Exclusive: Brazil closer to Boeing on jets deal after Biden visit

By Brian Winter

SAO PAULO (Reuters) - Brazil is closer to choosing Boeing Co.'s (BA.N) F-18 for one of the developing world's most sought-after defense contracts after U.S. Vice President Joe Biden addressed the government's main misgivings during a visit to Brasilia, officials told Reuters.

Biden met with President Dilma Rousseff on Friday and assured her that the U.S. Congress was likely to respect Boeing's agreement to transfer sensitive technology to Brazil as part of the deal, three officials who were present said on condition of anonymity.

The deal will involve 36 jets worth about $4 billion, with probable follow-up orders that would greatly increase the value of the contract over time. That makes it a critical prize for defense companies at a moment when the United States and many European countries are tightening military budgets.

The other finalists are France's Dassault Aviation SA (AVMD.PA) and Sweden's Saab AB (SAABb.ST).

Rousseff has not made her final decision, and the timing for an announcement remains unclear, the officials stressed.

But they said Rousseff's comments to Biden and other recent developments suggest a preference for Boeing, with a decision possible before she makes a state visit to the White House to see President Barack Obama in October.

"If it's Boeing, Biden will deserve much of the credit," one senior Brazilian official said.

Rousseff's main concern with Boeing's bid has been that the U.S. Congress could block technology transfers because of national security concerns. Brazil has cordial relations with the United States but angered some legislators in recent years through its interactions with Iran, Venezuela and other countries that antagonize Washington.

Rousseff, a pragmatic leftist, has said the technology is even more important than the jets themselves because the deal must boost Brazil's own budding defense industry, including planemaker Embraer SA (EMBR3.SA), to be worth the price.

In Friday's meeting, Rousseff first raised the jets deal and her concern over the transfers, officials said.

Biden did not make absolute promises about what Congress would do. But he did cite his more than three decades of experience in the Senate to address her worries point by point, the officials said.

"SEQUESTRATION" A FACTOR?

According to the officials' account, Biden explained that Senate Democrats have never gone against Obama on strategic defense sales, while most Republicans take the lead from Arizona Senator John McCain, who has expressed support for the Brazil deal.

Biden said U.S. defense budget cuts could reduce opposition in Congress to a deal that could help a U.S. company.

He also cited examples showing Congress has blocked defense sales in strategically difficult parts of the world such as the Middle East, but not peaceful, overwhelmingly democratic areas such as South America.

Before the conversation turned to other matters, Rousseff thanked Biden for giving her "strong" arguments to use in Boeing's favor, two of the officials said.

Asked to confirm the account, a White House official said: "We aren't going to comment on private conversations, but in general the United States strongly supports Boeing's bid."

Handicapping Brazil's decision on the jets deal has been difficult, largely because it has dragged on for so long.

Brazil first began looking into replacing its aging Mirage jets in the 1990s, and Rousseff's predecessor declared publicly in 2009 he was going to choose Dassault.

Yet for a variety of reasons, from budget constraints to election cycles, successive governments have not pulled the trigger. Company executives, some of whom have spent a decade or more pursuing Brazil, have joked in private that the country may have no real intention of buying the jets at all.

LONG-TERM RELATIONSHIP

Nevertheless, there are mounting reasons to believe that Rousseff will announce her decision before the end of this year, and that Boeing will be the winner.

Brazil's military has said maintaining its Mirages will become difficult after this year. Meanwhile, the sensitivities of spending billions of dollars during a rough economic spell could lead Rousseff to announce her decision before 2014, when she faces reelection.

Rousseff has cast the deal as a crucial part of Brazil's strategic alignment for decades to come - a message she repeated to Biden on Friday, the officials said.

While defying Washington's wishes on issues like Syria, Rousseff has sought a closer partnership with the United States. She has received a steady stream of Cabinet secretaries and senators, and accepted Obama's invitation for a state visit, the first by a Brazilian leader in 20 years.

The United States, for its part, chose Embraer in February to provide the Air Force with 20 light attack planes - a deal many Brazilians saw as a necessary condition to buy the F-18.

Boeing has also deepened its partnership with Embraer in recent months.

Meanwhile, the government has been less happy with the other finalists. France's recent agreement to build submarines with Brazil has resulted in fewer technology transfers than expected, one official said.

France and Sweden reportedly opposed Brazil's candidate to lead the World Trade Organization, who won the post last month. The United States also favored a different candidate, but was more restrained in its support, in Brazil's view.

"We notice these things, and they're all factors in the (jets) decision," a Brazilian official said. "This is so much money, and we want to choose the right partner."

(Reporting By Dave Gregorio)