BRAZIL SCENESETTER FOR VISIT OF 3+1 DELEGATION

C O N F I D E N T I A L SECTION 01 OF 03 BRASILIA 003141

SIPDIS

E.O. 12958: DECL: 11/30/2015
TAGS: PTER PREL PGOV ECON BR US
SUBJECT: BRAZIL SCENESETTER FOR VISIT OF 3+1 DELEGATION

Classified By: PolCouns Dennis Hearne, Reasons 1.4 (b) and (d).


1. (C) The Plenary Meeting of the 3 1 will provide an
important benchmark for Brazil's willingness to increase
cooperation with the United States on Counterterrorism,
something the GOB has been reluctant to do. We do not expect
a significant change in the GOB's position, which places
great importance on not inflaming public opinion, especially
among its large and influential Arab population, or damaging
its relations with the nations of the Middle East, including
those most responsible for terrorist actions worldwide. The
GOB places rather less importance on implementing policies
that will significantly reduce the amount of terrorist
financing and other support that comes from the Tri-Border
area, although it has implemented programs to comply with the
requirements of UNSCR 1267. Indeed, the Brazilian's top
political priority appears to remain preventing any public
statements that might imply that any such activities take
place there. The following paragraphs provide a backdrop
against which to view our Counterterrism efforts with Brazil.


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The Bilateral Relationship
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2. (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.


3. (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. 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.


4. (C) However, not all our conversations are difficult.
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 Secretary Rice, i.e., to the effect that Brazil
would seek intensified bilateral dialogue on scientific,
education, and environmental issues, reflect this desire to
cooperate only on matters of marginal interest to the U.S.

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Foreign Policy
--------------


5. (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.


6. (C) 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.


7. (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).


8. (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."

--------------
President Lula
--------------


9. (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.


10. (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.


11. (C) 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.

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Macro-Economic Developments
--------------


13. (C) Due to a cycle of monetary tightening that lasted
much of the year, combined with the effects of the ongoing
political crisis on investment and consumption decisions,
Brazil's economy will be hard pressed to attain growth of 3%
in 2005, after posting healthy GDP Growth of 4.9% in 2004.
The modest growth in 2005 masks some economic strengths:
Brazil has 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 news 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.

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Trade Policy
--------------


16. (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.

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Free Trade Area of the Americas- FTAA
--------------


17. (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.

LINEHAN