LULA IN CHINA TO DISCUSS PETROBRAS' PRE-SALT OIL RESERVES

President Lula arrived in China yesterday on an official visit. At the top of his agenda is securing a USD 10 billion dollar deal to finance the development of the ultra-deepwater offshore oil fields known as the pre-salt reserves. Another important item is getting the Chinese to adopt a more flexible attitude towards Brazilian products, mainly meat and poultry, which have been all but shut out from the Chinese market.

China is now Brazil’s largest trading partner (previous post), having passed the United States this year. In Q1 2009, it snapped up enormous amounts of low-value products, including iron ore and soybeans.

But Brazilians’ feelings are bruised by what they perceive as Chinese indifference to relations between the two countries. In 2008, China invested a grand total of USD 38.4 million in Brazil, while investments in Africa have been significantly higher: in 2006, Chinese investments in the region totaled USD 1.1 billion.

Chinese find Brazilians inscrutable

Perhaps the Chinese are befuddled by the peculiar Brazilian way of doing business. Saddled with a leach-like state apparatus, Brazil can drive to despair even the most seasoned international wheelers and dealers.

Those who aspire to doing business in Brazil must pay dues to anyone and everyone who has a say in public affairs, at any level of government. From the lowly functionary at the notary public’s office to ministers of state, everyone is looking for a piece of the action, which may be licit (fees, charges, surcharges, etc.), or illicit (kickbacks, “commissions”, “favors” etc.). These payoffs are tolerated by the Brazilian State because they simply supplement a seemingly unending alphabet soup of taxes and contributions that ultimately serve the same function: channeling money into the hands of government employees and of the country's upper caste, industrial and rural, that the State represents.

Those well-versed in the art of doing business in Brazil know how to get around these issues, avoiding traps like the one illustrated by the story of a multinational computer company that was looking to get in on Brazil’s domestic market of about 200 million.

The company had sent a young MBA to supervise the beginning of its operations in the country. While attempting to clear the initial batch of products and equipment at Brazilian Customs, the executive was informed that one of a very lengthy stream of documents lacked a certain rubber stamp. This fact meant, he was told, that the entire largish shipment would have to be unpacked and inspected item for item, putting back the project for several weeks.

The Customs official obligingly and obliquely informed him that a small fee, paid on the spot, would waive the need for the missing rubber stamp. Feeling outraged at the suggestion, the executive told the Customs official that he could go right ahead and unpack the whole lot.

When a more senior executive at the US headquarters of the firm heard about the impending delay, he swiftly went into action. He found an insider in Brazil who could dispatch things in a more expedient manner, called back the executive, and got things moving roughly on schedule. In the process, corners were cut, rules were bent, and toes were stepped on. But no matter – the company then went on to become highly successful and profitable in Brazil.

Perhaps the Chinese think such hassle is not worth the trouble. It is one thing to invest in Sudan and Algeria, two of the largest recipients of Chinese money in Africa. Institutions there are much less developed than in Brazil, meaning that they are also more pliable and, thus, more conducive to furthering Chinese interests.

Hu’s Money Never Came – Wonder Why

The most vivid illustration of the consequences of this clash of civilizations is given by the scant results produced by President Hu Jintao’s visit to the country in 2004. At the time, Lula signed several memoranda of understanding with China for infrastructure investments, which never materialized.

With Lula's current visit to China, he hopes to cinch the deal on a promised USD 10 billion for investments in Brazil’s pre-salt fields, primarily by Petrobras, which is now under Congressional investigation for corner cutting, rule bending, toe stepping, and outright graft, overpricing, corruption, and embezzlement.

With this investigation as a backdrop to Lula’s visit, I wish the Brazilian president the best of luck.