Cablegate: Scenesetter for the Visit of Codel Cornyn

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RR RUEHRG
DE RUEHBR #1276/01 1771514
ZNR UUUUU ZZH
R 261514Z JUN 06
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 5892
RUCPDO/USDOC WASHDC
INFO RUEHRG/AMCONSUL RECIFE 5018
RUEHSO/AMCONSUL SAO PAULO 7290
RUEHRI/AMCONSUL RIO DE JANEIRO 2345

UNCLAS SECTION 01 OF 05 BRASILIA 001276

SIPDIS

SENSITIVE
SIPDIS

H-PASS
FROM CHARGE CHICOLA FOR CODEL CORNYN

E.0. 12958: N/A
TAGS: PGOV ECON BR
SUBJECT: SCENESETTER FOR THE VISIT OF CODEL CORNYN

1. (SBU) The United States Mission in Brazil warmly welcomes your
planned July 1-3 visit to Foz de Iguacu. Consul General McMullen
will greet you in Sao Paulo, and he and his team will brief you on
your program. In addition, our DEA Country Attache and our Acting
DHS Attache will brief you on the full range of law enforcement
issues they confront.

2. (SBU) Your trip comes at a transition point on the political
scene. During the second semester of 2005, congressional deputies
from Lula's governing coalition were accused of accepting bribes,
while officials from the President's party (the PT) were alleged to
have engaged in influence-peddling and illegal campaign
fund-raising. These revelations forced the resignation of several
members of Lula's inner circle, including his former Chief of Staff
(who was also expelled from Congress).

3. (SBU) However, "scandal fatigue" has set in, and President Lula
has successfully used the slack time to recover lost political
ground. Recent polls show Lula regaining the lead in the
presidential race, and he is currently engaged in a busy schedule of
visits around the country - campaigning in all but name - while the
leading opposition candidate from the PSDB party has stalled in the
polls. The election campaign will commence in earnest after the
World Cup ends July 9 - Brazilians expect that their squad will be
in the finals - with presidential and congressional elections set
for early October.

THE BILATERAL RELATIONSHIP
--------------------------

4. (SBU) While relations between the U.S. and Brazil are friendly,
often the USG encounters major difficulties in gaining the
cooperation of senior policymakers on issues of significant interest
to the United States. Eager to assert its own influence, the
Brazilian government shies away from cooperation with the USG -
unless it can clearly be characterized as a reciprocal exchange
among equals. Indeed, hyper-sensitivity on issues viewed as
infringing on Brazil's sovereignty can get out of hand and may be
seen as signs of political immaturity. Many Brazilians believe the
U.S. has designs on the Amazon. Our fingerprinting of visitors to
the U.S. drew reciprocal treatment for Americans here; visa and
immigration issues remain sensitive points.

5. (SBU) During recent months, our ongoing dialogue with the
Brazilians has focused on a variety of potentially useful projects
for both sides. We sought to interest the GOB in a Defense
Cooperation Accord, but the Foreign Ministry rejected the proposal
even though the Defense Ministry was supportive. Gaining agreement
on privileges and immunities to be granted U.S. servicemen engaging
in military exercises has been just as tough, as the Foreign
Ministry saw it as "a foot in the door" and linked it with Brazil's
strong opposition to Article 98 agreements. We are receptive to
renegotiation of a stalled bilateral agreement governing space
launches at the country's equatorial base at Alcantara, but the GOB
has moved glacially to re-engage, even though the agreement clearly
serves Brazilian interests. On trade issues, when unscripted,
President Lula has characterized the FTAA as "off his agenda." IPR
is another sore point, as it has become clear that the USG and the
Brazilian government have different views on the degree of
protection to be afforded to intellectual property. Only after much
lobbying have we gotten the GOB to: a) turn the corner on copyright
piracy, and b) pursue negotiated solutions rather than compulsory
licensing of AIDS anti-retrovirals.

6. (SBU) However, not all our conversations are difficult. At the
personal level, Lula has met President Bush several times and the
two have a good rapport. On issues involving matters perceived as
technical in nature - i.e., law enforcement and science (but not
counter-terrorism) - the GOB is eager to engage. For example, from
2003 to 2004, the GOB worked quietly with us on the timing and
details of its counter-drug shoot-down program to accommodate our
statutory requirements. Brazil's Ministry of Health has expressed
its desire to expand the collaboration they have with the U.S.
Centers for Disease Control and the National Institutes of Health as
these agencies work within the Brazilian medical community to bring
newer treatments and technologies. The Brazilians have also eagerly
participated in the dialogue leading up to the first meeting of a
bilateral commission on science and technology, scheduled for July
2006, in Washington.

7. (SBU) On development assistance issues, our dialogue is
positive, but constrained. Notwithstanding lackluster results to
date, the Brazilian government's multi-billion dollar poverty
alleviation program - Zero Hunger - receives substantial funding
from the World Bank and IDB. Given USG budget constraints and the

BRASILIA 00001276 002 OF 005

fact that Zero Hunger is, in essence, a cash transfer program
(albeit with conditions), USAID support has been limited. Instead
of focusing on cash transfers to the poor, USAID has sought to
target its efforts towards promoting sustainable livelihoods - inter
alia, through working with small and medium-sized enterprises. The
Embassy's Public Affairs programs are aimed at promoting young
leaders take a similar targeted approach. This difference in focus,
broad cash transfers versus targeted assistance, ends up putting the
USG at the margins of Brazil's overall anti-poverty efforts.

COUNTER-DRUG EFFORTS
--------------------

8. (U) While not a significant drug-producing country, Brazil is a
conduit for cocaine base and cocaine HCl moving to Europe, the
Middle East and Brazilian urban centers, as well as a conduit for
smaller amounts of heroin moving to the U.S. and Europe. Cocaine and
marijuana are used among youth in the cities, particularly Sao Paulo
and Rio de Janeiro. Organized drug gangs are involved in narcotics
related arms trafficking.

9. (U) U.S. counternarcotics policy in Brazil focuses on working
with Brazilian authorities in identifying and dismantling
international narcotics trafficking organizations, reducing money
laundering, increasing awareness of the dangers of drug abuse and
drug trafficking and addressing related issues such as organized
crime and arms trafficking. Other key goals include assisting
Brazil in developing a strong legal structure for narcotics and
money laundering control and enhancing cooperation at the policy
level. Bilateral agreements provide cooperation between U.S.
agencies, the National Anti-drug Secretariat and the Ministry of
Justice. Specifically, the U.S. provided equipment and computers
for the coordinated intelligence center in Foz de Iguacu and
training courses in airport interdiction and container security.

10. (U) Brazil's first line of defense against drug smuggling is
enforcement at its heavily transited border crossings. Drug
traffickers exploit the expansive border in areas where Brazilian
law enforcement has only a minimal presence. To more effectively
combat trans-border trafficking organizations, Brazil is cooperating
closely with its neighbors by establishing joint intelligence
centers (JIC). The newest JIC is planned for the Brazilian/Bolivian
border.
11. (U) The GOB has begun to institutionalize its National Strategy
for Combating Money Laundering (ENCLA), holding its third annual
high-level planning session in December 2005. Also in 2005, the GOB
drafted, but has not yet presented to Congress, a bill updating its
anti-money laundering legislation. If passed, this legislation
would facilitate greater law enforcement access to financial and
banking records during investigations, criminalize illicit
enrichment, allow administrative freezing of assets, and facilitate
prosecutions of money laundering and terrorist financing cases.
12. (U) Brazil's Unified Public Safety System (SUSP), created in
2003, is now fully functional and showing results. SUSP, which is
administered by the Brazilian National Public Safety Secretariat
(SENASP), is a national system to integrate diverse state, civil and
military police forces. Collaboration between SENASP and NAS has
been good. A number of courses, including crisis management,
training for counternarcotics SWAT teams, and training for dog
handlers, were sponsored by NAS and hosted by SENASP for state law
enforcement officials throughout Brazil.
FOREIGN POLICY
--------------

13. (SBU) Reflecting Brazil's ambivalence towards the United
States, President Lula has run an activist foreign policy with a
focus on South America and the Third World, seeking to forge
alliances with other large and mid-sized powers (South Africa,
India, etc.). He has traveled extensively in pursuit of a higher
international profile for Brazil. Despite prodding from the USG and
others, Lula has refused to condemn Cuba for human rights violations
and, in fact, has pushed for Cuban membership in the Rio Group.
Brazil has also advocated a Cuba-Mercosul trade pact. The GOB has
worked to increase both its economic and political ties with
Venezuela. It has agreed to upgrade Venezuela from associate
membership to full membership status in Mercosul, and enhanced
integration of the two countries' energy sectors is high on its
agenda. Lula has been especially solicitous of Chavez. He has
praised the Venezuelan President's democratic credentials ("if
anything, Venezuela has an excess of democracy") and declared that
the Chavez government had been demonized by its foes. However,
Venezuela's apparent involvement in Bolivia's recent decision to
nationalize that country's oil and gas industry has dulled the
luster on this relationship.

BRASILIA 00001276 003 OF 005

14. (SBU) Given its size and natural resources, Brazil has long
seen itself as the natural leader of the region (even though that
perception is not shared by its neighbors). Brazil's reaction to
Bolivia's recent nationalization of foreign petroleum installations
in that country is a case in point. Shocked that the Bolivians
viewed the Brazilian oil parastatal Petrobras as a "boss, not a
partner," government policymakers have vacillated in response to
President Morales's threats.

15. (SBU) Emblematic of Brazil's efforts to gain greater standing
on the world stage is its tenacious pursuit of a permanent UN
Security Council (UNSC) seat. In fact, many observers point out
that Brazil has "subordinated" other economic and political
interests with such countries as China and Russia in exchange for
support (which has not been forthcoming) for its UNSC aspirations.
Brazil and other G4 states (India, Germany, Japan) are, despite
recent setbacks, continuing to press their campaign for a vote on a
resolution on UNSC reform. This stance is at odds with the position
of many Latin American countries, including those which Brazil
believes should follow its "natural leadership."

16. (SBU) Brazil has long seen international fora as a way to
enhance its international stature. Reflecting this, in 2005 it
launched failed national candidates for the top jobs at both the WTO
and the IDB. The failure of both, together with the unlikely
prospects for a permanent seat in the UNSC, has widely been seen in
Brazil as a "political disaster."

PRESIDENT LULA
--------------

17. (SBU) President Luiz Inacio Lula da Silva was inaugurated in
January 2003 after a career as a Sao Paulo metalworker and labor
leader. He founded the left-of-center Workers' Party (PT) in 1980
and lost three presidential campaigns before winning in the October
2002 elections. Lula is eligible to run for reelection in October
2006. Elected in large part on promises of promoting an ambitious
social agenda, including a "Zero Hunger" program, Lula's government
has failed to deliver much in this area, as managerial shortcomings
and the public's top concern - crime and public security - have not
improved under this administration.

18. (SBU) As noted above, the Lula Administration has been beset by
a grave political crisis as interlocking influence
peddling/vote-buying scandals plagued elements of Lula's PT party.
During the second half of 2005, the crisis placed Lula on the
defensive and politics were dominated by investigations,
accusations, and revelations. The President's Chief of Staff
resigned his post and was later expelled from Congress. Meanwhile,
several other Congressmen were the subjects of investigations and
expulsion proceedings owing to bribery allegations. In April 2006,
the President's influential Finance Minister was forced to resign
(and remains under criminal investigation) because of unrelated
abuse of power allegations. Thus far, Brazilian society - including
the opposition - seems disinclined to hold Lula personally
responsible for the scandals, and he has recovered lost ground in
public opinion and holds a comfortable lead in the polls over his
principal opponent in the presidential contest.

MACRO-ECONOMIC DEVELOPMENTS
---------------------------

19. (SBU) President Lula and his economic team have implemented
prudent fiscal and monetary policies and pursued necessary reforms.
Brazil's external accounts, aided by a benign international
environment, have improved substantially over the last three years.
Although GDP growth dropped to 2.3% in 2005, down from a strong
performance (4.9%) in 2004, Brazil has experienced booming exports,
healthy external accounts, inflation under control, decreasing
unemployment and reductions in the debt-to-GDP ratio. Economic
activity should pick up in 2006; the markets expect GDP growth of
about 3.5%. Buoyed by exports and investment inflows, the Real has
remained at appreciated levels, allowing the government and
businesses to pay down external debt. The government pre-paid its
IMF obligations, its last remaining rescheduled Paris Club
obligations, and in April 2006 announced it had retired the last of
its Brady bonds. This removes from the books all restructured debt
associated with Brazil's late-1980's default. Based upon the
improving external debt dynamics, Fitch IBCA upgraded its credit
rating on Brazil's sovereign debt in February 2006, to BB (two
notches below investment grade). The economy also has shown
resilience, remaining for the most part unaffected by a major
political scandal and the replacement of the Finance Minister.

20. (SBU) Despite this considerable progress, key challenges

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remain. The public sector debt-to-GDP ratio is on a downward trend
but remains high, at about 51.6%. Real interest rates are among the
highest in the world; reducing them will require both reductions in
the government's borrowing requirement and reform of the financial
sector and the judiciary. Income and land distribution remain
skewed. Investment and domestic savings are low, although growing.
The informal sector constitutes between 35 to 40 percent of the
economy, in part because the tax burden (nearly 38 percent of GDP)
is high.

21. (SBU) Sustaining high growth rates in the longer term depends
on the impact of President Lula's structural reform program and
efforts to build a more welcoming climate for investment, both
domestic and foreign. In its first year, the Lula administration
passed key tax and pension reforms to improve the government fiscal
accounts. Judicial reform and an overhaul of the bankruptcy law,
which should improve the functioning of credit markets, were passed
in late 2004, along with tax measures to create incentives for
long-term savings and investments.

22. (SBU) Public-Private Partnerships, a key effort to attract
private investment to infrastructure, also passed in 2004, although
implementation of this initiative still awaits promulgation of the
necessary regulations. Labor reform, additional tax reform, and
autonomy for the Central Bank were on the agenda for 2005, but now
look unlikely to be addressed at least until after the October 2006
elections. Much remains to be done. The government needs to
improve the regulatory climate for investment, particularly in the
energy sector; to simplify torturous tax systems at the state and
federal levels; and to further reform the pension system.

TRADE POLICY
------------

23. (SBU) To increase its international profile(both economically
and politically), the Foreign Ministry (Itamaraty) is seeking
expanded trade ties with developing countries, as well as
strengthening the Mercosul customs union with Uruguay, Paraguay and
Argentina. Arguably the GoB has fallen short on this latter
objective. The Brazil-Argentine relationship is rife with trade
disputes, recently leading to adoption of a safeguard mechanism for
bilateral trade. Meanwhile, Uruguay and Paraguay regularly complain
that Brazil and Argentina reap a disproportionate share of benefits
from the bloc, and threaten the group's solidarity in various ways
-- for instance, Uruguay's recent discussions with the United States
regarding a possible FTA (which would contravene Mercosul rules).

24. (SBU) Nonetheless, the bloc remains engaged in certain external
trade negotiations. In 2004, Mercosul concluded free trade
agreements with Colombia, Ecuador, Venezuela and Peru, adding to its
existing agreements with Chile and Bolivia to establish a commercial
base for the newly-launched South American Community of Nations. As
noted earlier, Mercosul is upgrading Venezuela's status from
associate to full membership. In addition to Cuba, the bloc is
currently exploring free trade talks with Israel, the Dominican
Republic, Panama and states of the Gulf Cooperation Council, as well
as trying to build on partial trade liberalization agreements
concluded with India and South Africa in 2004.

25. (SBU) China, which was offered market economy status by Brazil
as a part of Lula's effort to secure PRC support for Brazil's bid
for a USNC seat, has increased its importance as an export market
for Brazilian soy, iron ore and steel, becoming Brazil's fourth
largest trading partner and a potential source of investment.
However, low-priced Chinese imports, particularly in the textile,
footwear, and toy sectors, are now threatening to displace domestic
Brazilian production. As many Brazilian observers have indicated,
all this effort is aimed at countries which together represent less
than a third of Brazil's foreign trade. Free trade negotiations
with the EU continue to languish.

DOHA AGENDA - WTO
-----------------

26. (SBU) While Brazil emphasizes South-South trade through
Mercosul's bilateral negotiations, it uses the Doha Development
Agenda (DDA) negotiations as the main forum for engaging with
developed country partners. The DDA is Brazil's top trade priority,
viewed as the last chance for perhaps 15-20 years to secure
fundamental changes in international trade rules, in particular, for
international agricultural trade. Brazil leads the G-20 group of
developing countries that is pressing for agricultural trade reform
in the DDA. Brazil's assertive leadership of the G-20 was blamed in
some quarters for causing the failure of the WTO Cancun Ministerial
in September 2003. Since then, Brazil has been more constructively

BRASILIA 00001276 005 OF 005

engaged in the Doha Round, initially as a member of the "Five
Interested Parties" and more recently G-6 informal group, although
many of its positions are still at odds with U.S. interests. At the
December 2005 Hong Kong Ministerial meeting, Brazil was key to
brokering the deal - albeit one of limited ambition - coming out of
that session. Brazil can be expected to maintain its assertive
stance in the Doha Round on agricultural trade reform while taking
more defensive postures in the discussions covering industrial
products and services.

FREE TRADE OF THE AMERICAS - FTAA
---------------------------------

27. (SBU) As indicated above, the Lula Administration shows no
serious interest in pursuing the FTAA. Despite serving as co-chair
and having secured in the November 2003 Miami meeting a new
framework for negotiation, Brazil has shown no inclination to move
the process along and has so far declined to convoke the next FTAA
Ministerial - which is now overdue.

CHICOLA

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