Petrobras Scandal Fuels Instability in Brazil

The government of Brazilian President Dilma Rousseff is embroiled in a heated controversy that implicates the state-owned oil company Petrobras in a wide-ranging corruption scheme. Early last week, prosecutors filed charges against João Vaccari, treasurer of the ruling Workers Party, who they allege had direct knowledge of illegal payments and payoff activities. Officials have identified a number of suspicious payments—amounting to $3.7 billion in bribes and fraudulent transactions—connected to several high profile politicians and members of the Brazilian president’s inner circle. On Wednesday, Swiss authorities seized $400 million worth of assets connected to the scandal. Industry analysts worry that the widening corruption scheme, coupled with the country’s worsening economic outlook, will cause international oil companies to terminate contracts and put potentially lucrative energy projects, like the recent discovery of deep-water oil reserves in pre-salt basins, on hold. At the center of the controversy is Petrobras, the state-owned oil company that the Brazilian president oversaw as chairwoman and energy minister between 2003 and 2010. Under Rousseff’s leadership, the government asserted greater control over the economy and state-owned enterprises, including Petrobras. The company nationalized lucrative deep-water oilfields, and during Rousseff’s tenure, allowed the government to buy ships, offshore platforms, and other equipment from struggling oil companies. This was a significant departure from the approach taken during the 1990s, when the government pushed the state-owned company to operate in a more capitalistic fashion. With the passage of a major 1997 law, Brazil opened Petrobras to foreign investment, and allowed competitors to develop the country’s vast oilfields. Exploratory projects took off. Between 1998 and 2008, estimates of the country’s oil reserves grew from 4.8 to 12.2 billion barrels. In her successful campaign to succeed her predecessor, President Luiz Inácio Lula da Silva, Rousseff championed the oil industry as a tool for economic progress. At Petrobras, she introduced fuel subsidies in 2006 in a bid to keep inflation low. Since then, the country has been importing gasoline and diesel fuel to sell at a loss. In 2013, Brazil imported 528,000 barrels per day (bbl/d) of petroleum products, an increase of 12 percent from the previous year, according to the U.S. Energy Information Administration (EIA). That same year, the United States exported 179,000 bbl/d of products to Brazil, one-third of the country’s imports. Fuel subsidies have grown the country’s oil demand and cost the government $14.8 billion over the last three years, according to investment bank Credit Suisse. “Dilma Rousseff arrogantly claimed she got it all right when she was overseeing Petrobras, prioritizing oil over biofuels, encouraging the population to consume gasoline by keeping fuel prices low,” Adriano Pries, an energy consultant told the Times. “But now the shock is here: She got it all wrong and the entire country is paying for her energy policies,” he said. In many ways, Brazil’s rich natural resources—and Petrobras, the company that extracts them—became symbols of Brazil’s economic boom of the last decade. Many thought that Petrobras would even best Apple as the world’s most valuable publicly-traded company.  In response, Brazil created a sovereign wealth fund in 2008 to help save and invest the country’s growing oil revenues. Less than four years later, officials secretly withdrew 80 percent of the fund’s money to help balance a budget shortfall. The mismanagement of immense new resources—widely regarded at the time as a model for other nationalist economies—did not usher in an era of energy and financial security for the state. The corruption scandal at Petrobras has incensed Brazilians, many of whom have called for the ouster of the recently reelected president. Last weekend, more than one million protesters peacefully took to the streets to demand reforms. The Brazilian president’s popularity has plunged 20 percent in recent months, down to a 13 percent approval rating. Of course, the anger of the Brazilian people can also likely be traced to the country’s poor economic performance in recent years, augmented by falling oil prices and stagnating production. Bribes—in one case amounting to nearly $100 million—were funneled into offshore accounts that officials say were then used to support Rousseff’s 2010 campaign. So far, Vaccari is the closest prosecutors have come to Rousseff, who many Brazilians view as directly implicated in the scandal. But is also the most dangerous for the sitting president. “[He] knew that the payments were actually bribes,” Deltan Dallagnol, one of the prosecutors in the case, told reporters. The state-controlled oil giant is an engine of the Brazilian economy. The Wall Street Journal reports that Petrobras is responsible for 10 percent of the nation’s investments and generates $106.4 billion in revenue. Last month, Rousseff’s government—which owns a 64 percent stake in the company—failed to convince Moody’s not to downgrade the value of its debt. Brazil’s credit rating now stands at Ba2, two steps below investment grade. The treasury may have to bail Petrobras out, but not without causing a sovereign-debt downgrade, analysts say. Impeachment of Rousseff is not likely, but credit ratings downgrades and budget constraints have forced the government to end policies that lowered economy-wide prices. In the last decade, the economy grew 348 percent per capita between 2001 and 2011, but that has stymied. Brazil’s inflation rate increased 7.4 percent year-over-year in February—the fastest pace in 12 years—causing the price of everyday items, like food, electricity, and bus fares to skyrocket. On the streets, the value of Brazil’s currency, the Real, also weakened 30 percent against the U.S. dollar this year. “The combination of low oil prices, which may jeopardize the economic viability of the pre-salt exploration, and the current corruption investigations at Petrobras have limited the company’s ability to access the bonds market,” the global ratings agency Standard and Poor’s concluded. The U.S. Energy Information Administration (EIA) says the Brazilian government wants to bring 1.3 million additional barrels per day to market by 2030, but its ability to do so may be hampered by the declining pace of investment. The ultimate question is whether the unpopular president will be able to hold together a governing coalition in the wake of explosive new corruption details at Petrobras. The Brazilian economy needs a fiscal austerity measure, analysts say, but Rousseff’s inability to pass key spending reforms and tax increases could add to mounting credit downgrades. In the medium term, these changes could adversely affect investments in the country’s energy-rich deep-water reserves. Time will tell, but if the scandal continues to expand into the president’s inner circle, added uncertainty could spell trouble for the world’s seventh-largest economy.