US embassy cable - 05QUITO1715

C O N F I D E N T I A L SECTION 01 OF 03 QUITO 001715 
 
SIPDIS 
 
E.O. 12958: DECL: 07/20/2015 
TAGS: PGOV, PREL, EFIN, ENRG, EC, Economy, Oil Sector 
SUBJECT: ECUADOR: MIXED SIGNALS ON CHAVEZ DEAL 
 
REF: A. SECSTATE 127251 
     B. QUITO 1663 
 
Classified By: Charge d'Affaires AI Kevin Herbert, for reasons 1.4 (b&d 
). 
 
1.  (C) Summary:  Press reports suggest Ecuador is ready to 
sign agreements with Venezuelan President Hugo Chavez on 
financing and oil deals, despite President Alfredo Palacio's 
public denials that any GOE decision has been taken. 
Privately, however, Palacio administration officials are 
telling us a different story.  Unfortunately, the most public 
advocate of cutting deals with Venezuela, Minister of Economy 
and Finance Rafael Correa, has not been clearly refuted in 
public or reined in by President Palacio, fueling 
uncertainty.  Since prospects for multilateral financing 
appear dim, it is natural that Correa, already ideologically 
committed to state-controlled economies and no fan of the 
international financial institutions (IFIs), would welcome a 
financing offer from Chavez.  More rational members of the 
Palacio administration are looking for viable alternatives to 
Chavez.  With the notable exceptions of Foreign Minister 
Parra and Correa, we do not believe the GOE is eager for 
closer relations with Chavez.  Still, the GOE will want to 
maintain cordial relations with its Andean neighbor. 
 
2.  (C) Given local sensitivities to USG pressure, we have 
refrained from public comment on these developments. 
Privately, we have expressed to GOE interlocutors USG 
concerns about dealing with Chavez, drawing from existing 
guidance (Ref A), and urged more definitive actions on 
Ecuadorian-Venezuelan relations.  We will have an opportunity 
to meet directly with Palacio on July 27.  Meanwhile, we will 
work quietly with the anti-Chavez forces to blunt the effect 
of Correa, until Palacio decides to jettison him, as he is 
apparently considering doing to the Foreign Minister as early 
as next week.  End Summary. 
 
IFI Financing Delayed, at Best 
------------------------------ 
 
3.  (C) Disbursements from the World Bank (WB) and 
Inter-American Development Bank (IDB) have been put on hold, 
pending an evaluation from the IMF.  An IMF team is expected 
to arrive in Ecuador August 22.  However, Correa said he 
intends to meet with the IMF to press Ecuador's case when he 
is in Washington for the IDB meetings the week of July 25. 
 
4.  (C) We learned from IDB sources on July 19 that the 
Ministry of Economy sent letters last week to the IDB, WB, 
the Andean Community Development Bank (CAF) and the Spanish 
Embassy announcing significant cuts in their programs (up to 
50% in the case of the IDB).  Apparently, Correa wants only 
funds with no strings attached (i.e., neither loans or grants 
with conditions).  Given this posture and previous comments 
critical of the IFIs, it is difficult to believe that Correa 
is sincere about working with the IFIs. 
 
Searching for Alternative Financing 
----------------------------------- 
 
5.  (C) With dim prospects for financing from the IFIs and 
virtually no chance at attracting private financing, given 
the political and economic uncertainties in the country, it 
is not surprising that Correa (a likely 2006 presidential 
candidate) would seek funding elsewhere.  His first stop was 
Venezuela, but he has also mentioned China, Brazil and the 
Latin American Reserve Fund as other possible financing 
sources. 
 
6.  (C) An ideologue, with no political or government 
experience, Correa tends to view things from an academic, 
rather than political or practical perspective.  Thus, 
Chavez' offer for financing with no strings attached (at 
least according to Correa) must look attractive to him. 
Worse still, Correa identifies more with Chavez' statist 
policies than with IFI positions and current generally 
accepted economic policies. (See reftel A, Quito 1181, 
regarding Correa's tendency to let his ideology override his 
intelligence.) 
 
Talking But No Deals Yet 
------------------------ 
 
7.  (C) Correa sent six operatives July 19, including Vice 
Minister of Finance Magdalena Barreiro, to Caracas to work on 
technical aspects of the possible bond purchase.  Correa said 
he intends to replace expensive short-term internal debt 
(CETES, with interest rates of 8.5%) with long-term (minimum 
3 years) debt at lower interest rates.  He has not provided 
any other details on the proposal. 
 
8.  (C) When the possibility of Venezuelan financing first 
hit the press, Correa denied it, stating he was in Caracas to 
talk energy policy (Ref B).  Subsequently, there were reports 
about the possibility of Venezuela refining Ecuadorian oil. 
Press reports from the July 18 meeting of Andean leaders 
noted that Chavez made a similar unrealistic proposal to the 
Andean leaders, the creation of "Petroandina," a regional oil 
consortium.  Following his meeting with Chavez, President 
Palacio made no mention of the Venezuelan bond, refinery or 
Petroandina proposals. 
 
9.  (C) EmbOffs met with Energy Minister Ivan Rodriguez on 
July 20 to get his views on the Venezuela-related oil 
proposals.  Rodriguez took umbrage at Correa's messing in oil 
policy.  He added that Palacio had little in common with 
Chavez and Rodriguez thought it unlikely that Palacio would 
want closer relations with him. EmbOff's noted that the 
public perception was much different.  Rodriguez referred 
EmbOffs to the July 20 "El Universo" front-page story where 
Palacio said there was nothing agreed to with Chavez.  That, 
Rodriguez said, was the true story. 
 
10.  (C) As to Chavez' offer for assistance in the oil 
sector, Rodriguez said that they would look at what Chavez 
had to offer.  Their first level of analysis would be to 
"look at the numbers."  Then, there were political 
considerations to take into account, if the numbers made 
sense.  Rodriguez said that he had resisted Venezuelan 
invitations to visit Caracas.  He added that the GOE would 
welcome alternatives to the Chavez proposals.  EmbOffs agreed 
to work with Rodriguez, particularly with respect to his 
plans to modernize PetroEcuador's refinery in Esmeraldas. 
(More on that meeting in SepTel.) 
 
Palacio and Herreria Against the VZ Plan 
---------------------------------------- 
 
11.  (C) In a July 19 meeting with Charge and ADCM, 
Presidential Advisor Herreria said that Correa was acting on 
his own, without authorization from Palacio.  Charge 
acknowledged Ecuador's financing needs, but said the GOE 
needed to carefully weigh the political and economic costs of 
the financing.  Charge also noted that recent GOE actions 
made it appear that Ecuador was drawing itself closer to 
Venezuela.  Noting our concerns with Chavez' policies, he 
called for the Palacio administration to clarify its position 
with respect to Venezuela. 
 
12.  (C) Herreria said he would recommend that Palacio 
demonstrate that he is not pro-Chavez by declining an 
invitation to attend Bolivarian celebrations sponsored by the 
Venezuelan Embassy on July 24.  In addition, when in 
Guayaquil next week, Palacio would make clear that Ecuador is 
not subject to any country's influence, including Venezuela. 
According to Herreria, Palacio realizes Correa has designs on 
the presidency, but that in the end Palacio will not support 
a bond deal with Chavez.  He did not explain why Palacio has 
not reined in the charismatic Correa. 
 
13.  (C) As to Foreign Minister Parra, Herreria said Palacio 
was fed up with him.  In a subsequent July 20 phone call to 
ADCM, Herreria said Palacio intended to dump Parra, as soon 
as next week, with a couple of other ministers.  Curiously, 
while Palacio, according to Herreria, described Correa as 
"dangerously esoteric," Correa was not mentioned as one of 
those to be dismissed from the cabinet.  However, Palacio did 
agree to invite Embassy leadership to a private meal on July 
27 to hold frank discussions, with an open agenda. 
 
Comment 
------- 
 
14.  (C) Correa is clearly a loose cannon that Palacio 
eventually must come to terms with, but we are not the ones 
to tell him so, at least directly.  Still, despite press 
reports, the GOE is not ready to enter into any agreement 
with Chavez.  However, any public statements from the USG to 
pressure the GOE to stay away from Chavez could have the 
opposite effect.  A common theme throughout our conversations 
and indeed much of the public rhetoric of this administration 
is that Ecuador is a sovereign nation capable of running (or, 
just as likely, ruining) its own affairs.  We must also be 
judicious in our private comments to GOE officials for the 
same reason.  This is still an administration and President 
looking for acceptance and legitimacy, given its irregular 
ascension to power. 
15.  (C) Energy Minister Rodriguez, with whom we believe we 
can work, astutely noted that the GOE is looking for viable 
alternatives to offers such as those from Chavez.  That is 
not to say that we should change our position that Ecuador 
should adopt sound and sustainable economic policies as a 
precondition to further IFI support.  However, there are 
other avenues to pursue.  Facilitating interactions between 
the GOE and the U.S. private sector, offering technical 
assistance and visits by high-level USG officials or a 
presidential emissary are among the actions we can take to 
lend legitimacy to Palacio, which he clearly craves. 
 
16.  (C) Next month's arrival of Ambassador-designate Jewell 
will provide new impetus to our bilateral relationship.  In 
the interim, the proposed July 27 meeting between Embassy 
leadership and President Palacio presents another opportunity 
to make our case directly with Palacio.  We will also focus 
on those within the administration with whom we can work, 
including Minister of Trade Molestina, Minister of Energy 
Rodriguez, and Presidential Advisor Herreria. 
HERBERT