http://www.worldpoliticsreview.com/articles/14518/brazil-s-petrobas-scandal-forces-rousseff-s-hand-on-corruption
Brazil’s Petrobras Scandal Forces Rousseff’s Hand on Corruption.
By Sean Goforth, , Briefing
Demonstrators demand the impeachment of Brazil’s President Dilma Rousseff over an alleged scheme of corruption that siphoned money from the state-owned oil company Petrobras, Sao Paulo, Brazil, Nov. 15, 2014.
Earlier this month, while Brazilian President Dilma Rousseff rubbed shoulders with other global leaders at the G-20 summit in Australia, her justice minister, Jose Eduardo Cardozo, announced the arrest back in Brazil of 15 people for arranging kickbacks on contracts from state-owned oil company Petrobras. Shortly after hearing the news, two more executives from a major Sao Paulo construction company turned themselves in to police. The second round of the corruption investigation known as Operation Carwash was underway, and by Nov. 16, 23 people would be arrested, including Renato Duque, former head of services at Petrobras.
As word of the arrests spread, 10,000 people took to the streets of Sao Paulo, many of them hoisting banners that called for Rousseff’s impeachment. Instead of reflecting on global affairs, Rousseff’s parting remarks at the G-20 meeting addressed her home audience: The Petrobras corruption scandal “would change the country forever,” she said. “How? By ending impunity.”
Although corruption charges have swirled around Petrobras for years, the first sign that something was seriously awry at the company came after Paulo Costa was arrested during the launch of Operation Carwash eight months ago. In exchange for leniency, he told prosecutors that as Petrobras refinery chief he managed a fund that diverted $400 million from company coffers to political campaigns. He also provided the information that helped police begin building cases on some of the men who were arrested last week.
As word of the arrests spread, 10,000 people took to the streets of Sao Paulo, many of them hoisting banners that called for Rousseff’s impeachment. Instead of reflecting on global affairs, Rousseff’s parting remarks at the G-20 meeting addressed her home audience: The Petrobras corruption scandal “would change the country forever,” she said. “How? By ending impunity.”
Although corruption charges have swirled around Petrobras for years, the first sign that something was seriously awry at the company came after Paulo Costa was arrested during the launch of Operation Carwash eight months ago. In exchange for leniency, he told prosecutors that as Petrobras refinery chief he managed a fund that diverted $400 million from company coffers to political campaigns. He also provided the information that helped police begin building cases on some of the men who were arrested last week.
What makes Petrobras unique among corruption scandals in Brazil is that it is majority-owned and controlled by the Brazilian government, and since discovering massive oil deposits off Brazil’s coast in 2008, it has become a symbol of the country’s rise on the world stage. As chairwoman of Petrobras from 2003 until her election as president in 2010, Rousseff’s fortunes grew in lockstep with those of the company. Once in office, she continued to rely on Petrobras to bolster her image by promising to fund social welfare programs with larger and larger chunks of its future revenue. Then, as the economy slowed, she forced the company to subsidize domestic gas prices, a measure that also conveniently allowed her to soften the impact of rising inflation on the poor. This may have kept her popular among her political base, but during Rousseff’s first term, Petrobras recorded more than $44 billion in losses, mainly because of the fuel subsidies.
Since the corruption allegations surfaced in March, Rousseff tried to focus public attention first on the World Cup and then on the presidential election. She dodged a bullet in July when Brazil’s attorney general cleared the Petrobras board of wrongdoing in overpaying for a Texas oil refinery in 2006. And when the issue of corruption at Petrobras came up during the run-off for the presidency last month, Rousseff went on the offensive, firing back that the Brazilian Social Democracy Party of her opponent, Aecio Neves, fostered corruption in the 1990s—while accusing Neves of drunk driving for good measure.
Despite Rousseff’s re-election on Oct. 26, steering clear of the scandal will be more difficult now. In recent days, Petrobras CEO Graca Foster, arguably the second-most powerful woman in Brazil, has announced the creation of a compliance division to facilitate the ongoing corruption investigation at the company. Without a clear sense of how deep the corruption goes at Petrobras, an adviser to Rousseff told the leading Sao Paulo newspaper, Folha, that the probe may “paralyze” some of the company’s operations.
Meanwhile, Petrobras’ short-term finances are coming under increasing strain as a result of the scandal. It should have released a third-quarter earnings report weeks ago, part of routine requirements for all publicly traded companies. But in a highly unorthodox last-minute move, the company’s independent auditor demanded the ouster of a board member suspected of corruption before it would sign off on the report. At least two other attempts to report earnings fell through, and Petrobras has now postponed the release until Dec. 12. The delay has led some investors to speculate that the company’s debt rating may be downgraded, which would force the world’s most heavily indebted oil company to pay even higher interest on part of its debt.
The impasse over the earnings report underscores the close and occasionally crooked ties between Petrobras and the political coalition that has governed Brazil for the past 12 years. The board member cited by the auditor is Sergio Machado, who, as a senator from the Brazilian Democratic Movement Party (PMDB), became an early supporter of former President Luiz Inacio Lula da Silva’s Worker’s Party government. This cleared the way for Machado’s appointment as head of the transport division of Petrobras in 2003. Later, Costa claims in a sworn deposition, Machado gave him a bribe of $202,000.
In order to move forward, a majority of the board members seem content to fire Machado, but others have expressed reservations because he counts Senate President Renan Calheiros, also of the PMDB, as a stalwart backer. To get rid of Machado, Rousseff could also presumably turn on Calheiros, who is unpopular throughout much of Brazil for his own scandalous past. If she did, however, it seems likely that the PMDB, which is Brazil’s largest political party, would withdraw its support for her. Recently dubbed “the kingmakers of Brasilia,” the PMDB is an ideologically fluid organization that is known for its willingness to play second fiddle on the national stage, so long as its members enjoy plum postings in the Cabinet and on boards of state-run businesses.
Before long, Rousseff’s wait-and-see approach to the Petrobras scandal will start to carry significant costs. The remedy will require reckoning with corrupt members of her own coalition, but if Rousseff is serious about ending impunity in Brazil, she has little choice.
Sean Goforth is an analyst at Wikistrat, a geostrategic consulting firm, and author of “Axis of Unity: Venezuela, Iran & the Threat to America” (Potomac Books, 2012).
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