Brazilian politics over the last few years have been a roller coaster ride. Former president Dilma Roesseuff was impeached from office, once beloved president Lula is imprisoned for illegally accepting an apartment from a powerful construction company, and the current Brazilian president the least popular president in the Americas. Operation Car Wash, a major anti-corruption probe has implicated 28 powerful corporations, and almost all of the nations political class. Ordinary Brazilians are fed up with the corruption of their elites, and the upcoming elections in October of 2018, are expected to be the most volatile in modern Brazilian history. Today’s podcast episode is about the scandal at the heart of the crisis, the massive corruption scandal at Brazil’s state owned oil giant, Petrobras. The podcast will cover the history of Petrobras, the broader political system in which it functions and the incentives it creates for corruption, and the scandal that destroyed Petrobras’s reputation.

Petrobras, at first glance, is the last state owned company one would expect in the middle of a corruption scandal. It has a long standing reputation for honesty and good governance. Brazilian politicians, both civilian and military, have allowed it to hire the best and brightest engineers without political interference. It has long been a trail blazer in deep see oil drilling, winning awards for its innovative approach for squeezing oil out of Brazil’s challenging geology. It, despite the current scandal, has the lowest costs for recovering pre-salt oil in the world, with costs of extraction only at $8 per barrel. Moreover, the Brazilian government partially privatized Petrobras and opened up Brazilian oil fields to international competition in the 1990s, reducing the scope for politicization of decision making, and forcing Petrobras to invest into maintaining global competitiveness. By 2009, Petrobras was the 25th largest corporation in the world, with a market capitalization of $110 billion, and annual sales of $90 billion.

However, Petrobras could not permanently escape to institutional weaknesses of Brazil’s political system. The root of this problem lies in Brazil’s political system, especially its electoral system. The 2014 Brazilian election cost somewhere between $ 2 billion and $ 4 billion USD. On a per capita basis, Brazilian elections cost almost as much as American elections, despite the fact the Brazilian economy is much smaller than that of America. Corporations the rely heavily upon government largess, especially Brazilian construction giants that rely upon massive public works projects, that donate most heavily to politicians. Brazilian politicians often represent their donors more than they do the voters who voted them into office. Once in office, politicians show little loyalty to party or ideology. Instead, they are most interested in reelection, pork-barrel politics, and scratching the backs of the corporations that financed their election campaigns. Unsurprisingly, Brazilian politicians find it easier to simply bribe politicians to vote the right way. In 2005, Brazil was rocked by a scandal when it was discovered the workers party paid $12,000 a month to opposition politicians to vote the right way. As Petrobras grew in scale and power, it became harder and harder for it to avoid this corrupt political system.

The major discoveries of oil in the late 2000s changed Petrobras’s relationship to the rest of the Brazilian state. The government desired Petrobras to build oil refineries in the poorer regions of the country, ships built using unionized labor, and local content requirements to bring high technology manufacturing to Brazil. In order to accomplish these goals, the government appointed technocrats beholden PT, who didn’t necessarily think of the profits of Petrobras first in its decision making. However, these politicized technocrats were quickly enmeshed into the political system. The basics of the Petrobras scandal was quite simple. The major Brazilian construction companies organized themselves into a cartel to bid for contracts. The companies would receive inflated contracts, and would in return donate 3% of the value of these contracts to politicians. About 2% would got the PT, with the rest shared between other parties, money launderers and the technocrats. The total costs of the Petrobras proved to be massive. Petrobras lost fife sixths of its market capitalization since 2008. Petrobras lost $1.8 billion in bribes, and fined $2.1 billion by the FCC for misleading investors. The Abreu e Lima refinery, supposed to be the largest refinery in Brazil, saw costs quadruple due to corruption and mismanagement. The massive scandal at Petrobras turned what should have been a golden opportunity to modernize the country into a fiasco.

Selected Sources:

Industrial policy and state-making: Brazil’s attempt at oil-based industrial development