SUBJECT: Increasing limitations on foreign relations.
SIGNIFICANCE: The subjugation of international relations to limited domestic objectives is generating unnecessary tensions with potential sources of investment and diplomatic support.
ANALYSIS: In his inaugural speech on May 25, 2003, President Nestor Kirchner indicated that his foreign policy priority would be Mercosur, followed by Latin America, the United States and Europe (see ARGENTINA: Inexperienced Kirchner faces huge odds - May 30, 2003). In practice, foreign policy has focussed increasingly on two countries, Venezuela and Spain (see ARGENTINA/SPAIN: Doubts persist after Kirchner visit - June 27, 2006). Moreover, foreign relations have been marked by a combative tone and an apparent disregard for the sensibilities of foreign investors that has proved jarring to many observers:
In practice, this reflects the tone of domestic politics, in which Kirchner has consistently sought to identify and attack sources of opposition (despite the virtual lack thereof). However, it has created unnecessary frictions with foreign interlocutors unaccustomed to this political style.
Despite recognising the need for foreign investment, Kirchner's preferred economic model appears to be the concept of a 'national bourgeoisie' popular in the 1970s, under which domestic rather than foreign investors would drive growth, in tandem with a strong state role in the economy. However, recent official estimates that Argentines maintain some 122 billion dollars invested abroad point to the continuing need to attract foreign investment in the absence of sufficient domestic confidence in long-term prospects.
Near neighbours. Kirchner himself claims that his greatest regional affinity is with the government of Chilean President Michelle Bachelet and her predecessor, Ricardo Lagos. However, his policy choices and personalist style of leadership have generated the widespread perception that his government is closer to that of Venezuelan President Hugo Chavez than to the market-friendly centre-left government in Chile. Indeed, relations with Chile have been strained by cuts in gas exports, and recent decisions to double the price of those exports (in order to offset a rise in the price of Bolivian gas sold to Argentina, rather than passing the rise on to domestic consumers) and to raise the price of fuel for foreign drivers visiting Argentine petrol stations. Bachelet is set to register a complaint over this issue at the Mercosur summit in Cordoba, Argentina on July 20-21.
Similarly, domestic political considerations have been paramount in the continuing dispute with Uruguay over plans to construct two cellulose plants on the Uruguay River, which led to Argentina bringing a case before the International Court of Justice (see ARGENTINA/URUGUAY: Pulp plants pose pollution problem - February 7, 2006). On July 13, the Court ruled that construction of the plants could continue while the substance of the case was studied, a process that may take several years. Argentine efforts to block the plants (which have been interpreted in Uruguay as a ruse to relocate the investment to Argentina) have driven a wedge between the two governments -- initially widely viewed as highly compatible -- that may prove difficult to repair.
The conflicts with Chile and Uruguay, which have increased doubts over the future of an already debilitated Mercosur (see MERCOSUR/VENEZUELA: Regional (dis)integration risks - May 3, 2006), have been presented as the only means of defending Argentina's national interests -- reinforcing the impression that foreign policy focuses on disagreements rather than solutions.
Venezuela. Kirchner visited Caracas on July 4-5 to mark Venezuela's formal entry into Mercosur, an occasion that marked the announcement of a series of new bilateral initiatives:
In particular, it was announced that Argentina and Venezuela would issue a joint sovereign bond, the so-called 'Bono del Sur', the specifics of which are yet to be decided. The bond in theory would be used to finance a regional development bank "to eradicate poverty and achieve sustained economic growth".
Plans were announced for new hydrocarbons joint ventures, as well as cooperation in the area of housing construction and biogenetics and the construction of further oil tankers by Argentine shipyards.
Venezuela will support Argentine demands for renewed negotiations with the United Kingdom over the future of the Falkland Islands, while Argentina will support Venezuela's candidacy for a non-permanent seat on the UN Security Council for 2007-08.
Speaking to the Venezuelan National Assembly, Kirchner was at pains to stress the similarities between the two governments, noting that "our governments do not exercise either demagogy or populism". The strong relationship is hardly surprising:
* on the one hand, many Argentines (including many from the Left of Kirchner's Peronist party) lived in exile in Venezuela during the 1976-83 dictatorship; while
* on a more practical level, Venezuela has acquired some 3 billion dollars worth of Argentine bonds since last year and has invested in downstream activities in the country, reinforcing the position of newly created Argentine energy company ENARSA (and to some extent substituting for private foreign capital).
However, the increasingly close identification has had a negative impact elsewhere; following diplomatic disputes over Chavez's blatant backing of the losing Peruvian presidential candidate, Ollanta Humala, President-elect Alan Garcia has since visited Brazil and Chile but not Argentina, despite traditionally warm bilateral relations. The relationship has also attracted negative reactions in both the United States and Europe.
United States. After cordial beginnings, neither side has given sustained attention to the bilateral relationship, which has deteriorated following anti-US demonstrations at the November Summit of the Americas (see LATIN AMERICA/US: Intransigence mars Americas Summit - November 10, 2005) and the disappointment of early US expectations that Kirchner could represent a restraining influence on Chavez. Kirchner has abandoned his earlier avoidance of overt criticism, making sharp comments on US regional policy on recent visits to Madrid and Caracas, and was reportedly annoyed by recent meetings between State Department officials and former Economy Minister Roberto Lavagna, a probable opposition candidate next year.
Europe. Having focussed on Spain as Argentina's gateway to Europe, Kirchner's relations with other key countries have been poor -- in particular owing to the effect of the write-down of defaulted debt on bondholders (the case of Italy) and to frequent clashes with foreign owners of privatised utilities (the case of France) (see ARGENTINA: Suez withdrawal heightens utilities doubts - September 14, 2005). The initially cordial relationship with France has declined largely as a result of the dispute between Buenos Aires and French utilities operator Suez, to the extent that President Jacques Chirac pointedly bypassed Argentina on a recent state visit to Brazil and Chile. Current foreign policy towards Europe represents a radical departure from traditional ties which is already having a negative impact on foreign investment.
United Kingdom. Although Kirchner's first foreign visit as president was to London, at the invitation of UK Prime Minister Tony Blair, relations with both investors and the UK government have remained fraught. London has been increasingly irritated by sometimes aggressive Argentine demands for talks on the Falklands issue, which it attributes to the proximity of the Argentine elections next year. This is only partially true:
Kirchner, from the southern province of Santa Cruz, has strong personal feelings on the sovereignty issue; and the recent decision by the Falklands authorities to extend fishing licences for a 25-year period was interpreted by Buenos Aires as a violation of existing agreements, committed with London's backing.