Rousseff’s Petrobras corruption woes adds to already bad year for BRICS leaders

It hasn’t been a great year for BRICS leaders. South Africa’s Jacob Zuma is under siege for spending $20m of the public purse on his private residence. Russia’s Vladimir Putin’s regime is suddenly fragile with a plunging oil price compounding concerns over the Ukrainian invasion. And now Brazil’s Dilma Rousseff is struggling to contain growth of a massive corruption scandal at Petrobras, the State-controlled company she chaired during the period when the worst of the abuses occurred. That a chunk of illegally diverted Petrobras money went into the coffers of Rousseff’s political party compounds her troubles. – AH

By David Biller and Raymond Colitt

Russian President Putin, Indian Prime Minister Modi, Brazilian President Rousseff, Chinese President Xi and South African President Zuma smile at a group photo session during the 6th BRICS summit in Fortaleza(Bloomberg) — When President Dilma Rousseff was re-elected in October, Brazil’s economic difficulties looked to be the biggest challenge of her second term. Not any more.

The largest corruption scandal in the country’s history now threatens to deadlock Congress, undermine Rousseff’s political clout and snarl her efforts to put the economy back on track. Hundreds of millions of dollars from contracts at state- controlled Petroleo Brasileiro SA went to executives, contractors and political parties, according to prosecutors and witnesses. Police have jailed construction company officers who have been charged with bribery and money laundering.

With Brazil’s largest construction firms involved in the case, public works projects that are critical to economic revival could grind to a halt. And Rousseff, who presided over the Petrobras board of directors during part of the alleged graft operation, faces an emboldened opposition in a Congress with many members likely to be implicated in the scandal. That will make it tougher to win approval for her proposals, including changes in the tax and electoral structures.

“Without a doubt this scandal will create an institutional crisis, causing Congress to move at a turtle’s pace on other issues,” Humberto Costa, Senate leader of Rousseff’s ruling Workers’ Party, said in an interview on Dec. 9. “This scandal will dominate next year’s agenda.”

Rousseff has said before and after the election that her administration has done more than previous governments to combat graft. She said Nov. 16 that most Petrobras employees are honest and the episode will “end impunity” and change Brazil for the better. Her press office declined to comment.

State’s Witness

The case, dubbed Car Wash, erupted last March, when police began arresting people suspected of money laundering and other crimes. Several figures subsequently turned state’s witness. In their testimony, much of which has been released by the court in charge of the case, they describe a cartel of construction companies that for years fixed bids on Petrobras contracts, paid bribes to Petrobras executives, and funneled money to members of Congress and parties including the Workers’ Party.

The amount of money involved dwarfs that in any previous corruption scandal in Brazil. A Finance Ministry unit is rooting through 23.7 billion reais ($8.9 billion) in transactions since 2011 that are regarded as suspicious from people and companies cited in Car Wash to determine the volume of funds illegally laundered. One Petrobras executive who turned state’s witness, Pedro Barusco, has agreed to return $100 million mostly held in foreign bank accounts.

747 Projects

The case also extends beyond Petrobras. Investigators seized a document from Alberto Youssef, who has confessed to money laundering in his testimony, that lists 747 infrastructure projects carried out by 170 companies, according to the court. The judge so far has filed formal charges against 39 people, including more than 20 executives and employees from six of Brazil’s largest construction firms. Some of the executives remain in jail on preventive detention, prosecutor Deltan Dallagnol said Dec. 11.

The prosecutors are seeking to recover at least 1 billion reais, Dallagnol said. More accusations will follow, prosecutors said.

Petrobras stock has declined 56 percent in the past three months, compared with 17 percent for the benchmark Ibovespa index. Petrobras said Oct. 27 that it’s a “victim” in the case and is cooperating with authorities. The company’s executive managers, including Chief Executive Officer Maria das Gracas Foster, have given access to their computers, phones and offices to independent investigators who have a one-year contract to probe corruption allegations, Foster said to reporters Dec. 17.

Not Afraid

“This is good for the company,” she said. “We aren’t afraid of the truth.” The company didn’t respond to new requests for comment.

Because members of Brazil’s Congress can only be charged with crimes by the Supreme Court, the lower court in charge of Car Wash has not publicly named any politicians implicated by witnesses. One ex-Petrobras director, Roberto Costa, testified in a congressional hearing that he has named dozens of politicians who received bribes.

Prosecutor General Rodrigo Janot said Dec. 17 that he will request in February an investigation of nearly 30 members of Congress, newspaper O Globo reported. The names of the politicians will be made public then, Globo said.

Jammed Gears

At the least, the resulting uncertainty will jam the gears of government, forcing Rousseff to spend more political capital, time and effort to pass legislation, according to Joao Augusto de Castro Neves, an analyst at political risk consulting firm Eurasia Group. It’s already delaying the assembly of the cabinet for her second term, since she has to “think three times” before appointing a minister who might later be implicated, he said.

Congressional gridlock could hardly come at a worse time. Brazil’s economy crawled out of recession in the third quarter with growth of 0.1 percent, and this year will expand 0.2 percent, according to economists surveyed by Bloomberg. Inflation remains above the ceiling of the government’s target range, and since Rousseff took office in January 2011 the budget deficit has more than doubled, to 5 percent of gross domestic product in October.

First Goal

Rousseff said in her Oct. 26 victory speech that her first goal was to push for changes in regulations governing elections and parties, such as reducing the role of company funding of campaigns and tightening anti-corruption laws. She also said she intended to introduce policies to revive growth, and that Brazil must simplify its tax code.

While the government could implement most spending cuts without congressional approval, the chances of raising taxes to help narrow the budget deficit or overhauling the country’s unwieldy tax code now seem slim, according to Rafael Cortez, a political analyst with Tendencias Consultores.

“The risk for the government is that a rebellious Congress increases spending and blocks legislation of the microeconomic reform agenda,” Cortez said. There is also the matter of her personal accountability in the scandal, he said: “The question of how much the president knew will at least fuel a debate over possible impeachment, even though it doesn’t look likely at this stage.”

Corruption Network

Rousseff was chairman of the company’s board from 2003 to 2010. Ex-Petrobras executive Barusco has testified that the corruption network existed before and throughout her tenure. The board approves all financial statements and major projects. The chairman is not involved in the day-to-day running of the company. Rousseff said Sept. 8 she was unaware of corruption at Petrobras while chairman.

Jose Agripino, leader of opposition DEM party in the Senate, said in an interview that Rousseff’s responsibility is clear. “She will have to answer to the judiciary, not the opposition, over the loss of public assets,” he said Dec. 9.

Besides their work for Petrobras, the companies named by prosecutors, including OAS SA, Camargo Correa SA and Galvao Engenharia SA, are involved in building some of the country’s most important public works. Among them are the Belo Monte hydroelectric dam that will be the world’s third-largest, the North-South Railway stretching the length of the nation, the new terminal in Sao Paulo’s international airport, and subways in Sao Paulo, Rio de Janeiro and Salvador.

Ethical Conduct

Galvao declined to comment because the investigation is ongoing, its press office said by phone. OAS carries out its activities with integrity, guided by ethical conduct and respect for law, and will await the end of the investigation to comment, the company’s press office said in an e-mail.

Camargo Correa’s “executives will for the first time have the opportunity to familiarize themselves with all elements of the process and present their defense with the expectation of a fair and balanced trial,” the company’s press office said in an e-mailed statement.

Outside the halls of government, 68 percent of Brazilians say Rousseff has some responsibility for the corruption scandal at Petrobras, according to a Datafolha poll of 2,896 people on Dec. 2 and 3, which had a margin of error of plus or minus two percentage points.

The government’s approval rose to 52 percent from 48 percent in September, according to a CNI/Ibope poll of 2,002 people surveyed Dec. 5-8, which had a margin of error of plus or minus two percentage points. That rating remains 11 percentage points below the level preceding 2013 street protests, the poll shows. The demonstrations were the largest in two decades.

Approval Rating

The fact that the government’s approval rating hasn’t fallen reflects the public’s “callousness” about corruption, according to David Fleischer, a political science professor at the University of Brasilia, who cited a traditional Brazilian saying about politicians: “He steals, but gets things done.” The scandal may yet shock people out of their indifference, particularly because many invested their savings in Petrobras stock, Fleischer said.

Given the expanding scandal and the sluggish economy, the Rousseff government’s approval rating is likely to fall, according to Eurasia’s Castro Neves. And after the first half of 2015, her capacity to push bills through Congress will diminish, he said.

“She paid a big part of the political price for the corruption scandal, and there’s more to pay,” he said. – BLOOMBERG

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