BRAZIL SCENESETTER: CODEL PASTOR APRIL 4-10

UNCLAS SECTION 01 OF 06 BRASILIA 000405

SIPDIS

DEPARTMENT FOR H/CTO, WHA/BSC, WHA/EPSC

E.O. 12958: N/A
TAGS: OREP SENV KGHG ENRG ECON ETRD EINV EFIN PREL BR
SUBJECT: BRAZIL SCENESETTER: CODEL PASTOR APRIL 4-10


1. This message is sensitive but unclassified, please treat
accordingly.


2. (U) SUMMARY: Your visit comes at a time when the relationship
between the United States and Brazil is as productive and
broad-based as ever, with a strong bilateral relationship and
important economic ties. Brazil has assumed a larger role in
promoting regional stability by leading the UN peacekeeping
contingent in Haiti and views itself as a potential member of an
expanded UN Security Council. Through the financial crisis, Brazil
has played a leading role globally in the G20 and also led efforts
to conclude the Doha round of World Trade Organization (WTO)
negotiations. Further, the country has the potential to play a
major role in promoting global energy security. The Brazilian
government seeks to develop a global market for biofuels and also to
bring into production its vast, new off-shore oil and gas
discoveries. In spite of its relatively clean energy matrix, Brazil
is a major carbon dioxide emitter, largely as a result of
deforestation, which makes it a critical player in the discussion on
climate change. END SUMMARY.

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Political Overview
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3. (U) With democracy re-established in 1988 after a period of
military dictatorship, Brazil's democratic institutions are
generally strong and stable. President Lula remains a popular
president - one of the most popular in Brazil's history and indeed
in the world today, with recent approval ratings as high as 78% - as
a result of his orthodox economic policies and expanded social
programs. In the Congress, ongoing public scandals involving the
leadership of the Senate and various members of congress have led to
low ratings for the institution among the Brazilian public.
Increasingly, the court system has taken steps to curb impunity
among public officials. These steps have been well received by a
public accustomed to abuses by authorities.


4. (U) The United States and Brazil share the basic goals of
fostering hemispheric stability and preventing terrorist and drug
transit activity. The attainment of a permanent seat on the United
Nations Security Council has been a central goal of Brazil's foreign
policy under President Lula's government. Regionally, Lula has
maintained Brazil's historic focus on stability, seeing dialogue and
good relations with all parties as the best way to achieve this
goal. As a result, Brazil maintains an active dialogue with
Venezuela and Cuba, has worked to foster good relations with
Bolivia, has given its assistance in resolving the FARC hostage
crisis in Colombia, and has stood firmly on the principle of respect
for sovereignty in the region.

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Defense Cooperation
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5. (SBU) The first potential watershed in achieving a more robust
defense relationship with Brazil will be the decision on a next
generation fighter aircraft. Boeing's F-18 Super Hornet is a
finalist along with the French Rafale and Swedish Gripen. A
decision will be made in June 2009, with a final contract award in
October. It would be difficult to overstate the significance of
Brazil's Air Force committing to a U.S. aircraft as its primary
fighter for the next generation. Boeing's proposal combines
cutting-edge technology with a strong package of industrial
cooperation. To be successful, Boeing will have to make a strong
case that its offset package offers economic benefits to Brazil far
greater than its competitors.

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Expanding Economic Ties
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6. (U) Brazil is the tenth largest economy in the world and
received investment grade from Standard and Poor's and Fitch in

2008. Annual Gross Domestic Product (GDP) grew 5.1 percent in 2008,
and inflation was 5.8%. Prospects for 2009 have been dimmed by the
global economic crisis, taking previous predictions for annual GDP
growth from 4 per cent to .01 percent with some analysts predicting
a recession. Despite this decline in immediate prospects, Brazil
has thus far weathered the crisis better than most major economies,
due in large part to its conservative macroeconomic policies.


7. (U) Despite progress in recent years, income distribution in
Brazil remains grossly unequal, with 10 percent of the population
holding over 50 percent of the nation's wealth. Brazil is home to
50 percent of the people who live in extreme poverty in Latin
America. President Lula's social programs, combined with formal
sector job growth and real increases in the minimum wage, have
reduced income inequalities each year since 2004.

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8. (U) Millions of Brazilians have moved into the middle class
over the last few years. Nevertheless, roughly forty percent of the
population lives in poverty, a problem that can only be addressed by
sustained long-term growth. Unfortunately, major structural
challenges to long-term growth include a complicated and onerous tax
structure, high interest rates, and cumbersome labor and business
regulations. As a result of its regulatory structure, Brazil ranks
125th in the World Bank Group's Doing Business assessment of
regulatory climate in 181 countries. The informal sector (one of
the largest among large developing economies) constitutes an
estimated 40 percent of Brazil's economy, in large part in response
to the onerous tax and regulatory requirements to participate in the
formal economy. To promote growth, President Lula has vigorously
pursued a national Growth Acceleration Program (PAC) to increase
infrastructure investment in energy, transportation, and
sanitation/housing, a program that has received increased funding as
a countercylical measure in the face of the economic crisis.


9. (U) Brazil is a major producer and exporter. Agriculture makes
up 36 percent of exports, and the agribusiness sector accounts for
25% of Brazil's GDP. Brazil is a leading exporter of soybeans,
beef, sugar, coffee, and orange juice. Brazil also distinguishes
itself as a major exporter of civilian aircraft, steel, and
petrochemicals. The United States is Brazil's top trading partner,
and China has moved into position as number two. Brazil was a
significant leader in the World Trade Organization's Doha Round
negotiations and was active in trying to broker a deal between the
United States and India.


10. (U) Foreign direct investment in Brazil is increasing, with
inflows of USD 44 billion in 2008; USD 6.9 billion came from the
United States. Brazilian investment in the United States almost
tripled between 2001 (USD 1.4 billion) and 2006 (USD 3.9 billion).
President Lula has been actively selling Brazil (including at a
recent Wall Street Journal sponsored investment conference in
Brazil) as a solid investment destination during the financial
crisis due to its sound macroeconomic policies and relatively strong
economy.


11. (U) In recognition of Brazil's growing importance as a world
economy, the U.S. government seeks opportunities for positive
bilateral cooperation on economic issues. Brazil and the United
States are in discussions over a possible Bilateral Tax Treaty.
After both countries agreed in June 2008 to significantly expand
civil aviation opportunities, two U.S. airlines were granted
approval for 21 new frequencies. Further frequency allocations for
2009 under the agreement have been tentatively allocated.

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Global Financial Crisis
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12. (U) The global financial crisis has affected Brazilian
companies' exports and access to credit. Brazil's Finance Minister
continues to assert that Brazil is well-positioned to weather the
crisis while he and Central Bank contacts confirm moves to try to
mitigate the effects of the crisis. President Lula, taking a
leading role in the debt over how to handle the economic crisis
including through the G20 process, has criticized actors in
developed countries for sparking a crisis that affects developing
countries. He has called for increased regulation of the global
financial system, increased global access to trade finance, and an
expanded role for large emerging countries like Brazil in
international financial institutions such as the International
Monetary Fund (IMF). Presidents Lula and Obama agreed to work
together to advance our common interests through the G20 process and
have established working groups to that end.


13. (U) Over the past quarter Brazil has posted a series of poor
economic results that confirm the country will not escape the
current global financial crisis unscathed. A February 3 report
detailing a 14.5 percent drop in industrial output in December 2008
versus December 2007 (the biggest drop in 17 years),finally
prompted President Lula to admit that his country's economy may be
contracting. The government has reacted to the economic downturn
thus far with a series of piecemeal announcements and actions aimed
at increasing liquidity in the banking system, stimulating growth
through a series of targeted tax cuts, and seeking to shore up
exports. President Lula has announced his intention to develop a
comprehensive response plan for release in the coming weeks.
However, details still remain under interagency discussion.


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Energy
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-AREA FOR COOPERATION: BIOFUELS

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14. (U) For Brazil, turning ethanol into a world commodity is a
key aspect of increasing energy security. Though Brazilian ethanol
is produced from sugar cane, Brazil sees expansion of the global
ethanol market, regardless of feed stock, as a key interest. In
March 2007, the United States and Brazil signed a Memorandum of
Understanding (MOU) on biofuels cooperation. As a result,
scientists and laboratories from the two countries are
collaboratively researching next generation biofuels technologies.
We are also working together in various multilateral fora to develop
international biofuels standards and sustainability criteria. By
making it easier to treat biofuels as a tradeable commodity, these
standards should foster the emergence of a vibrant global biofuels
market.


15. (U) The United States and Brazil are jointly assisting a group
of developing countries in creating their own biofuel markets, with
the goal of reducing their dependence on imported oil. The joint
cooperative effort initially targeted four countries: Haiti, St.
Kitts, El Salvador, and the Dominican Republic. In November 2008,
five new countries joined the group: Guatemala, Guinea-Bissau,
Honduras, Jamaica, and Senegal. Brazil would like to see the United
States aggressively expand these cooperation efforts to include
developing countries in Africa and Southeast Asia, both as a
development tool and as a way to increase the commodity market for
ethanol.


16. (U) Modest tax breaks have stimulated the Brazilian domestic
ethanol market and have led new car purchasers to opt overwhelmingly
for "flex-fuel" cars that can run on gasoline, ethanol, or any
combination of the two. In 2008, ethanol surpassed gasoline as the
dominant automotive fuel. Domestic demand consumes 85 percent of
all production. The other 15 percent is exported, primarily to the
United States, making our ethanol import surcharge a continuing
irritant in bilateral relations. The GOB also uses mandates to
promote greater use of biodiesel.

-VAST OIL AND GAS DISCOVERIES


17. (U) The discovery in 2007 of potentially massive offshore
("pre-salt") reserves of oil and gas estimated to contain between
30-80 billion barrels of oil equivalent could put Brazil within the
top ten oil countries by reserves. Though the discoveries have
generated a great deal of excitement, industry observers caution
that developments will probably be slow in coming due to the
expensive technological challenges involved with ultra-deepwater
drilling, including a worldwide shortage of equipment such as
drilling rigs.


18. (U) Petrobras appears to be overextended internationally and
is hamstrung by limited equipment resources. However, it has
launched a multi-billion dollar procurement initiative and is
reexamining its international priorities so that it can focus on
domestic opportunities, though it remains to be seen how the global
financial crisis will may affect those plans. U.S. oil companies
are poised and ready, in many cases, to take on more exploration
opportunities. Brazil is currently reexamining its oil sector
structure to make the most use of these finds. Interim reports
suggest that the GOB may be leaning towards developing a state-owned
company to manage the rights to the oil fields as they contract out
the exploration. Brazil has expressed interest in having U.S.
companies involved in the exploitation of Brazil's oil reserves.

-FURTHER ENHANCING ENERGY COOPERATION


19. (U) Brazil and the United States have many other common areas
of interest in the energy sector. The convergence of our interests
offers opportunities to enhance both countries' national energy
security. Building on the success of the biofuels relationship,
Brazil and the United States have identified three new areas of
possible collaboration under a preexisting Memorandum of
Understanding between the U.S. Department of Energy and Brazil's
Ministry of Mines and Energy and established new working groups in
the areas of energy efficiency, clean coal, and nuclear energy. The
United States also has commercial interests, particularly in nuclear
energy, as Brazil looks to expand its civilian nuclear energy
program. For example, Westinghouse is in the running to build four
to eight new nuclear reactors in Brazil over the next ten years.


20. (U) The United States would like to parlay these and other
shared interests into support for a hemispheric energy partnership.
There are many opportunities for joint cooperation including
research and development, energy efficiency, and green technologies.
It is important that prominent Brazilian policymakers perceive the
level of importance the USG accords to this efforts. Any
appropriate opportunities for the delegation to reinforce this
message would be invaluable as we pursue this major policy
initiative.


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The Environment and Climate Change
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21. (U) Brazil pursues two sometimes-conflicting goals with regard
to the Amazon region. On the one hand, it seeks to preserve the
natural resources and biodiversity found there. To that end, the
government requires landowners to preserve eighty percent of forest
on their lands and has placed large amounts of the forest into
protected areas, such as national parks and indigenous reserves. At
the same time, the Brazilian government seeks economic growth and
redistribution of land. Thus, since the 1970s it has built a
network of roads through the Amazon, which has opened the region to
timber and agriculture (mainly cattle and soybean) interests.


22. (U) Massive and ongoing clearing of the Amazon Forest releases
large quantities of carbon dioxide into the atmosphere. The GOB
estimates that about 75% of the country's green house gas emissions
come from changes in land use and deforestation. From 1970-2000,
Brazil's ranked 6th in the world for cumulative carbon dioxide (CO2)
emissions - the country emitted 51,000 metric tons of CO2 (including
land use),about six percent of the global total. During the same
time period, the United States emitted 137,000 metric tons of CO2
(including land use),about sixteen percent of the global total, and
was ranked number one.


23. (U) The GOB has taken a defensive position on deforestation,
most of which is illegal and takes place on public lands. The GOB
has not been able to establish an effective presence in the vast
Amazon, leaving ranchers and farmers to clear government land with
relative impunity. However, the national government, state and
local governments, non-governmental organizations, and the business
community are pursuing a variety of means to reduce the
deforestation rate. In October 2008, the national Amazon Fund
received a pledge of up to one billion dollars from Norway through

2015. Marriott Hotels and Coca-Cola recently contributed to a State
of Amazonas program called Foundation Sustainable Amazonas (FAS) to
financially support residents living in state reserves who choose to
preserve their forests. Other organizations, such as the Moore
Foundation and The Nature Conservancy, have programs to encourage
conservation and to prevent the Amazon from being turned into
soybean fields.


24. (U) The GOB has stepped up enforcement efforts to stop illegal
clearing and has displayed great interest in the use of programs
which pay people to avoid deforestation. These efforts, combined
with a drop in agriculture commodity prices, are expected to result
in a significant decrease in the deforestation rate this year. In
December 2008, the GOB announced a domestic goal of reducing the
deforestation rate to about 6,000 square kilometers per year by

2017. The deforestation rate dropped from a high of over 25,000
square kilometers in 2003 and in 2004 to around 11,000 square
kilometers in 2007 and in 2008.


25. (U) In international climate change negotiations, Brazil has
been far less bold and innovative, contending that only developed
countries should be required to assume emission reduction targets.
However, some within the GOB want Brazil to take a position of
leadership on climate change. Although he has yet to persuade the
Ministry of Exterior Relations (the GOB lead on climate change
negotiations),Environment Minister Carlos Minc urges Brazil and
other developing countries to take on emissions reductions targets
in return for financial assistance and technology transfer.


26. (U) The tremendous international interest in the Amazon has
made many Brazilian officials ultrasensitive on the topic. Further,
a myth has arisen that the United States is interested in militarily
seizing the Amazon either to preserve it or to claim its vast
natural resources.


27. (U) Brazil is a relatively "green" country. Hydropower
provides around 85% of Brazil's electricity, and passenger cars now
use more ethanol than gasoline. However, in order to meet growing
demands for electricity that can not currently be met through
hydropower, the GOB may resort more often to fossil fuels (which
currently provide less than nine percent of Brazil's electricity).


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GOLDMAN ABDUCTION CASE
--------------


28. (U) American David Goldman is currently pursuing a Hague
Abduction Case, involving his son Sean who was brought to Brazil by
his mother and wrongfully retained here over 4 years ago. The case
has been remanded to the 16th Federal Court in Rio de Janeiro. The
Court has two cases before it: the return motion from Mr. Goldman
under the Hague Convention on International Child Abduction, and the
custody motion by Sean's Brazilian stepfather which was originally

BRASILIA 00000405 005 OF 006


filed in a Rio state court. The Ambassador and numerous elements
within the Mission have been working firmly but quietly behind the
scenes to remind the GOB of its obligations under the Hague
Convention. We are cautiously optimistic that the move to the
Federal Court will result in a more just decision on the Hague case.
We remain in constant touch with David Goldman and his Brazilian
attorney to ensure that their interests are represented effectively
in Brasilia. A decision may be announced soon.

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Security Situation in Brazil
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29. Political and labor strikes and demonstrations occur
sporadically in urban areas and may cause temporary disruption to
public transportation. Naturally, protests anywhere in the world
have the potential to become violent. In addition, criminal
organizations, during 2006, staged several violent campaigns against
public institutions in the Sao Paulo State leading to a large number
of deaths. While it is unlikely that U.S. citizens would be targeted
during such events, U.S. citizens traveling or residing in Brazil
are advised to take common-sense precautions and avoid any large
gatherings or any other event where crowds have congregated to
demonstrate or protest. Individuals with ties to criminal entities
operate along the tri-border area of Argentina, Brazil, and
Paraguay. These organizations are involved in the trafficking of
illicit goods; some individuals in the area are financially
supporting designated foreign terrorist organizations. U.S.
citizens crossing into Paraguay or Argentina may wish to consult the
Country Specific Information for those countries.


30. Crime throughout Brazil (especially Rio de Janeiro) has
reached very high levels. The Brazilian police and the Brazilian
press report that the rate of crime continues to rise, especially in
the major urban centers - though it is also spreading in rural
areas. Brazil's murder rate is more than four times higher than
that of the United States. Rates for other crimes are similarly
high. The majority of crimes are not solved.


31. Street crime remains a problem for visitors and local
residents alike, especially in the evenings and late at night.
Foreign tourists are often targets of crime and Americans are not
exempt. This targeting occurs in all tourist areas but is especially
problematic in Rio de Janeiro, Salvador and Recife.


32. Caution is advised with regard to nighttime travel through
more rural areas and satellite cities due to reported incidents of
roadside robberies that randomly target passing vehicles. Robbery
and "quicknapping" outside of banks and ATM machines are common. In
a "quicknapping," criminals abduct victims for a short time in order
to receive a quick payoff from the family, business or the victim's
ATM card. Some victims have been beaten and/or raped.


33. The incidence of crime against tourists is greater in areas
surrounding beaches, hotels, discotheques, bars, nightclubs, and
other similar establishments that cater to visitors. This type of
crime is especially prevalent during Carnaval (Brazilian Mardi
Gras),but takes place throughout the year. While the risk is
greater at dusk and during the evening hours, street crime can occur
both day and night, and even safer areas of cities are not immune.
Incidents of theft on city buses are frequent and visitors should
avoid such transportation. Several Brazilian cities have
established specialized tourist police units to patrol areas
frequented by tourists. In Rio de Janeiro, crime continues to
plague the major tourist areas.


34. At airports, hotel lobbies, bus stations and other public
places, incidents of pick pocketing, theft of hand carried luggage,
and laptop computers are common. Travelers should "dress down" when
outside and avoid carrying valuables or wearing jewelry or expensive
watches. "Good Samaritan" scams are common. If a tourist looks
lost or seems to be having trouble communicating, a seemingly
innocent bystander offering help may victimize them. Care should be
taken at and around banks and internationally connected automatic
teller machines that take U.S. credit or debit cards. Very poor
neighborhoods known as "favelas," such as those located on steep
hillsides in Rio de Janeiro, are found throughout Brazil. These
areas are sites of uncontrolled criminal activity and are often not
patrolled by police. U.S. citizens are advised to avoid these
unsafe areas. Carjacking is on the increase in Sao Paulo, Recife
and other cities.


35. Travelers using personal ATMs or credit cards sometimes
receive billing statements with non-authorized charges after
returning from a visit to Brazil. The Embassy and Consulates have
received numerous reports from both official Americans and tourists
who have had their cards cloned or duplicated without their
knowledge. Those using such payment methods should carefully monitor
their banking online for the duration of their visit.

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36. While the ability of Brazilian police to help recover stolen
property is limited, it is nevertheless strongly advised to obtain a
"boletim de ocorrencia" (police report) at a "delegacia" (police
station) whenever any possessions are lost or stolen. This will
facilitate the traveler's exit from Brazil and insurance claims.


37. In many countries around the world, counterfeit and pirated
goods are widely available. Transactions involving such products
may be illegal under local law. In addition, bringing them back to
the United States may result in forfeitures and/or fines.


38. COMMENT: Brazil has seen its importance on the world stage
multiply exponentially in just the last few years. It is a major
player in the region and while the government is largely friendly
and open to the U.S., they do not and will not always see eye to eye
with us. The most promising areas for collaborating with Brazil,
while also furthering our own national interests, lie in the areas
of energy and climate change. Your visit offers the opportunity to
highlight how important Brazil is in this effort and underline our
strong interest in expanding our relationships in these areas. END
COMMENT.

SOBEL