Brazil: Oily mess

Petrobras: the key players In Brazil's hyper-consumerist society, people are accustomed to paying for everything in instalments, from fridges and televisions to silicon breast implants. But less commonly known is that even bribes to political parties can allegedly be paid parcelado, as the practice of paying in instalments is called.

That is what Augusto Ribeiro de Mendonca Neto, a former board member of oil and gas services company Toyo Setal, claimed in testimony in March. He alleges that he paid bribes to the ruling centre-left Workers' party, or PT, between 2010 and 2013 in exchange for winning contracts with state-owned oil company, Petrobras.

The allegations form part of an investigation into a vast corruption scandal at Petrobras known as "car wash". As part of the probe, Mr Mendonca told prosecutors that Joao Vaccari Neto, former PT treasurer, asked him to disguise the bribes as payments to a printing and advertising company named Editora Grafica Atitude.

"The collaborator [Mr Mendonca] said payments made to Editora Grafica Atitude by his companies, SOG/Setal, were in the order of R$2.5m ($822,440) [and] that these were made in monthly instalments," prosecutors cited him as saying as part of a plea bargain. The allegations are in a court order authorising Mr Vaccari's arrest in April.

Mr Mendonca's account is one of a growing number alleging endemic corruption by the ruling party of President Dilma Rousseff and its coalition. The accusations - which are denied by Mr Vaccari and the PT - together with a gathering economic recession have thrown into crisis one of Latin America's longest-serving ruling parties, and are threatening to reshape the political future of the continent's largest country and most important economy.

So deep is the disenchantment - with critics accusing the PT of using Petrobras as a source of illicit funds to help it maintain power - that even the party's most senior politician and foremost champion, Luiz Inacio Lula da Silva, the former president, is coming under direct fire for the first time. A preliminary investigation was opened this month to look at separate allegations that he has engaged in illegal influence peddling in his business dealings in Cuba and Africa.

Mr Lula da Silva was one of the world's most popular politicians when he left office after eight years in 2010. Yet this month he was subjected to a panelaco, a Latin American protest in which people bang pots and pans in their homes, when he appeared on TV to champion the PT's stance on workers' rights.

"Not in recent history has Lula faced anything like that panelaco," says Fernando Schuler, professor at Insper in Sao Paulo. "Before, the difference was that these movements were against Dilma, now they are hitting Lula."

Seeking payback

One of the main sources of discontent with Mr Lula da Silva, Ms Rousseff and the PT are the problems at Petrobras, a company once regarded as a national champion for its prowess in deepwater oil exploration. Although not accused of direct involvement in corruption, Ms Rousseff was chairman when much of the wrongdoing took place and Mr Lula da Silva was president.

This week, Aldemir Bendine, the new head of Petrobras, attended an unusual event in Brasilia. Hosted by the attorney general, Mr Bendine received on behalf of Petrobras R$157m in funds stolen by corrupt former executives that investigators had repatriated from Swiss bank accounts. The money was part of large sums diverted from Petrobras, some of which allegedly went to the PT and the ruling coalition.

"A day such as this, in which we have recovered the first sums lost through these practices, reinforces Petrobras on the path to overcoming this crisis," Mr Bendine told the ceremony.

He said the company was launching lawsuits to recuperate another R$1.3bn. But analysts say even this amount is tiny in comparison with the damage done by corruption and mismanagement.

Mr Vaccari is just one of scores of people, including 54 political figures, who are accused of receiving illicit funds from Petrobras.

The case is being driven by a group of independent public prosecutors, federal police officers and judges working out of the southern city of Curitiba. They allege former executives and mostly ruling coalition politicians accepted bribes from a cartel of construction and service companies in exchange for contracts. With Petrobras investing more than $220bn over five years, the flow of such contracts was huge.

Petrobras flirted with technical default on its debt this year when the scandal forced it to delay release of its 2014 financial results, a requirement of some bond covenants. The move also jeopardised Brazil's sovereign credit rating. When Petrobras did finally release the results last month, it revealed direct losses from corruption of R$6.2bn and an impairment charge of R$44.6bn partly related to delays on corruption-affected refinery projects.

The release of the results headed off the immediate crisis. But the company's situation remains dire. The crisis is delaying its development of giant oil discoveries off the southeast coast of Brazil, known as pre-salt - because they lie under a layer of the compound up to 7km below the ocean surface - which will make it harder to reduce its net debt load of $106bn, the largest in the industry. Energy research group Wood Mackenzie has revised down its estimates for peak production from Petrobras for the pre-salt by 900,000 barrels per day to 3.2m bpd by 2025. With oil today at around $67 per barrel, this implies an opportunity cost of $22bn a year in missed production.

On top of the losses from corruption, the company suffered further damages of R$60bn from a Rousseff policy of forcing it to subsidise domestic petrol prices between 2011 and 2014, according to an estimate by Andre Gordon, vice-president of Brazil's minority shareholder association Amec.

So severe were the losses from the subsidy scheme that Brazil's stock market regulator, the CVM, this month announced an investigation into the former board of Petrobras, including ex-finance minister Guido Mantega who doubled as chairman of the company.

"The biggest problem at Petrobras is not car wash [the corruption probe]," former company executive-turned-witness, Paulo Roberto Costa, told a parliamentary commission last week. "The [biggest] problem was the price policy implanted by the majority shareholder."

Oil bonanza

In 2007, when Petrobras announced its discoveries of the pre-salt, the PT kicked off a wave of oil nationalism. The party revived a slogan, "The oil is ours", to call for Brazil to exploit its own reserves. The original campaign had led to the creation of Petrobras in 1953.

The PT, a party born out of the struggle that helped Brazil overcome a 20-year military dictatorship that ended in 1984, promised the oil from the pre-salt would bankroll much-needed improvements in education and health. These days, critics joke that the PT really meant that the oil was literally theirs.

"The PT saw with the discovery of the pre-salt that Petrobras could become a great instrument to preserve themselves in power for the next 100 years," says Adriano Pires, founder of the Brazilian Centre of Infrastructure who formerly worked at the oil regulator, ANP.

But with the scandal deepening and the delays in production stalling, the much-promised economic windfall is running out of steam. It comes against the backdrop of the end of the commodities supercycle and a weak economy, which analysts expect to slide into recession this year.

After winning re-election in 2014 by one of the narrowest margins in recent history, Ms Rousseff hired Joaquim Levy, a Chicago-trained finance minister, to restore Brazil's sinking finances.

But many analysts question the likely strength of any turnaround in the economy and whether it will be enough to save the PT. Unemployment is creeping up and inflation is high.

The International Monetary Fund this week called on Brazil to introduce tougher fiscal austerity.

Worse for Ms Rousseff, opinion polls show that the proportion of Brazilians who see her government as bad or terrible rose to 64 per cent in March from 27 per cent in December. In March and April, Brazilians took to the streets of the country's major cities to call for her impeachment.

The weak economy and scandal have split the PT. Some dissident party members, such as former Sao Paulo mayor Marta Suplicy, say it has lost touch with its roots. "Every time I open the paper, I feel even more horrified by the [party's] excesses than the day before," she said in a recent newspaper interview .

Aside from internal divisions, the PT also faces a restive Congress. Its main coalition partner, the PMDB, now heads both the lower house and the Senate, and frequently opposes the government.

"We are now in a political mess, there is a lack of clear leadership, the congress is becoming more active in trying to compete with the executive branch," Fernando Henrique Cardoso, former president and senior opposition figure, told the Financial Times.

With Ms Rousseff taking more of a backseat - she avoided making the International Workers' Day televised presidential speech on May 1 - Mr Lula da Silva has tried to fill the vacuum.

Until this month, he still seemed able to retain his popularity. But then prosecutors revealed the inquiry into alleged illicit influence-peddling by him in Cuba and other countries amid accusations he helped Odebrecht, a construction company, win overseas contracts between 2011 and 2012. He and Odebrecht have both denied the allegations.

Mr Lula da Silva has also hinted that he might stand again in the 2018 elections. "I'm returning to the fight," he proclaimed. With almost four years, the PT can recover, say analysts. But the party's errors on the economy, the Petrobras scandal and another earlier corruption case, known as mensalao, in which close comrades of Mr Lula da Silva were convicted of vote-buying in Congress, show deep problems.

Many Brazilians remain sceptical that car wash will directly touch Mr Lula or his protege, Ms Rousseff.

"I think he [Lula] should be investigated," says Marcia Gomes, a psychologist shopping on Avenida Paulista, Sao Paulo's main thoroughfare. "But if he got out of the mensalao without any charges, nothing will come of it this time either."

Untouchables

However, if there is one thing the car wash investigation has shown, it is that Brazil's institutions - the national police, attorney general's office and courts - are maturing. Impunity for the rich and powerful remains a huge problem, but it is not as easy as it once was.

An increasing number of executives of companies involved in the scandal, such as Mr Mendonca, are queuing up to strike plea bargains with prosecutors in exchange for leniency. The more who sign up, the worse things might become for the government and PT.

Certainly, the central judge in the case seems in no mood to let up. "The world of crime cannot be permitted to contaminate the political party system," said federal justice Sergio Fernando Moro, in his ruling authorising the arrest of the PT's Mr Vaccari.

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