Latin America analyst Reva Bhalla discusses the challenges new Brazilian President Dilma Rousseff will face on crime, defense, the economy and foreign affairs in 2011. Editor’s Note: Transcripts are generated using speech-recognition technology. Therefore, STRATFOR cannot guarantee their complete accuracy. Colin: Brazil's President Dilma Rousseff is no newcomer to politics, after all she was her predecessor's chief of staff. 2011 is shaping up as having a very full agenda. Apart from recovery from deadly floods, where the death toll is approaching 800, there is much to be done. A full half of one percent increase in interest rates reminded us the economy is overheating. Welcome to Agenda where I'm joined by webcam to STRATFOR's Latin America analyst Reva Bhalla. Reva, let's start by discussing the new president's agenda. Reva: Well Colin, Dilma Rousseff has a lot of items on her plate. Everything from major defense deals that she has to make decisions on, security issues with the country's favela issue to important decisions Brazil has to take as it is emerging as a major regional power. One thing to keep in mind is that Dilma may not have the charisma as Lula, but she has a reputation for being very non-ideological, very technocratic. She employs this sort of no-nonsense attitude with her staff and she expects her staff to come to her with a plan B in pretty much every proposal. So she's very much in the process of re-evaluating a lot of major decisions right now, including the jet fighter deal, which is taking a lot of attention these days. Colin: Who's in the frame to win the jet fighter contract? Reva: Well, toward the end of the Lula administration, it seemed pretty clear that Brazil would go ahead and opt for the French Rafale jet, for mainly political and strategic reasons. Now Dilma has basically re-opened the bidding process. U.S. firm Boeing is trying to sweeten the deal, but Brazil is very concerned about being tied to certain congressional constraints in agreeing to the U.S. deal, something that Brazil is very irked by especially when it comes to technology transfers. Now the Swedish Gripen offers more to Brazil in terms of price and performance, but we think this decision is still going to boil down to mainly a political and strategic decision in that Brazil is more likely to lean more toward the French jet. Colin: Brazilian interest rates are very high, up half of one percent this week and more to come. That's forcing the currency up, which might have two harmful effects: attracting hot money and damaging exports.
Reva: Brazil maintains very strict fiscal policy and for good reason considering that the country was mired in an economic crisis just less than two decades ago. Now, in trying to keep inflation under control, Brazil has kept extremely high interest rates — right now it's at about 11.25 percent. Now, with a government that is likely very unwilling to cut down on public spending, there are serious side effects to this kind of policy. One of those side effects is the boost to the country's already appreciating currency. Now the stronger the Brazilian real gets, the less competitive Brazilian exports are on the open market. The Brazilian government really doesn't have any good options in trying to deal with this currency crisis, but it's transforming slowly and slowly into more of a political issue, especially as business and trade unions especially in the financial hub of Sao Paulo are applying more pressure on the state to do something to protect Brazilian industry. Again, Brazil doesn't have very good options in dealing with this, but it is definitely an issue that is going to be pre-occupying the state in the coming year. Colin: Let's turn to resources. Can Brazil really realize its dream and become a major oil exporter?
Reva: Well, its going to be difficult, but Brazil is definitely dedicated to this project. By the "project," we are referring to the pre-salt fields — Brazil's offshore deepwater fields that could potentially make Brazil a major oil exporter in the years to come. Now, this is going to require a lot of investment. We have already seen Brazil's Petrobras employ some rather unorthodox means of capitalizing this endeavor. But the Brazilian government has made clear it's going to be dedicating its resources in hopes of realizing this geopolitical dream. Colin: What about domestic political problems like crime and drugs? Reva: Now, Brazil faces a major challenge ahead to both pacify and integrate major favelas in the city of Rio de Janeiro. They've been employing a strategy called the UPP strategy that basically involves first overt military force that drives the drug-traffickers out and then a long-term police occupation. Now, this is an impressive model that's worked on a small scale but replicating it on a larger scale is going to be extremely difficult. What's happened so far is that a lot of the drug-traffickers in Complexo Alemao, which was the last favela targeted, are simply being displaced. Now that has side effects, especially when more drug-trafficking activity is just going from favela to favela or coming more from the favelas into city centers. Also, these drug-trafficking groups, particularly Comando Vermelho, the main group in Rio, they're extremely well armed. And, if the state keeps pushing them in this pacification campaign, they do have the means of perhaps selectively carrying out attacks and trying to pressure the state to backing off of this offensive. Colin: The other so-called BRIC countries are Russia, India and China. To what extent is Brazil joining them on the global scene? Reva: Well, Brazil is most definitely emerging on the global scene; it's no longer this insular power that it has been for decades now. And so of course we see a lot of countries reacting to that. You know, Brazil is interacting with the French on major defense deals, with the Chinese in this deepening economic relationship, also with the Indians where Brazil and India face a lot of competition with each other in certain industries. And so Brazil is learning more and more how to assert itself on the global scene and we can expect Brazil to fumble in a lot of respects. You know, Brazil is also trying to involve itself in issues that are very distant from the South American continent. For example, in very thorny Middle East issues. But, while this attracts a lot of attention, Brazil is slowly gradually attempting to assume this leadership role but it may not necessarily want to make very hard decisions or deal with the negative repercussions that may be attached to such a role. Colin: Reva, it's good to have you with us on Agenda, I'm sure we'll talk again soon. Reva: Certainly Brazil is a high priority for STRATFOR and we will be watching all these issues closely.