VZCZCXRO0749
RR RUEHRG
DE RUEHBR #1276/01 1771514
ZNR UUUUU ZZH
R 261514Z JUN 06
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 5892
RUCPDO/USDOC WASHDC
INFO RUEHRG/AMCONSUL RECIFE 5018
RUEHSO/AMCONSUL SAO PAULO 7290
RUEHRI/AMCONSUL RIO DE JANEIRO 2345

UNCLAS SECTION 01 OF 05 BRASILIA 001276 
 
SIPDIS 
 
 
SENSITIVE 
SIPDIS 
 
H-PASS 
FROM CHARGE CHICOLA FOR CODEL CORNYN 
 
E.0. 12958: N/A 
TAGS: PGOV ECON BR
SUBJECT: SCENESETTER FOR THE VISIT OF CODEL CORNYN 
 
¶1.  (SBU) The United States Mission in Brazil warmly welcomes your 
planned July 1-3 visit to Foz de Iguacu.  Consul General McMullen 
will greet you in Sao Paulo, and he and his team will brief you on 
your program.  In addition, our DEA Country Attache and our Acting 
DHS Attache will brief you on the full range of law enforcement 
issues they confront. 
 
¶2.  (SBU) Your trip comes at a transition point on the political 
scene.  During the second semester of 2005, congressional deputies 
from Lula's governing coalition were accused of accepting bribes, 
while officials from the President's party (the PT) were alleged to 
have engaged in influence-peddling and illegal campaign 
fund-raising.  These revelations forced the resignation of several 
members of Lula's inner circle, including his former Chief of Staff 
(who was also expelled from Congress). 
 
¶3.  (SBU) However, "scandal fatigue" has set in, and President Lula 
has successfully used the slack time to recover lost political 
ground.  Recent polls show Lula regaining the lead in the 
presidential race, and he is currently engaged in a busy schedule of 
visits around the country - campaigning in all but name - while the 
leading opposition candidate from the PSDB party has stalled in the 
polls.  The election campaign will commence in earnest after the 
World Cup ends July 9 - Brazilians expect that their squad will be 
in the finals - with presidential and congressional elections set 
for early October. 
 
THE BILATERAL RELATIONSHIP 
-------------------------- 
 
¶4.  (SBU) 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. 
 
¶5.  (SBU) 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, as the Foreign 
Ministry saw it as "a foot in the door" and linked it with Brazil's 
strong opposition to Article 98 agreements.  We are receptive to 
renegotiation of a stalled bilateral agreement governing space 
launches at the country's equatorial base at Alcantara, but the GOB 
has moved glacially to re-engage, even though the agreement clearly 
serves Brazilian interests.  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 different views on the degree of 
protection to be afforded to intellectual property.  Only after much 
lobbying have we gotten the GOB to: a) turn the corner on copyright 
piracy, and b) pursue negotiated solutions rather than compulsory 
licensing of AIDS anti-retrovirals. 
 
¶6.  (SBU) However, not all our conversations are 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 
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 counter-drug shoot-down program to accommodate our 
statutory requirements.  Brazil's Ministry of Health has expressed 
its desire to expand the collaboration they have with the U.S. 
Centers for Disease Control and the National Institutes of Health as 
these agencies work within the Brazilian medical community to bring 
newer treatments and technologies. The Brazilians have also eagerly 
participated in the dialogue leading up to the first meeting of a 
bilateral commission on science and technology, scheduled for July 
2006, in Washington. 
 
¶7.  (SBU) On development assistance issues, our dialogue is 
positive, but constrained.  Notwithstanding lackluster results to 
date, the Brazilian government's multi-billion dollar poverty 
alleviation program - Zero Hunger - receives substantial funding 
from the World Bank and IDB.  Given USG budget constraints and the 
 
BRASILIA 00001276  002 OF 005 
 
 
fact that Zero Hunger is, in essence, a cash transfer program 
(albeit with conditions), 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.  The 
Embassy's Public Affairs programs are aimed at promoting young 
leaders take 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. 
 
COUNTER-DRUG EFFORTS 
-------------------- 
 
¶8.  (U)  While not a significant drug-producing country, Brazil is a 
conduit for cocaine base and cocaine HCl moving to Europe, the 
Middle East and Brazilian urban centers, as well as a conduit for 
smaller amounts of heroin moving to the U.S. and Europe. Cocaine and 
marijuana are used among youth in the cities, particularly Sao Paulo 
and Rio de Janeiro. Organized drug gangs are involved in narcotics 
related arms trafficking. 
 
¶9.  (U) U.S. counternarcotics policy in Brazil focuses on working 
with Brazilian authorities in identifying and dismantling 
international narcotics trafficking organizations, reducing money 
laundering, increasing awareness of the dangers of drug abuse and 
drug trafficking and addressing related issues such as organized 
crime and arms trafficking.  Other key goals include assisting 
Brazil in developing a strong legal structure for narcotics and 
money laundering control and enhancing cooperation at the policy 
level.  Bilateral agreements provide cooperation between U.S. 
agencies, the National Anti-drug Secretariat and the Ministry of 
Justice.  Specifically, the U.S. provided equipment and computers 
for the coordinated intelligence center in Foz de Iguacu and 
training courses in airport interdiction and container security. 
 
¶10.  (U) Brazil's first line of defense against drug smuggling is 
enforcement at its heavily transited border crossings.  Drug 
traffickers exploit the expansive border in areas where Brazilian 
law enforcement has only a minimal presence.  To more effectively 
combat trans-border trafficking organizations, Brazil is cooperating 
closely with its neighbors by establishing joint intelligence 
centers (JIC).  The newest JIC is planned for the Brazilian/Bolivian 
border. 
¶11.  (U) The GOB has begun to institutionalize its National Strategy 
for Combating Money Laundering (ENCLA), holding its third annual 
high-level planning session in December 2005. Also in 2005, the GOB 
drafted, but has not yet presented to Congress, a bill updating its 
anti-money laundering legislation.  If passed, this legislation 
would facilitate greater law enforcement access to financial and 
banking records during investigations, criminalize illicit 
enrichment, allow administrative freezing of assets, and facilitate 
prosecutions of money laundering and terrorist financing cases. 
¶12.  (U) Brazil's Unified Public Safety System (SUSP), created in 
2003, is now fully functional and showing results.  SUSP, which is 
administered by the Brazilian National Public Safety Secretariat 
(SENASP), is a national system to integrate diverse state, civil and 
military police forces.  Collaboration between SENASP and NAS has 
been good.  A number of courses, including crisis management, 
training for counternarcotics SWAT teams, and training for dog 
handlers, were sponsored by NAS and hosted by SENASP for state law 
enforcement officials throughout Brazil. 
FOREIGN POLICY 
-------------- 
 
¶13.  (SBU) Reflecting 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 large and 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.  The GOB has 
worked to increase both its economic and political ties with 
Venezuela.  It has agreed to upgrade Venezuela from associate 
membership to full membership status in Mercosul, and enhanced 
integration of the two countries' energy sectors is high on its 
agenda.  Lula has been especially solicitous of Chavez.  He has 
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.  However, 
Venezuela's apparent involvement in Bolivia's recent decision to 
nationalize that country's oil and gas industry has dulled the 
luster on this relationship. 
 
 
BRASILIA 00001276  003 OF 005 
 
 
¶14.  (SBU) 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 its neighbors).  Brazil's reaction to 
Bolivia's recent nationalization of foreign petroleum installations 
in that country is a case in point.  Shocked that the Bolivians 
viewed the Brazilian oil parastatal Petrobras as a "boss, not a 
partner," government policymakers have vacillated in response to 
President Morales's threats. 
 
¶15.  (SBU) 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.  In fact, many observers point out 
that Brazil has "subordinated" other economic and political 
interests with such countries as China and Russia in exchange for 
support (which has not been forthcoming) for its UNSC aspirations. 
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." 
 
¶16.  (SBU) 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." 
 
PRESIDENT LULA 
-------------- 
 
¶17.  (SBU) 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 public's top concern - crime and public security - have not 
improved under this administration. 
 
¶18.  (SBU) As noted above, the Lula Administration has been beset by 
a grave political crisis as interlocking influence 
peddling/vote-buying scandals plagued elements of Lula's PT party. 
During the second half of 2005, the crisis placed Lula on the 
defensive and politics were dominated by investigations, 
accusations, and revelations.  The President's Chief of Staff 
resigned his post and was later expelled from Congress.  Meanwhile, 
several other Congressmen were the subjects of investigations and 
expulsion proceedings owing to bribery allegations.  In April 2006, 
the President's influential Finance Minister was forced to resign 
(and remains under criminal investigation) because of unrelated 
abuse of power allegations.  Thus far, Brazilian society - including 
the opposition - seems disinclined to hold Lula personally 
responsible for the scandals, and he has recovered lost ground in 
public opinion and holds a comfortable lead in the polls over his 
principal opponent in the presidential contest. 
 
MACRO-ECONOMIC DEVELOPMENTS 
--------------------------- 
 
¶19.  (SBU) President Lula and his economic team have implemented 
prudent fiscal and monetary policies and pursued necessary reforms. 
Brazil's external accounts, aided by a benign international 
environment, have improved substantially over the last three years. 
Although GDP growth dropped to 2.3% in 2005, down from a strong 
performance (4.9%) in 2004, Brazil has experienced booming exports, 
healthy external accounts, inflation under control, decreasing 
unemployment and reductions in the debt-to-GDP ratio.  Economic 
activity should pick up in 2006; the markets expect GDP growth of 
about 3.5%.  Buoyed by exports and investment inflows, the Real has 
remained at appreciated levels, allowing the government and 
businesses to pay down external debt.  The government pre-paid its 
IMF obligations, its last remaining rescheduled Paris Club 
obligations, and in April 2006 announced it had retired the last of 
its Brady bonds.  This removes from the books all restructured debt 
associated with Brazil's late-1980's default.  Based upon the 
improving external debt dynamics, Fitch IBCA upgraded its credit 
rating on Brazil's sovereign debt in February 2006, to BB (two 
notches below investment grade).  The economy also has shown 
resilience, remaining for the most part unaffected by a major 
political scandal and the replacement of the Finance Minister. 
 
¶20.  (SBU) Despite this considerable progress, key challenges 
 
BRASILIA 00001276  004 OF 005 
 
 
remain.  The public sector debt-to-GDP ratio is on a downward trend 
but remains high, at about 51.6%.  Real interest rates are among the 
highest in the world; reducing them will require both reductions in 
the government's borrowing requirement and reform of the financial 
sector and the judiciary.  Income and land distribution remain 
skewed.  Investment and domestic savings are low, although growing. 
 The informal sector constitutes between 35 to 40 percent of the 
economy, in part because the tax burden (nearly 38 percent of GDP) 
is high. 
 
¶21.  (SBU) 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. 
 
¶22.  (SBU) 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, additional tax reform, and 
autonomy for the Central Bank were on the agenda for 2005, but now 
look unlikely to be addressed at least until after the October 2006 
elections.  Much remains to be done.  The government needs to 
improve the regulatory climate for investment, particularly in the 
energy sector; to simplify torturous tax systems at the state and 
federal levels; and to further reform the pension system. 
 
TRADE POLICY 
------------ 
 
¶23.  (SBU) To increase its international profile(both economically 
and politically), the Foreign Ministry (Itamaraty) is seeking 
expanded trade ties with developing countries, as well as 
strengthening the Mercosul customs union with Uruguay, Paraguay and 
Argentina.  Arguably the GoB has fallen short on this latter 
objective.  The Brazil-Argentine relationship is rife with trade 
disputes, recently leading to adoption of a safeguard mechanism for 
bilateral trade.  Meanwhile, Uruguay and Paraguay regularly complain 
that Brazil and Argentina reap a disproportionate share of benefits 
from the bloc, and threaten the group's solidarity in various ways 
-- for instance, Uruguay's recent discussions with the United States 
regarding a possible FTA (which would contravene Mercosul rules). 
 
¶24.  (SBU) Nonetheless, the bloc remains engaged in certain external 
trade negotiations.  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.  As 
noted earlier, Mercosul is upgrading Venezuela's status from 
associate to full membership.  In addition to Cuba, the bloc is 
currently exploring free trade talks with Israel, the Dominican 
Republic, Panama and states of the Gulf Cooperation Council, as well 
as trying to build on partial trade liberalization agreements 
concluded with India and South Africa in 2004. 
 
¶25.  (SBU) China, which was offered market economy status by Brazil 
as a part of Lula's effort to secure PRC support for Brazil's bid 
for a USNC seat, 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. 
However, low-priced Chinese imports, particularly in the textile, 
footwear, and toy sectors, are now threatening to displace domestic 
Brazilian production.  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.  Free trade negotiations 
with the EU continue to languish. 
 
DOHA AGENDA - WTO 
----------------- 
 
¶26.  (SBU) While Brazil emphasizes South-South trade through 
Mercosul's bilateral negotiations, it uses the Doha Development 
Agenda (DDA) negotiations as the main forum for engaging with 
developed country partners.  The DDA is Brazil's top trade priority, 
viewed as the last chance for perhaps 15-20 years to secure 
fundamental changes in international trade rules, in particular, for 
international agricultural trade.  Brazil leads the G-20 group of 
developing countries that is pressing for agricultural trade reform 
in the DDA.  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 
 
BRASILIA 00001276  005 OF 005 
 
 
engaged in the Doha Round, initially as a member of the "Five 
Interested Parties" and more recently G-6 informal group, although 
many of its positions are still at odds with U.S. interests.  At the 
December 2005 Hong Kong Ministerial meeting, Brazil was key to 
brokering the deal - albeit one of limited ambition - coming out of 
that session.  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 
--------------------------------- 
 
¶27.  (SBU) 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 so far declined to convoke the next FTAA 
Ministerial - which is now overdue. 
 
CHICOLA