This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 04 BRASILIA 002125 
 
SIPDIS 
 
SENSITIVE 
 
TREASURY FOR A/S GLASER 
 
E.O. 12958: N/A 
TAGS: EFIN ETTC
SUBJECT: SCENESETTER CABLE FOR VISIT OF TREASURY ASSISTANT 
SECRETARY GLASER 
 
SIPDIS 
 
REF: Brasilia 2082 
 
¶1. (U) The United States Mission in Brazil warmly welcomes 
your August 20-23 visit to Brasilia.  We are currently 
working with your staff on the logistical arrangements for 
your travel.  Embassy has requested meetings for your 
delegation with counterparts at the Finance, Justice, and 
Foreign Ministries; the Central Bank; and Brazil's Financial 
Intelligence Unit (COAF).  In addition, we are scheduling a 
press availability on the afternoon of August 23 and 
meetings with various elements of the Embassy Country Team. 
 
¶2.  (SBU) Your visit comes in the midst of Brazil's worst 
political scandal in more than 20 years.  Congressional 
deputies from President Lula's governing coalition stand 
accused of accepting bribes, while officials from the 
President's party (the PT) are alleged to have engaged in 
influence peddling.  The PT's slush fund financing of 
various political campaigns has highlighted the need for the 
government to tighten financial controls and bolster the 
staff of its fledging Financial Intelligence Unit.  Already, 
proposals are circulating within the GOB to include tax 
evasion and off-the-books financing as predicate offenses 
for the crime of money laundering.  In addition, the 
Brazilians are examining interagency the idea of buttressing 
the current civil penalties banks face for failing to report 
suspicious transactions with criminal ones.  While neither 
of these proposals has yet made it to Congress, once the 
Lula Administration submits these bills given the prevailing 
political climate we could see quick legislative action. 
 
¶3.  (SBU)  In your public statements on money 
laundering/terrorism finance, we recommend that you 
underscore the years of useful cooperation between USG and 
Brazilian law enforcement authorities on these issues - 
while emphasizing that your visit is not connected in any 
way to the ongoing political scandal.  You might want to 
note that your visit is part of a continuing series of 
consultations (both bilateral and multilateral) between anti- 
money laundering/terrorism finance officials in both 
countries.  Brazilian audiences will likely focus more on 
the money laundering aspects of your message as even among 
government interlocutors here terrorism finance does not 
have a high profile.  Given the sensitivities surrounding 
the Tri-Border area, you may want to limit your press 
activities when you are in that region. 
 
¶4.  (SBU)  Below is some further background information on 
the economic and political situation in Brazil today.  We 
look forward to exploring these themes and others during the 
course of your visit. 
 
FOREIGN POLICY 
-------------- 
 
¶5.  (SBU) President Lula has run an activist foreign policy 
with a focus on South America, forging alliances with other 
mid-sized powers (South Africa, India) as well as other 
third world countries.  He has moved to revitalize Mercosul 
as a trading bloc and has sought a regional approach to the 
FTAA talks.  Indeed, given its size and natural resources, 
Brazil has long seen itself as the natural leader of the 
region (even if that perception is not shared by many of its 
neighbors).  In February 2005, Lula signed a "strategic 
alliance" with Venezuela's Hugo Chavez to promote joint 
energy and infrastructure projects, as well as possible 
purchases by Venezuela of Brazilian defense articles. 
 
¶6.  (SBU) Emblematic of Brazil's rising self-confidence on 
the world stage is its tenacious pursuit of a permanent UN 
Security council (UNSC) seat.  Brazil and other G4 states 
(India, Germany, Japan) are pressing now for votes on a 
resolution on UNSC reform.  This stance is at odds with the 
USG position, which wishes to defer UNSC reform until after 
other changes in the UN systems, and which currently 
endorses Japan's UNSC bid.  Brazil leads the UN peacekeeping 
force in Haiti with 1,200 troops on the ground there, and is 
also spearheading a "G-20" group of developing nations. 
Brazil has a long tradition of commitment to the UN and 
other multilateral institutions.  Many Brazilians are 
therefore deeply concerned by the war in Iraq, viewing it as 
a sign of U.S. unilateralism.  President Lula voiced public 
opposition to the war, although this opposition never 
jeopardized bilateral relations and both sides continue to 
work on the broader bilateral agenda.  Finally, Brazil is a 
player in high-profile global issues such as health (AIDS, 
pharmaceuticals) and the environment.  However, its stances 
on these issues (such as the possible compulsory licensing 
of anti-AIDS drugs) has at times not been welcome to USG 
policymakers. 
 
¶7. (SBU) Brazil's self-confidence has changed the tone of 
its relationship with the U.S., sometimes in ways to our 
liking, sometimes not.  It helped keep issues like our 
requirements that Brazilian airlines furnish passenger data 
or our insistence on stronger IPR enforcement from blowing 
up into political food fights.  The GOB worked quietly with 
us on the timing and details of its shoot-down program to 
accommodate our statutory requirements.  Nevertheless, hyper- 
sensitivity on issues viewed as infringing on Brazil's 
sovereignty can get out of hand and may be seen as signs of 
political immaturity.  Many Brazilians believe the U.S. has 
designs on the Amazon.  Our fingerprinting of visitors to 
the U.S. drew reciprocal treatment for Americans here; visa 
and immigration issues remain sensitive points. 
 
PRESIDENT LULA 
-------------- 
 
¶8.  (U) President Luiz Inacio Lula da Silva was inaugurated 
in January 2003 after a career as a Sao Paulo metalworker 
and labor leader.  He founded the left-of-center Workers' 
Party (PT) in 1980 and lost three presidential campaigns 
before winning in the October 2002 elections.  Lula can run 
again in October 2006, and recent polls give him a sizeable 
lead over potential challengers.  He has traveled 
extensively in pursuit of a higher international profile for 
Brazil.  He has met President Bush several times and the two 
have a good rapport.   Despite the common perception that 
Lula's social agenda, including his trademark "Zero Hunger" 
program, has not delivered much, Lula's popularity remains 
high and remarkably detached from that of his government. 
He is seen as honest, optimistic and inclusive, particularly 
towards the lower classes and marginalized sectors.  Lula 
often seeks a range of opinions on policy, making a point of 
consulting labor, civil society, business leaders, and state 
governors.  Since the mid-1990s, the PT party has steadily 
moderated its leftist positions and moved towards the 
center, forming alliances with parties from the left to the 
right.  This has caused some grumbling from the PT's left 
wing but made the party far more electable. 
 
¶9.  (SBU) During recent months the Lula Administration has 
been beset by a political crisis as interlocking influencing 
peddling/vote-buying scandals continue to unfold.  The 
President's Chief of Staff has resigned his post, Lula has 
embarked upon a series of cabinet shuffles, and a number of 
high-level officials in Lula's party and his party's 
coalition have departed.  Central Bank President Meirelles 
may depart the government soon (due to unrelated allegations 
against him) though Finance Minister Palocci appears well- 
entrenched.  Still, a July 2005 poll shows that Lula's 
approval rating stands at 60%, and, so far, the scandals 
have not punished Brazil in the international markets. 
Lula's popularity reached a nadir of 54% in June 2004, when 
the public seemed to lose confidence in his fiscal austerity 
program and in the face of weak 2003 GDP growth and 
stubbornly high unemployment.  Overall, confidence in the 
administration has rebounded as the economy improved, 
although the recent corruption scandals still may take a 
toll.  The public's top concern -- crime and public security 
-- has not notably improved under this administration.  The 
opposition will use these shortcomings and scandals to try 
to deny Lula any legislative victories in hopes of eroding 
Lula's popularity prior to the October 2006 elections. 
 
ECONOMIC DEVELOPMENTS 
--------------------- 
 
¶10.  (U) Brazil's economy, aided by a benign international 
environment, should have another solid year in 2005.  GDP 
growth of 5% in 2004 has coupled with booming exports, 
healthy external accounts, inflation under control, 
decreasing unemployment and reductions in the debt-to-GDP 
ratio.  President Lula and his economic team have 
implemented prudent fiscal and monetary policies and pursued 
necessary microeconomic reforms.  In March 2005, the 
Brazilian government declined to renew its Stand-by 
Agreement with the IMF and in mid-July it announced that it 
would pay early US$5.12 billion in Standard Reserve Facility 
payments due by March 2006. 
 
¶11.  (U) Brazil has made progress but significant 
vulnerabilities remain.  Despite registering its first year- 
on-year decline in 2004, Brazil's (largely domestic) 
government debt remains high, at 52% of GDP.  Total foreign 
debt, while falling, is still large in relation to Brazil's 
modest export base.  Over time this concern will be reduced 
by healthy export growth, which has anchored the positive 
trade and current accounts.  Personal incomes improved in 
2004 after a significant decline over the previous decade. 
Income and land distribution remains skewed. 
 
¶12.  (U) Sustaining high growth rates in the longer term 
depends on the impact of President Lula's structural reform 
program and efforts to build a more welcoming climate for 
investment, both domestic and foreign.  In its first year, 
the Lula administration passed key tax and pension reforms 
to improve the government fiscal accounts.  Judicial reform 
and an overhaul of the bankruptcy law, which should improve 
the functioning of credit markets, were passed in late 2004, 
along with tax measures to create incentives for long-term 
savings and investments. 
 
¶13.  (U) Public-Private-Partnerships, a key effort to 
attract private investment to infrastructure, also passed in 
¶2004.  Labor reform and autonomy for the Central Bank are on 
the agenda for 2005.  Despite this well-considered reform 
agenda, much remains to be done to improve the regulatory 
climate for investments, particularly in the energy sector; 
to simplify tortuous tax systems at the state and federal 
levels; and to further reform the pension system.  Prospects 
for much of this reform agenda are dim for the remainder of 
Lula's term. 
 
TRADE POLICY 
------------ 
 
¶14.  (U) President Lula has made economic growth and poverty 
alleviation top priorities.  Export growth figures 
prominently in plans to generate growth and reduce what is 
seen as a vulnerability to international financial market 
gyrations.  To increase exports, the government is seeking 
access to foreign markets through trade negotiations and 
increased export promotion as well as government financing 
for exports. 
 
¶15.  (U) To increase its international profile (both 
economically and politically), the Lula administration is 
seeking expanded trade ties with developing countries, as 
well as a strengthening the Mercosul customs union with 
Uruguay, Paraguay and Argentina.  In 2004, Mercosul 
concluded free trade agreements with Colombia, Ecuador, 
Venezuela and Peru, adding to its existing agreements with 
Chile and Bolivia to establish a commercial base for the 
newly-launched South American Community of Nations.  This 
year Mercosul is pursuing free trade negotiations with 
Mexico and Canada and hopes to be able to resume trade 
negotiations with the EU.  The trade bloc also plans to 
launch trilateral free trade negotiations with India and 
South Africa, building on partial trade liberalization 
agreements concluded with these countries in 2004.  China 
has increased its importance as an export market for 
Brazilian soy, iron ore and steel, becoming Brazil's fourth 
largest trading partner and a potential source of 
investment. 
 
DOHA AGENDA - WTO 
----------------- 
 
¶16.  (SBU) Brazil leads the G-20 group of developing 
countries that is pressing for agricultural trade reform in 
the WTO Doha Development Agenda negotiations.  Brazil's 
assertive leadership of the G-20 was blamed in some quarters 
for causing the failure of the WTO Cancun Ministerial in 
September 2003.  Since then, Brazil has been more 
constructively engaged in the Doha Round as a member of the 
"Five Interested Parties" informal group, although many of 
its positions are still at odds with U.S. interests.  In May 
2005, Brazil's current representative to the WTO, Ambassador 
Luiz Seixas Correa, was defeated by former EU Trade 
Commissioner Pascal Lamy for the position of WTO Director 
General; Seixas Correa will be replaced by Ambassador 
Clodoaldo Hugueney in September.  Brazil is expected to 
maintain its assertive stance in the Doha Round on 
agricultural trade reform while taking more defensive 
postures in the discussions covering industrial products and 
services. 
 
FREE TRADE OF THE AMERICAS - FTAA 
--------------------------------- 
 
¶17.  (SBU) The U.S. and Brazil have been co-chairs of the 
FTAA ("ALCA" in Portuguese) talks since 2002.  It has been a 
difficult period, rife with uncertainty over Brazil's 
commitment to the talks.  While the Lula administration shed 
the extreme anti-FTAA rhetoric of the 2002 presidential 
campaign, it has not embraced the FTAA as a priority. 
Strong Brazilian commercial interests have yet to overcome 
these ideological hurdles to what is viewed as a "U.S.-led 
initiative." 
 
¶18.  (U) During the FTAA Ministerial in Miami in November 
2003, the U.S. and others agreed to a new framework for 
negotiations to accommodate the sensitivities of Mercosul 
countries, principally Brazil.  The compromise allowed 
countries to assume different levels of commitments, but 
guaranteed that there would be a common set of rights and 
obligations covering all the original areas of negotiation. 
Following the Miami Ministerial, negotiations to define the 
"common set" have not been successful.  U.S. and Brazilian 
negotiators met in January and in February 2005 to explore 
prospects for resuming negotiations, but the process has not 
moved forward, in part due to Mercosul's continued interest 
in pressing for U.S.-Mercosul negotiations.  Brazil is 
slated to host the next FTAA ministerial meeting, but no 
date has yet been set. 
 
REFORM AGENDA 
------------- 
 
¶19.  (U) In 2003, Congress passed Lula's key reforms to the 
public sector pension system and the tax code.  The 2004 
legislative season was not very productive, in part because 
of a political scandal early in the year followed by 
campaigning for the October municipal elections.  In 
December 2004, several key bills passed into law, including 
a reform of the judicial system, a modern bankruptcy law, 
and Public Private Partnerships to fund infrastructure 
projects.  In March 2005, a law to legalize biotechnology 
crops and stem cell research passed.  The Lula 
administration has been less successful in combating crime, 
poverty, and decaying infrastructure.  The flagship "Zero 
Hunger" program has reached only a fraction of the estimated 
50 million Brazilians living in poverty.  The administration 
was also slow to make progress on agrarian reform.  Other 
bills awaiting attention this session include: further 
judicial reforms, Central Bank autonomy, and a reform of 
political parties and campaign funding. 
 
AGRICULTURE 
----------- 
 
¶20.  (U) Agriculture is a major sector of the Brazilian 
economy, and is key for economic growth and foreign 
exchange.  Agriculture accounts for 13% of GDP (and 30% when 
including agribusiness) and 40% of Brazilian exports. 
Brazil enjoyed a positive agricultural trade balance of 
US$34 billion in 2004.  Brazil is the world's largest 
producer of sugar cane, coffee, tropical fruits, frozen 
concentrated orange juice (FCOJ), and has the world's 
largest commercial cattle herd (50% larger than the U.S.) at 
170 million head.  Brazil is also an important producer of 
soybeans (second to the United States), corn, cotton, cocoa, 
tobacco, and forest products.  The remainder of agricultural 
output is in the livestock sector, mainly the production of 
beef and poultry (second to the United States), pork, milk, 
and seafood. 
 
LINEHAN