Pulp Mills Divide the River Plate

Pulp Mills Divide the River Plate



Theme: The conflict between Argentina and Uruguay over the construction of two pulp mills in the Uruguayan city of Fray Bentos is becoming more serious, although certain moves suggest the possibility of a negotiated settlement.

Summary: The governments of Argentina and Uruguay are at loggerheads. The conflict involves the construction of two plants designed to produce paper pulp, one backed by Spanish capital and the other Finnish, in the Uruguayan city of Fray Bentos. The Argentines see the venture as environmental aggression, making it a bilateral issue. Uruguay considers it a strictly internal, domestic matter in which the country’s sovereignty is at stake. The conflict arose from local political battles and electoral issues in the Argentine province of Entre Ríos. From there, with President Kirchner’s support (or unwillingness to stop it), it became a national issue. Uruguay’s response has been uncompromising and the constant criticism of Mercosur expressed by different political and economic actors has amplified a large number of complaints against Argentina. The two governments could lose control of the dispute since strong nationalist feelings have been stirred up among the general public. In fact, the conflict mounted steadily through February, as the Argentine Congress authorised the government to approach the International Court in The Hague, the Uruguayan government requested mediation before the Organisation of American States (OAS) and Argentina proposed that work on the projects be stopped for three months. This demonstrates how the conflict has gone beyond the bounds of Mercosur, given the apparent inability of Brazilian diplomacy to deal with a dispute which, if it continues to worsen, threatens to ruin what little remains of Mercosur. However, in early March there were a few, though insufficient, signs that tensions may be easing.

Analysis: The relatively tranquil waters of the Uruguay River –a tributary of the River Plate, a large part of which delimits the border between Argentina and Uruguay– are becoming increasingly turbulent. One of the four bridges between the two countries links the Argentine city of Gualeguaychú, in the province of Entre Ríos, with the Uruguayan city of Fray Bentos. This bridge and the Paysandú bridge have been blocked by picketers who form the Citizens’ Environmental Assembly in Gualeguaychú. There are other similar groups in Colón and in Concepción del Uruguay (Argentina). Why have the bridges been blocked? Because Fray Bentos is where the two pulp mills at the heart of this bilateral dispute will be built.

A total of US$1.8 billion will be invested in the two factories –the biggest foreign direct investment in Uruguayan history, equivalent to nearly 10% of the country’s GDP–. One plant belongs to the Spanish company ENCE (Empresa Nacional de Celulosa España) and the other to the Finnish company Oy Metsä-Botnia Ab (known as Botnia). Both claim to have state-of-the-art environmental technology that meets the European Union (EU) standards that will come into effect in 2007. They also say that their plants produce little pollution and that they are willing to work with all parties involved to limit pollution and establish controls to prevent irreparable damage.

However, in the previous months, the government of Entre Ríos, headed by Governor Jorge Busti, originally motivated by political and electoral interests, had raised the spectre of pollution and mobilised the local population against the Uruguayan project with accusations of acid rain, carcinogenic waste and other similar hazards. On issues such as these, once people have been mobilised, it is much more difficult to demobilise them without giving something in exchange. The threat of environmental hazards has led many local people to fear that the second residences they possess on the banks of the river –properties with great tourist potential– will lose value. This is confirmed by point X (Socio-economic impact) of the Report by the Argentine Delegation to the High-level Bilateral Technical Group (GTAN), on February 3, 2006: “The study… shows the damage that will be caused by the depreciation of rural and urban properties… loss of potential earnings…, lost tourism and lost productivity due to the impact of acid rain”.

This drawn-out process has triggered irrational mechanisms in both countries, heightening already strong nationalist feelings. A curious fact is that both sides make a point of emphasising how much they have in common and how little separates them. However, as we have seen in recent months, this is not enough, since both sides are characterised by intransigence and a lack of flexibility. The ideological affinities between the two governments have not helped either, even though both Presidents theoretically belong to the same group of leftist Latin American leaders. It is worth recalling how Néstor Kirchner supported Tabaré Vázquez in the final stretch of the campaign, including entering into conflict with the then-President of Uruguay, Jorge Batlle, over the special voting facilities provided to the large Uruguayan colony in Argentina, aimed at avoiding a run-off round (with the danger of Blancos and Colorados joining together). After the election of Vázquez, and with Lula and Kirchner leading Brazil and Argentina, the time seemed to have arrived to re-launch Mercosur, which had been languishing among attacks from within and without. But once again, reality imposed itself on florid Latin American rhetoric and a conflict broke out that should never have started.

The Legal Context
Along much of its course, the Uruguay river marks the border between Argentina and Uruguay. In 1975, an agreement was signed between the two countries and since 1976 the Uruguay River Management Commission (CARU) has been in charge of implementing the agreement and managing the most diverse aspects of the river’s utilisation, from maintenance of the bridges that span it, to conservation of fishing resources, to environmental questions. The bilateral treaty states that whoever plans to carry out works that could affect navigation, water flow or water quality must notify CARU in order for consultations to begin between the two countries. In general, the notified party accepts and the other party can carry on with the planned works. If there is no agreement, it is up to the governments to solve the problem and the bilateral agreement provides for up to 180 days of direct negotiations. Once this period is over and if the dispute continues, either party may approach the International Court of Justice in The Hague.

The agreement and CARU are the natural framework for settling disputes, but in light of how events have unfolded, in May 2005, after a new President was elected in Uruguay, the new Presidents and chancellors of the two countries met and created the High Level Technical Group (GTAN). This group was made up of experts from both countries. Significantly, the Argentine delegation also included representatives of the government of Entre Ríos and of the Gualeguaychú Citizens’ Environmental Assembly. The intransigent attitude of Governor Busti and the Assembly representatives shows how little interest they had in arriving at a negotiated settlement. The GTAN met twelve times between August 3, 2005, and January 30, 2006.

Before the GTAN began functioning in June 2005, Argentina expressed its environmental concerns to the project’s financiers: the International Finance Corporation (IFC –a branch of the World Bank–), the BBVA bank and the ING financial group. Acknowledging these concerns, the IFC made a new report whose conclusions were rejected by Argentina due to ‘their partial or incomplete nature’. From the start, there has been a sort of dialogue of the deaf, with Uruguay arguing the ‘sovereign’ nature of its decisions, and Argentina emphasising the ‘trans-border impact’ of the project. This is a case of a national perspective clashing with a bilateral one. After six months of negotiations, the GTAN concluded its activities without reaching a consensus. Enough time had passed for Argentina to approach the Hague Court.

The Uruguayan Project
The project to build the pulp mills was generated by the previous government and is a direct result of the programme in the 1990s to boost the forestry industry. As it turns out, this project has become a State issue and has taken on the importance of a national undertaking. The paper mills (popularly known as papeleras) are mobilising Uruguayans in a way that only the national soccer team is normally capable of. The state of public opinion is accurately reflected by certain Uruguayan websites such as http://bustismos.blogspirit.com/archive/2006/02/06/busti-park.html (which calls itself ‘an eastern space devoted to denouncing the incoherencies of Jorge Busti’). This is clearly confirmed by a survey by MORI Uruguay (February 26, 2006), which shows that 42% of Uruguayans want their government to act more assertively in response to the Argentine position. This figure clearly reflects the fact that 76% of those surveyed support the building of the pulp mills.

In the past twenty years, forestry operations have become an increasingly important economic issue, not only in Uruguay, but in the entire Southern Cone. Uruguay took major steps in forestry in 1987, with a law that stimulated tree-planting and wood-based industries focused on exporting. Since then, 50,000 hectares of forest have been planted annually, for a total of 800,000 hectares to date. The expansion of the forestry sector has had a great impact on the structure of the Uruguayan economy and will be strengthened by the operations at the new pulp mills. Uruguayans, therefore, are positive about the plants and disturbed by the overreaction in Argentina. Argentina, with 1.5 million hectares of managed forest, nearly doubles the same figure for Uruguay. For its part, Chile has 2.1 million hectares of cultivated forest, while Brazil has 5 million. However, the predominance and development of the Brazilian pulp and paper sectors have less to do with the number of hectares under cultivation than with its efforts at industrialising the sector; the country has 241 pulp and paper mills, compared with 10 in Argentina and 13 in Chile (seven paper plants and six pulp plants). The forestry sector plays an important role in the Chilean economy, equivalent to 3.5% of GDP, and is the second most important activity after mining. Forest exports are in the order of 3.4 billion dollars a year –1% of total exports–.

In 1990, ENCE established itself in Uruguay through its subsidiary Eufores, focusing on forest development. After several years of study and assessment, in 1997 Eufores acquired Estancia M’Bopicuá, and two years later created Terminal Logística M’Bopicuá S.A., with Eufores as sole shareholder. La Terminal, located at kilometre 108 on the Uruguay river, 12 kilometres upstream from Fray Bentos on a secondary channel, has been operating since November 2003. It can handle Panamax and Post-Panamax ships with a draft of up to 10 metres and has facilities for highway and railway transport. It connects with the Uruguayan highway system via routes 2 and 24, and to the Argentine system via the bridge from Fray Bentos to Puerto Unzué. It also has links to the Uruguayan railway system and the Ferrocarril Mesopotámico railway system in Argentina. The ENCE factory, with an investment of US$600 million and an annual production of 500,000 tonnes of wood pulp, is expected to start operations in 2008. The Botnia project, implemented by Compañía Forestal Oriental S.A. (FOSA), is twice as big, with an investment of US$1.2 billion and an annual production of 1 million tonnes of pulp. The plant is expected to employ three hundred workers. In both cases, the pulp will be produced from eucalyptus. Start-up of the plants is expected to lead to a 1.8% increase in GDP. The two investments will create about 12,000 jobs (7,500 direct and 4,500 indirect).

Argentina’s Arguments
In late 2002, Argentina heard unofficially that a pulp mill would be built in Fray Bentos. Despite there being no known authorisation or official confirmation of this, the Argentine authorities say they immediately began (within CARU) to request information on the project, in particular an environmental impact study, given their concern regarding possible pollution in Argentine territory. The Argentines say that the Uruguayan delegation to the Commission simply ignored them.

Next, Argentina accused Uruguay of violating the Uruguay River Statute when its Minister of Housing, Land-use Planning and the Environment authorised ENCE to build a paper plant in October 2003. For Argentina, this was the first of three consecutive violations. One week after ENCE received authorisation, Argentina called an extraordinary session of CARU to request that the established mechanism for providing prior information and consultation be put into practice. According to the Argentine authorities, Uruguay avoided this by remaining silent, leading to paralysis in the Commission. The Argentine Foreign Minister, Jorge Taiana, said that ‘this has become a controversy at the [national] government level over the implementation and interpretation of the Statute’ (Presentation by Chancellor Jorge Taiana to the Foreign Affairs Commission of the Chamber of Deputies”, February 14, 2006; at http://www.mrecic.gov.ar).

An exchange of diplomatic notes followed. The Uruguayan chancellor provided information on the project and, according to Argentina, the note revealed that Uruguay had held the information since July 2002, but had avoided following the information and consultation mechanisms. Argentina’s response emphasised the lack of information provided, especially regarding the environmental impact, and contained complaints that ENCE had been authorised to proceed before the Argentine government was consulted. To a great extent, Uruguay’s reluctance to inform Argentina was due to its fear that the investment would end up in another country. The Kirchner government also complained that on the same day that former President Jorge Batlle agreed not to authorise the contract until Argentina had received the environmental impact study, Uruguay ‘unilaterally’ authorised the construction of the ENCE plant.

In early 2004, Argentina and Uruguay attempted to reach a negotiated settlement, given what the Argentines interpreted as the paralysis of CARU. In March, the Foreign Ministers of both countries (Didier Operti of Uruguay and Rafael Bielsa of Argentina) reached an agreement in principle. This was one of the most obscure moments of the conflict, since the Argentine claim that the agreement was never ratified and the Uruguayans say it is fully valid. Once again, Argentina’s complaints focused on Uruguay’s unwillingness to provide information. Two other acts of non-compliance followed: Botnia was authorised to construct a new cellulose plant (close to the ENCE plant and twice as big) and authorisation was given for the construction of a port terminal at the Botnia plant.

When the GTAN met, the Argentine Minister passed on a set of requests from the government of the province of Entre Ríos, including a request to move the plants to a location far from the province’s populated areas –something totally unacceptable to the Uruguayan government–. It was also requested that more information on the plants be provided and that the works be stopped for 180 days, while the necessary environmental reports were being prepared. Uruguay did not respond satisfactorily to any of these requests.

The Argentine Protest
As mentioned above, the conflict originated with the attempt by the leaders of the province of Entre Ríos, headed by Governor Jorge Busti, to mobilise local society to prevent the construction of the paper mills, an impossible goal, since Governor Busti did not have the authority to stop a deal between the Uruguayan government and foreign investors. For this reason, as Joaquín Morales Solá wrote in La Nación, ‘anything that falls short of this useless goal is bound to appear to be a defeat’. It is important to note that beyond the demonstrations in favour of the environment, there was a parallel agenda with political and electoral objectives. This made it possible to mobilise local society practically en bloc, including housewives, labourers, merchants, the bishop and the mayor.

These mobilisations finally led to the blockade of the four bridges that link Argentina and Uruguay. Even the movement of trucks between Chile and Uruguay was affected. As a result, Chile began using ships to trade with Uruguay, because the cross-continental highway (which links Chile, Argentina and Uruguay) was blocked at the Gualeguaychú and Colón bridges. Other negative repercussions of the blockade included the irreparable damage to the Uruguayan tourist season, since many Argentines changed their summer vacation plans rather than risk not reaching their destinations.

Now that the conflict has flared up and local society has been mobilised in what is considered legitimate defence of its territory (water, air and the environment in general), it will be complicated to demobilise it. A key part of deactivating the conflict is to lift the blockades of the bridges. This is what Busti was hoping for, in order to rein in a conflict that had slipped out of control. This became increasingly complicated, especially after the meeting between President Kirchner and the representatives of Entre Ríos at the presidential palace. On the principle that social movements should not be repressed, Kirchner did not ask the protestors to lift the blockade of the bridge, despite its international repercussions, for fear that they would refuse. The provincial representatives returned home more convinced than ever that Kirchner was not asking anything of them. Governor Busti had the same problems in early March when –undoubtedly at the President’s request– he tried to have the bridges unblocked. After their initial failure, there were some shifts in the position of Assembly representatives, who have been losing legitimacy due to a lack of support from social movements on the Uruguayan side. It is perfectly obvious that the people most likely to suffer the effects of pollution would be those closest to the plants, in Uruguay, rather than those living on the other side of the river.

It was President Kirchner, at the request of the government of Entre Ríos, who backed Argentina’s case before the International Court in The Hague (of course, after seeking and receiving the support of parliament). If this line of pursuit continues to its end, it will be the first time that Argentina has gone to this court to settle a dispute. The issue of whether to go to the Court in The Hague was presented to parliament by Minister Taiana, both in the Chamber of Deputies and in the Senate. There was harsh rhetoric against Uruguay and the Argentine version of the conflict was emphasised, particularly the idea that this is a bilateral issue.

According to the 1975 Uruguay River Statute, the International Court of Justice in The Hague is the authority to which the parties can appeal in the case of bilateral disputes, after exhausting certain prior negotiating procedures. Certain legal experts, such as Daniel Sabsay, support the Argentine position and argue that the Court is the proper authority to solve the problem. This is so, among other reasons, because the Court can appoint non-voting consultants to participate in the proceedings, which makes expert opinions available in very technical disputes that are then resolved by a selected group of elected judges whose decision is just as binding as when the Court’s rulings involve all its members. These seven-member groups were set up in 1993 to deal with States that request quick rulings, for example in environmental cases. The parties can also request urgent interim measures to prevent construction until the Court rules on the substance of the issue, although to date The Hague Court has not often accepted this type of request. However, some of the most politicised sectors of the opposition, such as the one represented by Senator Rodolfo Terragno, oppose the measure outright.

The Uruguayan Position
The Uruguayan position is based on the fact that these are very high-tech factories and on the conviction that they will not pollute. It is also based on the fact that Uruguay is the Latin American country that is most respectful of the environment, in contrast with Argentina, whose ten cellulose plants use quite outdated technology and pollute much more. On the Environmental Sustainability Index, Uruguay is the third-ranked country in the world, after Finland and Norway. As for corruption, the Transparency International Index of perceived corruption ranks Uruguay 32nd of 158 countries, compared with Argentina’s 97th-place ranking.

At the end of 2005, 62% of Uruguay’s population was in favour of the pulp mills, while 11% was against them. In the area affected by the construction project, opinion is more polarised, with 69% in favour (74% in the city of Fray Bentos) and 19% against. At the time of the survey, nearly half of respondents thought that the issue was one of competition for foreign investment. This does not mean that in Uruguay there has not been opposition to the project; there has been, particularly from environmentalists. However, there is such strong popular support for the project because the government of Tabaré Vázquez (of the Frente Amplio-Encuentro Progresista party) has backed it seamlessly. This has deactivated a large number of protests by leftist organisations that had demonstrated in previous years. At the same time, the agitated tone of the Argentine protests, the closure of the border bridges by Argentine pickets and the lack of police action in Entre Ríos, have all reduced the volume of internal criticism. Thus, with the backing of the traditional political parties –the Blancos and Colorados– the construction of the factories has become a State issue in Uruguay, whereas this is not the case in Argentina.

The enormous support President Vázquez has received is also a straightjacket that limits his government’s ability to manoeuvre, and he has repeatedly indicated that he does not want to be forced to make decisions on the basis of resolutions by citizen assemblies, further complicating the situation. Large sectors of the government are also convinced that the blockade of the bridges is somehow under the authority of the Argentine government. In response, the Uruguayan government has hardened its position: the President has promised to hold a cabinet meeting in Fray Bentos and personally lay the cornerstones of the pulp plants. Former Uruguayan President Jorge Batlle, in his characteristically blunt way, described Uruguay’s position like this: ‘With Mercosur as it is now, we’re stuck. Other countries in the region are opening up trade with the entire world while we’re stuck fighting with each other. It looks like Mercosur won’t be opening up until Brazil decides to open up’.

Bilateral Negotiations
Before construction ends, Argentina wants the Uruguayan government to prove that the venture will not cause pollution. In a recent speech (February 26, 2006), President Kirchner called for construction to stop for two or three months in order for independent experts to prepare an environmental report. He said the same thing a few days later before Congress, at the opening of this year’s parliamentary session. On both occasions, the Argentine President sounded more conciliatory than on other occasions and suggested that Tabaré Vázquez is still his friend and that he does not want to do him any harm.

After the Argentines decided to go to The Hague, the Uruguayans responded by requesting mediation by the OAS, and Uruguay’s vice-chancellor, Belela Herrera, met with OAS Secretary General José Miguel Insulza. Insulza said that the OAS would intervene only if both parties requested this, but Argentina’s answer was clear: it does not favour mediation of any kind, fearing that the third party would complicate matters. Instead, the Argentine government seeks a direct agreement between the interested parties. This position responds largely to the weakness of its arguments and the fear that mediation or arbitrage could end up supporting Uruguay. The advantage of The Hague is that it is a long road and any ruling would be handed down when the dispute has been forgotten and the political costs of a possible loss would no longer matter.

However, going to the Hague presents certain political and economic complications to which the Argentine authorities have given very little attention, apart from strictly legal arguments. Before any ruling by the Court (which could be a long time coming) and given the uncertainty involved in the process, Uruguay could suffer economic setbacks caused by a loss of foreign investment. In such circumstances, both ENCE and Botnia could end up abandoning their projects. More seriously still, investments in Mercosur could also be affected. A scenario of this kind would tend to force the government to formalise strategic alliances –starting with the United States– contrary to the interests of Argentina and Mercosur.

The most recent Argentine proposals presented by President Kirchner (the latest one in his speech to the national Congress) involve suspending construction for two or three months in order to allow a group of environmental experts to submit their findings. However, this proposal was rejected outright by Uruguay, which used the ‘sovereignty’ argument and emphasised the government’s commitment not to take a step forward until the blockade of the bridges linking the two countries is lifted. The Uruguayan position is based on its offer for the two countries to jointly monitor the activity at the plants and, if there is indeed pollution, to take coordinated corrective measures. This offer has been rejected by the Argentines, who have remained intransigent. However, this will have to be the basis for a true solution.


Possible Consequences
This international conflict could spread. Brazil has announced the possible construction of another paper plant using similar technology, also on the Uruguay river. On February 7, Paraguay’s Environment Ministry sent a message to the Argentine-Paraguayan Mixed Commission on the Paraná River, regarding the probable pollution that Paraguay is receiving from the paper plants installed in the Argentine province of Misiones (in particular the Puerto Piray plant). This, plus the repercussions in Chile of the bridge blockades, shows how the conflict could end up affecting the entire Southern Cone. For this reason, Uruguay hopes that the Lula government will involve itself more actively in the issue and will be able to help set a reasonable tone between Kirchner and Vázquez, whose relations are very tense at present.

But the conflict also has internal repercussions. In Argentina there are signs of concern in Misiones and Formosa, two of the provinces where the pulp and paper industry is most important. Misiones has three paper mills and, unlike Entre Ríos, the local population supports their operations. From their Peronist perspective, the representatives of these provinces are very concerned about the position of the national government, which has made its opposition to the Uruguayan plants a matter of principle.

Although there are some signs that negotiation is still possible, the signals received by both sides in early March were contradictory. Neither side wants to give its public the impression of a defeat –something that would be much more costly for Kirchner than for Vázquez–. The possibility of a meeting in Chile on the occasion of Michele Bachelet’s swearing-in as President is an opportunity that should not be missed, even though the Presidents on either side of the Uruguay river are hardly on speaking terms these days. They must consider how much is at stake in both their countries, rather than insistently maintaining an intransigent course. Among other things, the future of Mercosur itself is at stake.

Carlos Malamud
Senior Analyst, Latin America, Elcano Royal Institute