The Finnish firm, Metsa-Botnia, is building a plant on the Uruguay River near the Uruguayan town of Fray Bentos that would produce one billion tons of pulp a year, while the Spanish company, Ence, is developing a plant nearby that would deliver 500 million tons of pulp a year. The plants are due to be operational by the third quarter of next year.

The combined investment of $1.8bn would be the biggest foreign investment in Uruguay’s history and Metsa-Botnia’s investment of $1.1bn-$1.2bn would be the biggest foreign investment ever made by a Finnish company.

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However, Argentina’s government, spearheaded by president Néstor Kirchner, has been campaigning vigorously to stop the mills because it believes they would contaminate the Uruguay River and the popular Argentine tourist destination, Gualeguaychú.

On May 4, Argentina presented a case against the plants to the International Court of Justice at The Hague. In turn, Uruguay has filed a claim against Argentina with the secretary general of the Organisation of American States and has threatened to leave the South American trading block, Mercosur.

Recently, the dispute was dramatically brought to the world’s attention when Evangelina Carrozo, a carnival queen from Gualeguaychú, protested against the mills at the summit between European and Latin American leaders in Vienna.

Esteban Fernández Medrano, a partner of Buenos Aires-based economic consultancy Macrovision, said: “I think we are seeing double standards on the part of the companies involved and the Argentine government. It seems that the companies think they can use technology in the developing world that is being phased out in Europe. And the Argentine government is highly critical of these plants despite the fact that there are already several paper mills in Argentina.”

The World Bank’s private-sector arm is considering $400m in funding for the mills but has put this on hold until it completes an environmental impact study.

On March 28, Ence suspended its plant’s construction for 90 days to await the outcome of the investigation. Metsa-Botnia halted building at its plant for 10 days but it has now resumed construction work.

Erkki Varis, chief executive of Metsa-Botnia, said: “It is not necessary to stop the plant. The environmental studies can take place with the construction work on course. It would be difficult to halt the work because there are many people working and many companies contracted.”

The Argentine government has been pressuring the Finnish government to stop Metsa-Botnia’s construction because Finnvera, which manages the export credit guarantees provided for the Metsa-Botnia project, is owned by the Finnish government.

Jason Mitchell