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17 Feb

Everything You Need to Know About the Petrobras Scandal

Everything You Need to Know About the Petrobras Scandal

Dear Friends,

Once again hope this post finds you well. I thought this time we would look at one of the most widely known and impactful events in recent times in Brazil. The amazing breadth and depth of the Petrobras scandal has startled even the most jaded of Brazilians, and has become a symbol of many of the institutional, economic and societal imbalances in Brazil today.

The speed with which this one-time superstar and market darling has fallen is as spectacular as the scope and scale of the corruption. It truly exposes a level of greed, deceit and lack of controls, and even now no one knows the full extent of the corruption.

Brazil, and when I say Brazil I mean Brazilian citizens, will be paying for this scandal for decades to come in higher energy costs and taxes that will be required to make sure the company stays solvent. Too big to fail is an understatement and with the government backing the golden shares, there is no backing out on it.

There is a great saying, “Acorda Brasil!”, which translated means “WAKEUP BRAZIL!” After the Mensalão, Eike’s X implosion, BTG, Pertrobras and many others, people are shell-shocked. Change can only come from Brazilians when as a society they refuse to accept corruption as common practice and demand that people are held accountable for their actions, regardless of social, political or economic standing.

We are all in it together. I for one look at the events unfolding today in Brazil and am very hopeful for a better, stronger, dynamic, open and more stable tomorrow. Brazil is blessed with an abundance of everything it needs to be a dominant world player

Everything You Need to Know About the Petrobras Scandal

If you don’t live in Brazil, you probably only know the Petrobras Scandal as another chapter in Brazilian corruption.

But the investigation’s significance goes well beyond past scandals like the FIFA World Cup debacle, both in monetary and cultural scope.

Let’s take a look at the facts, how the scandal managed to occur, and why Petrobras’ fall from grace has big implications for the fabric of Brazilian society. It’s a story with more twists and turns than a Hollywood blockbuster.

Understanding Petrobras

To understand the scandal’s impact, first we have to examine Petrobras as a whole. Once upon a time, the Brazilian petroleum giant was a model company and a major source of pride for the Brazilian people.

From its founding in 1953 until 1997, Petrobras held a (legal) monopoly on Brazil’s oil industry as a majority state-owned entity. Even after 1997, Petrobras continued as a major player in Brazil’s energy sector.

Back in 2006, Petrobras’ market value shattered the magic $100 billion ceiling, and just a year later was ranked in the top 10 of the Reputation Institute’s most prestigious companies in the world.

By 2008, Petrobras had blown past Microsoft as the third-most profitable business in the Americas.

Before the recent scandal, the company was widely considered the most prestigious in Brazil, with a great public image known for investing heavily in Brazilian culture, arts and entertainment.

The Petrobras scandal isn’t significant just because it marks the downfall of a Brazilian titan of industry, but also because the company was a symbol of Brazil’s limitless future.

The Scandal

In 2013—hot on the heels of several record-setting years—Petrobras had taken an unexpected turn for the worse.

That October, Petrobras was rated the most-indebted business in the world by Merrill Lynch.

By the following year, that debt would balloon to just over $170 billion.

So what happened?

In February of 2014, the Brazilian federal police launched Operação Lava Jato (Operation Car Wash), originally as an investigation into money laundering. Later, the operation would expand to uncover the biggest ring of corruption in Brazilian history.

Police raids across 6 Brazilian states targeted some of Brazil’s most elite politicians and businessmen, some of whom were Petrobras directors. The investigation switched gears, aimed at uncovering the source of so-called “suspicious contracts” conducted by Petrobras beginning in the early 2000s.

And what were those “suspicious contracts?”

Way back in 2004, head honchos at Petrobras awarded lucrative construction and service contracts to a ring of other businesses in exchange for massive kickbacks, enriching both the corrupt executives and their associates.

In the past, these companies would have competed with each other to secure contracts. But in 2004, they decided to work together, arranging ahead of time who would win which contracts, and charging far more than normal for their services.

On top of that, money in the form of “donations” was given to prominent political parties and individual politicians.

And why?

Because with the end of Petrobras’ monopoly, government agencies were now responsible for overseeing contract bidding processes to uphold the free market. Those individuals, however, could be persuaded to look the other way.

After all, Petrobras is still majority-owned by the Brazilian government.

Most prominent among these “gift” recipients was the Workers’ Party, to which current President Dilma Rousseff belongs. The Brazilian Workers’ Party is suspected of accumulating over $200 million over the years—millions that went toward political campaigns.

In total, estimates put the amount of money illegitimately siphoned from the company anywhere between $3B to 8B. That’s a pretty big range, and just emphasizes that we don’t really know the full extents of the corruption yet.

Blowback

Several prominent Brazilian politicians were wrapped up in the laundering ring, including:

  • Edison Lobão, former Minister of Mines and Energy, for accepting more than $50 million in bribes from Petrobras;
  • Eduardo Cunha, Speaker of the Chamber of Deputies (equivalent to the US Speaker of the House), for receiving over $40 million in kickbacks from Petrobras;
  • José Dirceu, President Lula’s former Chief of Staff, for pulling the strings behind much of the operation;
  • João Vaccari Neto, Treasurer of the Brazilian Workers’ Party, for accepting suspicious donations.

The investigation seems to grow with no end in sight, as everyone from sitting senators to billionaire investment bankers to construction contractors to military officers have been indicted.

The taint of corruption lingers over President Rousseff as well, with calls for her resignation despite no hard evidence linking her to the scandal. Rousseff was the chairwoman of Petrobras from 2003-2010, roughly corresponding to the time frame investigated by Operation Car Wash.

The scale of the Petrobras scandal is difficult to grasp for non-Brazilians. But consider that much of Brazil’s optimism for future growth was based on Petrobras’ seemingly “too big to fail” attitude, and it’s easy to see why Brazilians are outraged and facing a bit of an identity crisis.

Petrobras has already shaken things up by moving fresh faces into its upper management positions, on top of installing a brand new Head of Compliance to expand their once-nonexistent whistleblower program.

Still, the company continues to be a place where powerful politicians can hand out cushy positions to friends and family. It remains to be seen if Petrobras can turn around their public image, and just how badly the scandal will affect Brazil’s economic growth in the near future.

The saga is still unfolding, though. And it’s hard to tell just how deep the rabbit hole goes.

Acorda Brasil!!!!!

“Sometimes I wonder whether the world is being run by smart people who are putting us on or by imbeciles who really mean it.” – Mark Twain