LULA COMES TO CARACAS

C O N F I D E N T I A L CARACAS 000527

SIPDIS


NSC FOR CBARTON
HQ USSOUTHCOM ALSO FOR POLAD

E.O. 12958: DECL: 03/30/2010
TAGS: ECON ETRD PREL ENRG MASS BR VE
SUBJECT: LULA COMES TO CARACAS

Classified By: ECONOMIC COUNSELOR RICHARD M. SANDERS FOR REASON 1.4 D

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SUMMARY
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1. (SBU) Brazilian President Luiz Inacio Lula Da Silva
concluded a 24-hour visit to Venezuela on February 14. His
visit included public appearances at a conference of business
leaders along with a joint Brazilian-Venezuelan declaration
and signing ceremony for more than two dozen agreements. The
Brazilian leader's visit provided President Hugo Chavez with
another opportunity to promote his own "Bolivarian" political
and economic agenda while thumbing his nose at the U.S. in
the process. The big winner however is Brazil, which comes
away with a series of commitments (albeit mainly at the
"letter of intent" level) aimed at increasing trade with
Venezuela and access to the lucrative Venezuelan petroleum
sector. End Summary

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Feel the Love
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2. (SBU) Mutual admiration was definitely high on the agenda
at Caracas' Miraflores Palace on February 14. Brazilian
President Luiz Inacio Lula Da Silva publicly characterized
the relationship between Brazil and Venezuela as a "strategic
alliance" across a number of areas including petroleum,
military purchasing and cooperation, and infrastructure
projects. The agreements signed by the two countries, Lula
said, are "a model of integration that we want to practice
with other colleagues in the region." Lula's visit to
Venezuela comes soon after the ratification of the "economic
complementation agreement" between Mercosur, the South
American Common Market, and the Andean Community on February
1, which envisions a slow liberalization of trade between the
two entities, but has as many as 6000 footnotes and
exemptions which limit its application.


3. (SBU) Venezuelan President Hugo Chavez, who has been
calling loudly for Latin American integration said that
Brazil's support for uniting Latin America against the U.S.
was "vital" and that the process of integration had "come to
the point of no return." In a meeting with Venezuelan and
Brazilian businessmen at the presidential palace, both
leaders alluded to the U.S. saying that the solution to the
economic problems of South America is "not in the north."
Chavez also said that that integration of South America is
more important "than ever because of the many threats."
Complementing Chavez, Lula said that he was happy with what
was occurring in Venezuela "where we are seeing a government
concerned with the industrialization of the country."

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Sign on the Dotted Line
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4. (U) During the Brazilian leader's visit, the two
governments signed a joint declaration that included a
reported 26 bilateral agreements, accords, memoranda of
understanding and letters of intent. The majority of these
agreements were petroleum related, but also included accords
on agriculture, science and technology, and military issues.


5. (C) One agreement calls for the two state oil companies,
PDVSA and Petrobras, to jointly explore, pump, and sell
natural gas and crude oil. The agreement envisions joint
participation in the Mariscal Sucre and Deltana Platform
natural gas projects as well as gas extraction in the Gulf of
Venezuela and heavy oil extraction in the Orinoco belt. A
U.S. executive whose company has an investment in a field now
operated in Venezuela by Petrobras discounted the seriousness
of much of the "letter of intent" oil agreements. With
respect to the Mariscal Sucre and Deltana Platform project
references; however, he noted that the agreement could block
the access of other companies to those projects.


6. (U) According to Brazilian media reports, Brazil's largest
petrochemical firm, Braskem, and Venezuela's PDVSA have
signed a memorandum of understanding which covers a joint
project to build a petrochemical plant in Venezuela. Chavez,
who this month signed an agreement in Argentina to establish
a PDVSA branch and open a chain of service stations in the

country, is also reported to be interested in having PDVSA
purchase the petrochemical unit and nationwide service
station chain of the Brazilian Iparanga Petroleum Company.


7. (C) An American mining executive told Econcouns that of
all the deals mentioned, the most likely to come to fruition
were those for the Brazilian construction firm Odebrecht to
build an additional bridge across the Orinoco, and mining
giant CVRD's joint venture in coal with Venezuelan state
entity Carbozulia.

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The Raw Numbers
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8. (SBU) Trade between Venezuela and Brazil has traditionally
been fairly minimal. Over the last several years, an average
of around 6% of Venezuelan imports and 2% of exports have
been accounted for by Brazil. Bilateral trade in 2004 was
approximately $1.6 billion, almost double the $880 million
level of the economically disastrous year of 2003, but still
below the level of trade in 2000. The large expansion in
joint-energy projects envisioned in the agreements would,
according to President Lula, be nearly double bilateral trade
again this year to $3 billion.

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F-16's and Super Tucanos
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9. (U) A key area of interest to Venezuela is the purchase of
military aircraft from Brazil. According to media reports,
Venezuela has been interested in purchasing 12-24 "Super
Tucano" light-combat airplanes from Brazil's Embraer, the
world's fourth largest manufacturer of civilian and military
aircraft. Such a purchase is valued at between $110 and $180
million. Embraer would also be involved in maintaining and
upgrading the existing Venezuelan Tucano fleet. Though
Chavez and Lula did sign a military cooperation agreement, no
sales agreement was signed.


10. (SBU) During his weekly "Alo Presidente" television
program that aired the Sunday before Lula's visit, Chavez
claimed that the U.S. had repeatedly delayed delivery of
spare parts for Venezuela's F-16 fleet, that the U.S. imposed
"unacceptable conditions," and that he would have to "look
elsewhere for the parts." While the turboprop Super Tucano
is hardly a substitute for the F-16, Chavez nonetheless
praised Brazil for "not imposing those kinds of restrictions"
on Venezuela.

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COMMENT
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11. (SBU) Brazil has much to gain from Lula's visit. Brazil
is interested in a number of joint projects between Petrobras
and PDVSA. In addition, gaining entree for Brazilian
industrial firms into Venezuela could help them obtain
contracts for additional large infrastructure projects.
Despite Lula's claim that the agreements signed during this
visit will help to double bilateral trade this year, there
are so few firm plans in the these agreements that it is
doubtful that the impact in 2005 could be so substantial.


12. (C) Lula has clearly expressed his interest and policies
regarding South American integration and closer political and
economic ties. Cooperation with Venezuela has the added
bonus of being very profitable for Brazil and Brazilian
firms. As with other leaders who have visited before, Chavez
saw Lula off clutching a massive sheaf of signed papers and
documents. Critics are quick to point out that the dossier
is long on intention and short on substance. The meeting
however served both parties well: Chavez gains a bit of
legitimacy in regional cooperation and may get his Super
Tucanos; Lula gains more political traction in his goals of
continental integration and economic success in expanding
Brazil's market access.
Brownfield


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2005CARACA00527 - CONFIDENTIAL