Brazil’s Slumping Economy and Bribery Scandal Eat Away at Dilma Rousseff’s Popularity

Source: By SIMON ROMERO, New York Times • Posted: Friday, March 20, 2015

RIO DE JANEIRO — President Dilma Rousseff ran for office declaring that she would harness an oil bonanza in Brazil to supercharge the economy while avoiding the corruption and mismanagement that have plagued other oil-rich countries in the developing world.

But less than three months into her second term as president, Ms. Rousseff is fighting for her political survival as Petrobras, the national oil company she oversaw and has championed, reels from a colossal bribery scandal.

Compounding her problems is the prospect that the economy could shrink in 2015 for the second consecutive year, the first such contraction here since the onset of the Great Depression in 1929 and 1930.

Public anger over the scandal, and the slumping economy, brought hundreds of thousands of people to the streets of Brazil last weekend demanding Ms. Rousseff’s resignation. On Wednesday, a public opinion survey showed her approval rating at a paltry 13 percent.

“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,” said Adriano Pires, a prominent energy consultant. “But now the shock is here: She got it all wrong, and the entire country is paying for her failed energy policies.”

Ms. Rousseff’s fall from grace has been fast, as calls for her ouster have grown louder over the revelations of bribery on an epic scale at Petrobras on her watch. Her approval rating plunged to 13 percent in March from 23 percent in February, according to a public opinion survey released on Wednesday by Datafolha, a Brazilian polling company. The poll, conducted on March 16 and 17 in interviews with 2,842 people, had a margin of sampling error of plus or minus 2 percentage points.

While even Ms. Rousseff’s political opponents say that the possibility of her being impeached or resigning remains distant, she is grappling with political and economic crises that are feeding off one another and eroding her authority.

In addition to the street protests this month, prominent figures in her own Workers Party have begun criticizing her reluctant embrace of austerity measures sought by her critics in the business establishment.

At the same time, centrist leaders in her coalition in Congress are in open revolt against Ms. Rousseff, blaming her for not shielding them from inquiries over their involvement in the Petrobras scandal, raising doubts about whether she can push through unpopular spending cuts.

As Ms. Rousseff, 67, grows isolated from her own base of support, Brazil’s currency, the real, has undergone a sharp devaluation, falling more than 30 percent against the dollar since she won the first round of presidential elections in October. Meanwhile, concerns are growing over the problems at Petrobras, which ranks among the world’s most indebted companies.

Recipients of the bribes pocketed vast sums; one manager, Pedro Barusco, has agreed to return nearly $100 million he hid in offshore accounts. The executives also said they channeled portions of the bribes to the Workers Party, some of which were used in Ms. Rousseff’s 2010 campaign, and to other parties and leaders in her coalition.

The scheme was put into motion during a period roughly corresponding to the time when Ms. Rousseff was chairwoman of Petrobras, from 2003 to 2010. At the time, she also served as energy minister and chief of staff to President Luiz Inácio Lula da Silva, her predecessor.

No testimony has surfaced indicating that Ms. Rousseff personally profited from the bribery scheme, and she has insisted that she knew nothing about it until investigators revealed it last year.

Ms. Rousseff was a forceful presence at Petrobras, a sprawling enterprise founded in 1953, using her influence to expand the role of state-controlled companies and banks in Brazil’s economy.

With new legislation, she put Petrobras firmly in control of new deep-sea fields and gave it a nationalist mandate to buy ships, oil platforms and other equipment from struggling Brazilian companies, causing project delays and cost overruns.

These strategies were a shift from the 1990s, when Brazil’s government ended Petrobras’s monopoly, exposing the company to market forces while keeping it under state control.

The push to build entire domestic industries supplying Petrobras, as well as huge refineries in states controlled by allies of the Workers Party, created thousands of jobs — until now. The scandal and the worldwide slump in oil prices have caused Petrobras to suspend work on projects like a huge refinery complex in Itaboraí, a city near Rio de Janeiro.

The work force at the refinery has dwindled to less than 5,000 from a peak of 35,500 in 2013, according to union officials. Many laborers have returned to their home states in Brazil’s relatively poor northeast, but as many as 200 unemployed workers now live on the streets of Itaboraí, according to Fábio Krespane, coordinator of the city’s agency for the homeless.

Others are squatting in apartment complexes built during the boom years. One of the squatters, Leirson Fabiano Santos, 34, an unemployed heavy machinery supervisor, estimated that 90 percent of the workers had voted for Ms. Rousseff, but added, “I no longer have any good things to say about her.”

“Now she wants to raise taxes and energy prices so that we, the masses, pay the price for the corruption at Petrobras,” Mr. Santos said.

Ms. Rousseff had kept electricity prices low in recent years in a bid to keep inflation from accelerating, before allowing them to rise after she narrowly won re-election in October. Subsidized gasoline prices also wreaked havoc on Brazil’s once-envied ethanol industry by making biofuels costlier, with more than 60,000 jobs lost from 2013 to 2014 from sugar mill closings, according to Unica, a sugar and ethanol trade group.

Eyeing the achievements of Norway and Canada, oil-rich countries with enviable living standards, Brazil took steps to prepare for lean times, like putting a portion of oil revenues in a sovereign wealth fund created in 2008. But the idea was short-lived: Ms. Rousseff’s government raided the fund in 2012 to meet budget targets, leaving it with just a fraction of its holdings.

Still, energy experts point out that Brazil has strengths lacking in many other oil-rich countries such as Venezuela, including trusted institutions such as the Federal Police, which revealed the scandal to the nation, and the Supreme Court, which authorized investigations of an array of influential legislators. And a diverse economy, including a cutting-edge agricultural sector and a broad industrial base, reduces the reliance on oil. Petrobras also has technical expertise when it comes to finding and producing oil in complex offshore fields.

“Despite all the government meddling and the culture of corruption at the top of the company, Petrobras is still doing quite well on an operating level,” said Cleveland Jones, a geologist at the State University of Rio de Janeiro.

Even so, the oil scandal contributing to Brazil’s economic quagmire is fueling a broader re-evaluation of the policies that strengthened the role of state-controlled enterprises under Ms. Rousseff. Even her own finance minister, Joaquim Levy, is questioning the wisdom of giving so much power to corruption-plagued companies like Petrobras.

“State capitalism doesn’t work very well in a democracy,” Mr. Levy said in a speech to business leaders in São Paulo this week.