BRAZILIAN FOREIGN MINISTRY SAYS "NO CRISIS YET"

C O N F I D E N T I A L SECTION 01 OF 02 BRASILIA 000888

SIPDIS

SIPDIS

E.O. 12958: DECL: 05/08/2016
TAGS: PREL EINV EPET XM BR
SUBJECT: BRAZILIAN FOREIGN MINISTRY SAYS "NO CRISIS YET"
WITH BOLIVIA, BUT TWO POTENTIAL FLASHPOINTS ARE BREWING

REF: BRASILIA 882

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Classified By: PolCouns Dennis Hearne, 1.4 (B) & (D)


1. (C) Summary: Bolivia agreed not to interrupt gas
supplies to Brazil, and Brazil agreed to continue investing
in Bolivia's hydrocarbon industry at the May 4 meeting in
Puerto Iguazu, Argentina, according to the Brazilian Foreign
Ministry's Bolivia Desk Officer. This understanding has
deterred an immediate crisis, he said. However, two
potential crises loom on the horizon: 1) Bolivia may impose
a unilateral price increase (such an intention has been
reported in the press, but so far there has been no official
notification) and 2) Bolivia could repossess some or all of
the farms currently operated by 15,000 Brazilians who moved
into the Santa Cruz region over the past twenty years.
Brazil hopes that a meeting between Petrobras and Bolivian
officials later this week may move the issue back to the
technical arena, reducing its political volatility. End
Summary.


2. (C) Foreign Ministry Bolivian Desk Officer Lauro de
Castro Beltrao Filho told poloff May 8 that the two private
commitments made at the May 4 Puerto Iguazu, Argentina
meeting justified President Lula da Silva's characterization
of the situation between Brazil and Bolivia as "not a
crisis." At the Puerto Iguazu meeting, Bolivian President
Morales promised that he would not interrupt gas supplies to
Brazil, and President Lula promised that Brazil would
continue to invest in Bolivia. However, Beltrao, cautioned,
the commitment on investment is not airtight. Petrobras, as
a publicly traded company with thousands of private
investors, will be the one to ultimately decide on investment
issues consistent with future conditions. He added that,
while there is no ongoing crisis, the situation remains
serious and could develop into a crisis in the near future.

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Gas Prices, Agricultural Reform, Could Provoke Crisis
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3. (C) Bolivia could foment a crisis in one of two ways.
First, it could unilaterally impose a gas price increase.
Beltrao noted that La Paz had already publicly indicated an
intention to raise prices by 61 percent, but the Brazil side
had received nothing official from Bolivia in that regard.
Since, according to the contract Petrobras has with Bolivia,
the price of gas is to be decided by mutual agreement between
both sides, a unilateral price increase would constitute a
breach of contract. (He noted that an adjustment mechanism
is built into the contract to allow prices to fluctuate
yearly based on a market basket of goods, and that every five
years or so, the two sides will engage in a more
comprehensive renegotiation of the price.) Beltrao pointed
out that regional gas prices had been gradually rising so
Bolivia might be justified in requesting a price increase.
However, it would have to obtain agreement from Petrobras
before implementing an increase.


4. (C) A separate, but related, issue is the status of some
15,000 Brazilians who moved into the Santa Cruz area of
Bolivia over the past twenty years and who are currently
growing soybeans on farms in the region. Most moved from
neighboring regions in Brazil, attracted by soil that is
richer and land prices that are cheaper than those found on
the Brazilian side of the border. Beltrao noted that on the
same day as the gas nationalization was announced, the
Morales government also indicated its intention to carry our
agricultural reforms that could affect those Brazilian
farmers. Any action taken that would threaten the rights of
those farmers would occasion a public outcry in Brazil,
probably worse than that caused by the spectacle of Bolivian
soldiers occupying Petrobras facilities. Beltrao noted that
Brazilians had been particularly shocked by that display, and
he attributed much of the popular criticism of President
Lula's response to the outrage over those images.

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Hoping to Move Focus Back to Technical Issues
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5. (C) According to Beltrao, there will be a new round of
talks over nationalization in Bolivia this week. He said

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Petrobras will conduct the talks, most likely without
government participation, as Brazil would like to return the
issue to the technical arena, thereby turning down the
political temperature. He said he was unaware whether
Bolivian Government officials would join YPFB at the meeting.


6. (C) Comment: Whether or not the Foreign Ministry is
prepared to acknowledge a current "crisis" between Bolivia
and Brazil, there clearly appears to be a crisis of
confidence in Lula's foreign policy team. Press criticism of
the Lula adminstration continued over the weekend, with the
largest newsmagazine pillorying President Lula's chief
foreign policy advisors for their handling of the Bolivian
episode, and several other international setbacks, labeling
them at one point, "Sheep in Sheep's Clothing."

Chicola