Brazil offered to pay about $200 million per year for the electricity from Paraguay, as well as contribute financing to allow Brazilian companies to build a new electricity transmission line from Itaipu to the Paraguayan capital of Asuncion. Paraguay said it would not settle for less than $1.6 billion per year, a sum worth about a quarter of 2008 Paraguayan government expenditures.

Despite its small size, Paraguay is brimming with electricity, 94 percent of which it exports to its large neighbors, Argentina and Brazil. About 24 percent of Paraguay’s total electricity is generated at the Itaipu dam, the largest dam in the world (soon to be outpaced by China’s Three Gorges Dam) and half-owned and operated by Paraguay. But Paraguay uses only 16 percent of its half of Itaipu’s output. The rest is sold to Brazil for just over $100 million per year, according to terms generated in a 1973 treaty.

From Brazil’s perspective, the deal remains relatively fair — the wherewithal to build the dam in the first place came from Brazil’s own coffers. But Paraguay contends that with equal ownership it ought not be locked into a low price, particularly when Brazil can turn around and sell Itaipu electricity for 10 times as much to the key industrial zone of Sao Paolo. It’s not just the money that makes this a contentious issue. With the Itaipu dam supplying 20 percent of Brazil’s total electricity, any question regarding Itaipu electricity is of the utmost strategic importance to Brazil.

With so much on the line, it should come as no surprise that the negotiations between Brazil and Paraguay have been frigid. Not only is Brazil attempting to balance its own needs in the face of the global economic downturn, it is also experiencing a very significant rise in its geopolitical power relative to the rest of South America. Brazil clearly has the upper hand in the matter — including a military that regularly practices seizing and locking down the dam, and the expertise and financing required to run the dam. While Brazil may be willing to find a compromise with Paraguay, is not going to let Paraguay dictate the terms.