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Cablegate: Brazilian Firms Samba All the Way to the Bank

VZCZCXRO9447
RR RUEHAO RUEHRG
DE RUEHCV #3561/01 3411852
ZNR UUUUU ZZH
R 071852Z DEC 06
FM AMEMBASSY CARACAS
TO RUEHC/SECSTATE WASHDC 7228
INFO RUEHAC/AMEMBASSY ASUNCION 0738
RUEHBO/AMEMBASSY BOGOTA 7155
RUEHBR/AMEMBASSY BRASILIA 5837
RUEHBU/AMEMBASSY BUENOS AIRES 1530
RUEHLP/AMEMBASSY LA PAZ 2424
RUEHPE/AMEMBASSY LIMA 0679
RUEHMN/AMEMBASSY MONTEVIDEO 0886
RUEHQT/AMEMBASSY QUITO 2510
RUEHSG/AMEMBASSY SANTIAGO 3841
RUEHAO/AMCONSUL CURACAO 1081
RUEHGL/AMCONSUL GUAYAQUIL 0726
RUEHRG/AMCONSUL RECIFE 0006
RUEHRI/AMCONSUL RIO DE JANEIRO 0152
RUEHSO/AMCONSUL SAO PAULO 0074
RHEHNSC/NSC WASHDC
RUEHRC/DEPT OF AGRICULTURE USD FAS
RUCPDOC/DEPT OF COMMERCE

UNCLAS SECTION 01 OF 02 CARACAS 003561

SIPDIS

SENSITIVE
SIPDIS

TREASURY FOR KLINGENSMITH AND NGRANT
COMMERCE FOR 4431/MAC/WH/MCAMERON
NSC FOR DTOMLINSON
HQ SOUTHCOM ALSO FOR POLAD

E.O. 12958: N/A
TAGS: ECON ETRD VE
SUBJECT: BRAZILIAN FIRMS SAMBA ALL THE WAY TO THE BANK

REF: CARACAS 3413

1. (SBU) SUMMARY: Venezuelan-Brazilian trade is expected to
reach USD 4 billion this year, representing a 60 percent
increase over 2005. This increase is consistent with
Venezuela's import boom and with the growing relationship
between the two countries. Brazilian firms also seem to be
winning more than their share of large infrastructure
contracts. In concert with deepening political ties
represented, inter alia, by Venezuela joining Mercosur,
President Lula da Silva's public endorsement of Chavez and
Chavez's post election victory lap to Brazil and beyond;
Brazilian firms and exporters, for now at least, are sitting
in the sweet spot. END SUMMARY.

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2. (U) Venezuelan-Brazilian trade reached USD 3.5 billion
(USD 3 billion in imports from Brazil and USD 500 million in
exports to Brazil) as of October 2006, and is expected to
close the year near the USD 4 billion mark. This would
represent a USD 1.5 billion (60 percent) increase over
bilateral trade in 2005 and over a 100 percent increase since
2000. In addition, the balance of trade has shifted
dramatically from a Venezuelan surplus in 2000 of USD 576
million to an expected USD 3.2 billion Brazilian surplus by
the end of 2006. Venezuelan exports to Brazil consist
primarily of petroleum derivatives (fuel, plastics,
fertilizer, etc.) whereas the array of Brazilian goods
imported to Venezuela continues to grow, from agricultural
products to arms. Brazilian state-owned arms manufacturer
Imbel recently announced the sale of 5,350 9mm pistols to
Venezuela. Brazil's largest export to Venezuela so far in
2006 has been cell phone equipment, followed by automobile
parts and chicken.

3. (SBU) Brazilian President Lula da Silva's endorsement of
Chavez's re-election bid (reftel A) at the opening
celebration for the second bridge over the Orinoco river
(connecting the Brazil-Venezuela highway) seemed a diplomatic
faux pas, but really it was simply good business. The bridge
was built by the Brazilian construction firm Odebrecht and
financed by Brazil's development bank (BNDES). It reportedly
cost Venezuela between USD 1.1 and 1.2 billion (reportedly 40
percent over budget) and plans are already underway for
bridge number 3. (Note: While Odebrecht also "won" the
contract for the 3rd bridge, so far as we can tell there was
no bidding process. End Note.) Brazilian firms have also
been very successful in winning other major infrastructure
projects in Venezuela, including the replacement for the
collapsed bridge on the highway from the airport in La Guaira
to Caracas. (Note: The BRV initially tried to rebuild the
bridge itself and only turned to an outside contractor in
mid-2006. The BRV claims the bridge will be open for
business in Spring of 2007. End Note). Odebrecht is also
the main contractor for Lines 3 and 4 of the Caracas metro.

4. (U) The Brazilian state-owned oil company, Petrobras, has
increased cooperation with PDVSA and a joint project is
underway to build a refinery in Pernambuco, Brazil, that is
expected to cost between USD 2.5 and 2.8 billion. When
completed, the refinery will be the first in Brazil capable
of refining Venezuela's brand of heavy crude, with a capacity
of 200,000 barrels a day. Petrobras is also certifying
extra-heavy crude reserves in the Orinoco belt in eastern
Venezuela and may well take part in any tender for future
extraction.

5. (U) Venezuela's entrance to Mercosur and departure from
CAN and the G-3 group (Mexico, Colombia, and Venezuela) will
give the Brazilians additional advantages by lowering tariffs

CARACAS 00003561 002 OF 002


and trade barriers, while increasing them for competitors in
other countries in the region. This will not occur
overnight, however as Andean Community trade preferences are
set to continue for another 4-plus years, and Venezuela has
yet to even negotiate the specific product line market access
terms for its Mercosur accession. (Note: It remains to be
seen the effect on actual companies that export to Venezuela,
as many are large multinational firms which have branches in
Mercosur countries and will be able to shift their production
for the Venezuelan market. End Note.)

6. (SBU) At a recent meeting with a representative of the
Venezuelan-Brazilian Chamber of Commerce (CAVENBRA), the
representative insisted that many of the recent successes of
Brazilian firms were actually years in the making and the
result of sustained effort rather than political favoritism.
He observed, for example, that Odebrecht had been in
Venezuela for 10 years before it received its first major
contract and that many Brazilian firms successes come from
their ability to approach the BRV with package deals that
include financing from Brazil's development bank. (Comment:
Our contact was very sensitive to the perception that they
were taking business away from other countries and repeatedly
stressed that in recent years they had become better
competitors and were not succeeding as a result of political
favoritism. While Brazilian companies in general have become
more pronounced overseas in recent years, the rate of
increase for trade and the startling success in winning major
infrastructure projects since Chavez took office make it seem
unlikely that they became so competitive overnight. End
Comment.)

7. (SBU) While Brazilian contractors are garnering major
projects, few Brazilian businesses are investing in Venezuela
long term. In a trend seen throughout the private sector,
firms are delaying investment and reducing capital spending.
(Note: Foreign Direct Investment (FDI) to Venezuela has
amounted to a paltry USD 75 million through August of 2006,
as compared to USD 900 million for all of 2005. End Note.)
In addition, Brazilian firms seem to have similar complaints
as the business community in general, including an
incompetent bureaucracy and oppressive regulations. As an
example, the representative of CAVENBRA noted that Brazil's
attempts to import soy beans to Venezuela have been stymied
by a slow import approval process at the Ministry of
Agriculture, which has left trucks sitting at the border with
rotting produce.

8. (SBU) COMMENT: Fueled by the oil windfall, Venezuelan
government spending and imports are at all-time highs and
many companies are reaping the benefits of this massive
spending. The creation (both existing and planned/imagined)
of regional entities and mega-projects such as Telesur, a
Bank of the South, the gas pipeline of the south, the train
of the south, etc. are political decisions by Chavez to
project himself regionally. Brazilian firms probably
represent some of the few regional firms with the breadth and
depth of experience to complete many of the planned massive
infrastructure projects. At the same time, the opening up of
Brazil's north west, home to 40 million people, gives Brazil
a geographical advantage over many competitors in the
Venezuelan marketplace. It seems very likely that
Brazilian-Venezuelan commercial ties will continue to grow in
the near term, as Brazilian firms ride the economic gravy
train and that the Brazilians will continue to make
significant economic inroads, thanks to Chavez's focus on
deepening south-south ties. END COMMENT.

WHITAKER

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