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Cablegate: Brazil:Deputy Palocci Economics Meeting with Ambassador

VZCZCXRO2340
RR RUEHRG
DE RUEHBR #2215/01 3371640
ZNR UUUUU ZZH
R 031640Z DEC 07
FM AMEMBASSY BRASILIA
TO RUEHC/SECSTATE WASHDC 0567
INFO RUEHRI/AMCONSUL RIO DE JANEIRO 5514
RUEHSO/AMCONSUL SAO PAULO 1254
RUEHRG/AMCONSUL RECIFE 7445
RUCPDOC/USDOC WASHDC

UNCLAS SECTION 01 OF 02 BRASILIA 002215

SIPDIS

DEPT PASS USTR FOR KATE DUCKWORTH
DEPT PASS DOC/ITA/MAC/OLAC ANNE DRISCOLL
DEPT PASS TREASURY LUYEN TRAN

SENSITIVE
SIPDIS

E.O. 12958:N/A
TAGS: EFIN ECON EINV PREL BR
SUBJECT: BRAZIL:DEPUTY PALOCCI ECONOMICS MEETING WITH AMBASSADOR

1. (SBU) SUMMARY: The Ambassador met November 20 with Antonio
Palocci, an influential pro-business Federal Deputy (PT, Workers
Party, from Sao Paulo) and former Finance Minister. Deputy Palocci
was enthusiastic about a possible US-Brazil regional infrastructure
initiative and suggested specific projects focus on Bolivia, as a
counterweight to Venezuela's influence. Palocci was supportive of a
US-Brazilian bilateral tax treaty, noting its benefits for both
countries' companies, but cautioned that Jorge Rachid (head of
Brazil's federal revenue service, "Receita Federal," and responsible
for tax treaty negotiations) feared loss of tax revenue under a
treaty and would never support one unless this fear could be
addressed. Palocci offered his best-guess on who might eventually
replace Renan as Senate president and commented on PT strategy for
renewing the CPMF. END SUMMARY.

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POTENTIAL US-BRAZIL INFRASTRUCTURE INITIATIVE
--------------------------------------------- -

2. (SBU) Deputy Palocci was enthusiastic about the regional
infrastructure initiative Treasury is leading in developing with the
Planning Ministry. Palocci saw the initiative as a way to
revitalize the "group for growth" he had led while Finance Minister
with former Secretary Snow. He emphasized infrastructure
development was an important regional economic and political
priority. Palocci advocated that the initiative should emphasize
supporting an energy project with Bolivia. He said Bolivia looks to
Venezuela because the country is too poor to accomplish anything
without help. He saw a US-Brazil infrastructure initiative as a way
to create interests for Bolivia apart from Venezuela and via
IDB/Bank instruments. Palocci felt energy projects on the
Brazil-Bolivia border would economically benefit both countries and
provide an opportunity to elevate political integration that would
counter Morales-Chavez cooperation. He emphasized that a regional
energy agenda for infrastructure cooperation projects would be
particularly helpful in improving integration of the region, moving
countries in the region away from Chavez, and improving the climate
in the region for international investment. Knowing President Lula
well, Palocci felt he would want to support an agenda with this
focus, while remaining careful to retain a good relationship with
Chavez.

3. (SBU) Palocci opined that Planning Minister Bernardo was the
perfect choice to lead this initiative on the Brazilian side and
noted that Itamaraty and Casa Civil could be relevant in handling
the political aspects of moving the initiative forward. At the
Ambassador's request, Palocci agreed to discuss his views on the
political aspects of a potential US-Brazil infrastructure initiative
with both Bernardo and with presidential foreign affairs adviser
Marco Aurelio Garcia. He agreed to speak again with the Ambassador
before WHA A/S Shannon and EB A/S Sullivan's upcoming visit.

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TAX TREATY
------------

4. (SBU) Palocci stated the conceptual problem with a tax treaty is
basically that Receita Federal models suggest a treaty would lead to
tax revenue losses for Brazil. Palocci indicated he would meet soon
with head of Receita Federal Jorge Rachid and explore whether this
issue could be addressed. He reassured that new ways could be found
to resolve the issue and commented that Rachid is pragmatic.
Palocci then deflated the hopeful mood a bit in noting that
"normally, Receita Federal will find any way possible to make it go
wrong; Rachid undid the agreement we had with Germany." He promised
to share feedback with the Ambassador after his meeting with
Rachid.

----------------------------------
A POLITICIAN ALWAYS TALKS POLITICS
----------------------------------

5. (SBU) Palocci opined that the PT had made a tactical mistake in
currying PSDB (Brazilian Social Democracy Party, a leading
opposition party) support for extension of the CPMF (tax on
financial transactions). He noted PT ended up short of the votes it
needed and wasted a month attempting to build support. On possible
names to succeed embattled Senate President Renan Calheiros if/when
he resigns (considered a near certainty), Palocci thought Senator
Jose Maranhao (PMDB, Brazilian Democratic Movement Party, governing
coalition; of Paraiba) or Senator Edison Lobao (PMDB; of Maranhao, a
protege of Jose Sarney, senator and former president of Brazil) were
most likely, and Senator Gerson Camata (PMDB; of Espirito Santo) or
Senator Garibaldi Alves (PMDB; of Rio Grande do Norte) were also
possibilities.

BRASILIA 00002215 002 OF 002

6. (SBU) COMMENT: Deputy Palocci remains influential within the PT
party following his stint as Finance Minister. He is well-connected
with a strong sense of what the executive and legislative branches
are willing and able to accomplish on economic issues. His
enthusiastic support, for political as well as economic reasons, for
the developing infrastructure proposal and his willingness to engage
on the tax treaty are encouraging signs for eventual success of
these bilateral initiatives. END COMMENT.

SOBEL

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