Date first published: 15/04/2025
Key sectors: energy; infrastructure
Key risks: business risks; economic risks; frustration of process; regulatory changes
Risk development
On 1 April Paraguay suspended negotiations with Brazil over the Itaipu Dam after it was revealed that Brazil’s intelligence agency (Abin) had spied on Paraguayan officials. The cyber espionage operation, carried out under former president Jair Bolsonaro and continuing into the early months of Luiz Inacio Lula da Silva’s administration, aimed to access information related to the renegotiation of Annex C of the treaty, which governs electricity tariffs at the dam and represents a major economic interest for Paraguay. Asuncion condemned the surveillance as a breach of international law, summoned Brazil’s ambassador and announced that talks would remain suspended until Brazil provides satisfactory clarifications. Brazil confirmed the operation ended on 27 March 2023, shortly after President Lula took office on 1 January.
Why it matters
The spying scandal has triggered a diplomatic rupture between the two countries, with Asuncion invoking its national sovereignty and raising concerns over trust in bilateral relations. The fallout has stalled implementation of a landmark agreement – finalised in February and due to be signed by 30 May – to revise Annex C of the Itaipu Treaty, which governs electricity tariffs and revenue sharing from the binational dam. For Paraguay, the delay jeopardises prospects of significantly boosting annual revenues through direct access to Brazil’s open energy market. These funds could significantly bolster public investment in infrastructure, energy distribution and industrial development – key pillars of Asuncion’s long-term economic strategy. The deal also carries political weight, reinforcing Asuncion’s push for greater energy sovereignty and fairer terms within its asymmetric relationship with Brasilia.
While Brazil’s energy supply remains unaffected, the dispute raises questions about the reliability of cross-border cooperation and could dampen investor confidence in regional infrastructure projects. It also tests Lula’s ability to manage inherited issues and could complicate his broader efforts to strengthen regional alliances. The scandal has attracted regional scrutiny, and a prolonged impasse may undermine integration initiatives led by Lula, particularly through blocs such as Mercosur and the Community of Latin American and Caribbean States (CELAC).
Background
The Itaipu Dam is one of the world’s largest hydroelectric plants, jointly operated by Paraguay and Brazil. Under the 1973 treaty, both countries share the energy produced. Annex C, which governs the dam’s financial and operational terms – including the pricing and sale of surplus Paraguayan energy – is set to be renegotiated every 50 years. Annex C has long been a politically sensitive issue in Paraguay, where past governments have faced public backlash over perceived concessions to Brazil.
In 2023 Paraguay secured a better deal, raising the price Brazil pays for surplus electricity from US$16.78 to US$19.28 per kilowatt-month, valid until 2026. The new preliminary agreement, finalised in February 2025, would allow Paraguay to sell its surplus directly in Brazil’s open market, ending decades of pricing restrictions and potentially transforming its energy revenue model.
Risk outlook
The suspension of bilateral talks jeopardises the 30 May signing of revised Annex C terms. Brazil is likely to issue clarifications to ease tensions, but trust will likely take time to rebuild. While a collapse in negotiations is unlikely, continued diplomatic strain could delay implementation and stall Paraguay’s access to Brazil’s open energy market. The dispute underscores heightened bilateral tensions and may prompt Paraguay to seek greater leverage in future talks.