FACTBOX-Key political risks to watch in Ecuador

QUITO Fri Dec 2, 2011 10:00am EST

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QUITO Dec 2 (Reuters) - The signing of contracts with two mining companies, tensions between the central government and lawmakers and an ongoing row between the media and President Rafael Correa are issues to watch in Ecuador.

CORREA AND THE MINING SECTOR

Ecuador is set to sign contracts with two Canadian miners planning to invest some $3 billion for gold and copper mines in the mineral-rich Andean country. Negotiations for the contracts have taken much longer than expected because Ecuador is trying to reap high benefits from the nascent mining industry, which would allow Correa to boost social spending.

Kinross Gold Corp. plans to develop Ecuador's largest gold project, Fruta del Norte, and Ecuacorriente - an affiliate of Canada's Corriente Resources - will work on the Mirador copper mine.

Ecuador has said that the deals will be signed in late December or in early 2012 and that the companies will be paying royalties of between 5 percent and 8 percent, depending on mineral prices.

According to the government, Kinross and Ecuacorriente have agreed to make advance royalty payments before their mines start producing.

Ecuador is also negotiating contracts with International Minerals over its Rio Blanco gold-silver project, with Ecuacorriente over its Panantza-San Carlos copper deposit and with IAMGold , which plans to develop the Quimsacocha gold-copper-silver mine.

If all the projects go ahead, Ecuador could receive some $7 billion in mining investments over the next seven years.

The five projects were initially delayed as the government tightened regulations for the industry. Correa has had a tumultuous relationship with foreign investors, revising oil contracts to better favor the government and defaulting on the nation's debt.

He wants to diversify the economy from crude oil exports, and has taken a softer approach with investors planning to develop large mines than with oil companies with investments in the OPEC member country.

What to watch:

-- Kinross and Ecuacorriente signing contracts.

-- More miners coming in to tap Ecuador's resources.

CONGRESSIONAL TENSIONS

A decision by Correa to hike taxes despite a vote by lawmakers rejecting the measure is likely to increase tensions between the central government and Congress. Rivals have accused Correa of wanting to undermine Congress and the judiciary.

Correa has accused lawmakers and judges of being inefficient and influenced by a political "elite". He vows to push ahead with an overhaul of state institutions with or without support from lawmakers.

He said he may organize public votes to get the go-ahead from supporters for his policies. Increased state spending has made him popular among the poor and he won a referendum in May on reforms aimed at shaking up the judiciary.

Correa is well placed to win re-election in January 2013, although he still has not said whether he plans to run. Even though his rivals are divided, the opposition has a thin majority in Congress.

What to watch:

-- Increasing tensions between Correa and Congress.

-- Political jockeying ahead of 2013 national elections.

MEDIA FREEDOM AND THE ECONOMY

Lawmakers are set to debate a controversial bill that calls for the creation of a media watchdog. Rights groups fear that Correa will use the regulator to hamper media freedom in the OPEC-member country.

Ecuador sentenced three newspaper directors and a former columnist to jail in July, and fined them and the paper $40 million for libeling Correa, prompting widespread condemnation from rights groups.

Correa often accuses the press of lying to undermine his government and calls them "the real opposition," while news organizations accuse him of trying to silence critics.

Correa is part of a South American leftist alliance that includes presidents Hugo Chavez of Venezuela and Evo Morales of Bolivia, who have changed laws to boost their power and have also been accused of stifling media freedom.

After excluding itself from debt markets by defaulting on $3.2 billion in global bonds three years ago, Ecuador has met funding needs with bilateral credit deals, mostly from China.

Ecuador signed a $2 billion credit deal with China in June and in October it signed a deal for a $571 million loan with a Chinese bank, which took total debt commitments to China to around $7.3 billion, including loans, advance payments for oil sales, and energy project financing.

In November, Correa announced that his government is in talks with a Chinese bank for a loan worth $1.7 billion. He also vowed to deepen economic ties with China.

Ecuador is expected to grow 6.5 percent in 2011, well above the government's target for the year.

The construction of the mines should boost economic growth next year. Before announcing that the contracts were almost done, the government forecast economic growth in 2012 at 5.35 percent.

However, the economy is highly dependent on crude exports, and could suffer badly if oil prices were to fall.

What to watch:

-- Worsening tensions between Correa and the media.

-- Ecuador signing a new loan deal with China.

OIL TALKS, CHEVRON AND REFINERIES

A judge ordered Chevron in February to pay $8.6 billion to clean up pollution at old drilling sites in the Amazon. Chevron denies the charges, and the 17-year-old legal saga looks far from over as both sides appeal.

A U.S. judge later froze the enforcement of the ruling outside Ecuador, but in September an appeals court reversed the order, although the plaintiffs promised not to seek enforcement until their appeal process in Ecuador is done.

Oil companies including Schlumberger , Halliburton and Baker & Hughes are in talks over $1.5 billion in investments to increase output in four large mature oil fields controlled by state-run oil company Petroecuador.

The Esmeraldas refinery, controlled by Petroecuador, is being overhauled and will be off stream for eight months in 2012. With a production capacity of 110,000 barrels per day, Esmeraldas is the largest refinery in Ecuador and the government is investing some $850 million to revamp it.

What to watch:

-- Further legal rulings and moves in the Chevron case.

-- Talks with oil investors moving forward slowly.

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