On April 21, 2015, an estimated half a million Brazilians took to the streets to call for President Dilma Rousseff’s impeachment over the billions embezzled from Petrobras (Brazil’s semi-public energy company). Yet President Rousseff did not even have to leave office to lose her power. Four days earlier, Rousseff gave her vice president, Michel Temer, who is from a different political party, control over her political agenda with Congress, effectively leaving her a lame-duck president with four years remaining in her second term. To regain control, Rousseff will need to focus her efforts on two priorities: lifting a stagnant economy and mitigating the fallout from Petrobras’ massive corruption scandal.

The Perfect Storm

Over the last decade, Brazil’s economy expanded rapidly—fueled by a rise in commodity prices and Chinese demand—reaching 7.6 percent growth in 2010. Yet over the past two years these same drivers brought the economy to a halt, with slower economic growth in China meaning lower revenues for Brazil. In 2014, the economy grew less than 1 percent and the International Monetary Fund (IMF) projects a recession in 2015.[1]

Figure 1: Brazil’s GDP Percentage Change by Quarter, 2008-2014

Source: Instituto Brasileiro de Geografia e Estatística (IBGE), July 2015.

Inflation, which cuts into Brazilians’ purchasing power, has also increased despite the government’s best efforts to control it. In April 2015, inflation reached 8 percent, surpassing the Central Bank’s 6.5 percent benchmark.

As in most countries, Brazilians’ economic wellbeing is closely connected to their general support for the government. The economy played a central role in last year’s presidential election, in which Rousseff was re-elected with a razor-thin margin. The main opposition presidential candidates ran on economic reforms pledges, highlighting the uncertainty surrounding the Brazilian economy’s future.[2] Now back in power, Rousseff’s political capital remains tied up with Brazil’s economic performance, and the more painful the conditions, the less political power she will wield.

Petrobras’ corruption scandal further damaged Rousseff’s domestic agenda. The scandal broke out in March 2014, when the Brazilian federal police began investigating a money-laundering scheme within the national energy company. The scheme worked by inflating the cost of Petrobras’ projects and contracts, and then channeling the extra revenue to Petrobras directors, CEOs of private companies, and politicians, of which members of Rousseff’s own Partido dos Trabalhadores (Workers’ Party or PT) were the main benefactors. More than forty high level politicians—including the presidents of both houses of Congress and the chairmen of multiple political parties—are under investigation.

Petrobras has felt the hit from the momentous events, with the firm’s stock value dropping and complications for the energy giant’s investment plans. On April 23 of this year, Petrobras published results showing an overall loss of US$7.2 billion, with US$2 billion estimated to be money lost to corrupt individuals.[3] Given Petrobras’ significant role within Brazil—it is the country’s largest company, with annual revenues of about 8 percent of GDP—this puts further constraints on an already fragile economy.[4] Similarly, the firm also estimated a loss of US$14.8 billion caused solely by the decrease in the value of its assets.[5]

The latest announcement came hours after Paulo Roberto Costa, Petrobras’ former supply director, was convicted of money laundering. The announcement also arrived after the federal police arrested João Vaccari Neto, former PT party treasurer, on April 15, after charging him with receiving irregular donations from some of Petrobras’ suppliers.[6] Vaccari Neto’s arrest brought the scandal one step closer to the president. Although President Rousseff declared a “war against corruption,” 87 percent of Brazilians believe that she knew about the scandal while heading the company from 2003 to 2010—derailing her image of being tough against corruption.[7]

Brazilians have responded angrily. A recent Brazilian Datafolha poll puts Rousseff’s disapproval rating at 60 percent, with a mere 13 percent approving of her government.[8] The political consequences of such figures are resounding. With such a high disapproval rating just five months into her second term, members of the government coalition are trying to distance themselves from her. Meanwhile, the opposition is becoming even bolder.

The PMDB Asserts Its Power

These developments, as well as Rousseff’s razor-thin victory in October 2014, created the atmosphere for a political putsch within the governing coalition.[9] For years, the Brazilian Democratic Movement Party (PMDB) has resented the PT’s control over the political agenda and over critical ministries and agencies. As a junior partner, it has delivered votes to the PT governments in Congress (since Lula’s election in 2003) and has received little in return, with the exception of six out of Brazil’s twenty-seven ministries and the vice presidency. Further, while members of the PMDB control the powerful agriculture and energy ministries, they would have preferred more important posts such as leadership of the finance ministry.[10] Similarly, Vice President Temer was relegated to the position of president-in-waiting, playing a largely symbolic role during Rousseff’s first term.[11]

Now, however, the PMBD is increasingly assuming power. On February 1, 2015, Eduardo Cunha, PMDB deputy for Rio de Janeiro, was elected on the first ballot as president of the Chamber of Deputies.[12] This position is of strategic importance since it controls the legislative agenda. Furthermore, Cunha ran a campaign to make the chamber independent of the executive, a clear sign that the lower house would not follow Rousseff’s leadership. Since Cunha’s election, he has pursued his own agenda, even vetoing Rousseff’s candidates for ministers.

Comparable political maneuverings have occurred in the Senate. Renan Calheiros, a PMDB senator from Alagoas, a Brazilian state in the northeast, was reelected on February 1, 2015 and has run the upper chamber in a similarly autonomous manner.[13] Faced with a more independent Congress, President Rousseff had no choice but to hand the legislative agenda over to her vice president and the PMDB’s leader.

This situation has created a new development in Brazilian politics in which a parliamentary system has descended over Brazil’s presidential regime. While Brazil’s constitution creates a presidential, multi-party system, never before has the president, as the head of state and head of government, been pushed to the sole role of head of state. For all intents and purposes, Vice President Temer has become the chief of staff and leader of the executive branch, while Cunha has taken the mantle of prime minister in the Chamber of Deputies. In response, many in Brasilia have jokingly named the Chamber of Deputies the “House of Cunha,” a reference to Netflix’s popular House of Cards television series.

The “Current” Status Quo to Remain in Place

The PMDB’s control over the Brazilian government will not lead to radical policy changes, but it will hold back Rousseff’s and the PT’s agenda. President Rousseff has attempted to regain control on the economic front—appointing technocrat and University of Chicago graduate Joaquim Levy as finance minister to boost financial markets’ confidence. Levy’s policies have already tightened Brazil’s budget, ending subsidies and other wasteful government payments. These policies are likely to continue, along with the other austerity measures he has put in place.

However, austerity measures are unpopular with Rousseff’s constituency. The dissatisfaction between the PT and its electorate raises tensions between the president and her finance minister. In a private meeting, Levy criticized Rousseff by saying she did not always make effective decisions, a statement that would not have been tolerated during Rousseff’s first term. Yet Levy has maintained investors’ confidence, and his independence is seen as critical for the economy’s eventual recovery.[14] Rousseff’s dependence on Levy shows her loss of political support.

It is not all bad news for Rousseff. It is unlikely that there will be any impeachment process stemming from her involvement in the Petrobras scandal. Although Cunha defected from the government coalition and is considering articles of impeachment, he has also acknowledged that it would be damaging for Brazil’s institutions.[15] Cunha’s decision was also personal, as the speaker has been accused by Julio Camargo, a former lobbyist tied to the Petrobras scandal, of receiving R$5 million (US$1.5 million) in dividends.[16] For its part, the PMDB, including both Temer and Calheiros, announced that Cunha’s decision does not follow the party line and that it will remain in coalition with Rousseff’s PT.[17]

To restore her political power, President Rousseff needs to regain Brazilians’ confidence in clean governance and in the economy. Her first step should be to expand anti-corruption operations and fully cooperate with the prosecutors and Rodrigo Janot, Brazil’s attorney general, who has been at the forefront of the Petrobras investigation.[18] Cunha’s revolt shows that Rousseff has not intervened in the investigation, a great step forward. Similarly, Rousseff should make a public statement that neither she nor the PT will prevent prosecutors from investigating any politician (whether a member of the PT, PMDB, or other party) or interfere if they are convicted. Lastly, Rousseff should work closely with Temer, Levy, and Calheiros to ensure that her economic policies pass through Congress—especially with Cunha now in the opposition—and help revitalize the economy.

Having governed for four years without needing to compromise, President Rousseff now needs to learn how to share power. If she does so, Rousseff could salvage the remainder of her presidency, but any moves to the contrary could see her become irrelevant for the remainder of her term.

About the Author

Luis Ferreira Alvarez is a Houston-based energy and political analyst focusing on Latin America. He has an MPA from Cornell University and a BA from the University of California, Berkeley.