VZCZCXRO2949
PP RUEHLMC
DE RUEHLP #2981/01 3131349
ZNY CCCCC ZZH
P 091349Z NOV 07
FM AMEMBASSY LA PAZ
TO RUEHC/SECSTATE WASHDC PRIORITY 5592
INFO RUEHAC/AMEMBASSY ASUNCION 7251
RUEHSW/AMEMBASSY BERN 0156
RUEHBO/AMEMBASSY BOGOTA 4625
RUEHBR/AMEMBASSY BRASILIA 8527
RUEHBU/AMEMBASSY BUENOS AIRES 5751
RUEHCV/AMEMBASSY CARACAS 2977
RUEHCP/AMEMBASSY COPENHAGEN 0213
RUEHPE/AMEMBASSY LIMA 3174
RUEHLO/AMEMBASSY LONDON 0122
RUEHMD/AMEMBASSY MADRID 3654
RUEHMN/AMEMBASSY MONTEVIDEO 4971
RUEHNY/AMEMBASSY OSLO 0142
RUEHOT/AMEMBASSY OTTAWA 0496
RUEHQT/AMEMBASSY QUITO 5612
RUEHSG/AMEMBASSY SANTIAGO 0216
RUEHRI/AMCONSUL RIO DE JANEIRO 0962
RUEHSO/AMCONSUL SAO PAULO 2156
RUEHUB/USINT HAVANA 0658
RUEHBS/USEU BRUSSELS
RHMFISS/HQ USSOUTHCOM MIAMI FL
RUMIAAA/USCINCSO MIAMI FL
RUEHLMC/MILLENNIUM CHALLENGE CORP
RHEBAAA/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHEHNSC/NSC WASHINGTON DC

C O N F I D E N T I A L SECTION 01 OF 03 LA PAZ 002981 
 
SIPDIS 
 
SIPDIS 
 
PASS TO EEB/ESC/IEC/EPC GLENN GRIFFIN 
 
E.O. 12958: DECL: 03/07/2017 
TAGS: ECON PGOV EPET EMIN EINV EB BL
SUBJECT: RESOURCE NATIONALISM IN BOLIVIA 
 
REF: SECSTATE 150999 
 
Classified By: Ecopol Chief Mike Hammer for reasons 1.4 (b) and (d). 
 
------- 
Summary 
------- 
 
¶1.  (C)  The Morales administration believes that the state 
should be more involved in all aspects of the Bolivian 
economy.  In that context, resource nationalism does not 
stand alone; control of natural resources just happens to be 
the most valuable for the administration both financially and 
symbolically.  The "nationalization' of Bolivia's gas remains 
a very popular move by the government and is seen by the 
majority of Bolivians as netting a large cash windfall for 
the nation.  At present, it is unclear if the reality of 
falling production levels and lack of investments will push 
the government to establish a more stable judicial and 
economic environment or will only motivate them to take even 
more radical steps toward greater state control over the 
nation's resource wealth. End summary. 
 
--------------------- 
Gas "Nationalization" 
--------------------- 
 
¶2.  (C)  The Morales administration's May 2006 
nationalization decree raised tax rates on production and 
called for the state petroleum company (YPFB) to gain control 
over "the entire hydrocarbons production chain" through 
majority ownership in key companies. The result has been 
additional revenue for the government (although most of the 
trumpeted windfall is the result of price increases) and a 
climate of judicial and regulatory insecurity.  The most 
glaring results of "nationalization" within the industry 
itself are, perhaps, the lack of investment that followed, 
the inability of Bolivia to meet its international contracts, 
and an ominous (thought slight for now) drop in production. 
(Note:  Currently Bolivia is failing to deliver the minimum 
levels of gas on three out of its four major international 
contracts. End note.)  The government now clearly realizes 
that it needs to attract additional investments, but as one 
industry expert put it "Bolivia is now akin to Lorena Bobbitt 
and the first thing we need to do is drop the knife!". 
 
------------------ 
Winners and Losers 
------------------ 
 
¶3.  (C)  The main beneficiary of "nationalization" was the 
Morales administration; the action was, and continues to be, 
very popular with the majority of Bolivians.  After "500 
years of exploitation" there is a thirst for control over 
national resources and even in the face of looming gas 
shortages and distribution problems with diesel and gasoline, 
the "nationalization" itself is still popular. 
 
¶4.  (C)  The state has also benefited in the sense of 
increasing its role within the economy.  However, this 
greater power and responsibility was not accompanied by any 
increase in institutional capacity.  The attempt to 
centralize the entire production chain within the state has 
resulted in judicial uncertainty, frustration with government 
 
LA PAZ 00002981  002 OF 003 
 
 
partners, and a lack of significant investments in all areas 
of the production chain. For example, despite a legal mandate 
to gain control over the gas transport company, Transredes, 
the state needs to acquire an additional 16% stake.  Because 
of this, Transredes is stuck in legal limbo, unable to raise 
additional capital to carry out needed expansion projects. 
To whom would a bank be lending the money, the state or 
Transredes?  Moreover, there is universal agreement in the 
industry that YPFB lacks the technical capacity to do the job 
assigned to it.  Company executives complain that it is fine 
for the national company to assume a greater role, but they 
need someone competent to work with.  The Norwegian Consul in 
La Paz, who is initiating a cooperation program to improve 
YPFB management, admitted that "the challenges are even 
bigger than we imagined."  (Note:  Encouraging Bolivia to 
work with third party governments like Norway and/or Spain 
could be one avenue for the USG to take to help curb radical 
resource nationalism in Bolivia. End note.) 
 
----------------- 
The Mining Sector 
----------------- 
 
¶5.  (C)  The Morales administration's February 9, 2007 
nationalization of Glencore's Vinto tin smelter has yet to be 
followed by other forced nationalizations in the mining 
industry, although the state mining company (COMIBOL) has 
also "regained control" of the formerly cooperativist Huanuni 
mine.  Vinto's nationalization may have been a special case 
(Note: Some observers suggest that Vinto's past ties to Evo's 
nemesis Gonzalo "Goni" Sanchez de Lozada prompted the 
smelter's nationalization. End note.)  Yet, despite record 
prices, uncertainty in the mining sector has led to falling 
production levels. 
 
¶6.  (C)  Evo's May 1 2007 declaration that Bolivia's national 
territory constituted a "state mineral reserve" has had 
little real impact on international companies yet, since 
subsequent decrees weakened the declaration and current 
mining concessions are not affected.  U.S. mining executives 
inform us, however, that this decision has decreased their 
interest in exploration and investment in Bolivia, since 
increased national control over mining concessions could make 
it difficult for companies to develop new projects in Bolivia. 
 
¶7.  (C)  Of more concern to mining companies at the moment is 
the pending mining law (or mining code) which could include 
the requirement that all mining operations in Bolivia sign 
fifty-fifty joint ventures with the state (cooperativist 
mines may be exempted for political reasons.)  Reportedly 
companies will have only one year from the promulgation of 
this law to sign joint venture contracts, and some observers 
suggest that this will result in "de facto" nationalizations 
if companies cannot make a profit giving up fifty percent 
control to the state (or if they do not want to accept the 
inefficiencies and potential liabilities of working closely 
with Bolivia's overstretched and understaffed state mining 
company.) 
 
------------ 
What's Next? 
------------ 
 
¶8.  (C)  Although our contacts in the mining ministry and 
 
LA PAZ 00002981  003 OF 003 
 
 
COMIBOL insist that fifty-fifty joint partnerships are all 
that the state wants at this time, it is important to note 
that Evo's most popular action as president has been his 
"nationalization" of the hydrocarbons sector.  As domestic 
issues such as rising inflation put pressure on his 
administration and his popularity, Evo may be tempted to 
initiate a propaganda power-play by sending troops onto mine 
sites the way he did with gas fields in May 2006. 
 
¶9.  (C)  If Evo decides to nationalize parts of the mining 
sector, we expect to see graduated, "differentiated" 
nationalization.  For political reasons, Evo is unlikely to 
nationalize deposits currently worked by cooperativist miners 
(since they are likely to protest in the streets of La Paz 
with dynamite.)  Former Goni-properties (now owned by Swiss 
company Glencore) may prove tempting.  Of the three large 
U.S. operations in Bolivia, Newmont's Inti Raymi mines are 
probably safest from nationalization, as they are low-grade, 
complex ore and are nearing the end of their mine life. 
Coeur D'Alene's San Bartolome mine is counting on close 
relations with cooperativist groups to deter government 
interest in nationalization.  Apex's San Cristobal mine is 
most vulnerable, having just started production and facing 
financial difficulties due to proposed tax increases and 
potential changes to the import tax recovery system.  San 
Cristobal executives assure us that they do not anticipate a 
forced nationalization.  Other industry observers are less 
sanguine, however, and the high level of uncertainty in the 
sector as a whole is serving to limit exploration and 
investment interest in Bolivia. 
 
------- 
Comment 
------- 
 
¶10.  (C)  It is difficult to predict where the lack of 
investment and falling production levels across the natural 
resource industries will push the Morales Administration. 
They may see value in providing a clearer judicial operating 
environment and be rewarded with additional investment 
(recent Petrobras announcements of interest in further 
investments may signal this is the case) or more radical 
elements in the government may well blame the private sector 
for economic failings and seek outright nationalization (the 
October 2007 withdraw from the World Bank's International 
Center for the Settlement of Investment Disputes may signal 
this is the case).  There is no love of the private sector in 
this administration and a struggle between their leftist 
ideology and the need to attract more investment is clearly 
taking place.  To date, ideology has had the upper hand and 
while the long-term prospects for the economy have suffered, 
Evo's popularity has not.  It is also worth noting that 
Morales may feel that countries such as Venezuela and Iran 
offer him a viable alternative to private sector financing. 
 
 
GOLDBERG