Brazil & Southern Cone - May 2012 (ISSN 1741-4431)

Trade restrictions; contentious tax accords; and now corruption allegations surrounding the dredging of a bi-national canal. Managing diplomatic relations with Argentina is turning into a full time job for Foreign Minister Luis Almagro. It is also taking up an increasing amount of time for President José Mujica and his vice-president, Danilo Astori.

“Mercosur is going through its worst moment in history. This must be analysed. In practical terms there is a denial of the most basic principles of the Mercosur treaty,” Astori said this month in a direct reference to Argentine trade barriers, which are blocking Uruguayan exports in contravention of the free movement of goods enshrined in the Mercosur founding treaty. Astori is merely venting the frustration felt by businesses in Uruguay. This has found a loud echo in the opposition which, in turn, is pressuring the government to turn the heat up on Argentina.

With frustrated resignation, Astori said all that Uruguay could do was to “negotiate with professionalism” and to build “reserves of patience”. President Mujica embodies this pragmatism. Beyond the occasional verbal expression of displeasure, there is not really much Uruguay can do, as Mujica has publicly acknowledged, as Argentina would scarcely notice any tit-for-tat retaliatory measures.

Astori did not stop at differences over trade restrictions though. He said that there was clear friction with Argentina over several other issues, such as the dredging of shared waters, ports, energy, gas and electric power. Foremost amongst these is the dredging of the bi-national Martín García canal. Mujica claims to have extracted assurances from his Argentine peer President Cristina Fernández to proceed with a project to deepen the Martín García canal from 32 to 34 feet.

Uruguayan opposition congressmen are deeply suspicious of the commitment in Buenos Aires to the project, however, as Uruguay has struggled for years to win Argentina’s backing. There are ulterior motives at play here. The Martín García canal is one of two in the River Plate; it runs to Nueva Palmira, the large free trade zone administered by the Uruguayan State. The other canal, Emilio Mitre, leads directly to Buenos Aires; it was dredged to 36 feet in 2006 by Argentina. As such, ships carrying more than 45,000 tonnes have to transit the Mitre canal rather than Martín García. The Uruguayan opposition, and the press, are convinced that Argentina is trying to prevent Nueva Palmira thriving at the expense of Buenos Aires and Rosario.

Foreign Minister Almagro announced last October that bidding for dredging the Martín García canal was poised to begin. Nothing happened. Then Argentina’s foreign minister, Héctor Timerman, visited Montevideo at the end of April this year to announce that the dredging would be put out to tender on 3 May. This was seen as a concession by the Argentine government to Mujica for Argentina’s tough new import restrictions. Again, however, nothing happened. The Argentine delegation at the bi-national administrative commission of the River Plate (Carp) had other ideas. It raised a number of objections on 9 May, to the public disenchantment of Astori, which could take months to resolve.

The delay has spawned speculation and indeed allegations directed at Argentine officialdom. Juan Manuel Garino, a deputy for the more right-wing opposition party, the Partido Colorado (PC, Colorados), denounced that he had been offered a bribe of US$1m by Argentine officials from the Carp to support a bid by the Dutch company Riovia to carry out the work to deepen the Martín García canal.

The Colorados and the more moderate opposition Partido Nacional (PN, Blancos) have summoned Almagro to testify before the senate about the alleged irregularities surrounding the bidding process to dredge the canal. President Mujica gave a sharp riposte: “Whoever is saying this should immediately go to the judiciary or shut up,” he said. Uruguayan government sources informed the national daily El Observador, however, that allegations of an “arrangement” between Riovia, which has maintained the canal since 1991, and Argentine officials had caused friction in the bilateral negotiations.

When Riovia’s contract for dredging maintenance on the canal expired in January this year it sought to raise its fee from US$12m a year to US$20m. The Uruguayan government managed to beat the company down to US$15m but Uruguayan opposition deputies are questioning why this deal was signed at all when another Dutch company, Van Oord, was offering to do exactly the same maintenance job for a fraction of the cost (US$9m).

Opposition legislators are so incensed with what they perceive to be the government’s meek subservience to Argentina that they are refusing to vote in favour of a new tax information sharing and double-taxation accord struck between Uruguay and Argentina on 24 April. After (the now former) French President Nicolas Sarkozy branded Uruguay one of a dozen countries that the international community should shun as “tax havens” during the G20 summit in Cannes last November, the government sought to escape the Organization for Cooperation and Economic Development (OECD)’s “grey list” of jurisdictions which have committed to but not yet “substantially implemented” an “internationally agreed tax standard”.

The Uruguayan opposition argues that Argentina (which complains that many Argentines use Uruguayan banks to avoid domestic taxes) was behind Sarkozy’s comments. They also insist that if Uruguay is going to have to give ground on a bilateral tax information exchange agreement (TIEA) with Argentina then Argentine trade protectionism should be discussed too.

• Tax accord

Uruguay’s economy minister, Fernando Lorenzo, signed the tax accord with the head of Argentina’s tax authority (Afip), Ricardo Echegaray. It must be ratified in the respective parliaments of both countries before coming into effect. Lorenzo said the agreement would not be applied retroactively and he rejected that either government would now seek to carry out joint audit actions in each other’s territories. Lorenzo said the agreement formed part of his government’s efforts to fulfil the second stage of the OECD’s transparency agreement, to help Uruguay improve its international status and become more attractive to investors, an objective which will have been enhanced by the decision by Standard & Poor’s to restore the country’s investment grade rating [RBS-12-04].

• Military tension

Uruguay’s First Lady Senator Lucía Topolansky caused a real stir in April by calling for the armed forces to be “loyal” to the political project of the ruling left-wing coalition Frente Amplio (FA). She also maintained that the FA was transforming the armed forces internally with this end in sight. The military top brass expressed profound concern at her remarks and the defence minister, Eleuterio Fernández Huidobro, himself a former Tupamaro guerrilla like Topolansky, was forced to reject them publicly (see our sister Weekly Report [WR-12-18] for more details on this story).