VZCZCXRO2340
RR RUEHRG
DE RUEHBR #2215/01 3371640
ZNR UUUUU ZZH
R 031640Z DEC 07
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 0567
INFO RUEHRI/AMCONSUL RIO DE JANEIRO 5514
RUEHSO/AMCONSUL SAO PAULO 1254
RUEHRG/AMCONSUL RECIFE 7445
RUCPDOC/USDOC WASHDC

UNCLAS SECTION 01 OF 02 BRASILIA 002215 
 
SIPDIS 
 
DEPT PASS USTR FOR KATE DUCKWORTH 
DEPT PASS DOC/ITA/MAC/OLAC ANNE DRISCOLL 
DEPT PASS TREASURY LUYEN TRAN 
 
SENSITIVE 
SIPDIS 
 
E.O. 12958:N/A 
TAGS: EFIN ECON EINV PREL BR
SUBJECT: BRAZIL:DEPUTY PALOCCI ECONOMICS MEETING WITH AMBASSADOR 
 
¶1. (SBU) SUMMARY:  The Ambassador met November 20 with Antonio 
Palocci, an influential pro-business Federal Deputy (PT, Workers 
Party, from Sao Paulo) and former Finance Minister. Deputy Palocci 
was enthusiastic about a possible US-Brazil regional infrastructure 
initiative and suggested specific projects focus on Bolivia, as a 
counterweight to Venezuela's influence.  Palocci was supportive of a 
US-Brazilian bilateral tax treaty, noting its benefits for both 
countries' companies, but cautioned that Jorge Rachid (head of 
Brazil's federal revenue service, "Receita Federal," and responsible 
for tax treaty negotiations) feared loss of tax revenue under a 
treaty and would never support one unless this fear could be 
addressed.  Palocci offered his best-guess on who might eventually 
replace Renan as Senate president and commented on PT strategy for 
renewing the CPMF.  END SUMMARY. 
 
--------------------------------------------- - 
POTENTIAL US-BRAZIL INFRASTRUCTURE INITIATIVE 
--------------------------------------------- - 
 
¶2. (SBU) Deputy Palocci was enthusiastic about the regional 
infrastructure initiative Treasury is leading in developing with the 
Planning Ministry.  Palocci saw the initiative as a way to 
revitalize the "group for growth" he had led while Finance Minister 
with former Secretary Snow.  He emphasized infrastructure 
development was an important regional economic and political 
priority.  Palocci advocated that the initiative should emphasize 
supporting an energy project with Bolivia.  He said Bolivia looks to 
Venezuela because the country is too poor to accomplish anything 
without help.  He saw a US-Brazil infrastructure initiative as a way 
to create interests for Bolivia apart from Venezuela and via 
IDB/Bank instruments.  Palocci felt energy projects on the 
Brazil-Bolivia border would economically benefit both countries and 
provide an opportunity to elevate political integration that would 
counter Morales-Chavez cooperation.  He emphasized that a regional 
energy agenda for infrastructure cooperation projects would be 
particularly helpful in improving integration of the region, moving 
countries in the region away from Chavez, and improving the climate 
in the region for international investment.  Knowing President Lula 
well, Palocci felt he would want to support an agenda with this 
focus, while remaining careful to retain a good relationship with 
Chavez. 
 
¶3. (SBU) Palocci opined that Planning Minister Bernardo was the 
perfect choice to lead this initiative on the Brazilian side and 
noted that Itamaraty and Casa Civil could be relevant in handling 
the political aspects of moving the initiative forward.  At the 
Ambassador's request, Palocci agreed to discuss his views on the 
political aspects of a potential US-Brazil infrastructure initiative 
with both Bernardo and with presidential foreign affairs adviser 
Marco Aurelio Garcia. He agreed to speak again with the Ambassador 
before WHA A/S Shannon and EB A/S Sullivan's upcoming visit. 
 
------------ 
TAX TREATY 
------------ 
 
¶4. (SBU) Palocci stated the conceptual problem with a tax treaty is 
basically that Receita Federal models suggest a treaty would lead to 
tax revenue losses for Brazil.  Palocci indicated he would meet soon 
with head of Receita Federal Jorge Rachid and explore whether this 
issue could be addressed.  He reassured that new ways could be found 
to resolve the issue and commented that Rachid is pragmatic. 
Palocci then deflated the hopeful mood a bit in noting that 
"normally, Receita Federal will find any way possible to make it go 
wrong; Rachid undid the agreement we had with Germany."  He promised 
to share feedback with the Ambassador after his meeting with 
Rachid. 
 
---------------------------------- 
A POLITICIAN ALWAYS TALKS POLITICS 
---------------------------------- 
 
¶5. (SBU) Palocci opined that the PT had made a tactical mistake in 
currying PSDB (Brazilian Social Democracy Party, a leading 
opposition party) support for extension of the CPMF (tax on 
financial transactions). He noted PT ended up short of the votes it 
needed and wasted a month attempting to build support. On possible 
names to succeed embattled Senate President Renan Calheiros if/when 
he resigns (considered a near certainty), Palocci thought Senator 
Jose Maranhao (PMDB, Brazilian Democratic Movement Party, governing 
coalition; of Paraiba) or Senator Edison Lobao (PMDB; of Maranhao, a 
protege of Jose Sarney, senator and former president of Brazil) were 
most likely, and Senator Gerson Camata (PMDB; of Espirito Santo) or 
Senator Garibaldi Alves (PMDB; of Rio Grande do Norte) were also 
possibilities. 
 
BRASILIA 00002215  002 OF 002 
 
 
 
¶6. (SBU) COMMENT:  Deputy Palocci remains influential within the PT 
party following his stint as Finance Minister. He is well-connected 
with a strong sense of what the executive and legislative branches 
are willing and able to accomplish on economic issues.  His 
enthusiastic support, for political as well as economic reasons, for 
the developing infrastructure proposal and his willingness to engage 
on the tax treaty are encouraging signs for eventual success of 
these bilateral initiatives.  END COMMENT. 
 
SOBEL