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C O N F I D E N T I A L SECTION 01 OF 02 BRASILIA 000888 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: DECL: 05/08/2016 
TAGS: PREL EINV EPET XM BR
SUBJECT: BRAZILIAN FOREIGN MINISTRY SAYS "NO CRISIS YET" 
WITH BOLIVIA, BUT TWO POTENTIAL FLASHPOINTS ARE BREWING 
 
REF: BRASILIA 882 
 
BRASILIA 00000888  001.2 OF 002 
 
 
Classified By: PolCouns Dennis Hearne, 1.4 (B) & (D) 
 
¶1.  (C) Summary:  Bolivia agreed not to interrupt gas 
supplies to Brazil, and Brazil agreed to continue investing 
in Bolivia's hydrocarbon industry at the May 4 meeting in 
Puerto Iguazu, Argentina, according to the Brazilian Foreign 
Ministry's Bolivia Desk Officer.  This understanding has 
deterred an immediate crisis, he said.  However, two 
potential crises loom on the horizon:  1) Bolivia may impose 
a unilateral price increase (such an intention has been 
reported in the press, but so far there has been no official 
notification) and 2) Bolivia could repossess some or all of 
the farms currently operated by 15,000 Brazilians who moved 
into the Santa Cruz region over the past twenty years. 
Brazil hopes that a meeting between Petrobras and Bolivian 
officials later this week may move the issue back to the 
technical arena, reducing its political volatility.  End 
Summary. 
 
¶2.  (C) Foreign Ministry Bolivian Desk Officer Lauro de 
Castro Beltrao Filho told poloff May 8 that the two private 
commitments made at the May 4 Puerto Iguazu, Argentina 
meeting justified President Lula da Silva's characterization 
of the situation between Brazil and Bolivia as "not a 
crisis."  At the Puerto Iguazu meeting, Bolivian President 
Morales promised that he would not interrupt gas supplies to 
Brazil, and President Lula promised that Brazil would 
continue to invest in Bolivia.  However, Beltrao, cautioned, 
the commitment on investment is not airtight.  Petrobras, as 
a publicly traded company with thousands of private 
investors, will be the one to ultimately decide on investment 
issues consistent with future conditions.  He added that, 
while there is no ongoing crisis, the situation remains 
serious and could develop into a crisis in the near future. 
 
--------------------------------------------- -------- 
Gas Prices, Agricultural Reform, Could Provoke Crisis 
--------------------------------------------- -------- 
 
¶3.  (C) Bolivia could foment a crisis in one of two ways. 
First, it could unilaterally impose a gas price increase. 
Beltrao noted that La Paz had already publicly indicated an 
intention to raise prices by 61 percent, but the Brazil side 
had received nothing official from Bolivia in that regard. 
Since, according to the contract Petrobras has with Bolivia, 
the price of gas is to be decided by mutual agreement between 
both sides, a unilateral price increase would constitute a 
breach of contract.  (He noted that an adjustment mechanism 
is built into the contract to allow prices to fluctuate 
yearly based on a market basket of goods, and that every five 
years or so, the two sides will engage in a more 
comprehensive renegotiation of the price.)  Beltrao pointed 
out that regional gas prices had been gradually rising so 
Bolivia might be justified in requesting a price increase. 
However, it would have to obtain agreement from Petrobras 
before implementing an increase. 
 
¶4.  (C) A separate, but related, issue is the status of some 
15,000 Brazilians who moved into the Santa Cruz area of 
Bolivia over the past twenty years and who are currently 
growing soybeans on farms in the region.  Most moved from 
neighboring regions in Brazil, attracted by soil that is 
richer and land prices that are cheaper than those found on 
the Brazilian side of the border.  Beltrao noted that on the 
same day as the gas nationalization was announced, the 
Morales government also indicated its intention to carry our 
agricultural reforms that could affect those Brazilian 
farmers.  Any action taken that would threaten the rights of 
those farmers would occasion a public outcry in Brazil, 
probably worse than that caused by the spectacle of Bolivian 
soldiers occupying Petrobras facilities.  Beltrao noted that 
Brazilians had been particularly shocked by that display, and 
he attributed much of the popular criticism of President 
Lula's response to the outrage over those images. 
 
--------------------------------------------- 
Hoping to Move Focus Back to Technical Issues 
--------------------------------------------- 
 
¶5.  (C) According to Beltrao, there will be a new round of 
talks over nationalization in Bolivia this week.  He said 
 
BRASILIA 00000888  002.2 OF 002 
 
 
Petrobras will conduct the talks, most likely without 
government participation, as Brazil would like to return the 
issue to the technical arena, thereby turning down the 
political temperature.  He said he was unaware whether 
Bolivian Government officials would join YPFB at the meeting. 
 
¶6.  (C) Comment:  Whether or not the Foreign Ministry is 
prepared to acknowledge a current "crisis" between Bolivia 
and Brazil, there clearly appears to be a crisis of 
confidence in Lula's foreign policy team.  Press criticism of 
the Lula adminstration continued over the weekend, with the 
largest newsmagazine pillorying President Lula's chief 
foreign policy advisors for their handling of the Bolivian 
episode, and several other international setbacks, labeling 
them at one point, "Sheep in Sheep's Clothing." 
 
Chicola