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

C O N F I D E N T I A L SECTION 01 OF 04 BRASILIA 002628 
 
SIPDIS 
 
FOR THE DEPUTY SECRETARY 
 
E.O. 12958: DECL: 09/30/2015 
TAGS: OVIP PREL ECON PGOV ETRD BR US
SUBJECT: SCENESETTER CABLE FOR VISIT OF THE DEPUTY SECRETARY 
 
Classified By: CDA PHILLIP CHICOLA, REASONS 1.4 (b) AND (d) 
 
 ¶1. (SBU) The United States Mission in Brazil warmly welcomes 
your planned October 5 to 7 visit to Brasilia.  Ambassador 
Danilovich will meet you upon arrival the evening of October 
¶5.  The next day, we have scheduled meetings for you with 
Foreign Minister Amorim, Finance Minister Palocci, 
Presidential International Affairs Advisor Marco Aurelio 
Garcia, and Senate leaders.  We have also scheduled you to 
announce the 2006 selections for the Mission's Youth 
Ambassador's program, to meet with the press and to 
informally meet and greet Embassy direct-hire personnel.  The 
meeting request with President Lula is still pending. 
 
¶2. (SBU) Your visit comes in the wake of a series of meetings 
in Washington between Brazilian cabinet ministers and their 
USG counterparts the week of September 25.  Foreign Minister 
Amorim met with Secretary Rice, USTR Portman, and yourself. 
Trade Minister Furlan, in town for the annual Brazil-U.S. 
Business Council meeting, met with Secretary Gutierrez, USTR 
Portman, and Secretary Bodman. Finance Minister Palocci, in 
Washington to attend the Bank/Fund meetings, met with 
Secretary Snow.  And Environment Minister Silva attended a 
 
SIPDIS 
bilateral meeting on environmental issues. 
 
THE BILATERAL RELATIONSHIP 
-------------------------- 
 
¶3. (C)  While relations between the U.S. and Brazil are 
friendly, often the USG encounters major difficulties in 
gaining the cooperation of senior policymakers on issues of 
significant interest to the United States.  Eager to assert 
its own influence, the Brazilian government shies away from 
cooperation with the USG - unless it can clearly be 
characterized as a reciprocal exchange among equals.  Indeed, 
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. 
 
¶4.  (C) During recent months, our ongoing dialogue with the 
Brazilians has focused on a variety of potentially useful 
projects for both sides.  We sought to interest the GOB in a 
Defense Cooperation Accord, but the Foreign Ministry rejected 
the proposal even though the Defense Ministry was supportive. 
 Gaining agreement on privileges and immunities to be granted 
U.S. servicemen engaging in military exercises has been just 
as tough sledding, as the Foreign Ministry saw it as "a foot 
in the door" and linked it with Brazil's strong opposition to 
Article 98 agreements.  While we seek to get the GOB to move 
forward with an agreement governing space launches at the 
country's equatorial base at Alcantara, our pleas are met 
with silence even as Brazil has executed space-related 
agreements with Ukraine and others.  On trade issues, when 
unscripted, President Lula has characterized the FTAA as "off 
his agenda."  IPR is another sore point, as it has become 
clear that the USG and the Brazilian government have 
differing views on the protection to be afforded to 
intellectual property.  Only after gargantuan efforts have we 
gotten the GOB to turn the corner on copyright piracy and 
(apparently) persuaded policymakers to seek negotiated 
solutions on compulsory licensing of AIDs anti-retrovirals. 
 
 
¶5.  (C)  However, all our conversations are not difficult. 
At the personal level, Lula has met President Bush several 
times and the two have a good rapport. On issues involving 
matters perceived as technical in nature - i.e., law 
enforcement and science (but not the environment or 
counter-terrorism) - the GOB is eager to engage.  For 
example, from 2003 to 2004, the GOB worked quietly with us on 
the timing and details of its shoot-down program to 
accommodate our statutory requirements (although now a new 
crop of GOB bureaucrats appears to be unaware of the 
government's past promises).  Foreign Minister Amorim's 
statements to the press in the wake of his September 26 
meeting with you, i.e., to the effect that Brazil would seek 
as a deliverable during the upcoming POTUS visit intensified 
bilateral dialogue on scientific, education, and 
environmental issues, reflect this desire to cooperate only 
on matters of marginal interest to the U.S. 
 
¶6.  (C)  On development assistance issues, our dialogue is 
positive - but still constrained.  Despite lackluster 
results, the Brazilian government's multi-billion dollar 
poverty alleviation program - Zero Hunger - receives 
substantial funding from the World Bank and the IDB.  Given 
USG budget constraints and the fact that Zero Hunger is, in 
essence, a cash transfer program, USAID support has been 
limited.  Instead of focusing on cash transfers to the poor, 
USAID has sought to target its efforts towards promoting 
sustainable livelihoods - inter alia, through working with 
small and medium-sized enterprises.  PA's Youth Ambassador 
program takes a similar targeted approach.  This difference 
in focus, broad cash transfers versus targeted assistance, 
ends up putting the USG at the margins of Brazil's overall 
anti-poverty efforts. 
 
FOREIGN POLICY 
-------------- 
 
¶7. (C)  In large part due to Brazil's ambivalence towards the 
United States, President Lula has run an activist foreign 
policy with a focus on South America and the Third World, 
seeking to forge alliances with other mid-sized powers (South 
Africa, India, etc).  He has traveled extensively in pursuit 
of a higher international profile for Brazil.  Despite 
prodding from the USG and others, Lula has refused to condemn 
Cuba for human rights violations and, in fact, has pushed for 
Cuban membership in the Rio Group.  Brazil has also advocated 
a Cuba-Mercosul trade pact.  In addition, the GOB has worked 
to increase both its economic and political ties with 
Venezuela.  Enhanced integration of the two countries' energy 
sectors is high on its agenda.  Lula has been especially 
solicitous of Chavez.  During the September 29-30 South 
American Community of Nations Summit in Brasilia, Lula 
praised the Venezuelan President's democratic credentials 
("if anything, Venezuela has an excess of democracy") and 
declared that the Chavez government had been demonized by its 
foes.  We understand that the Lula administration even paid 
for the transportation costs of Brazil's youth contingent 
attending the recent Bolivaran Youth Festival in Venezuela. 
Given all this, it would be unrealistic to expect Brazilian 
activism in support of Venezuelan democracy. 
 
¶8.  (C) In the face of declining inter-bloc trade, Brazil has 
sought to revitalize Mercosul.  It has pursued Mercosul-USG 
trade talks, an effort seen by many as a way to delay/derail 
the FTAA process.  Indeed, given its size and natural 
resources, Brazil has long seen itself as the natural leader 
of the region (even though that perception is not shared by 
many of its neighbors). 
 
¶9.  (C)  Emblematic of Brazil's efforts to gain greater 
standing 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, despite recent 
setbacks, continuing to press their campaign  for a vote on a 
resolution on UNSC reform.  This stance is at odds with the 
position of many Latin American countries, including those 
which Brazil believes should follow its "natural leadership." 
 
 
¶10. (C)  Brazil has long seen international fora as a way to 
enhance its international stature.  Reflecting this, in 2005 
it launched failed national candidates for the top jobs at 
both the WTO and the IDB.   The failure of both, together 
with the unlikely prospects for a permanent seat in the UNSC, 
has widely been seen in Brazil as a "political" disaster 
created by a badly designed foreign policy. 
 
PRESIDENT LULA 
-------------- 
 
¶11. (C) 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 is eligible to 
run for reelection in October 2006.  Elected in large part on 
promises of promoting an ambitious social agenda, including a 
"Zero Hunger" program, Lula's government has failed to 
deliver much in this area, as managerial shortcomings and the 
need for fiscal restraint have limited progress.  The 
public's top concern -- crime and public security -- have not 
improved under this administration 
 
¶12.  (C) In recent months the Lula Administration has been 
beset by a grave political crisis as interlocking influencing 
peddling/vote-buying scandals linked to important elements of 
Lula's PT party continue to unfold.  The crisis has placed 
Lula on the defensive and caused near paralysis in the 
congress and the executive branch.  Politics have become 
dominated by investigations, accusations and revelations. The 
President's Chief of Staff  resigned his post, and he and 
several other congressmen are the subjects of investigations 
and expulsion proceedings owing to bribery allegations. 
However, influential Finance Minister Palocci appears 
entrenched, despite recent corruption allegations against him 
-- which he has forcefully denied.  Thus far Brazilian 
society -- including the opposition -- seems disinclined to 
hold Lula personally responsible for the scandals or press 
for impeachment proceedings.  However, the breadth of the 
crisis and the continuing revelations have created a domestic 
political environment that is fluid and unpredictable. 
Indeed, some rumors link the President directly to the 
scandal.  Lula's popularity has been badly damaged, with 
recent polls suggesting he could lose his re-election bid 
should he pursue it in 2006. 
 
MACRO-ECONOMIC DEVELOPMENTS 
--------------------------- 
 
¶13. (C) President Lula and his economic team have implemented 
prudent fiscal and monetary policies and pursued necessary 
microeconomic reforms.  As a result, Brazil's economy, aided 
by a benign international environment, is having another 
solid year.  GDP growth of 4.9% in 2004 has coupled with 
booming exports, healthy external accounts, inflation under 
control, decreasing unemployment and reductions in the 
debt-to-GDP ratio.  In recent months, the real has risen 
sharply against the dollar and the Sao Paulo Stock Exchange 
(BOVESPA) has hit record levels.  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. 
 
¶14. (C) Overall, while Brazil has made considerable progress, 
problems remain.  Despite registering its first year-on-year 
decline in 2004, Brazil's (largely domestic) government debt 
remains high, at 52% of GDP.  Real interest rates (at more 
than 13 percent) are among the highest in the world.  Income 
and land distribution remain skewed.  Investment (including 
FDI) is low.  The country's sovereign risk ratings are, in 
general, three to four levels below investment grade.  And 
the informal sector constitutes between 35 to 40 percent of 
the economy, in part because the tax burden (nearly 38 
percent of GDP) is so high.  The good new is that, so far, 
the uncertainty surrounding the political scandal has neither 
retarded economic growth or frightened away foreign investors. 
 
¶15. (C) 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. 
 
¶16. (C) Public-Private-Partnerships, a key effort to attract 
private investment to infrastructure, also passed in 2004, 
although implementation of this initiative still awaits 
promulgation of the necessary regulations.  Labor reform and 
autonomy for the Central Bank are on the agenda for 2005 but 
look increasingly unlikely to be addressed this year. 
Despite this well-considered reform agenda, much remains to 
be done to improve the regulatory climate for investment, 
particularly in the energy sector; to simplify tortuous tax 
systems at the state and federal levels; and to further 
reform the pension system.  Given the current focus of 
Congress on the political scandal, prospects for much of this 
reform agenda are dim for the remainder of Lula's term. 
 
TRADE POLICY 
------------ 
 
¶17. (C) To increase its international profile (both 
economically and politically), the Foreign Ministry 
(Itamaraty) 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.  As 
many Brazilian observers have indicated, all this effort is 
aimed at countries which together represent less than a third 
of Brazil's foreign trade. 
 
DOHA AGENDA - WTO 
----------------- 
 
¶18. (C) 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.  Brazil 
can be 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 
--------------------------------- 
 
¶19.  (C)  As indicated above, the Lula Administration shows 
no serious interest in pursuing the FTAA.  Despite serving as 
co-chair and having secured in the November 2003 Miami 
meeting a new framework for negotiation, Brazil has shown no 
inclination to move the process along and has failed to 
convoke the next FTAA Ministerial - which is now overdue. 
 
 
CHICOLA