The Kickback That Killed Brazil

Itaboraí was once a petro-boomtown; it’s now an empty shell. How the Petrobras mega-scandal is destroying ordinary lives and bringing down the rich and powerful.

Gas tanks of Brazilian state-owned oil giant Petrobras are seen along the Negro river in Manaus, state of Amazonas, Brazil, on November 23, 2013. Manaus will host 4 matches during the FIFA World Cup 2014. AFP PHOTO / YASUYOSHI CHIBA        (Photo credit should read YASUYOSHI CHIBA/AFP/Getty Images)
Gas tanks of Brazilian state-owned oil giant Petrobras are seen along the Negro river in Manaus, state of Amazonas, Brazil, on November 23, 2013. Manaus will host 4 matches during the FIFA World Cup 2014. AFP PHOTO / YASUYOSHI CHIBA (Photo credit should read YASUYOSHI CHIBA/AFP/Getty Images)

RIO DE JANEIRO — Underneath the tiled awning of her whitewashed veranda, Cassia Gonçalves Moreira, 46, scoops clumps of damp pastry from a large plastic tub, rolls them between her hands, and methodically lines the bottom of a dozen or so small tins arranged on the table in front of her.

Next comes the filling: cheese, chicken, or hearts of palm. Then, she molds another dollop of pastry for the lid, before placing the completed empadas on a metal tray. A faint smell of rising dough drifts through the open door. Once she has cooked enough, she will put on her Brazil soccer shirt and start her daily trek around Itaboraí, a town a few miles east of Rio de Janeiro, across the Guanabara Bay, selling each empada for 3 real ($1).

“They don’t exactly pay for everything,” she said. “In fact, they don’t even cover the cost of the rent here. Still, they keep us from starving.”

To try to make ends meet, Moreira is falling back on the baking she first learned from her mother, when she was a child in the neighboring state of Minas Gerais. Until last December, however, she had spent most of her working life soldering metal in industrial plants across the country. For the last four years she worked at Comperj, a petrochemical complex on the outskirts of Itaboraí.

Ten years ago, Itaboraí was a commuter town, a home for those who could not afford to live in Rio, with some minor agricultural activity in its surrounding fields. What little local fame it enjoyed derived principally from the quality of its oranges.

But in 2005, then-President Luiz “Lula” Inácio da Silva laid the foundation stone for Comperj, a 17-square-mile refinery complex due to be the largest in Latin America. While Petrobras, Brazil’s state-run oil company, had an enviable reputation at the time for its technological prowess and managerial competence, it lacked refining capacity. Comperj was designed to plug that gap. According to Petrobras’s own website, the plant is due to open in August 2016 and will process up to 165,000 barrels of petroleum per day. By February 2015, it was 82 percent complete, according to the company.

From the moment construction began in 2005, tens of thousands of Brazilians flocked from across the country to Itaboraí in search of work opportunities. According to Paulo César, the president of Sintramon, the main union at Comperj, the plant was expected to create up to 200,000 direct and indirect jobs. A real estate boom followed, with hotels, apartments, and shopping malls springing up across the former farming community to cater to both the high-skilled and blue-collar workers drawn to the area. Moreira joined the rush in 2011.

Now, what may be the worst corruption scandal in Brazilian history is turning Itaboraí into a ghost town. Petrobras, once the largest company in Latin America, lost half its stock value between September 2014 and January 2015, following revelations that the company had colluded with some of Brazil’s biggest civil engineering firms to overcharge on its construction contracts, with the surplus cash lining the pockets of corrupt executives and politicians.

“When I arrived here four years ago, it felt like we had won the lottery,” Moreira said. “All the professionals I knew wanted to come here. It was like a gold rush.” She brings up a video on her smartphone that her husband, Paulo Cunha, had filmed when they worked together inside the plant, in which she appears dressed in her protective welding gear, brandishing a blowtorch, and waving enthusiastically at the camera. Moreira said the footage makes her sad now. “It’s the end of our dream,” she said. “I got goose bumps when I found out I had a job here. Now, it has become a nightmare.”

Over the course of 2014, rumors about the possible implications of the corruption story in the news began to spread across Comperj. Steadily, the workforce began to diminish. Contracts at the firms building the plant were not renewed; workers were fired. In December, Moreira’s employer, Alumini, one of the dozens of infrastructure and engineering firms subcontracted by Petrobras to build the plant, summoned its staff for an emergency meeting.

“They told us that business was slow at the moment, and that they were giving us a two-week vacation,” Moreira said. “After that, things would be back to normal, full-steam ahead.”

But while on vacation, Moreira began to feel a sense of unease. On a visit to the doctor, her private medical insurance credit card, one of the perks of her job, was refused. Then the credit on her workers’ meal card, usually topped up automatically, ran out. Finally, at the first day at work after the “vacation,” the bus due to drive Alumini workers to the plant never showed up.

“The company just disappeared,” she said. “There was no one in the office. The phone rang out.” Moreira has not seen any of her monthly $1,000 salary since December. And she is not the only one. According to Sintramon, the main trade union at Comperj, around 13,000 workers from the plant have been dismissed since July. Alumini alone has laid off 2,500 employees since December.

* * *

The corruption investigation into Petrobras that has brought work at Comperj to a virtual standstill burst onto Brazil’s headlines on March 17, 2014, when federal police arrested Carlos Habib Chater, the owner of a gas station outside Brasília, accusing him of running a money-laundering service.

This was the seemingly innocuous start to Operação Lava Jato (“Operation Car Wash”), an investigation that has wiped billions of dollars off the value of Petrobras, implicated dozens of the country’s top business executives and politicians, and is even threatening to bring down Brazil’s president, Dilma Rousseff, who won re-election for a second term of office last October. The latest opinion polls, published on April 11, show her approval rating at just 13 percent, while 63 percent are in favor of initiating impeachment proceedings.

Part of the evidence against Chater came from phone intercepts from conversations with Alberto Youssef, a black-market money dealer. Youssef, who began his career selling pastries on the streets of the southern city of Londrina and then became a smuggler of electronic goods from Paraguay, has spent the last 20 years helping a network of powerful contacts send money to foreign tax havens. He had previously been arrested nine times, including for suspected money laundering.

Three days later, in a separate inquiry, the police arrested Paulo Roberto Costa, the former director of refining and supply at Petrobras. Costa was under suspicion for his part in the purchase of an oil refinery in Pasadena, Texas. Between 2006 and 2012, Petrobras paid a total of $1.2 billion to buy the facility, despite the fact it had been purchased by a Belgian oil company, Astra, for just $42.5 million in 2005.

Shortly after their separate arrests, police established that the two men were long-standing associates. They are accused of coordinating a network of senior politicians and business executives from some of Brazil’s largest engineering and construction firms to siphon off cash from Petrobras’s public works contracts.

Youssef and Costa subsequently signed a plea deal with the public prosecutor’s office in which they offered to reveal all they knew about the massive scheme in return for reduced sentences. They testified that the state oil company was overcharging up to 3 percent on infrastructure projects, with the surplus cash going to the ruling Workers’ Party (PT) and its principal allies, the Brazilian Democratic Movement Party (PMDB) and the Progressive Party (PP). André Vargas, a PT deputy from São Paulo, was the first congressman to be removed from office, following reports that he had taken trips in Youssef’s private jet.

As the revelations emerged, Petrobras’s share price began to tumble, dragging down the index of the Bovespa (Brazil’s main stock market), as well as the real. The Brazilian currency fell to a 12-year low against the dollar in mid-March.

The company’s importance to the Brazilian economy can hardly be overstated. According to Samuel Pessoa, an economist at Fundação Getulio Vargas, a respected Rio de Janeiro-based think tank, the company and its subcontractors are responsible for around 10 percent of Brazil’s economic output.

For most of 2014, Brazil’s politicians were left sweating, while the police inquiry focused on the infrastructure companies subcontracted by Petrobras. In November, arrest warrants were served for 39 senior directors from some of Brazil most high-profile companies, including Camargo Corrêa, OAS, Odebrecht, and seven others. All are major donors to Brazilian political parties.

According to prosecutors, those companies willingly colluded in overcharging on Petrobras contracts, in return for individual kickbacks and corporate favors. Now, not only the individuals involved, but the companies themselves face potentially severe penalties, including fines of up to 20 percent of their previous year’s revenues and a ban on bidding for future government contracts.

With uncertainty surrounding the future of these companies, work on some of Brazil’s major infrastructure projects has ground to a halt, or at best been reduced to a minimum. Even work on some the country’s most prestigious projects, like the controversial Belo Monte hydroelectric dam in the Amazon, could be delayed by the legal consequences of Operation Car Wash. In late March, Eduardo Paes, the mayor of Rio de Janeiro, felt compelled to reassure local and international media that the corruption probe would not delay work preparing for the 2016 Olympic Games, despite the fact that many of the companies involved in their delivery are under investigation.

Meanwhile, at Comperj in Itaboraí, only around 4,000 of the 30,000 workers previously employed at the plant remain in their jobs. Alumini, Moreira’s employer, is under investigation for overcharging on its contracts with Petrobras. It vehemently denies the accusation and claims that it is still owed $300 million from the oil company for work it has already completed.

Lawyers acting for the companies under investigation are seeking leniency accords with prosecutors, arguing that penalizing the companies too severely could have serious consequences for the Brazilian economy. The latest weekly survey of market economists by Brazil’s central bank forecasts a contraction of 1.01 percent this year.

Not everyone is convinced by the companies’ arguments. Elio Gaspari, a columnist writing for the daily newspaper Folha de São Paulo, compared their pleas to those of Brazil’s 19th-century coffee plantation owners who lobbied against the abolition of slavery. “Like them, they say, the law may forbid it, but if the law is applied, the plantations will fail. However, there is one big difference: Dom Pedro II [then emperor of Brazil] did not take donations from slave owners,” he wrote.

Prior to her election as president in 2010, Rousseff served as Brazil’s mines and energy minister and spent seven years as the chairwoman of the executive board of Petrobras. Her opponents argue that she must have known about the corruption scheme. Some are even calling for her impeachment, just three months into her second term of office, but as yet there is nothing to implicate her directly. Speaking on March 9, the president acknowledged public anger at the corruption scandal, but insisted there were no legal grounds for impeachment. “We have to respect the rules of our democracy. The election is over, there were two rounds. You cannot have a third round.”

“It’s possible that a smoking gun might appear,” says David Fleischer, a professor at the University of Brasília. “Some people say that it’s possible, but not probable. What she has to focus on now is trying to clean up the whole mess, but so far she has just installed a bunch of cover-up guys.” The new CEO of Petrobras, Aldemir Bendine, appointed by the state-controlled board in February, has spent his entire working life at the state-owned Banco do Brasil. Investors hoping for an outsider to take control were disappointed; shares in the company fell 9 percent after news of his appointment was made public.

In early March, the long wait for the names of the accused politicians came to an end. The Supreme Court announced an investigation into 49 current and former politicians, almost all of whom are from the ruling PT or its coalition allies, including Renan Calheiros, the president of the Senate and speaker of the lower chamber, and Eduardo Cunha, both from the PMDB. Though nominally a government ally, with three ministerial portfolios, the PMDB is an opportunistic political party, with many different factions. Calheiros and Cunha believe the accusations against them are designed to divert attention from the role of the president’s party. They are now threatening to derail the president’s legislative program in retaliation. On April 15, the PT’s treasurer, Joao Vaccari, a close ally of President Rousseff, was arrested on charges stemming from the investigation.

Amid the corruption scandal, Rousseff is attempting to implement an austerity program by raising taxes and cutting spending in an attempt to post a primary budget surplus of 1.2 percent of GDP this year. To this end, the government has cut subsidies to fuel and electricity, which has helped drive inflation up to over 8 percent. While sky-high interest rates may help to rein in inflation eventually, they are also limiting consumption and slowing job creation in an economy approaching recession. Many in Brazil’s labor unions are horrified by the both president’s change of tack and the weakness of her party in congress. Last week, the legislature voted overwhelmingly to approve a law allowing companies to outsource their labor force, despite the opposition of the PT.

On March 15, more than a million Brazilians took part in massive anti-government rallies in cities across Brazil. The march featured members of the opposition, Brazilians calling for impeachment, and an extreme fringe demanding military intervention. But among the marchers were also disillusioned, left-wing former PT supporters. Another major protest took place on April 12, and though numbers were down significantly from the previous month, at least 100,000 took to the streets in São Paulo alone to protest against Rousseff.

At the demonstration alongside the Copacabana beach in Rio de Janeiro, Cristiano Nascimento, 42, a university teacher, said that even though he voted three times for the PT, he wouldn’t do so again. “I’m here to show my disgust,” he said. “The country is on the wrong path and the government is pretending that everything is okay.”

* * *

Just three days before the latest anti-Rousseff demonstration, the president declared that Petrobras is back “on its feet.” But for the residents of Itaboraí, it doesn’t feel that way. Almost every other apartment building or storefront has been plastered with a for-sale or for-rent sign.

On a side street off the main road, the offices of Sintramon are a hive of activity. The labor union is trying to negotiate settlements between the workers and the plant’s subcontractors. Comperj workers of all kinds, from caterers to quality-control managers, wait patiently in the tiled foyer for news of their salaries, their companies, or even just their documentation.

Rafaela Correa, 26, has been waiting for days for news of her official dismissal, without which she is unable to claim unemployment benefits. She is not hopeful that she will return to work at Comperj any time soon. “I don’t see much light at the end of the tunnel,” she said.

Without back pay or their workers IDs, which are required for interstate travel, migrants from states outside of Rio de Janeiro are unable or unwilling to return home. Local authorities are warning of a rising tide of homelessness, with up to 20 families a week seeking municipal assistance.

Paulo César, the president of Sintramon, said that it was not unprecedented for companies working at Comperj to go bust, but in the past, the union had been able to organize severance pay and compensation. “This time things are much harder,” he said. “It’s the workers who are paying the price for all this corruption. It’s the workers who are the ones being punished.” César is reluctant to pin too much of the blame on Rousseff or her party directly. “This corruption has been happening for years,” he said. “It just so happens it’s blown up on the PT’s watch.”

But as Cassia Moreira prepares for her journey around the town selling empadas, she says she is ashamed to say she voted for Rousseff in October’s elections. “My family mocks me. People laugh at me if they find out,” she said. “I voted for Dilma. Never again. The PT no longer represents the workers.”

This story has been updated to include the arrest of Joao Vaccari.