Skip to main content

An Petrobras oil platform anchored 175 kilometres from the shores of Rio de Janeiro. The company must find about $100-billion (U.S.) to develop the Libra oil field, which the government has insisted Petrobras run and take a 40-per-cent stake in.MARCELO SAYAO

It began, Pedro Barusco told Brazil's Congress, as a personal sort of thing: He pocketed bribes from the representatives of companies that wanted contracts with Petrobras, the national oil company where he was a senior executive. An envelope of cash here and there. That was back in the 1990s.

But about a decade ago, the corruption changed, he said, and he began taking bribes in concert with colleagues, and funnelling much of the cash to political parties. It became, in his words, "institutionalized" corruption. For example, he told the Congress inquiry, he took $300,000 (U.S.) from a Dutch construction firm and sent the money on to the treasurer of the ruling Workers' Party to fund the successful presidential campaign of Dilma Rousseff in 2010.

Mr. Barusco is just one witness in a mammoth investigation into the graft scheme that is mesmerizing Brazil. But his seven hours of testimony crystallized the shift in recent days as the scandal widened from a scam at Petrobras to include top political leaders, paralyzing government at a critical moment for the country.

Prosecutors have been looking into a kickback-for-contracts scheme that siphoned off at least $3-billion at Petroleo Brasileiro SA, known as Petrobras, for more than two years. But when former executives such as Mr. Barusco began naming names in exchange for reduced sentences, the probe widened to include political figures, with the allegation that as much as 3 per cent of the value of major construction and supply contracts was diverted to a slush fund for political parties.

The Supreme Court has authorized investigation into 57 politicians and senior officials who appear on a list drawn up by national prosecutor Rodrigo Janot. It includes a former president, two state governors and a former cabinet minister. Also named are the heads of both houses of Congress who angrily denied the allegations, calling them politically motivated, and made clear that they have the power to cause serious disruption if they are not cleared.

Also named was Fernando Collor de Mello, who was president of Brazil from 1990 to 1992 and was impeached for corruption but returned to politics in 2006. The former minister of mines and energy, Edison Lobao, is on the list, as are two former presidential civil chiefs of staff. And there are 34 current members of Congress from five political parties, nearly all of them part of the ruling coalition. One of them, Jeronimo Goergen – he represents the Progressive Party, which had the dubious distinction of having the most deputies on the prosecutor's list of any party – broke down into tears at a recent news conference, sobbing, "The party is finished! We can't go on!"

President Rousseff does not appear on the list and has insisted she knew nothing of the long-running scam. Nevertheless her capacity to govern has been sharply undermined by the upheaval in Congress. She needs to make dramatic changes in economic policy in order to stave off a looming recession and a credit downgrade. But her party relies on its coalition partners to govern. One of those is the largest party, the Party for the Brazilian Democratic Movement (PMDB), and two of its most powerful figures, Senate leader Renan Calheiros and House of Deputies leader Eduardo Cunha, are under investigation.

Ms. Rousseff had a plan to hike taxes, cut benefits and slash ministry budgets. But the outraged Mr. Calheiros has already refused to take forward a bill that would increase payroll taxes, a key part of the austerity plan. Mr. Cunha hinted darkly that new appointments by Ms. Rousseff may not receive lower house approval.

"All of this is getting in the way of the fiscal adjustment and that can have very big consequences for the economy and cause a lot of political damage," said Marco Teixeira, political scientist at the Getulio Vargas Foundation, a think tank in Sao Paulo. "In any other country in the world, [Mr. Calheiros and Mr. Cunha] would have to resign, but here, being the president of the houses [of Congress] is the best way they can help themselves."

Brazil was the hottest of the emerging markets just a few years ago. Soaring commodity prices, feverish job creation and bold social investment initiatives saw 30 million people lifted out of poverty. Now, there is a pervasive pessimism here, and an uneasy sense that worse is yet to come.

Petrobras, perceived as the crown jewel in Brazil's burgeoning economy, has been ravaged by the scandal. The values of shares in the company have fallen by 65 per cent since last September. The fall in oil prices isn't helping. New exploration and drilling plans have been scaled back. The company recently announced a plan to sell off $14-billion in assets over the coming year, and tens of thousands of people have lost jobs at subsidiaries and suppliers.

Up the coast of Rio de Janeiro state, small towns that were booming in the push to build and service offshore rigs now have deserted main streets, with for-rent signs in every second window.

The economic effect has rippled out as companies under investigation – there are more than 230 of them – saw their access to credit dry up. Nearly every big name in Brazilian infrastructure and construction is on the list, which has paralyzed building work on desperately needed ports, highways and airports, and threatens projects for the 2016 Summer Olympics in Rio.

The Brazilian real meanwhile has fallen to its lowest value against the dollar in 11 years. Inflation is at 7.7 per cent and climbing. A massive drought in the industrial heartland promises to further undermine growth. Credit agencies are re-evaluating the country's investment-grade rating.

Ms. Rousseff has counselled patience in a series of speeches and media appearances while also urging the investigators to penalize individuals but swiftly free up businesses to get back to work.

The scale of the scandal has eroded Brazilians' capacity for surprise, Prof. Teixeira said. "A few months ago, when we were only starting to know the corruption scheme, none of us knew it was so organized and solid, how deep the relationship between the political and the business world was, how the money travelled around. Today, nothing surprises me any more."

Headline writers are exhausting the possible synonyms for "things get even worse." A banner front page headline in the Rio newspaper O Globo last week read, "The crisis becomes more grave."

Claudio Frischtak, an economist and infrastructure expert, said the latest revelations confirm a widely held suspicion. "We have had the sense that it's not specific to Petrobras," he said, "that it's something way beyond one or 10 or 20 individuals being corrupt, of one or two or five firms organizing a cartel. It's such a vast scam, it has to be about maintaining a group in power and for political actors to enrich themselves."

The Congress inquiry has a deadline, and should conclude in about four months. But the criminal investigation, and the ensuing legal process, will likely drag on for years. Political office holders are protected by immunity that the Supreme Court must lift, and traditionally have proven almost bullet-proof in their ability to use the notoriously slow judicial system to evade punishment.

"In the medium to long term, there could even be a positive outcome from this," Prof. Teixeira said, given the level of transparency that will have to be introduced in government contracts. "There is big potential here for improvement in our political class."

By any name, it's a big scandal

In one sign of how the scandal has morphed in recent days, the nickname by which Brazilians refer to it has changed. It was once known as the Lava Jato, or car wash, which was the code name police gave the investigation. Now, though, it's Petrolao. To put the "ao" suffix on a word in Portuguese is to declare it the biggest of its kind, making this, loosely, "the big oily payoff." The name evokes Mensalao, the name for the corruption scandal that saw 20 people including 12 senior politicians jailed for their role in a congressional bribery scheme. The Mensalao scandal broke 10 years ago and was a landmark in Brazil, where elite political and business figures have historically been able to manipulate and evade justice. The Big Oily Payoff looks set to be even bigger.

Who's who in the corruption scandal

Renan Calheiros, president of the Senate, is on the national prosecutor's list of political leaders being investigated in the bribery scheme. Mr. Calheiros, 59, grew up poor in a family of eight children, but studied law, went into politics and developed a taste for the good life. In 2007 he was forced to resign as Senate president for ethical violations, among them that his support payments for a child from an extra-marital affair were being paid by a lobbyist for a construction firm. In 2013 his Senate colleagues re-elected him; that year he also had to repay about $12,000 when it was revealed he used a government jet to fly to the city of Recife to get hair transplants. Once an ally of President Rousseff's, he has suggested he will stall legislation until he is cleared of allegations he calls baseless. He represents the Party of the Brazilian Democratic Movement, the largest group in Congress, on whom Ms. Rousseff depends as her own Workers' Party lost seats in the last election.

Eduardo Cunha, president of the lower House of Deputies, also appears on the prosecutor's list. Mr. Cunha, 56, is a consummate deal maker. He represents the liberal city of Rio de Janeiro but has cultivated the support of evangelical Christians and virulently attacked gay rights and abortion access. These days people call him Brazil's Frank Underwood, after the Machiavellian House of Cards character. Mr. Cunha, too, has said he will obstruct legislation while he stands accused, unjustly he says, of involvement in the case.

Dilma Rousseff, 67, isn't on the prosecutor's list and has repeatedly insisted she knew nothing of the kickback scheme. She did serve as chair of Petrobras for seven years, until 2010, through the years of the alleged rampant graft. She was re-elected to a second term by a narrow margin in November, and at her inauguration in January vowed to weed out corruption. Last month, 77 per cent of those surveyed in a national poll said they believed she knew about the Petrobras corruption, and just 23 per cent said they think she is doing a good job – a drop from 42 per cent in December, and due almost entirely to this case. There have been some limited protests against her presidency in recent weeks; her opponents are invoking impeachment (for which there are no grounds at present) and vowing larger demonstrations.

Rodrigo Janot, 57, was named the country's chief prosecutor by Ms. Rousseff in 2013. His term expires in September, and Senate leader Mr. Calheiros is vowing he will not be renewed. He kept the country on tenterhooks for months before sending the much-discussed list to the Supreme Court last week, and came under heavy criticism for posing for pictures with protesters carrying signs reading, "Janot, you are the country's hope."