 
his efforts to be practical, Vazquez relies on a relatively 
small cadre of experienced officials to get things done.  A 
key ally in domestic politics has been Agriculture Minister 
and ex-Tupamaro guerrilla leader Jose Mujica who, despite his 
violent past, has often countered the extreme ideologues on 
the far-left.  Vazquez was also able to appease many of the 
far-left radicals when he addressed the human rights abuses 
committed during the "dirty war" period of the military 
dictatorship, uncovered the buried bones of disappeared 
persons, and prosecuted some of the perceived worst human 
rights abusers. 
 
-------------- 
Foreign Policy 
-------------- 
¶11. (C) The country's foreign relations have historically 
reflected the efforts of a small nation to advocate 
self-determination, respect for human rights and the rule of 
law, the pacific settlement of disputes, and economic 
cooperation. For example, Uruguay's robust participation in 
international peacekeeping operations can be partly explained 
by its dedication to and faith in international 
organizations. However, foreign policy under the Vazquez 
administration has been a formidable challenge, compounded by 
the stubbornly ideological, anti-US Foreign Minister Reinaldo 
Gargano. 
 
¶12. (C) By far, the GOU's most serious problem has been the 
severe bilateral dispute with Argentina over the construction 
of a Finnish-owned paper mill on a shared river -- not only 
because of soured bilateral relations with Uruguay's closest 
neighbor, but also because of the implications to foreign 
investment, an independent foreign policy, the power of 
radical NGOs and relations with Mercosur.  At $1.2 billion, 
the plant's construction cost represents 8% of Uruguay's GDP 
 
MONTEVIDEO 00000189  004 OF 005 
 
 
and its operation is expected to generate exports worth 2% of 
Uruguay's GDP.  It represents the largest Foreign Direct 
Investment in Uruguay's history.  Argentine government 
officials, some inhabitants of the Province of Entre-Rios 
across the river, and environmental activists claim the plant 
would harm fishing, farming, and tourist areas along the 
Uruguay-Argentina border. Argentina also claims that Uruguay 
violated the 1975 Uruguay River Treaty. Aspects of the case 
have gone before the International Court of Justice in The 
Hague and a Mercosur Tribunal, but Uruguay has sought little 
redress with the OAS. The U.S. voted to support the World 
Bank's IFC loan to the project. Protesters from Argentina 
have blocked bridges between Argentina and Uruguay off and on 
since December 2005 at great cost to Uruguay's trade and 
tourism revenues. The Uruguayans have felt bullied by 
Argentina's treatment and disappointed by Brazil's 
indifference. The paper mill dispute has indirectly 
contributed to closer ties with the U.S. 
 
¶13. (C) Uruguay has a heavy debt burden and no known 
hydrocarbon deposits, so that Venezuelan oil and money 
provide considerable temptation to boost the economy. 
Uruguay's state oil monopoly ANCAP recently signed a deal 
with Venezuela's state-owned PDVSA to help fund 24 percent of 
the cost of oil exploration in the Orinoco region of 
Venezuela in return for a proportional share of the resulting 
oil.  Details of the agreement remain murky, and observers 
are skeptical if ANCAP can fund its end of the bargain or if 
the endeavor will result in significant gains for Uruguay. As 
for PDVSA's pledge, a year and a half ago, to fund a $600 
million refurbishing of Uruguay's refinery to allow it to 
process Venezuela's heavy oil, it still remains to be 
implemented.  There is also much interest in natural gas from 
Bolivia, but delivery through the existing pipelines would 
necessarily have to pass through Argentina, and thus be 
subject to the vagaries of Argentine power needs. 
 
--------------------------------- 
The Economy, Trade and Investment 
--------------------------------- 
¶14. (U) Uruguay is a major agricultural producer. 
Agriculture and agro-industry account for 23% of GDP and over 
75% of total exports.  The major Uruguayan exports are meat 
(over $1 billion this year), long-grain rice, dairy products, 
wool and soybeans.  Forestry has surged over the last decade, 
due to favorable investment conditions and a favorable 
climate, where eucalyptus grows almost ten times as fast as 
in the U.S.  Uruguay does not import agricultural products 
but does import processed foodstuff.  Uruguay applies a 6.6% 
average tariff on agricultural goods and does not impose any 
kind of import quota.  There are no subsidies to agricultural 
production or exports. Given the importance of this sector 
for the economy, Uruguay has been active in bilateral and 
multilateral fora to push for trade liberalization, and U.S. 
agricultural subsidies are a hot topic.  The GOU's trade 
policy on agriculture has generally been in line with 
Mercosur's policies, and Uruguay is a member of the G-20 
group of countries calling for the elimination of 
agricultural subsidies.  The GOU threatened last year to file 
a case with the WTO on U.S. rice subsidies, but Embassy 
intervention allowed for the opening of a bilateral dialogue 
instead, in an attempt to resolve the issue.  Talks are 
ongoing, but the threat of an impending WTO case still 
remains on the horizon. 
 
-------------------------------------------- 
Comment: A Valuable Friend Worth Cultivating 
-------------------------------------------- 
¶15. (C) Uruguay is unlikely to become a strategic partner of 
the U.S., but it can be a valuable friend in a region that 
has significantly distanced itself from us in many instances. 
Over the last two years, we have been able to build a 
remarkable level of confidence with President Vazquez through 
enhanced trade initiatives and other confidence-building 
measures.  Now is the time to clearly define where we want 
our trade dialogue to lead us and if an FTA is our shared 
ultimate goal. Two ex-Presidents of Uruguay recently asked 
 
MONTEVIDEO 00000189  005 OF 005 
 
 
that I ensure that POTUS specifically engage Vazquez in 
discussing the path to an FTA.  Another one advised against 
doing so in public. In any case, now is also the time to 
engage Uruguay beyond trade to other areas of bilateral 
cooperation, especially regional stability and security. I 
believe that this can be done, but it will take time. 
Meanwhile, the POTUS visit serves as an important building 
block for deepening our overall engagement with Uruguay. End 
Comment. 
Baxter