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Development: The Costa Rican government fixed salary rises for public sector workers at 4.5% on 4 August.

Significance: This is one percentage point higher than the government's initial offer, but below the 6.27%-10% increases asked for by the unions. It is also well below inflation, which the government's statistics agency INEC forecasts to be 11% for 2004.

The minister of work, Ovidio Pacheco will submit the decree to President Abel Pacheco on 5 August. The salary rise will affect around 170,000 public-sector workers. President Pacheco apologised for not being able to offer workers more, 'We ask the unions to accept this increase with calm and patience, and that they understand that the country is experiencing difficult moments.' The salary rise will cost the government an extra US$5.6m a year.

The unions, meanwhile, insist the increase is not enough because it does not even match inflation. INEC reports that inflation has reached 7.64% for the first seven months of 2004. Xiomara Rojas, a union leader, said that they are considering launching a national strike. He added that one of the things that most irked union leaders was that the decision on the salary rise was made by decree and not through negotiation.

Development: The ministers of transport and foreign trade, Javier Chávez and Alberto Trejos, resigned from the government of President Abel Pacheco on 8 September.

Significance: Chávez and Trejos's resignations bring to six the number of ministers who have quit since 31 August. Pacheco's economic team has all but disappeared; along with Trejos went Anabelle González, the country's chief free-trade negotiator. It is also rumoured that Francisco de Paula, the president of the central bank, is also about to tender his resignation. Although still personally popular, the president can be in no doubt about the scale of the crisis, which will provide a real test for Costa Rica's historically stable political climate.

Chávez 's ministry oversees Riteve S y C, the firm that has a monopoly concession on vehicle safety inspections. This was one of the major targets of the truckers of the Movimento Civico Nacional (MCN) who blocked the country's roads for a number of days until a deal was reached on 31 August. Members of the MCN are meeting with Pacheco on 9 September; they are planning another strike for 14 September in order to continue their criticism of Riteve and to repudiate corruption among the country's politicians.

Ricardo Toledo, the minister of the presidency who resigned this week, was responsible, along with Chávez , for agreeing to the half percentage point salary hike which got the truckers off the blockades. Toledo claims he was forced out by the rest of the cabinet who disagreed with his decision to raise the truckers' salaries. Since leaving office he has claimed that certain people are 'blackmailing' the president, although he refused to give names.

Development: The Brazilian authorities rebuffed an article published by the British newspaper The Independent on 12 October portraying Rio de Janeiro as 'a city of cocaine and butchery'.

Significance: According to the article, the population of Rio de Janeiro lives 'in panic' because the police and the state are 'powerless and cannot guarantee public security'. The Independent says that people who live in the city's favelas have no choice but to 'stay on the side of drug traffickers' and that for the millions of kids involved in the drug trade 'Rio de Janeiro is a city with no hope and no future'. The British newspaper concluded its article by comparing armed conflicts between rival gangs in Rio de Janeiro to the wars in Chechnya and Sudan and points out that between 1980 and 2000 there were 600,000 deaths caused by guns in Brazil, more than the 350,000 killed during the 27-year civil war in Angola.

The newly re-elected mayor of Rio de Janeiro, César Maia, said the article was 'loaded with prejudices' and that the media was 'once more trying to trash Rio's image'. The anthropologist Alba Zalbar, a lecturer on urban violence in the University of Rio de Janeiro called the article another example of 'Anglo-Saxon prejudice against Latin peoples' saying there could be no comparison between the 'localised conflicts in Brazilian towns with ethnic, religious or political wars in other countries'. Zalbar, however, recognises the police lack proper training to deal with the drug trade and that corruption was endemic in Brazil.

The president of Rio de Janeiro's tourism agency (Riotur), Rubem Medina, said the city would make a formal complaint over the article. Medina said tourism brings an annual income of US$4.3bn to the country and that Brazil would lose US$430m 'if only 10% of tourists let themselves be influenced' by the article. In an official statement, the Public Security Secretary of Rio de Janeiro state said 'the state's policy is to fight the traffic of drugs' and that Rio de Janeiro 'is in seventh place in the Brazilian ranking of homicides'.

Development: South Korea's president, Roh Moo-hyun, extended a credit worth US$30m to Argentina when he met President Néstor Kirchner on 15 November.

Significance: This is the first fresh loan to Argentina since it defaulted on its commercial debt at the end of 2001. South Korea's Eximbank is extending the loan, and will be used exclusively to pay for South Korean goods and services. This is not the first time South Korea has signed such a deal with Argentina; Eximbank had a similar line to Argentina worth US$10m between 1996 and 2002.

During his visit to Buenos Aires, Roh signed four further agreements aimed at enhancing cooperation. Moreover, President Néstor Kirchner called for the creation of joint South Korean and Argentine firms, and he stressed the need for Argentina to diversify its exports to South Korea, which is already Argentina's second largest market in Asia, away from commodities. In order to achieve this, President Kirchner called for 'direct investment in the industrial and high-tech sectors'.

The two leaders agreed that South Korea should begin talks with Mercosur over broadening economic ties, with the possibility of signing a free trade agreement.

Argentines view Roh's visit as the appetiser ahead of the main course: the visit of China's president, Hu Jintao, who will arrive in Buenos Aires later today. Speculation has been rife over what opportunities Hu will bring to Argentina. Argentines are hoping for more than a US$30m credit line.

Development: Colombia's President Alvaro Uribe announced on 17 December that the Fuerzas Armadas Revolucionarias de Colombia (Farc) has until 30 December to release 63 of its hostages, or the government will extradite 'Simón Trinidad' to the US.

Significance: Uribe is playing his trump card in order to secure a prisoner swap. His government has tried the soft approach to instigating an exchange when it pardoned 23 Farc cadres on 2 December, but the rebels failed to free any prisoners in response to the calculated goodwill gesture.

The president has therefore chosen to take a harder line, threatening to send 'Trinidad', the most senior member of the Farc captured to date, to the US to face trial on drugs charges. The extradition of 'Trinidad', whose real name is Juvenal Ricardo Palmera, will be revoked only if the 63 hostages - 59 Colombians, three US citizens and a German - are freed by the end of the year.

This is the second time in recent days that Uribe has used the threat of extradition to make demands. Last week he told the paramilitary chief Salvatore Mancuso that he would face being sent to the US if the peace process did not progress as planned.

Development: The former economy minister, Carlos Boloña, was found guilty on 28 January of helping the disgraced former intelligence chief, Vladimiro Montesinos, to flee the country in 2000.

Significance: Boloña's conviction shows that the judiciary is slowly resolving the mess left in the wake of the collapse of the government of former president Alberto Fujimori. The former ministers of defence, José Villanueva, and industry minister, Guido Pennano, were also found guilty last week on charges of bribery. Many sentences against former ministers who served under Fujimori from 1997 to 2000, and several judges who held their posts in the same period, are pending in 2005.

Boloña was sentenced to a three-year suspended prison term and fined NS100,000 (US$30,000) for assisting Montesinos to flee while under indictment in September 2000.

Development: President Néstor Kirchner was presented with a report on 2 March into a drug-smuggling scandal, which prompted him last month to purge the air force high command for an alleged "cover up" and to replace the airport security agency, Policí­a Aeronáutica Nacional (PAN) with a new non-military outfit. Kirchner ordered Eduardo Schiaffino, the man he appointed as the new commander of the air force, to draw up the report on 24 February.

Significance: The national daily, Clarí­n, which claims in today's edition to have seen a copy of the report, says that the report backs up the government line that the air force was guilty of negligence and failing to pass on information to the defence minister, José Pampuro, about the 60kg of cocaine that was smuggled into Spain on board an Argentine carrier, Southern Winds, in September 2004. The opposition is clamouring for action. It says that the transport minister, Ricardo Jaime, who has links to SW, should be dismissed. It also wants a thorough investigation into SW and its links with government officials.

The report in Kirchner's hands, Clarí­n says, contains testimony from the former director of the PAN, Horacio Giaigischia, who says that he carried out an internal investigation into SW in November and met the head of the air force, Brigadier Carlos Rohde, three times to discuss his findings. Giaigischia claims that Rohde told him each time that he would look into the case. Interestingly, the former head of Argentina's Ezeiza airport, Commodore Alberto Beltrame, who was dismissed some time after the drug-smuggling episode, told a judge on 2 March that any officer investigating SW before the drug discovery was removed from the force. Beltrame's son, Walter, was arrested in connection with the drug smuggling.

(For a more detailed report on the SW drug-smuggling scandal and its political repercussions, see our latest edition of the Latin American Weekly Report).

Development: On 7 April the former president, Eduardo Duhalde, ruled out running for national senator in the province of Buenos Aires in the legislative elections on 23 October.

Significance: Some of Duhalde's staunchest supporters have been suggesting that their man might stand for election after government sources revealed earlier this week that the first lady, Cristina Fernández de Kirchner, will run for senator for the ruling Partido Justicialista in Buenos Aires. Duhalde, who is heading the Argentine delegation to the Vatican for the pope's funeral along with former president Carlos Menem, said that he could see there being two lists of candidates for the PJ in Buenos Aires. He wants his wife, Chiche, to run.

The government announced on 7 April that primary elections will be held on 7 August. Parties will choose candidates for the 130 seats up for grabs in the 255-seat lower chamber and the 24 seats in the 71-seat senate. Parties with more than one list of candidates will have to go to the primaries.

Development: President Carlos Mesa announced on 13 May that he has suspended a national convention aimed at tackling a range of Bolivia's problems.

Significance: The convention, known as the Encuentro por la Unidad de Bolivia, was due to be held in Sucre on 16 May. Mesa called the meeting on 11 May after he refused to approve the new hydrocarbons law passed by congress. The convention was intended to address three interlinked problems: the reform of the hydrocarbons law, devolution, and constitutional reform.

Mesa was forced to suspend the convention indefinitely after members of congress wanted nothing to do with it. Members of the judiciary also spurned the meeting. The president thanked the “patriotic attitude" of those who did accept the invitation to attend: mayors from around the country, the Church and human-rights groups as well as certain businessmen and civic organisations.

On announcing the suspension of the convention, Mesa called on Bolivians “to keep calm and continue supporting peace and cooperation". His message was paid little heed by the Central Obrera Boliviana (COB), the umbrella union organisation which will today (16 May) launch a nationwide strike to demand the nationalisation of Bolivia's oil and gas fields.

The centrepiece of the protest will be a weeklong march to La Paz across the Altiplano at the end of which the COB is threatening to “shut parliament". The strike is also expected to lead to roadblocks around the country.

Development: On 17 June the house of representatives approved the awarding of political status to members of the Autodefensas Unidas de Colombia (AUC) who disarm.

Significance: The paramilitaries' political status is one of the most controversial elements of the legal framework for the AUC's peace process which congress is currently debating. If, as expected, the senate also decides in favour of granting the paramilitaries political status, it is very unlikely members of the AUC will face extradition to the US, even in connection with crimes unrelated to their paramilitary activities such as drug trafficking.

The government hopes that the legal framework, known as the justice and peace legislation, will be approved today (20 June). This is the last day of the current legislative session, and the government is reluctant to have to call extraordinary sessions to approve the bill's second reading after the first reading was approved in April. On that occasion, legislators only supported the measure once the government had removed political status from the legislation.

Unlike in April, when the AUC threatened to pull out of the peace process if the government's version of the legal framework was approved, the paramilitaries are being cooperative. The AUC demobilised one bloc last week and another, the 400-strong Bloque Tayrona, said on 18 June that it too is willing to hand over its weapons.

The paramilitaries' good faith was less visible, however, when the government's peace commissioner, Luis Carlos Restrepo, admitted on 17 June that the AUC has been responsible for 492 homicides since they announced a ceasefire just under two years ago.

Development: On 21 July police arrested 47 piqueteros who had seized control of a Repsol YPF petrol plant in the Patagonian province of Santa Cruz.

Significance: The piqueteros have been blocking provincial roads leading to Cañadón Seco, where the plant is located, for the last week to demand jobs from the oil industry. The interior minister of Santa Cruz, Roque Ocampo, said that police had confiscated 60 Molotov cocktails, fuel-filled bottles and marine flares from the protesters. Repsol YPF and the provincial government promised to create 400 jobs in public works and environmental cleaning and up to 3,000 more in the near future.

Santa Cruz is the province in which President Néstor Kirchner rose to prominence. Kirchner, a former governor of Santa Cruz, is too engrossed in his personal battle with former president Eduardo Duhalde in the province of Buenos Aires to pay much attention to his old stomping ground. “Let's cut short the hypocrisy of 'I'm retiring, I'm not retiring'," he said yesterday in reference to Duhalde. He also accused the previous (Duhalde) government of failing to tackle Argentina's problems. “They handed me an office, a key and an Argentina in flames," he said.

Development: On 23 August 40 of the 43 legislators belonging to the Partido Liberal Constitucionalista (PLC) issued a statement calling for the release of the party's leader, Arnoldo Alemán, in order to end the institutional crisis in Nicaragua.

Significance: The PLC's adamantine insistence that Alemán be released is nothing new but the party has taken to issuing threats since Alemán was briefly released on 25 July only to be put under house arrest again (with stricter conditions) three days later. The statement says that “the stability of the country" depends upon the release of Alemán, who is currently serving a 20-year sentence for corruption. 

The PLC supported a parliamentary committee which recommended on 9 August that President Enrique Bolaños be removed from power for campaign irregularities along with three of his ministers: Julio Vega (Interior), Arturo Harding (Environment) and Miguel Angel Garcí­a (Education). The PLC is also refusing to cooperate with the executive to pass the Central American free trade agreement (DR-Cafta). 

The national assembly will consider the report of the parliamentary committee and Cafta when it returns from its recess on 5 September.

Development: The constitutional tribunal ruled unanimously on 27 September that an ordinance passed by the regional governments of Cusco and Huánuco authorising the free cultivation of coca was unconstitutional. The government had filed two constitutionality suits against the regional ordinances.

Significance: The good news for the government of President Alejandro Toledo, which wavered on the legality of the ordinance before deciding to oppose it for fear that it would set a dangerous precedent, was tempered by two warnings from different sources: the constitutional tribunal also called on Toledo's government to re-evaluate Peru's counter-drug policy, and Cusco's regional president Carlos Cuaresma warned that the government should expect serious protests from disillusioned coca growers.

The six justices on the tribunal savaged the government's coca policy on a number of fronts. The president of the constitutional tribunal, Javier Alva Orlandini, said that the anti-drug agency, Devida, had failed to implement a viable alternative development programme for coca growers. He said it was a big mistake not to include the coca growers more in discussions over alternative crops and the fight against drug-trafficking. He also questioned the government's coca-eradication policy, saying that it was not entirely constitutional that the government focus almost exclusively on this and not establish stricter regulation of the chemicals used to manufacture cocaine, such as kerosene, sulphuric acid and sodium carbonate.

Orlandini criticised the weak management of the state coca organisation Enaco, which he said was not buying enough coca for traditional uses. Only 8,000 of Peru's 50,000 coca growers sell to Enaco. It buys 3,000 tonnes out of an estimated 110,000 tonnes of coca (the bulk of this destined for the cocaine market) produced a year. Orlandini also urged Congress to include coca on the list of products recognised as natural patrimony of the nation and instructed the national cultural institute (INC) to evaluate the "technical convenience of declaring the traditional use of coca as cultural patrimony".

Orlandini finished up by saying that the tribunal's resolution was a starting point for talks to re-evaluate Peru's drug policy and that he would be seeking to meet Toledo and the president of congress, Marcial Ayaipoma, to that end shortly.
Cuaresma, who belongs to the junior partner in the ruling coalition Frente Independiente Moralizador, said that he would hold talks with the government to see how their differences over the coca issue could be resolved but there was more than a hint of a threat in his admonition that the protests "might get out of hand". He also said he was considering an appeal the ruling at the Inter-American Court of Human Rights (IACHR).

Elsa Malpartida, the president of the Asociación de Productores Cocaleros del Alto Huallaga, also warned that there would be protests. She said "we are blindly dominated by the United States" and that the problems would not be resolved until Peru got a government that put the country's concerns above the need to abide by international treaties.

The government's next step will be interesting. It has hardened its stance on its coca policy in the last two months. In August the foreign minister, Manuel Rodrí­guez Cuadros said that the government, "cannot make any kind of concession to narco-trafficking or the illicit expansion of the coca leaf." The president of Devida, Nils Ericsson, had also warned that Peru could end up turning into a 'narco-state' if the trend launched by Cusco and Huánuco was not checked.

The ruling will have repercussions beyond the Toledo administration though. With presidential elections due in April 2006 and no clear favourite, presidential aspirants will be acutely aware that (at least partial) opposition to the coca-eradication policy is a vote-winner. This will provide cause for concern in Washington as coca eradication is the bedrock of US drug policy in the Andean region. Add to that the growing support for the leader of the coca growers and presidential candidate, Evo Morales, ahead of Bolivia's elections and it is not difficult to predict that coca will be very high on the agenda of the newly-appointed US assistant secretary of state for Western Hemisphere Affairs, Tom Shannon.</

Development: An unofficial meeting of congressional and other political activists in Santa Cruz on 31 October appears to have cooled tempers, if not produced the basis for a solution to the five-week-long row over the allocation of congressional seats between departments.

Significance: The 31 October meeting was called by the Comité pro Santa Cruz but drew leading non-Cruceños, such as Gonzalo Avedaño, the leader of the bloc of deputies from La Paz, the country's biggest department. Eight of the country's nine departments were represented, either by congressional leaders or extraparliamentary groups, at the Santa Cruz meeting. Potosí­ was the only absentee. José Luis Flores, the civic leader for La Paz, said that Santa Cruz's and Cochabamba's demands for, respectively, four and two extra congressional seats, were entirely justified and only Paceño politicians' personal interests were preventing a solution. 

Norah Soruco, the president of the lower chamber of congress said that all congress should aim to do this week is vote through a solution to the seat-allocation problem. Congress should not, she said, talk any more about possible solutions. Congress still has to consider President Eduardo Rodrí­guez's compromise, which would award Santa Cruz two more seats at the expense of Oruro and Potosí­ and there are several other options floating around. The spokesman for the Corte Nacional Electoral, Salvador Romero, said that provided the elections, which were due on 4 December, were held on either 11 or 18 December, the inauguration of the new president could occur on 22 January, as planned. 

The left is increasingly determined that the elections must take place: Juan del Granado, the mayor of La Paz, said that his department should give up congressional seats to allow the elections to take place. The seat-allocation row was produced by the electoral law that mandated the use of the 1991 census, rather than the 2001 census, as the basis for allocating congressional seats. In the 10 years between the censuses there has been a shift of population from the poor western highlands to the richer eastern departments of Santa Cruz and Cochabamba.

ARGENTINA: Argentina's central bank forecasts that foreign reserves will surge more than US $7 billion this year to about US $26.7 billion.

ARGENTINA: Retailers saw a strong increase in sales in November, with a growth of 6.2% compared with the previous year, according to report made by the Argentine Confederation of Median Enterprise (CAME).

BRAZIL: Interest rates will continue to fall into next year. The monetary authorities reduced the overnight (Selic) rate by 25 basis points at its meeting on November 23rd, taking the benchmark down to 18%. With real annual inflation running at 6.36% in October, this remains one of the highest such rates in the world.

COSTA RICA: The Minister for Foreign Commerce (Comex) stated that Costa Rica produced exports of US$5.7bn dollars between last January and October, an increase of 9.9% in comparison with the same period during 2004.

MEXICO: Mexican inflation is expected to stand at 3.26% in 2005, according to the monthly survey among private analysts for November 2005, carried out by the Mexican central bank Banxico, as reported on December 2, 2005.

MEXICO: Higher oil exports and family remittances have helped produce a smaller-than-expected current- account deficit. The gap was US$650m for the third quarter, according to the central bank, which had forecast that it would be US$845m.

PERU: Foreign tourists to Peru are expected to reach the record high number of 1.3 million in 2005, up 23% year-on-year, according to projections of the Peruvian chamber of tourism president, Carlos Canales, on December 4, 2005.

Development: On 15 January President Alfredo Palacio gave his state of the nation address in which he promised to continue pushing ahead with his plans for political reform.

Significance: From an initial approval rating of over 50%, Palacio now has the support of just 23% of the population. It is also far from clear as to whether the population at large continue to share his faith in a constituent assembly as the solution to the country's institutional crises. Furthermore, after 33 cabinet changes in the first nine months of his government, rumours abound that the interior minister, Alfredo Castillo, who was appointed just before Christmas, may be about to resign.

As regards political reform, Palacio promised to continue his struggle to realise profound changes. Although he said that parliament "deserves all respect", he added that the people were tired of "living in misery and despair" and said that constitutional rights were not respected in Ecuador. "Persistently, and inexcusably, the political elite has denied the right of the people to be consulted, to decide on political reform, […] to exercise their legitimate sovereign right to a constituent assembly," he said. Congress has an approval rating of 3%.

The president also said that he had ordered an audit of the country's external debt to find out where all the money spent by the government over the last few years had gone. In the last ten years Ecuador has paid out more than US$90bn without keeping a complete record of the destination of these funds. However, over the past year foreign public debt was reduced from US$11.060bn to US$10.769bn. Internal public debt rose from US$3.489bn to US$3.932bn from December 2004 to December 2005. Palacio said the government would not resort to shock measures to sort out the country's finances.

On a positive note, Palacio pointed out the improvement in Ecuador's international relations in the region, mentioning Chile, Peru and Colombia, but not, pointedly, Venezuela. The president added that Ecuador also enjoyed "mutually respectful" relations with the US, with which it is close to finalising a free-trade agreement. Today (16 December) Palacio is due to fly to Bogotá to meet his Colombian counterpart, Alvaro Uribe.

Meanwhile, also on 15 December, former president Lucio Gutiérrez gave his own state of the nation address to a local radio station from a high-security prison in Quito, in which he continued to claim that he was overthrown by a coup.

Development: President Evo Morales had a long meeting with the US ambassador, David Greenlee, on 18 February.

Significance: The result of the meeting is the establishment of a “closed shop" for coca growing in Chapare. Under the closed shop, only members of the coca-growers' union will be allowed to grow coca in Chapare. 

Under this deal, the US will go along with Morales's “zero cocaine but not zero coca" policy. The US will accept what is, essentially, the status quo. This is a certain amount of semi-authorised coca-growing in Chapare. The US had wanted all of this coca-growing eradicated. As a result of the meeting with Morales, the US is now prepared to accept that each member of the coca growing union in Chapare can grow coca on a cato (a 1,600 square metre plot). Morales talked vaguely of this agreement leading to a “voluntary" reduction in coca production in Chapare.

What Morales appears to have promised the US is that the coca-growers' union in Chapare will control coca production. He pointed out that the union had stopped new (non-coca union) growers trying to grow coca in the Carrasco national park in Chapare.

Greenlee did not comment on Morales's claim that there had been “enormous agreement" on the zero cocaine but not zero coca policy and that there would be more initiatives to control the raw materials needed to turn coca into cocaine and the money produced by drug trafficking. Greenlee's main complaint was about the virtual shutdown in coca eradication in and around Chapare. Official figures show that only 26 hectares were dealt with in January. Greenlee said that the US wanted to see more action.

Development: President Néstor Kirchner will meet his Uruguayan counterpart Tabaré Vázquez in Colonia, west of Montevideo, on 29 March to try and come up with a solution to the current spat over the construction of two paper mills on the banks of the River Uruguay.

Significance: The dispute over the paper mills is an acute embarrassment for Kirchner, making him look weak for refusing to confront the protesters who have been blocking two bridges linking the Argentine province of Entre Rí­os to Uruguay. Vázquez agreed to the meeting after protesters (temporarily at least) lifted the roadblocks earlier this week.

The dispute over the plants has been undermining the drive for greater integration in Mercosur. Tellingly, the Kirchner administration has cancelled Mercosur's fifteenth anniversary celebrations, scheduled for 27 March and due to be held in Argentina's Congress, after sounding out the foreign ministries and legislators of fellow Mercosur members. Uruguay's foreign ministry had said it was considering the invitation but saw little to celebrate.

Development: President Evo Morales chose the occasion of International Labour Day to announce a decree nationalising Bolivia's gas and oil industry. Morales issued a stark ultimatum to foreign companies: agree to new contracts within six months or leave.

Significance: Morales made it very clear that the government would not stop with gas. He said that the next step would be to nationalise mines, forestry resources and land so that Bolivians regained sovereignty over their natural resources. For the time being Bolivia's 56 gas fields and refineries are in the hands of the army and “battalions of engineers", which Morales ordered in to ensure, as he put it, that normal operations continued and there was no interruption of supply and exports.  

Although the announcement came out of the blue and understandably went down badly with foreign gas companies, they will take some hope from the fact that Morales has not actually broken his campaign promise; to nationalise the sector but not expropriate companies' assets. This is where the decree is vague. Foreign companies will be obliged to sell 51% of their assets to the state-owned Yacimientos Petrolí­feros Fiscales Bolivianos (YPFB) but they will be invited to stay on as minority shareholders if they agree to sign up to new contracts over the next six months with YPFB, which will control production, distribution and sales.  

The decree does not specify how much the government will pay (market value or a government-set value) or indeed from where the money for the purchase will come. Morales said that foreign companies would be able to keep only 18% of production revenues for the next six months while negotiating the new contracts; the remaining 82% would go to YPFB. The decree did not outline the royalties they will have to pay on this.

Morales first made the announcement speaking at the San Alberto field, in the state of Tarija, in which Brazil's state-owned company Petrobras has a controlling stake. He had only just returned to the country after holding a meeting in Havana with Cuba's President Fidel Castro and Venezuela's President Hugo Chávez . “The plundering by foreign companies is at an end," Morales said. “Foreign companies that have said they will freeze their investments can leave,"- a reference to the fact that foreign companies have largely stopped investment while waiting to see what Morales would do next. He then returned to La Paz where he addressed thousands of people from the presidential palace.

The vice-president, Alvaro Garcí­a Linera, said that the government expected to see annual energy-related revenue go up from US$460m to US$780m in 2007. However, not everyone was impressed. The leader of the influential union Central Obrera Boliviana, Jaime Solares, said that Morales had not gone far enough and that the government should have booted out the foreign companies altogether.  

The foreign companies that will be affected most are Petrobras, the Spanish -Argentine Repsol YPF, Britain's BG and BP, France's Total and the US giant Exxon Mobil. Brazil's president Lula da Silva said he was perplexed and would be phoning Morales today (see related Brazil article). This will be a very important discussion: Lula and Morales have a decent rapport and Bolivia must be careful not to alienate Brazil which is, by some margin, its largest gas importer. The Spanish government said that it was deeply concerned by developments and that it could only hope that the Bolivian government would hold “a genuine negotiation and dialogue" with the companies affected. If they fail to agree on terms the foreign companies may well decide to pursue legal channels for the violation of their contracts.

Separately, Morales's decision also spiced up the second round of election campaigning in Peru, where the nationalist frontrunner Ollanta Humala, who has promised to win back Peru's natural resources, was besieged with questions about what he planned to do about Peru's gas. His spokesman denied that he planned any expropriations. His rival in the run-off, Alan Garcí­a, said that Morales was making a mistake. He blamed Venezuela's President Hugo Chávez for putting him up to it.

Development: Former president Alan Garcí­a scored a decisive victory over his nationalist rival Ollanta Humala in the presidential elections on 4 June. With more than 77% of the vote counted he had won 55.5%, enough to prompt Humala to concede.

Significance: Garcí­a faces two big challenges before he takes office on 28 July. First, he will need to form a coalition of sorts in congress if he wants to drive through his legislative agenda. His Partido Aprista Peruano won 36 of the 120 seats in the legislature; Humala's Unión por el Perú won 45 seats. He will also need to name a consensus cabinet. The PAP has already sent out feelers to see whether the highly respected former interim president Valentí­n Paniagua would take over as prime minister, the bridge between the president and the cabinet. Nobody managed to tie down the job under President Alejandro Toledo.

Humala won 14 of the 24 departments but the key to Garcí­a's victory was Lima. One-third of Peru's voters reside in the capital and Garcí­a's 26-point margin of victory there was crucial. Garcí­a also won all of the coastal departments, including Piura and La Libertad (which together with Lima account for 47% of Peru's eligible voters), except Arequipa, where Humala won a resounding victory (64% to 36%). The central and southern departments, except Cerro de Pasco and Ucayali, went to Humala. Garcí­a also won 65% of foreign votes (including those in Venezuela).

Lourdes Flores, the candidate for the conservative coalition Unidad Nacional (UN) who narrowly lost out to Garcí­a in the first round, warned Garcí­a that he won with “borrowed votes" and would need to seek broad support in many areas. The vast majority of Flores's supporters, in Lima, backed Garcí­a in the second round on the grounds that he was “the lesser of the two evils". 

Garcí­a could certainly do with the support of the UN in congress (the UN has 17 seats) but he will be uncomfortably aware that to forge an alliance with the UN would be very unpopular in the poor, interior of the country, which roundly rejected Flores as the candidate of the rich elite in the first round. An unprecedented number of Peruvians cast their ballots for Humala in these poorer departments and Garcí­a will need to acknowledge this.

Humala recognised the victory of Garcí­a but emphasised that his brand of nationalism had “changed the political map" in Peru. He said he had won “a social and political victory" and that his UPP would keep social marginalisation and the demands of Peru's poor at the top of the political agenda in congress. It will be interesting to see what role Humala plays now - whether he retreats into the background somewhat or plays an antagonistic role - and whether the fledgling UPP hangs together as a coherent force. The party leadership had noticeable differences with Humala when it came to choosing congressional candidates earlier in the year. 

Speaking to supporters outside the PAP headquarters in Lima, Garcí­a promised a government of “consensus, dialogue and openness" that would not forget the “poor and needy" who, he admitted, had offered “considerable support to señor Humala". Interestingly, he stressed on several occasions that Peru needed to tie its economy to the world economy. There is some speculation that he will offer the economy ministry to someone with no links to the PAP to assuage the fears of investors.

Garcí­a could not resist a final dig at Venezuela's President Hugo Chávez , who he criticised savagely throughout the campaign for his overt support for Humala and for trying to turn Peru into a “client state". “We defeated the efforts of señor Hugo Chávez to try and incorporate us into his regressive expansion strategy, on a military model, that he is trying to establish in South America." This will have gone down well with the US State Department but it is debateable whether much else he says will.

Garcí­a consistently evaded questions about his stance on the free trade agreement with the US during the campaign. President Toledo wants to try and push this through congress before he leaves office but will struggle to do so. Garcí­a was also vague about where he stood on coca eradication and hinted that he might seek to revise contracts with international mining companies.