Sorry, didn't see the first question at first - I haven't been able to find a way to specify encoding with openquery, every attempt has resulted in syntax errors.
The servers in question, SQL server and Postgres server, are in different countries, if that's what you meant. Postgres runs on Debian 3.16.7 x86_64. I'm the dba for the postgres database in question, but not too familiar with MS tools. Data import will be done by MS dba-s in their location, but they have had even less luck figuring out the encoding issue.
2) Do you have pgAdmin(http://www.pgadmin.org/) or the psql client installed on the Windows machine? If so does running a query through them show the correct results?
I did install PgAdmin III in the environment I set up for testing the solution, which is as close as possible to the live environments we'll be using. Simply running the query there gives the same garbled result, "õ" instead of "õ" etc. Running "set client_encoding to latin1; select * from table", however, gives the correct result.
I have given the instructions for getting the correct data via PgAdmin and Import Data to my colleagues, but they are strictly MS people so I'm yet to see how this works out.
I would prefer if there was minimal amount of trouble on their end, because we'll be migrating the data while the services running on that data have been turned off, which means any delay will cause financial loss. That's why I'm looking to get the driver working.