BRAZIL - DEPUTY NATL SECURITY ADVISOR FROMAN DISCUSSES CEO

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SUBJECT: BRAZIL - DEPUTY NATL SECURITY ADVISOR FROMAN DISCUSSES CEO
FORUM, DOHA, CLIMATE CHANGE, G8, G20, WITH GOB, JUNE 18-19

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(U) This message is sensitive but unclassified, please treat
accordingly.


1. (SBU) SUMMARY: Government of Brazil (GOB) meetings with Deputy
National Security Advisor for International Economic Affairs Michael
Froman in Brasilia June 18-19 focused on CEO Forum, G8 and G20
preparations, Major Economies Forum (MEF) and Doha. Casa Civil head
Minister Dilma Rousseff and Mines and Energy (MME) Deputy Minister
Marcio Zimmermann welcomed development of a strategic partnership on
energy, both noting that U.S. company investment significantly
trails European and Asian. Rousseff supported adding energy to the
CEO Forum, noting the private sector is an important voice in
deepening the strategic relationship. On climate change, Rousseff
called USG new engagement and leadership a fundamental and welcome
change, and committed to GOB engagement in the MEF process, with
Environment (MMA) Deputy Minister Izabella Teixeira also supporting
a more active GOB role. However, External Affairs (MRE) Under
Secretary Vera Machado deferred to MEF negotiator Luis Figueiredo
Machado, who said GOB should not break ranks with the G77 and
outlined his concerns with the MEF process and USG approach
asserting that MEF should only be a listening platform rather than a
negotiating forum. On the CEO Forum's Bilateral Tax Treaty (BTT)
recommendation, Rousseff said legislative changes (e.g., for
OECD-standard transfer pricing) would be possible if the
negotiations advance this year, as nothing would happen once the
election cycle begins. Stressing familiar concerns regarding tax
revenue collection and perceived "asymmetries" between the United
States and Brazil, Finance Deputy Minister Nelson Machado underlined
difficulties in achieving a BTT that would be attractive to the
government and congress. On Doha negotiations, MRE Under Secretary
Pedro Mendonca and Assistant Secretary Carlos Marcio Cozendey
affirmed that the GOB is open to a dialogue where USG outlines its
specific priorities for market access and what USG can offer in
exchange. Froman welcomed GOB input in the preparatory process for
the G20 meeting in Pittsburgh. Regarding the G8, Vera Machado
indicated continued GOB dissatisfaction with the quantity and
quality of G5 participation. Froman's meetings June 19 in Sao Paulo
will be reported septel. END SUMMARY.

ENERGY


2. (SBU) Rousseff affirmed continued GOB support for the CEO Forum.
She welcomed the Forum incorporating energy into its agenda, noting
that the private sector is an important voice in seeking to deepen
strategic USG-GOB energy cooperation. Referring to FDI more
generally, Rousseff noted that U.S. companies are not investing in
infrastructure development to the extent European and Asian
companies are, and even in the energy sector, U.S. companies'
participation is down. She emphasized that the USG and GOB need to
develop a strategic relationship on energy overall, not simply focus
on specific projects. Rousseff welcomed more USTDA, EXIM and OPIC
energy engagement in Brazil, noting Brazil had a long-established
relationship with China and to date it had been easier to work with
Japan and Korea than with the USG. Rousseff emphasized the
importance to Brazil that the strategic relationship with the USG
becomes more significant. "A long-term relationship with you in
this sector is very important for us," she said.


3. (SBU) In a separate meeting, MME Deputy Minister Zimmermann
agreed that the USG and the GOB should seize the opportunity to
develop a strategic energy relationship and could benefit from each
others' experience, particularly since Brazil had developed with a
clean energy matrix relying highly on renewables. He noted
Petrobras' experiences with U.S. companies, including suppliers,
create excellent possibilities for deeper partnerships given the
pre-salt finds. Noting the deficit of U.S. companies' participation
in the energy sector overall compared to Europe and Asia, Zimmerman
welcomed the CEO Forum incorporating energy into its purview.


4. (SBU) Touching on on-going GOB work to develop a structure to
manage the pre-salt resources, Zimmermann indicated that the GOB was
focused on developing a model that would attract investors and avoid
Dutch disease. Noting that environmental challenges mean Brazil can
no longer construct large hydropower facilities, Zimmermann
indicated Brazil would probably launch development of new nuclear
plants next year. (NOTE. In May, Brazil restarted construction of
a third reactor, Angra III. END NOTE.) Zimmermann said Brazil
planned to liquefy natural gas at sea (in conjunction with oil

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extraction) to sell, and expressed interest in oil refinery
development projects with U.S. companies as Brazil seeks to deliver
more value-added product in the future.

CLIMATE CHANGE


5. (SBU) Rousseff acknowledged Brazil is well-positioned, given its
clean energy matrix relying on renewables like hydropower and
biofuels. She noted a great challenge in climate change management
is the global logistics infrastructure does not yet exist for
alternative fuel delivery as it does for fossil fuels. Rousseff
noted wind and solar can only complement other power sources. While
nuclear power development will proceed in Brazil, she noted
resistance in Europe. Therefore, she viewed developed, particularly
European, countries' goals for climate change with skepticism.
Rousseff believed that China would try to prove it was equal to the
challenge, and its still very centralized structure would allow it
to do so. She thought achieving India's buy-in would be
particularly difficult.


6. (SBU) Meanwhile, she underlined, the GOB would remain committed
to its domestic goals to tackle deforestation and would continue to
work to regularize land rights and suppress illegal deforestation.
Rousseff stressed that establishing land rights would be Brazil's
"great contribution" and most difficult challenge in preserving the
Amazon. She noted that Brazil wanted to manage economic activity in
the Amazon similarly to the way off-shore rigs are managed ("take
people in to work, then take them out") so as to avoid creating
cities/communities in the forest and minimizing the footprint of
economic activity. Brazil's ambition, Rousseff summarized, is to
prove a model that is viable in using the forest's services without
impacting the forest.


7. (SBU) Rousseff was notably positive and intrigued regarding the
provisions of the Waxman-Markey "American Clean Energy and Security
Act of 2009" bill. She opined that this represented an "extremely
important strategic fundamental change" that the United States now
is becoming the leader on climate change. She thought this change
represented the only way global climate change negotiations could go
forward. Rousseff emphatically confirmed that Brazil will give "all
positive signals" in the MEF process. Noting "common but
differentiated responsibilities" does not mean a country should
avoid what is clearly its responsibilities, Rousseff stated, "we can
be very supportive of these initiatives" in MEF. In response to
Rousseff's interest in climate change developments in the United
States, Froman offered to send an expert to Brazil to brief in
further depth.


8. (SBU) In a later meeting with Vera Machado, who is Brazil's
Leader's Representative for the MEF process, she claimed that she
hadn't had sufficient time to focus on this part of her portfolio.
She did not attend the MEF meeting in Paris in May, and she said
she would not attend the MEF meeting in Mexico at the end of June.
In an indication that MRE is not prioritizing the MEF Forum or
contemplating a re-examination of its positions, Vera Machado left
the discussion on climate change to her deputy, Figueiredo Machado,
who would be going to Mexico. Froman reviewed the key elements of
the draft building blocks to be considered at the July MEF leaders
meeting in Italy.


9. (SBU) Figueiredo Machado expressed concern about the MEF
process. When pressed, he explained that Brazil did not want to see
the MEF process serve as a negotiating platform, which could
undercut the ongoing negotiating process under the UN Framework
Convention on Climate Change (UNFCCC). He stressed that Brazil and
the other MEF developing countries cannot negotiate positions that
could affect the G-77 countries' negotiating position. The UNFCCC
process is "more democratic" than the MEF, he explained, which
includes only a handful of G-77 members. He didn't mind if the
developed countries agreed to targets within the MEF process, but
the MEF developing countries could not speak about what all
developing countries would do. If Brazil agrees to details within
the MEF, he explained, then "we will have betrayed the G-77. We
will be lynched by them." Figuereido Machado discounted Mexico's
efforts to advance the negotiations saying that Mexico is not part
of the G-77 and doesn't care about it. Similarly, he downplayed the
support by UN Secretary General Ban Ki-moon for the MEF process
because he was just "following the South Korean line."

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10. (SBU) Figueiredo Machado assured that he did value the MEF
process. The MEF could produce a general, common vision on the
UNFCCC negotiations, leaving the details to that body. In this way,
he opined, the MEF process could end well. The participants could
"create nice language to put in the mouths of our leaders." As for
the UNFCCC process, he hoped that there was a possibility for
reaching agreement between the G-77 and the developed countries. He
added, "we are creative." Figueiredo Machado acknowledged that
President Obama and President Lula wanted to see progress on climate
change. Figueiredo Machado urged increasing contact between the
Brazilian negotiators and the USG team. He said that many times the
problem is a lack of understanding between the two sides, rather
than a real conflict. He underlined that the US has known the
Brazilian position for a year and that position had not changed.
Froman countered, however, that the US position had changed and thus
the need for real engagement and negotiation.


11. (SBU) With respect to the draft building blocks for
consideration by MEF members, Figueiredo Machao said they had
concerns about the details. The detail that appeared to bother him
the most was the lack of a clear statement about the paramount
position of the UNFCCC process. The current language seemed to
suggest that the MEF process was a parallel negotiating process.
Further, he disagreed with the concept of a "peak year" in the
building blocks. He said could not agree to the principle of
developing countries taking on targets.


12. (SBU) Froman described the progress being made with the
Waxman-Markey climate change legislation in the House of
Representatives. Figueiredo Machado responded cautiously to the
possibility of offsets being included in U.S. legislation. He said
that this needed more discussion and better understanding. "We are
concerned by new mechanisms that may harm the climate, even though
they may help some groups [such as Brazil with forest credits]," he
said. Brazil worries that offsets will lead to other countries
eluding from their obligations to reduce emissions, he said. In the
long term what will save trees is not foreign aid, but solving the
climate change problem that threatens them, he opined. Moreover, he
faulted offsets because the majority of the benefits would only go
to a few developing countries, such as Brazil, China and India.
Other developing countries would be left in the cold, such as Congo
with its forests being cleared, he lamented.


13. (SBU) At a June 19 breakfast with the MMA Deputy Minister
Izabella Teixeira and a key climate change advisor Branca Americano,
Froman asked about how to make progress in the UNFCCC negotiations.
Americano said that it seemed the negotiations within the UNFCC were
"locked up" and she thought the MEF process could help unlock them.
She cautioned that the MEF process could not appear to be dictating
to the G-77. Teixeira said that Rousseff can play a key role in the
negotiations and after Copenhagen. She can broaden the internal
negotiations beyond just the MRE and the Ministry of Science and
Technology (MCT),which have run the process to date. She jokingly
described MRE and MCT as "lovers" who were not interested in other
Ministries' input. Americano concurred with Froman that for Brazil
climate change negotiations may be more of an opportunity than a
constraint on economic growth. Americano noted, with Teixeira's
agreement, that MRE Minister Celso Amorim is open-minded and could
possibly help produce movement within the Brazilian negotiating
team. Teixeira was supportive of the new initiatives to combat
deforestation as part of climate change. These ideas can help shape
not only the national dialogue, but also Brazil's international
position. She also encouraged the USG to reach out to other
ministries not usually involved in environmental and climate change
debates - such as the Finance Ministry, the Ministry of Planning,
Budget and Management, and the Ministry Of Development, Industry and
Trade (MDIC).

DOHA


14. (SBU) Emphasizing that the USG is not calling to re-negotiate
modalities or re-open previous concessions, Froman indicated the
United States needs to understand better what an agreement would
concretely yield U.S. producers. In particular, the United States
needs to understand better how countries intend to apply
flexibilities laid out in the formulae in order to see what new
market access will be achieved. In the meeting with MRE U/S

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Mendonca, WTO negotiator A/S Carlos Marcio Cozendey noted it is
fairly clear in most cases what sensitivities each country intends
to capture in its flexibilities. For example, he said, "everybody
knows autos will be on our flexibilities list." However, he stated,
"it is different not to know versus not to be happy." If the issue
is the latter, Brazil would be very open to a dialogue where the
United States says what it wants and what it is willing to pay for
it. Cozendey stressed that it is positive that the USG wants to
engage in a dialogue. He indicated Brazil wants certain things from
the United States, citing agricultural access and the ethanol tariff
as examples, and welcomed a chance to talk directly to the United
States. At the same time, Cozendey emphasized, the USG has to be
clear with Brazil regarding what it is not happy with and where it
wants more.


15. (SBU) U/S Mendonca emphasized that re-opening modalities would
be a Pandora's box; Cozendey reminded that while Brazil had accepted
the modalities text, Argentina did not. This situation created
intra-Mercosul tension; since Doha did not reach the end-game,
bringing Argentina on-board was never fully resolved within
Mercosul. Brazil has had some discussion with Argentina about
granting Argentina internal Mercosul concessions in order to achieve
buy-in; this internal negotiation will need to be completed,
preferably without the modalities text itself being thrown open for
discussion, and Argentine objections, again.


16. (SBU) In his meeting with Rousseff, she emphasized that Doha's
conclusion was an enormous priority for President Lula and welcomed
USG openness to this discussion. In response to a China question,
Rousseff noted the relationship is challenging, because China is
both Brazil's major industrial competitor and its biggest
agricultural consumer. Negotiations are not linear - Brazil can
find itself winning and losing simultaneously and sometimes in the
same degree. "The greatest complicating factor in this story is how
the U.S.-China relationship is." On the other hand, Rousseff agreed
there is no reason for U.S. and Brazilian industry to distrust one
another. "We have to bring our relationship closer together in the
complicated environment of China's emergence, which would be good
for both our economies," underlining again that a strategic
partnership on energy would be an important step.

G8 PLUS G5/FOOD SECURITY


17. (SBU) U/S Vera Machado reflected on the current global
groupings. She opined that they are willing to participate in the
G8 plus 5 with the intention that it will become a larger grouping
in the future. The prior week, MRE Minister Celso Amorim on his way
to the Brazil-Russia-India-China (BRIC) summit in Moscow had called
the G8 process dead and added that it would be supplanted by a
larger grouping. Machado complained that Brazil was being excluded
from the G8 Foreign Ministers meeting and the Finance Ministers
meeting in Italy. She said Brazil should at least be invited as an
observer to these meetings. "We feel excluded," she said. Further,
Brazil wants to participate further in the G8 process as a pathway
to a larger group. While the G20 was mentioned during the
conversation, Machado never explicitly or implicitly suggested that
it should replace the G8 or the G8 plus G5. She was emphatic,
however, that the G8 should expand to include Brazil. She said this
could be done in stages, with Brazil initially as an observer, as
part of a long term path toward full membership.
FOOD SECURITY


18. (SBU) MRE's Coordinator General for International Action to
Combat Hunger, Milton Rondo noted progress on international food
security efforts. He described a two-track approach - emergency or
immediate assistance, where he said the USG has been a leader for
years, and long term help with seeds through international bodies
(like the Food and Agriculture Organization (FAO) and the World Food
Programme (WFP)). He wanted to see strengthening of a "Right to
Food." Rondo agreed with the USG that the World Bank should play a
greater role, and he advocated for crop insurance. Paragraph 2 of
Article 25 of the UN Declaration of Human Rights implicitly
supported crop insurance, he said.


19. (SBU) Rondo listed areas where he saw a convergence of views
with the USG:
-access to seeds (he commented that Brazil is concerned about
farmers becoming dependent on just a few sources of seeds);

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-finance and credit;
-infrastructure, particularly for storage (Brazil is working with
Central America to improve their storage capacity);
-women, since in many places women do most of the farm work, but
rarely have title (e.g., he said in Kenya that 70% of the farm
workers were women, who owned just 10% of the land);
-research, both Brazil and the United States are leaders in this
field;
-South-South cooperation and maybe trilateral cooperation with the
United States participating; and
-Importance of concluding the Doha Round.


20. (SBU) U/S Vera Machado added that she saw a need for three
steps on food security. First, there should be a high level meeting
on the subject. Second, more agriculture research is called for and
the results need to be widely disseminated. Third, there should be
better coordination of financing for food security. Separately,
Nelson Machado indicated that the Finance Ministry has not been
engaged on the development of the G8 food security initiative.

G20


21. (SBU) In the meetings with U/S Mendonca (G20 Sherpa, MRE) and
U/S for International Affairs Galvao (G20 sous-Sherpa, Finance),as
well as in the Finance Deputy Minister Nelson Machado meeting (which
Galvao also attended),Froman welcomed on-going Brazilian input into
the G20 preparatory process for the Pittsburgh meeting. MRE and
Finance stressed the continued importance of good inter-governmental
communication in the preparatory process and the priority the GOB
places on International Financial Institutions (IFI) governance
reform. U/S Mendonca inquired how labor would be incorporated into
the G20 discussion. Froman noted that social safety net issues and
issues regarding how best to prepare the labor force to succeed were
under discussion. In the Nelson Machado meeting, Galvao noted that
Finance Minister Mantega would like to relaunch the dialogue with
Treasury on bilateral and macroeconomic issues, in addition to
on-going G20 discussions. Galvao indicated that Mantega intended to
discuss this proposal with Treasury Secretary Geithner.

BILATERAL TAX TREATY


22. (SBU) Noting significant divergences between the United States
and Brazil on BTT issues, Rousseff concurred negotiations should
resume via DVC before the CEO Forum to examine the possibility of
concluding an agreement. She mentioned that services would need to
be excluded from the BTT and that transfer pricing was a particular
problem. She noted that there was no subject that could not
eventually be dealt with, including those that would require
legislative changes, even if some elements would require a staged
approach. Rousseff noted that if the negotiation yielded a result
this year, legislative changes would be possible to pursue; next
year would be impossible, given the election cycle. In a separate
meeting, Finance Deputy Minister Nelson Machado said the possibility
of legislative changes was the last question to ask, not the first.
Stressing familiar concerns regarding tax revenue collection and
perceived "asymmetries" between the United States and Brazil, he
underlined difficulties in achieving a BTT that would be attractive
to the Brazilian government and congress. He emphasized that
information exchange was the most important element of a BTT for
Brazil; consequently the GOB is expending much effort to see the
U.S.-Brazil Tax Information Exchange Agreement (TIEA) passes
congress. Rousseff and Nelson Machado agreed that negotiators would
meet again by DVC before the CEO Forum, to assess what progress is
possible and the viability of continued negotiations in the near
term.

COMMENT


23. (SBU) GOB interlocutors affirmed the continued priority placed
on the CEO Forum and welcomed moving toward a strategic partnership
on energy issues. Meetings highlighted the discrepancy in MEF
ambition and engagement between the Casa Civil and Environment
Ministry on one hand, and the Ministry of External Relations (MRE)
with the lead in the negotiations on the other. While the MRE and
Finance generally are satisfied with G20 discussions, MRE expressed
continued frustration with GOB participation in G8 mechanisms.
Following her meeting with Froman, Rousseff commented to her
International Affairs Advisor, Carlos Alfredo Teixeira, that she was

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pleased with the positive tone and common interests discussed.
Carlos Teixeira noted the early bilateral visit by the National
Security Council was an important demonstration of the new
Administration's desire to engage with Brazil. END COMMENT.


24. (U) MEETING PARTICIPANTS:

Casa Civil

Dilma Rousseff, Head of Casa Civil
Carlos Alfredo Teixeira, International Affairs Advisor

MRE - Economic Affairs

Pedro Luiz Carneiro de Mendonca, U/S for Economic Affairs
Luis Balduino, A/S Finance and Services Affairs
Carlos Marcio Cozendey, A/S Economic Department
Marco Galvao, Finance Ministry, U/S International Affairs
Alvaro Vereda Oliveira, Finance Ministry, A/S Financial
Organizations and Regional Integration

MRE - Political, Environment, G8 Affairs

Vera Barrouin Machado, U/S for Political Affairs
Luis Figueiredo Machado, A/S Environment Department
Milton Rondo, General Coordinator, International Action to Combat
Hunger
Joao Tabajara, General Coordinator, US/Canada desk
Saulo Arantes Ceolin, U/S staff advisor

Mines and Energy

Marcio Zimmermann, Deputy Secretary
Alexandre Peixoto, Chief of Staff
Rubem Barbosa, International Affairs Advisor

Finance

Nelson Machado, Deputy Secretary
Marcos Galvao, U/S International Affairs
Nelson Barbosa, U/S Economic Policy
Alberto Pinto Souza, Deputy General Coordinator, International Tax
Affairs, Receita Federal (IRS-equivalent)
Talmon de Paula Freitas, International Tax Affairs Advisor, Receita
Federal
Renato Stancato, MRE, Finance and Services staff

Environment

Izabella Teixeira, Deputy Secretary
Branca Americano, Climate Change Advisor

SOBEL