BRAZIL: CENTRAL BANK COOPERATION WITH THE BANK OF RUSSIA

UNCLAS SECTION 01 OF 02 BRASILIA 000952

SIPDIS

SENSITIVE
SIPDIS

NSC FOR CRONIN
TREASURY FOR OASIA - DAS LEE, DDOUGLAS
STATE PASS TO FED BOARD OF GOVERNORS FOR ROBITAILLE
USDOC FOR 4332/ITA/MAC/WH/OLAC/JANDERSEN/ADRISCOLL/MWAR D
USDOC FOR 3134/ITA/USCS/OIO/WH/RD/SHUPKA
STATE PASS USAID FOR LAC

E.O. 12958: N/A
TAGS: ECON EFIN PGOV PREL BR
SUBJECT: BRAZIL: CENTRAL BANK COOPERATION WITH THE BANK OF RUSSIA
AND OTHER EMERGING COUNTRY MONETARY AUTHORITIES



1. (SBU) Summary: Henrique Meirelles, president of the Brazilian
Central Bank (BCB),traveled to Moscow May 10-11 to meet with local
monetary authorities. During that visit, Meirelles planned to sign
a cooperation agreement with the Bank of Russia (BOR) as officials
there are reportedly interested in the Brazilian inflation targeting
system, the BCB apparatus for effectuating inter-bank settlements
and Brazilian banking supervision arrangements. For their part, the
Brazilians have two main interests: 1) developing trade finance
mechanisms between the two countries, and 2) attracting a share of
Russia's disposable investment capital, given Russia's recent high
current account surpluses, a fact reflected by the US$230 billion in
international reserves it has accumulated. End Summary.


2. (U) According to press reporting here, the BOR is interested in
information exchanges regarding the institutional framework that
Brazil has adopted to implement its inflation targeting system. In
Brazil, the annual inflation target, currently 4.5%, is set by the
National Monetary Council (NMC),a body that consists of the
President of the Central Bank, the Minister of Finance and the
Minister of Planning and Budget. Decisions on the interest rate
necessary to meet the inflation target are made by the Monetary
Policy Committee (COPOM) of the Central Bank, which consists of the
Central Bank President and the eight directors, who meet eight times
a year. (The benchmark overnight SELIC rate currently stands at
15.75%.) The COPOM enjoys only de facto independence in its
interest rate decisions; legislation granting the BCB formal
autonomy has languished in Congress for several years. The interest
rate decisions are informed by a sophisticated macroeconomic model
maintained by the BCB's economic studies department. The
econometric model of the inflation targeting system reportedly
piqued the BOR's interest because of Brazil's experience as a major
emerging market economy that successfully tamed high inflation.


3. (U) These institutional arrangements are complemented by an
elaborate system of interactive reporting to communicate with the
public and financial markets. The BCB surveys financial
institutions that maintain their own econometric models of the
Brazilian economy and publishes weekly a report on market
expectations which incorporates the average predictions that these
models make on key economic variables, such as inflation (any one of
several indexes),GDP growth, exchange rate, and interest rates.
(See, inter alia,
www4.bcb.gov.br/PEC/GCI/Ingl/readout/R2006051 2.pdf) The COPOM also
publishes the week after the minutes of its interest rate-setting
meetings. In 2005, China implemented a similar market expectations
survey mechanism, which reportedly was based substantially on the
Brazilian model. Important for the Russians was the fact that the
survey is completely electronic, which allows the Brazilian Central
Bank to conduct real time monitoring of the evolution of market
expectations. Similar market expectations survey systems have been
implemented in Argentina and Colombia.


4. (U) Meirelles was joined by representatives of the public and
private Brazilian banks on this visit to Russia. These
representatives will be presenting Brazilian banking technology
(software and monitoring systems),which reportedly also is of
interest to the BOR. Brazilian financial institutions invested
early and heavily in the development of electronic banking systems,
spurred by hyperinflation, which made every minute of payment
"float" count. This made Brazil a leader in introducing real time
electronic settlement systems between banks. Finally, the media
here report that the BOR is interested in Brazil's banking
supervision arrangements, which are enhanced by Central Bank
electronic monitoring systems.


5. (U) The Brazilian Central Bank has developed formal and informal

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cooperation agreements with China, Mozambique, Indonesia, and
Ukraine. The Brazilian Central Bank has also developed cooperation
agreements with countries such as Angola in which it transfers
technology in the areas of international reserve management, risk
management and benchmark.


6. (SBU) Comment: Brazil sees Russia through a couple of different
prisms. The first is President Lula's foreign policy priority,
advanced primarily by the Ministry of External Relations (MRE),to
build cooperation among developing countries (the "South-South
Cooperation" moniker would apply but for Russia's awkwardly northern
geographic location). The Central Bank, however, tends to be more
pragmatic than the MRE, and is likely motivated primarily by the
desire to build the financial infrastructure to facilitate trade.
Russia already is an important market for certain Brazilian
products, notably beef. It would love to add some higher tech
exports, such as banking software, to the mix. End Comment.

CHICOLA