Petrobras Scandal: The Cost for Rousseff

How the Petrobras scandal is hurting Brazil’s President Dilma Rousseff.

BY LATIN AMERICA ADVISOR
Inter-American Dialogue

A corruption scandal involving alleged graft at Brazilian state oil company Petrobras has widened in recent weeks as the country's Supreme Court approved investigation into 54 high-level politicians accused of involvement, and the comptroller general opened cases against several of the country's major construction companies. The broadening scandal comes amid an economic slowdown and political challenges to the leadership of President Dilma Rousseff. How much of an effect will the scandal have on the government's ability to address the country's economic problems and the outlook for growth? How will investigations against major construction companies affect the development of infrastructure projects, particularly ahead of next year's Olympics?

 
Guilherme Casarões, lecturer in international relations at Fundação Getulio Vargas, Faculdades Rio Branco and the Escola Superior de Propaganda e Marketing: The greatest hurdle the government has to overcome is fundamentally political, not just economic. Without legislative support, the Rousseff administration will not be able to pass critical legislation to sustain macroeconomic policies--the federal budget, to begin with, but also some long-awaited reforms, such as the tax reform--that would help her address the economic problems. Major corruption scandals involving the president's coalition parties not only weaken her government, whose approval and legitimacy are plunging, but also spur a 'run-for-your-life' strategy among those parties. Judging by the most recent events, the greatest opposition to President Rousseff is no longer the parties who struggled against her in the 2014 elections, but her own 'intimate enemy,' the vice president's Brazilian Democratic Movement Party (PMDB). It rules both legislative chambers and has been imposing defeats on the president, while demanding more room and power within the coalition. Furthermore, as long as investigations affect the civil construction giants, one of Brazil's most prosperous economic sectors, the foundations of the developmentalist model launched by the military in the 1970s and deepened under Lula and Rousseff will begin eroding. This may lead to an even greater economic slowdown at home and also cause some foreign policy setbacks. After all, most of Brazil's global strategy toward Africa and Latin America relied on the alliance between Brazil's National Development Bank (BNDES) and such national 'champions' of civil construction, such as Odebrecht and OAS, which are now sidelined. While it is still unclear how this will affect next year's Olympic Games, it sure has the potential to undermine the country's reputation abroad. Therefore, one of the greatest challenges before President Rousseff is to uphold Brazil's positive image in a time of political and economic turbulence, and a sound diplomacy--boosting trade and investments and standing up for the right global causes--is perhaps the best way to make it happen.

M
elvyn Levitsky, professor of international policy and practice at the University of Michigan's Gerald R. Ford School of Public Policy and former U.S. ambassador to Brazil: Brazilians are used to--in fact almost inured to--corruption and graft in the public sector. Reports of corruption over the years have increased cynicism, particularly among the growing middle classes. Corruption has also helped build a large informal economy; why report income and pay taxes if politicians steal from you? The current Petrobras scandal ('Petrolão'), which follows the congressional vote buying scandal ('Mensalão') during the Lula administration, has had a much more serious effect for several reasons. First, its sheer size. Estimates have varied from hundreds of millions to several billion dollars in bribes and kickbacks. Secondly, as indicated in the question posed, the number and level of political figures and companies involved. The 50-some politicians being investigated include the presidents of the Senate and the Chamber of Deputies as well as a number of members in both houses of the ruling  Workers' Party. Third, Petrobras' standing and reputation as the crown jewel of Brazilian state companies. Prized and praised as a leader in domestic and foreign exploration of oil and gas fields (especially as a hope for Brazilian leadership in energy via exploration of huge pre-salt ocean deposits), Petrobras has now been shown to be tarnished and corrupt. Finally, as the second of two major scandals, Petrolão has exposed the Workers' Party as no longer the flag carrier of the working class, but rather as a party interested in self perpetuation for venal purposes. A key question is how much and when did Dilma, who was energy minister and a member of the Petrobras board of directors, know about the scandal. The large demonstrations taking place indicate that a significant slice of the public believes she knew quite a bit and for a good deal of time. Not only will Petrolão affect Dilma's ability to govern, it could bring the downfall of her government.

Paul Groom, managing partner at Telefinance Advisors in São Paulo: It is less than five months since the re-election of Dilma Rousseff. The 'Lava Jato' scandal relating to bribes paid to politicians by major Brazilian companies concerning contracts with state-owned oil company Petrobras was already percolating during the election and was one of the causes of the president's slim margin of victory (3.28 percent) over Aécio Neves, the PSDB opposition candidate. Now the government finds itself with unfavorable ratings of more than 50 percent in most of the 15 north and northeastern states where the president received a plurality of votes. Today, Rousseff finds herself irrelevant to the political process. She has been overwhelmed by a scandal of immense proportions where as president of Petrobras' administrative counsel from 2003 to 2010 she should have known what was going on. The president has a résumé that shows much courage in opposing the seizure of power and the military's effective eradication of the opposition and human rights in the late 1960s and early 1970s. On becoming president, Rousseff fired a dozen ministers because of their purported involvement in corruption. Now she is implicated, at least by association, with crimes causing economic hardship to many of the people-the poor, dispossessed and unemployed-for whom she fought in the past. What of business? This will be a difficult year, but with the changing dynamics of business, the private sector will adapt. The forex parameters will take time to percolate through the economy, but will provide new incentives for producers of Brazil's many quality products.

Joel Korn, president of WKI Brasil: The magnitude of the corruption scandal--fueled by the uncertainties surrounding the full extent of the ongoing and prolonged investigations--weakens the government and adds further stress to the already-strained relationship between the president and Congress. As such, it has made it even more challenging for the government to obtain legislative approvals for critically needed fiscal measures. In addition to the widely publicized corruption scandal, the impact of the necessary economic adjustment actions on social programs and the implications of inflationary pressures with slow economic activity on disposable income and the unemployment level explain the poor reviews and very low level of consumer and investor confidence in President Rousseff's administration. Against this background, economic growth in 2015 is extremely unlikely. In fact, all the efforts must be directed toward reducing the extent of the inevitable GDP drop. The ongoing investigations of leading Brazilian construction companies within the context of the corruption scandal, although a source of concern, should not have a meaningful impact on the successful and timely completion of the 2016 Olympics infrastructure projects. I am confident that the International Olympic Committee and Rio de Janeiro Organizing Committee's members, along with the government officials at federal, state and municipal levels will be taking the required actions to mitigate the effects of such investigations, ensuring that the critical 'legacy' infrastructure projects and those directly associated with the Olympic Games' facilities are delivered on schedule.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor