When the world gets closer.

We help you see farther.

Sign up to our expressly international daily newsletter.


The Petrobras Scandal And The Future Of Brazilian Democracy

Revelations of massive corruption at Petrobras come with more than economic consequences. The credibility of the entire state is at stake. All eyes are on President Dilma Rousseff.

How can Brazilian President Dilma Rousseff deal with the "Petrobras earthquake"?
How can Brazilian President Dilma Rousseff deal with the "Petrobras earthquake"?


SANTIAGO — The corruption scandal inside Latin America's biggest firm, Brazil's Petrobras oil, was off the news radars for a few days. Now it has returned with a vengence. We are now seeing that this is a case bound to grow by the day, both in terms of implicating more individuals and the deeper ramifications.

It may be no exaggeration to say it could threaten President Dilma Rousseff's ability to govern, as she begins her second term.

For almost a year now, magistrates have investigated an increasingly complex web of fraudulent contracts, fake bills, bribes and money laundering that began years before, and have turned Petrobras into an informal bank of sorts, passing money from firms onto prominent members of the country's parliamentary, executive and party elite.

So far inquiries have shown suspicious payments worth around $9.1 billion, made between 2011 and 2014. Call it the "Petrobras earthquake," evidently one of the biggest scandals of its kind in Brazilian history.

The "bomb" effectively went off after federal police arrested one of the firm's directors, who began to name alleged accomplices in return for clemency. The names included those of top directors of six of the country's engineering and construction firms — contracting firms routinely working with Petrobras — and 30 or so senior or former state officials, mostly from Rousseff's Workers' Party (PT).

It turns out that the corruption began under the previous President Luis Inacio Lula da Silva, when Rousseff was energy minister and effectively responsible for goings-on in Petrobras. Indeed as minister in 2009, she rejected investigators' indications of possible corruption in Petrobras.

The scandal is proving to be as financially damaging as it is noisy. Petrobras shares lost 65% of their value since September 2014, infuriating minority stockholders who include institutions and foreign funds. One of these, the city of Providence, Rhode Island, is taking action with courts in New York and the Securities and Exchange Commission (SEC), to check if Petrobras broke U.S. laws.

The expanding list of charges and revelations is creating problems for any and all sectors it touches. Building firms accused of involvement are finding it difficult to finance themselves on the money markets, and their participation in upcoming public works projects has become less likely. One of them, OAS, could not repay the $62 million it owed locally, with an early January deadline.

Friend of Dilma

There are doubts now about Petrobras's own ability to finance itself on the international markets. With annual sales worth $130 billion and earnings of around $10 billion in 2013, Petrobras can claim to be Latin America's biggest firm, but with debts of around $130 billion, also the most indebted.4

[rebelmouse-image 27088555 alt="""" original_size="450x600" expand=1]

Petrobras HQ in Rio de Janeiro — Photo: galio

The situation may threaten the country's investment rating whose deterioration would immediately make credit more expensive for government and firms.

Yet the problem is not so much financial as institutional. Public opinion and investors see corruption as rampant in the government, legislature and the parties. That will make governing Brazil difficult for some years, and many believe the solution may involve an overhaul or reconstruction of national institutions.

Rousseff has reappointed her friend Maria das Graças Silva Foster as Petrobras chief. That was a mistake. The CEO may not have known what was happening there but she was still responsible. The public and markets would probably have welcomed her dismissal.

What Dilma needs now to govern is to recover trust. Even without Petrobras she faced a challenge in her second term: to relaunch faltering economic growth without significantly impacting the social policies that have taken 50 million Brazilians out of poverty in the past 15 years.

Reality is not helping her. Investment in Brazil fell 7% in 2014, and forecasts are of stagnation this year. The price of raw materials is dropping, while the annual growth rate, which hovered just below 2% in her first four-year term, has given way to recession. Brazil must turn its spending deficit into a surplus if it wants to avoid another reason for a credit downgrade, which is not easy in a country of wages calculated on the basis of prosperous times and incredibly generous pensions for public-sector employees.

Rousseff may have to implement austerity plans that will fuel unemployment and raise transport and public utility prices, but she imprudently promised in her campaign that austerity, while necessary, would be painless for Brazilians. Now add to this the non-stop revelations of the Petrobras mess.

The president effectively faces a historical task, to demolish part of Brazil's institutional architecture and establish new, solid bases for something new. She must lead by embracing total transparency, whatever the political costs. In recent weeks she has made market-friendly appointments and flirted with economic liberalization. She may not be sincere, but gestures matter. She had better believe that she will need private sector backing.

For now, the country must wait for the Petrobras aftershocks to subside so it can assess the damage and casualties: They will be considerable.

And that could be good. Brazil needs such an overhaul of its institutions, politics and economy to realize its ambitions of becoming a top global player. In that sense the Petrobras earthquake may one day be seen as a positive trigger. But this year and the next, it will leave a trail of individual victims and institutional destruction.

You've reached your limit of free articles.

To read the full story, start your free trial today.

Get unlimited access. Cancel anytime.

Exclusive coverage from the world's top sources, in English for the first time.

Insights from the widest range of perspectives, languages and countries.

FOCUS: Russia-Ukraine War

From The Trenches Of Avdiivka, Ukraine's Hell On Earth

Journalists from Ukrainska Pravda report directly from the trenches near Avdiivka, one of the oldest settlements in the eastern Donetsk region of Ukraine, where troops are facing near-constant Russian fire.

Photo of Ukraine soldiers patroling at Avdiivka city of Donetsk

Ukraine soldiers patrolling near Avdiivka.

Olga Kirylenko

“Get down!”

Machine gun fire whistling overhead is interrupted by the shout of a combat medic named Petro. Five people, including three soldiers and two journalists from Ukrainian publication Ukrainska Pravda fall to the snow.

Stay up-to-date with the latest on the Russia-Ukraine war, with our exclusive international coverage.

Sign up to our free daily newsletter.

The sound of ringing bullets seemed distant to Petro's team and, as those under fire always hope, didn't come too close to hitting.

“Are you all good?” Petro asks after a few seconds.

Keep reading...Show less

You've reached your limit of free articles.

To read the full story, start your free trial today.

Get unlimited access. Cancel anytime.

Exclusive coverage from the world's top sources, in English for the first time.

Insights from the widest range of perspectives, languages and countries.

The latest