Itaipu Fallout: Scenarios for Energy, Diplomacy, and AI in Paraguay
Between June 2022 and March 2023, Brazil’s federal intelligence agency (ABIN), under former President Jair Bolsonaro, carried out covert cyber-espionage targeting Paraguayan officials involved in negotiations over Annex C of the Itaipu Dam treaty—a key bilateral agreement governing how profits and surplus energy from the world’s second-largest hydroelectric facility are shared. The Brazilian operation, executed via overseas servers in Chile and Panama, extracted emails and internal planning documents from Paraguay’s Ministry of Foreign Affairs and Itaipu negotiating team. After President Luiz Inácio Lula da Silva took office on January 1, 2023, his administration swiftly shut down the surveillance by March 27, 2023.
In April 2025, Paraguay’s government, led by President Santiago Peña, condemned the espionage as a breach of sovereignty, recalled its ambassador from Brasília, and suspended ongoing negotiations. The Itaipu Dam—generating 14,000 MW—supplies about 88% of Paraguay’s electricity and exports around 50% of its energy output to Brazil. With Annex C directly affecting how Paraguay monetizes its excess energy, the standoff posed both fiscal and developmental risks. Paraguay derives nearly 30% of its public revenue from Itaipu-related inflows.
At the July 2025 Mercosur Summit, Lula and Peña agreed to resume negotiations, signaling a diplomatic thaw. But beyond repairing relations, the resumed talks carry major strategic potential: Paraguay’s abundance of ultra-low-cost, renewable electricity positions it as a future AI and data infrastructure hub. Tech leaders and foreign analysts have identified Paraguay as an emerging destination for energy-hungry AI models, data centers, and compute clusters. With favorable tax policy and surplus power, the Itaipu treaty’s outcome could directly shape Paraguay’s digital-industrial future—attracting firms like OpenAI, Nvidia, and Google to consider South America’s most electrified small economy as a base for advanced computing.
Base Case: Strategic Reconciliation and Measured Progress (60%)
Following the diplomatic reset at the July 2025 Mercosur Summit, Paraguay and Brazil resume Annex C negotiations with new digital security protocols, third-party observers, and staggered revenue-sharing benchmarks. By early 2026, a revised treaty is ratified, slightly favoring Paraguay with improved tariff terms and modernized governance structures. Energy prices remain competitive, allowing Paraguay to restart paused AI and cloud infrastructure projects with confidence. Several mid-scale international data centers—backed by Latin American venture capital and regional development banks—begin construction in late 2026, anchored in Asunción and Ciudad del Este. Brazil, while diplomatically bruised, regains some credibility after increasing transparency around ABIN operations and pushing for a regional “digital non-aggression pact” within Mercosur.
This outcome preserves regional stability and positions Paraguay to cautiously enter the digital infrastructure race while maintaining fiscal discipline. However, geopolitical memory of the espionage lingers, capping the depth of future bilateral cooperation.
Upside Case: Tech-Driven Convergence and AI Leap (25%)
By early 2026, negotiations between Paraguay and Brazil not only produce a favorable and durable Itaipu agreement, but also catalyze broader bilateral cooperation around energy‑for‑innovation exchanges. In this scenario, Paraguay receives sharply better surplus energy rates and formalized commitments from Brazil for tech and infrastructure collaboration. Using this geopolitical windfall, Paraguay quickly finalizes public–private partnerships with U.S. and Korean tech firms, converting Itaipu’s surplus into a national AI strategy focused on model training, GPU hosting, and regional cloud services. By 2027, Paraguay is hosting Latin America’s largest AI-friendly green compute cluster, attracting major players like Meta AI and OpenAI. The country earns reputational benefits as a “Switzerland of AI”—neutral, affordable, and hyper-secure.
This upside depends on unusually effective diplomacy, strong global AI demand, and Paraguay’s internal bureaucratic agility to execute digital industrial policy at speed. If realized, it could shift the regional tech power center away from Brazil and Chile toward a smaller, more agile Paraguay.
Downside Case: Treaty Breakdown and Tech Collapse (15%)
Talks between Paraguay and Brazil collapse by early 2026, as intelligence findings deepen distrust and nationalist factions in both countries weaponize the dispute. Without a renewed Annex C, Paraguay is forced to sell its Itaipu energy at below-market rates under the 1973 framework, locking in fiscal losses. Investor confidence evaporates. Foreign tech firms redirect their AI infrastructure investments to Colombia, Chile, or Mexico. Domestically, the stalled energy reform derails Paraguay’s planned AI and cloud computing clusters, and a proposed fiber-optic backbone project is frozen due to capital withdrawal.
In this scenario, Paraguay suffers a dual blow: weakened sovereignty over its most valuable asset and missed entry into the next industrial wave. The country faces brain drain, rising energy subsidy costs, and a strategic pivot away from technology toward raw energy exports and low-margin manufacturing.
The downside case assumes persistent diplomatic intransigence, absence of mediation, and renewed geopolitical instability in the Southern Cone, potentially compounded by global AI overcapacity by 2026–27.
