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RHMFISS/HQ USSOUTHCOM MIAMI FL

UNCLAS SANTIAGO 000415 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: PGOV ECON PREL ENRG CI
SUBJECT:  SCENESETTER FOR CAPSTONE COURSE 
 
Summary 
------- 
 
¶1. (SBU) The Embassy looks forward to your visit to Santiago, which 
comes as Chile's presidential campaign begins to heat up.  President 
Michelle Bachelet -- who is currently enjoying the highest approval 
ratings of her presidency -- is constitutionally precluded from 
seeking a second term.  The election, scheduled for December 2009, 
will likely be a tight race between former President Eduardo Frei 
and businessman and former Senator Sebastian Pinera.  Economically, 
Chile is feeling the effects of the global financial crisis, 
although the country is entering this difficult period with strong 
economic fundamentals and sound policies.  Chile faces an energy 
crisis which has slowed economic growth but spurred significant 
U.S.-Chile collaboration on energy policies.  End Summary. 
 
Concertacion: Still in Power after 18 years 
------------------------------------------- 
 
¶2. (U) Chile's center-left coalition government, the "Concertacion," 
has been in power continuously since the end of Pinochet's military 
dictatorship in 1990.  The election of current President Michelle 
Bachelet in January 2006 was heralded as historic.  Bachelet is 
Chile's first female president, a single mother and agnostic in a 
country with strong, conservative Catholic roots, and a survivor of 
torture during the Pinochet regime.  Bachelet's tenure has included 
some difficult episodes including student strikes in June 2006 and 
problems associated with the 2007 initiation of a new public 
transportation system (Transantiago) in the capital.  However, the 
President -- whose charisma and compelling history have won her 
widespread personal affection -- has won high marks for her handling 
of the financial crisis and international affairs.  An April 2009 
poll gives Bachelet an approval rating of 62 percent -- her best 
performance yet. 
 
Chile on the International Stage 
-------------------------------- 
 
¶3. (SBU) Despite some early domestic political missteps, Bachelet 
performs well on the international stage and has contributed to 
Chile's rising international stature.  In September 2008, she 
convened a summit of UNASUR, the nascent South American political 
union, which helped to diffuse, at least temporarily, a crisis in 
Bolivia and prevented the meeting from degenerating into an 
anti-American forum.  More recently, she hosted left-leaning world 
leaders, including Vice President Biden, for the Progressive 
Governance Leaders Summit in Vina del Mar in March.  Chile serves as 
UNASUR's president pro tempore, has a large group of Latin American 
peacekeepers in Haiti, and is generally active, if behind the 
scenes, in regional multilateral fora.  Chile and the U.S. see 
eye-to-eye on many regional and international issues, but Bachelet 
has made it clear that Chile does not blindly follow where the U.S. 
leads.  In comments during the 2008 UN General Assembly, Bachelet 
said that the U.S. and Chile were "political friends" and criticized 
the U.S. for its role in precipitating the financial crisis.  She 
has repeated the latter charge in other public fora as well. 
 
¶4. (SBU) There are some tensions between Chile and its neighbors 
Peru and Bolivia over territorial disputes stemming from the 19th 
century War of the Pacific.  In January 2008, Peru submitted a case 
to the International Court of Justice in The Hague asking for a 
decision on a new maritime border with Chile.  For its part, Bolivia 
would like to regain direct access to the sea -- a request Fidel 
Castro publically backed during Bachelet's February 2008 trip to 
Cuba.  Nonetheless, all parties are committed to a peaceful 
resolution of these issues and Chile has said that it is committed 
to strengthening relations with both countries.  Relations between 
Chile and Venezuela are often frosty, with Chileans objecting to 
Chavez's grandstanding and arrogance. 
 
All Eyes on the Presidential Race 
--------------------------------- 
 
¶5. (U) Presidential elections are scheduled for December 2009. 
President Bachelet is constitutionally precluded from seeking an 
immediate second term.  Sebastian Pinera of the opposition National 
Renewal party will represent the Alianza Coalition.  Many analysts 
cited "Concertacion fatigue" -- exacerbated by four cabinet 
reshuffles, an energy crisis, the whiff of corruption in several 
ministries, and increasing concerns over the disenchanted indigenous 
Mapuche minority -- as the principle reasons behind Pinera's early 
lead in the polls.  However, the race has tightened significantly 
since Eduardo Frei, former Chilean President (1994-2000) and current 
Senator, emerged as the Concertacion candidate.  This is thought to 
be due in part to increased levels of confidence in the current 
Concertacion administration's handling of the economic crisis. 
 
General Economic Backdrop 
------------------------- 
 
¶6. (U) Chile's free market economy, development model, and strong 
institutions have set an example for other countries in the region. 
Although the global financial crisis has impacted the country, solid 
economic fundamentals are helping it weather the worst of the 
turmoil. 
 
¶7. (U) The economic slow-down, a decline in copper prices and an 
accompanying rise in unemployment top the list of Chilean economic 
concerns.  Chile's GDP grew by a less than the expected 3.2 percent 
in 2008.  The economy may grow at a rate of less than 1 percent in 
2009, according to some forecasts.  Copper accounted for more than 
59 percent of Chile's exports in 2008, and its price is currently 
around 50 percent off of highs seen in mid 2008.  The national 
unemployment rate is currently 8.5 percent, although by some 
measures it has already climbed into double digits in several 
regions, including Santiago.  As economies around the world 
contract, demand for Chilean exports is decreasing.  The global 
crisis has also affected liquidity in the financial sector, making 
it harder for some companies to maintain access to capital. 
 
¶8. (U) Despite these concerns, Chile has maintained a budget 
surplus, relatively low debt, and more than USD 21 billion in 
offshore sovereign wealth funds, mostly from record copper prices in 
previous years.  Poverty dropped from 40 percent of the national 
population in 1990 to 14 percent in recent years.  In January 2009, 
President Bachelet announced a USD 4 billion plus (2.8 percent of 
GDP) stimulus plan to help boost economic growth and maintain 
employment.  According to a study compiled by the Treasury 
Department, Chile's plan is the fifth largest in the world based on 
the size of the investment relative to GDP.  In March, the Chilean 
government announced a Pro-Credit Initiative to further stimulate 
the domestic economy by helping generate USD 3.6 billion in private 
loans. 
 
Chile:  A Leader in Trade 
------------------------- 
 
¶9. (U) Chile has been a global leader in trade liberalization for 
the past 20 years and can boast trade agreements with 58 countries. 
New FTA agreements with Peru and Australia came into effect in March 
2009, and Chile is currently negotiating FTA's with Russia, Malaysia 
and Turkey.  Chile is also a member of the P-4 (Trans-Pacific 
Partnership Agreement). 
 
¶10. (U) The U.S. is Chile's largest trading partner, and Chile is 
our fifth largest trading partner in Latin America.  Overall 
bilateral trade has grown by more than 200 percent since the 
U.S.-Chile FTA was signed in 2004, reaching USD 20 billion in 2008. 
The U.S.-Chile FTA continues to benefit both nations.  Chile is in 
the process of allowing U.S. beef to enter its market.  However, 
sticking points remain.  Chile is on the Special 301 Priority Watch 
list for its poor performance in protecting intellectual property, 
including copyrights, trademarks, pharmaceutical patents, and 
proprietary clinical test data for pharmaceuticals and agricultural 
chemicals.  In October 2008, the Chilean Congress took a positive 
step by passing the Patent Cooperation Treaty.  However, Chile still 
has a long way to go in improving its IPR protections, including 
approving a draft copyright law (now before Congress) and 
strengthening enforcement mechanisms to fight trademark 
counterfeiting and copyright piracy. 
 
The U.S. and Chile:  Partners Across the Board 
--------------------------------------------- - 
 
¶11. (U) The U.S. and Chile continue to partner on a broad set of 
initiatives, including education, scientific research, and 
military-military cooperation.  In May 2008, President Bachelet 
announced government plans to significantly increase scholarships 
for Chileans to study abroad.  The new GOC scholarship program is 
currently being launched with plans to send over 2.500 
students/scholars overseas in 2009.  Program leaders estimate that 
approximately one-third may choose to study in the U.S.  These 
exchanges build on the success of the U.S.-Chile Equal Opportunities 
Scholarship Program, inaugurated in 2007, to sponsor English and 
academic studies for Chilean PhD students who come from 
disadvantaged and rural areas that have not traditionally had access 
to English language schools or study abroad opportunities. 
 
¶12. (U) The Chile-California Partnership for the 21st Century is an 
umbrella agreement signed on June 12, 2008, by President Bachelet 
and Governor Arnold Schwarzenegger.  It is a revival of a pair of 
previously existing cooperation projects from the 1960's:  The 
Chile-California Program (1963-1970) and the University of 
Chile-University of California Cooperation Program (1965-1970).  In 
signing the agreement, Chile and California have agreed to 
coordinate efforts and promote collaboration through cooperative 
actions and initiatives in sectors including education, the 
environment, technology, agriculture and energy.  During a 2008 
meeting with President Bachelet in California, Governor 
Schwarzenegger signaled his interest in visiting Chile -- a move 
that would delight Chileans. 
 
¶13. (SBU) The U.S. and Chile also enjoy a strong military-military 
relationship.  The capability and professionalism of the Chilean 
Armed Forces, along with our continuing, positive bilateral 
engagement, make Chile an ideal training partner, especially when 
compared with the other militaries in the region.  There are regular 
exchanges between the U.S. and Chilean military to include 
operational forces, academy students, technical experts, as well as 
reciprocal visits between military leaders from both countries. 
Chile actively participates in joint exercises and is pursuing a 
military modernization program that will rely heavily on U.S. 
equipment, thus increasing interoperability.  Already Chile boasts 
the largest Foreign Military Sales Program in SOUTHCOM, and more 
purchases are pending.  A State Partnership Program, which links a 
U.S. State National Guard with the Chilean Armed Forces, was 
inaugurated on April 29 with the state of Texas by the National 
Guard Bureau and the SOUTHCOM Commander.  This program will further 
strengthen military ties and open new avenues for military to 
military cooperation. 
 
Facing a Serious Energy Crisis 
------------------------------ 
 
¶14. (SBU) Chile is facing a series of energy and environmental 
policy challenges, including how to supply the projected 12,000 MW 
it needs over the next ten years.  Recent droughts, predicted 
changes to hydrological cycles as a result of climate change, and 
reduced natural gas supply from Argentina have forced Chile to 
increase dependence on diesel and coal, and look to liquid natural 
gas to supply its energy demand.  Uncertainty about securing energy 
supplies is a top concern of Chile's government because of its 
potential impact on the country's economic growth.  Chile's 
electricity matrix is dominated by hydropower and thermal plants, 
with coal's usage likely to increase over the next ten years.  The 
country has very little domestic hydrocarbons and is highly 
dependent on imports.  In 2007 Argentina cut Chile's gas supply to 
barely meeting residential demand, and drought reduced hydroelectric 
to the point where Chile launched an aggressive energy conservation 
campaign to stave off rolling blackouts. 
 
¶15. (SBU) Continuing supply disruptions have led Chile to pursue 
alternatives for importing natural gas and to acknowledge the need 
to reduce energy consumption, increase energy efficiency and explore 
the full range of energy sources, including renewables and nuclear. 
The situation is complicated by the fact that although Chile has a 
Minister of Energy, Marcelo Tokman, responsibility for energy policy 
is not consolidated under a single ministry, but distributed among a 
number of government agencies.  The law creating a Minister of 
Energy, which would be responsible for long-term energy policy, will 
likely be passed in mid-2009.  Moreover, although President Bachelet 
promised not to introduce nuclear power during her administration, a 
national debate over nuclear generated power is underway.  The 
National Energy Commission has commissioned several studies to 
explore the issues, and both major presidential candidates have 
indicated a willingness to explore energy options. 
 
¶16. (SBU) Chile is eager to expend cooperation with the U.S. on a 
range of energy and environment issues, particularly on renewables 
and energy efficiency, and to exchange information on policies, 
technology and commercially viable options for improving its energy 
situation.  Chile is working with several U.S. agencies to increase 
bilateral cooperation in three target projects: launching its New 
Renewable Energy Center; an international bid solicitation for a 
pilot solar plant in northern Chile; and energy policy formation, 
including energy efficiency policies. 
URBAN