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DE RUEHBR #0952/01 1351838
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R 151838Z MAY 06
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 5372
INFO RUEHRG/AMCONSUL RECIFE 4759
RUEATRS/DEPT OF TREASURY WASHINGTON DC
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RUEHQT/AMEMBASSY QUITO 1805
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RUCPDO/USDOC WASHDC
RHEHNSC/NSC WASHDC

UNCLAS SECTION 01 OF 02 BRASILIA 000952 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
NSC FOR CRONIN 
TREASURY FOR OASIA - DAS LEE, DDOUGLAS 
STATE PASS TO FED BOARD OF GOVERNORS FOR ROBITAILLE 
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D 
USDOC FOR 3134/ITA/USCS/OIO/WH/RD/SHUPKA 
STATE PASS USAID FOR LAC 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PGOV PREL BR
SUBJECT: BRAZIL: CENTRAL BANK COOPERATION WITH THE BANK OF RUSSIA 
AND OTHER EMERGING COUNTRY MONETARY AUTHORITIES 
 
 
¶1. (SBU) Summary: Henrique Meirelles, president of the Brazilian 
Central Bank (BCB), traveled to Moscow May 10-11 to meet with local 
monetary authorities.  During that visit, Meirelles planned to sign 
a cooperation agreement with the Bank of Russia (BOR) as officials 
there are reportedly interested in the Brazilian inflation targeting 
system, the BCB apparatus for effectuating inter-bank settlements 
and Brazilian banking supervision arrangements.  For their part, the 
Brazilians have two main interests: 1) developing trade finance 
mechanisms between the two countries, and 2) attracting a share of 
Russia's disposable investment capital, given Russia's recent high 
current account surpluses, a fact reflected by the US$230 billion in 
international reserves it has accumulated.  End Summary. 
 
¶2. (U) According to press reporting here, the BOR is interested in 
information exchanges regarding the institutional framework that 
Brazil has adopted to implement its inflation targeting system.  In 
Brazil, the annual inflation target, currently 4.5%, is set by the 
National Monetary Council (NMC), a body that consists of the 
President of the Central Bank, the Minister of Finance and the 
Minister of Planning and Budget.  Decisions on the interest rate 
necessary to meet the inflation target are made by the Monetary 
Policy Committee (COPOM) of the Central Bank, which consists of the 
Central Bank President and the eight directors, who meet eight times 
a year.  (The benchmark overnight SELIC rate currently stands at 
15.75%.)  The COPOM enjoys only de facto independence in its 
interest rate decisions; legislation granting the BCB formal 
autonomy has languished in Congress for several years.  The interest 
rate decisions are informed by a sophisticated macroeconomic model 
maintained by the BCB's economic studies department.  The 
econometric model of the inflation targeting system reportedly 
piqued the BOR's interest because of Brazil's experience as a major 
emerging market economy that successfully tamed high inflation. 
 
¶3. (U) These institutional arrangements are complemented by an 
elaborate system of interactive reporting to communicate with the 
public and financial markets.  The BCB surveys financial 
institutions that maintain their own econometric models of the 
Brazilian economy and publishes weekly a report on market 
expectations which incorporates the average predictions that these 
models make on key economic variables, such as inflation (any one of 
several indexes), GDP growth, exchange rate, and interest rates. 
(See, inter alia, 
www4.bcb.gov.br/PEC/GCI/Ingl/readout/R2006051 2.pdf) The COPOM also 
publishes the week after the minutes of its interest rate-setting 
meetings.  In 2005, China implemented a similar market expectations 
survey mechanism, which reportedly was based substantially on the 
Brazilian model.  Important for the Russians was the fact that the 
survey is completely electronic, which allows the Brazilian Central 
Bank to conduct real time monitoring of the evolution of market 
expectations.  Similar market expectations survey systems have been 
implemented in Argentina and Colombia. 
 
¶4. (U) Meirelles was joined by representatives of the public and 
private Brazilian banks on this visit to Russia.  These 
representatives will be presenting Brazilian banking technology 
(software and monitoring systems), which reportedly also is of 
interest to the BOR.  Brazilian financial institutions invested 
early and heavily in the development of electronic banking systems, 
spurred by hyperinflation, which made every minute of payment 
"float" count.  This made Brazil a leader in introducing real time 
electronic settlement systems between banks.  Finally, the media 
here report that the BOR is interested in Brazil's banking 
supervision arrangements, which are enhanced by Central Bank 
electronic monitoring systems. 
 
¶5. (U) The Brazilian Central Bank has developed formal and informal 
 
BRASILIA 00000952  002 OF 002 
 
 
cooperation agreements with China, Mozambique, Indonesia, and 
Ukraine.  The Brazilian Central Bank has also developed cooperation 
agreements with countries such as Angola in which it transfers 
technology in the areas of international reserve management, risk 
management and benchmark. 
 
¶6. (SBU) Comment: Brazil sees Russia through a couple of different 
prisms.  The first is President Lula's foreign policy priority, 
advanced primarily by the Ministry of External Relations (MRE), to 
build cooperation among developing countries (the "South-South 
Cooperation" moniker would apply but for Russia's awkwardly northern 
geographic location).  The Central Bank, however, tends to be more 
pragmatic than the MRE, and is likely motivated primarily by the 
desire to build the financial infrastructure to facilitate trade. 
Russia already is an important market for certain Brazilian 
products, notably beef.  It would love to add some higher tech 
exports, such as banking software, to the mix.  End Comment. 
 
CHICOLA