VZCZCXYZ0005
RR RUEHWEB
DE RUEHBU #0496/01 1081724
ZNY CCCCC ZZH
R 171724Z APR 08 ZDK
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 0802
INFO RUCNMER/MERCOSUR COLLECTIVE
RUEHCV/AMEMBASSY CARACAS 1784
RUEHMD/AMEMBASSY MADRID 2040
RUEHFR/AMEMBASSY PARIS 1388
RUEAIIA/CIA WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RHMFISS/HQ USSOUTHCOM MIAMI FL
RHEHNSC/NSC WASHINGTON DC
RUCPDOC/USDOC WASHINGTON DC
C O N F I D E N T I A L BUENOS AIRES 000496
SIPDIS
SIPDIS
E.O. 12958: DECL: 04/16/2018
TAGS: ECON EINV EIND ETRD AR VE BR MX
SUBJECT: ARGENTINE GOVERNMENT TAKEN BY SURPRISE AS CHAVEZ
NATIONALIZES ARGENTINE STEEL MILL IN VENEZUELA
REF: A. CARACAS 532
B. 07 CARACAS 1518
C. BUENOS AIRES 439
Classified By: Economic Officer Ian Sheridan, reasons 1.4, b. and d.
1. (C) SUMMARY. The Government of Venezuela's (GOV)
announcement that it would nationalize Venezuela's largest
steelmaker, Ternium Sidor, majority-owned by Argentine
interests, has rattled local markets and complicated the
relationship between Argentine President Cristina Fernandez
de Kirchner (CFK) and Venezuelan President Hugo Chavez. Top
GOA officials told us that Chavez made the move without
consulting CFK or even informing the GOA, and reportedly out
of "solidarity" with Sidor's workers. Local press reports
indicate that he was also motivated by charges that he has
not delivered on promises of new low-cost housing and that
the steel industry has not provided enough of its product to
the domestic market. The Argentine media reported that
Chavez ignored entreaties from CFK and Sidor's majority
owner, Argentine steelmaker Techint, seeking a
reconsideration of his action. Argentine business and union
leaders have come out strongly against the action, claiming
that it threatens Mercosur integration. Some local media
have taken CFK to task for Chavez's "slap" against a supposed
friend and others have questioned Venezuela's still-pending
admission into Mercosur. Indemnification details remain to
be worked out, but local media estimates the value of
Techint's holdings in Sidor at US$2.5 - 3 billion. The deal
appears to be another setback for the still-new CFK
administration, and has caused local industry and media to
question the value of the "brotherly" relationship with the
controversial Chavez. END SUMMARY.
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Chavez nationalizes Argentine-owned Sidor
-----------------------------------------
2. (C) The GOV's decision to nationalize Venezuela's largest
steelmaker, Ternium Sidor, majority-owned by Argentine and
Brazilian interests, has rattled local markets and put
President Cristina Fernandez de Kirchner (CFK) in a bind,
given her ties to Chavez and her obligation to protect
Argentine investments. Senior GoA officials, in private
conversations with the Ambassador and Assistant Secretary
Shannon (septels), reported that Venezuelan President Hugo
Chavez made this move in the middle of the night without any
prior consultation, nor did they call the GOA to give them a
heads up. The GoV's public rationale claimed the
nationalization was declared out of "solidarity" with Sidor's
workers, after a meeting where the GOV claimed that the
"arrogant" and "inhumane" company showed more concern for its
plant machinery than its workers.
3. (SBU) Chavez first threatened to seize Sidor in August
2007, but intervention by then-President Nestor Kirchner and
Techint executives helped to bring about a truce (that
reportedly also involved GOV demands that Sidor sell more
steel to the local market and increase the price it paid for
iron from a GOV-owned iron mine). Media reports noted that
CFK also spoke on this matter with Chavez during her visit to
Caracas in March 2008.
4. (U) The media has reported this action as Chavez's first
nationalization of an Argentine company, and the first in
Venezuela involving the assets of such a closely tied
country. It also occurred during the run-up to Venezuelan
gubernatorial elections, and shortly after the April 3
announcement of the nationalization of Venezuela's largest
cement producers: Mexico's Cemex, France's Lafarge, and
Switzerland's Holcim. Local media has speculated that
Chavez's action was partly motivated by growing domestic
criticism that he has not delivered on promises of new
low-cost housing, and that the steel and cement industries do
not provide enough to the domestic market. "The takeovers of
both cement and steel industries will be used to breathe new
life into construction in Venezuela, especially in the form
of lower tier housing," Lehman Brothers analyst Gianfranco
Bertozzi said in a research report.
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Ternium Sidor a Majority Argentine Firm
---------------------------------------
5. (U) Ternium Sidor, state-owned before its 1997
privatization and the fourth largest steel producer in Latin
America, is 59.7% controlled by the Luxembourg-based (and
NYSE-listed) Ternium Group. The latter is controlled by
Argentina-based Techint, a multinational conglomerate with
interests in over 100 engineering, steel, oil, gas and
service companies in more than 35 countries, and whose
President is Italian-Argentine Paolo Rocca. The GOV owns
20.4% of Ternium Sidor, and its union 19.9%. This
nationalization also affects one of Brazil's major steel
producers, Usiminas, which holds a 14.25% stake in Techint
(and thus about 8.5% of Sidor). Ternium also owns
steelmakers in Argentina (Siderar) and Mexico (Hylsa); its
stock price has fallen more than 15% since the announcement.
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Techint pleads for reprieve
---------------------------
6. (U) Techint President Rocca reportedly asked Chavez in a
letter to find a solution, and pointed to Sidor's efforts to
assuage worker demands with a 130% salary increase, the
incorporation of some 600 contractors into Sidor's permanent
workforce, and increases for its 2,500 pensioners. Rocca
reportedly also highlighted the importance of strengthening
Mercosur relations among Venezuela, Brazil and Argentina. He
also wrote to CFK to ask for her help.
---------------------------
GOA weighs in - to no avail
---------------------------
7. (C) According to media reports, Chavez ignored two calls
from CFK seeking a reconsideration of the GoV's action, and
that the decision could affect "Mercosur" investment. GOA
officials confirm she raised the issue with him, but did not
give us details. The same media reports indicated that on the
night of April 10, Chavez told CFK that it was the matter was
final, and there was no chance for a revision. However,
Chavez apparently reassured CFK that the action would not
otherwise harm GOV-GOA relations.
--------------------------------------
Argentina Industry Plays Mercosur Card
--------------------------------------
8. (C) One GOA minister told A/S Shannon that this was a blow
to Mercosur as the project had Brazilian and Argentine
investment and thus was an example for Mercosur integration.
Argentine industry picked up this theme. In an April 10
meeting with EconCouns, Juan Carlos Lascurain, President of
the Argentine Industrial Union (UIA) and ex-Techint
executive, said that "the integration of Venezuela as a
Mercosur partner requires amicable commercial relationships
and mutual trust." He subsequently repeated this same strong
statement to the media. Separately, the UIA also warned of
"negative consequences" of the nationalization, in terms of
the commercial and industrial relations between Argentina and
Venezuela and within the Mercosur trading bloc. The UIA also
warned that the nationalization is already having a negative
impact on companies that have started or are contemplating
projects in Venezuela. (Lascurain and the Argentine
Industrial Union have been steadfast allies of the Kirchners,
and Lascurain provided crucial private-sector support to CFK
during the recent agricultural crisis.) In a public speech
on April 17, the Secretary of AEA, the Argentine Business
Association for larger firms, called the move "very negative"
for Argentina and Mercosur.
-------------------
Brazilian interests
-------------------
9. (C) Media reports noted that Techint also asked Brazil to
get involved, given the Brazilian minority equity stake in
Sidor. The media noted that Venezuela's official entry into
Mercosur still awaits Brazilian (and Paraguayan) Senate
approval. This approval was first delayed last year after
Chavez referred to the Brazilian Senate as "parrots of the
(U.S.) 'empire,'" in response to the Senate's official
criticism of Chavez' decision to cancel the license of open
air TV broadcaster RCTV (ref B). CFK placed a call to
President Lula to try to recruit his help, a GOA minister
told us.
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Argentine Media slams CFK
-------------------------
10. (SBU) Local media harshly condemned Chavez's "slap"
against his supposed friend CFK, and the Kirchners'
friendship/alliance with him in the first place. An
editorial in Argentina's second largest daily dismissed the
GOV's excuse that the dispute was labor-related, saying that
it represented just one more action on Chavez's part to
accumulate power and control more sectors of the economy. It
also called for the GOA to re-assess its close ties with
Caracas, not only because of Chavez's lack of respect for
democratic institutions, but because he is now "threatening
the economic interests of Argentina." A prominent
businessman called for a re-consideration of Venezuela's
(still pending) incorporation into Mercosur. A leading
journalist from Argentina's second largest newspaper said
that the main hurdle for President CFK now is to prove that
her government is more than just a more moderate version of
the Chavez regime itself. Other media have echoed these
themes.
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Terms of Compensation TBD
-------------------------
11. (SBU) Media reports indicated that the GOV announced it
will take control of Sidor "without stepping on anyone's toes
and by paying indemnities as appropriate." A committee has
been formed to determine compensation; local media reported
that CFK has tasked Planning Minister Julio De Vido ensure
that Argentine interests get a fair hearing. Media reports
estimate the value of Techint's potential indemnification in
the range of US$2.5-$3 billion. The GOV says it is open to
negotiation, and compensation could be in the form of cash,
bonds, and/or shares. Observers note that at this point it
appears that the only thing that Argentine interests can do
is hope for a fair price. The media has reported that
negotiations will also factor in the price that Techint pays
for the large amount of iron ore it buys in Venezuela for
steel mills elsewhere.
12. (SBU) Chavez designated his Vice President, Ramon
Carrizales, as the mediator. Carrizales has also become a de
facto voice of Sidor workers, and recently stated, "I am part
of a workers' government, and Venezuela must re-gain its
steel for its own development."
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Comment
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13. (SBU) The GoV's nationalization of Sidor represents yet
another setback for the young CFK administration, which
remains reliant on Venezuela for buying GOA bonds (ref C).
It has caused local industry and media to question the value
of the Kirchners' "brotherly" relationship with the
eternally-controversial Chavez. Local analysts point out the
growing political cost of the relationship with Venezuela in
light of the December 2007 "Valijagate" embarrassment,
Chavez's unsavory ties to Iran and Russia, and perceptions of
his increasingly autocratic rule.
WAYNE