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Brazil's Petrobras scandal could bring down its government. Here's why.

President Dilma Rousseff (L) with just-detained former President Luiz Inácio Lula da Silva.
President Dilma Rousseff (L) with just-detained former President Luiz Inácio Lula da Silva.
(Mario Tama/Getty Images)

For the past two years, Brazil has been rocked by a major corruption scandal involving its state-run oil company, Petrobras. So major, in fact, that it looks like it might go all the way to the top. On Friday morning, Brazilian police raided the home of the country's previous president, Luiz Inácio Lula da Silva. The former president was detained for three hours of questioning, and then released.

Lula, as he's generally referred to, is a member of the same political party as current President Dilma Rousseff. He's widely seen as her political mentor. That means any charges that emerge could end up having real consequences for Rousseff and for Brazilian politics more generally.

But to understand any of this, you need to understand the basics of the Petrobras scandal itself: what happened, why it happened, and how it's become big enough to threaten the Rousseff government. What follows, then, is a very brief timeline that'll guide you through the major portions of the scandal.

2004 to 2014: the corruption scheme itself

Oil Rigs Off Coast Of Rio de Janeiro (Mario Tama/Getty Images)

For roughly 10 years, Petrobras — which is Brazil's largest company — engaged in one of the most astonishing corruption schemes ever to be uncovered in a modern democracy.

Petrobras, as a giant oil company, needs to employ a lot of builders. Some executives in Brazil's largest construction companies realized this was a way to extort a great deal of money. The scheme, which intimately involved Petrobras executives and corrupt politicians, worked something like this:

  1. Construction executives secretly created a cartel to coordinate bids on Petrobras contracts and systematically overcharge the company.
  2. A select group of Petrobras employees turned a blind eye, allowing the construction companies to charge Petrobras outrageous sums.
  3. The construction executives then pocketed the proceeds from these inflated contracts, and rewarded their partners inside Petrobras with big bribes.
  4. Some of the proceeds also got sent to friendly politicians, either as personal gifts or donations to their campaigns. Because Petrobras is partially owned by the state, politicians can often help secure jobs for Petrobras executives.

The kickbacks, the New York Times reports, "include a huge inventory of gifts — Rolex watches, $3,000 bottles of wine, yachts, helicopters and prostitutes." They continue, astonishingly:

There were also staggering sums of money, most of it flowing through a network of phantom corporations, some of it hand-delivered by an elderly gentleman who flew around the world with bricks of cash, shrink-wrapped and strapped beneath thigh-high socks and a Spanx-like vest.

All in all, the scandal appears to have cost Petrobras upwards of 5.3 billion dollars.

Crucially, all of this happened under either Lula or Rousseff's watch. In fact, Rousseff was the minister of energy during the first years of Lula's presidency (2003 to 2005) and on the board of Petrobras until 2010 (the year she was elected president).

Mid 2013 to March 2014: the arrest of a known crook breaks the case wide open

Paulo Roberto Costa, the first Petrobras official to fall.
(Evaristo Sa/AFP/Getty Images)

Brazilian prosecutors had no idea this was happening. In fact, they only uncovered it by accident.

In mid-2013, police brought in Alberto Youssef, a money launderer who had been already been arrested nine times, on yet another money laundering charge. But this time, Youssef had something very different to say.

"Guys," Youssef reportedly told prosecutors, "if I speak, the republic is going to fall."

Youssef knew about the Petrobras scandal, and started naming names. The first to fall was Paulo Roberto Costa, a former Petrobras official who was directly linked to Youssef: He had gifted Costa a Land Rover as a bribe. Police arrested Costa in March 2014, and he too cooperated. Between the two of them, police had enough information to go after some of Brazil's wealthiest and most powerful individuals.

The broader investigation, known as Operation Car Wash, officially began on March 17, 2014. It got its name, per Bloomberg, because a lot of the money was apparently laundered through an actual car wash.

It's still running to this day.

March 2015: massive political arrests and protests

Brazil protest Batman Rio
A batman at an anti-Rousseff protest holds a sign that translates as "Out Dilma."
(Steffen Stubager/Anadolu Agency/Getty Images)

Between March 2014 and March 2015, dozens of engineers, construction executives, and Petrobras officials were arrested as part of Operation Car Wash. But in March 2015, the scandal really blew up: Brazil's Supreme Court announced that it was investigating 34 politicians on suspicion of involvement in the scandal.

The speakers of both of Brazil's houses of Congress were included in the investigation. All of them, save one, were members of Lula and Rousseff's Workers' Party.

This announcement was the biggest signal to date that President Rousseff could be blamed for the scandal — after all, these people were all members of her party. Massive protests erupted around Brazil (pictured above) and many people began calling for Rousseff's resignation.

The scandal only deepened as 2015 went on. In April, police arrested João Vaccari Neto, the Workers' Party treasurer. In June, they picked up Marcelo Odebrecht, the head of the country's largest construction company.

It's important to note that no evidence, to date, links Rousseff personally to Petrobras kickbacks. But the evidence that her party is deeply involved has made the scandal into a personal issue for her: How can she be trusted with the presidency if she's surrounded by crooks?

By the end of the year, Eduardo Cunha — the speaker of the lower house of Parliament and a political opponent of Rousseff's — filed impeachment charges. Ironically, Cunha himself remains under investigation in the Petrobras scandal.

January 2016: the end of a horrible economic year

Brazilian Government Plans For Social Program Cuts Amid Recession (Mario Tama/Getty Images)

While all this was happening, Brazil was in the middle of a severe recession.

Over the course of 2015, Brazil's economy shrank by 3.8 percent. That's roughly on par with Russia, which is currently suffering under punishing international sanctions. To make matters worse, inflation is at a 12-year high, partly owing to Brazil's extremely high deficit (which is at roughly 10.8 percent of GDP).

Basically, goods are getting more expensive at the same time that economic growth is collapsing, depriving Brazilians of the cash they need to pay for more expensive stuff. It's like the stagflation the US suffered through in the 1970s, only worse.

All of this makes people even angrier at the Petrobras scandal, which only strengthens the calls to impeach Rousseff. But the scandal itself makes it harder for Rousseff's government to make moves to address the root causes of Brazil's economic woes. It's a nasty Catch-22.

"Political paralysis has hampered Brazil's efforts to tackle its economic problems," the BBC explains. "President Dilma Rousseff is trying to head off the opposition's efforts to impeach her over alleged accounting irregularities, which means she cannot afford to alienate supporters in her Workers' Party by cutting spending or raising taxes."

March 2016: the search of Lula's house

Lula.
(Nelson Almeida/AFP/Getty Images)

And now the police just went after Lula, the former president and Rousseff's mentor.

While it's unclear if Lula will eventually be formally arrested and charged, his detention shows that the scandal could escalate at essentially any time, creating even more headaches for Rousseff.

Moreover, it complicates Brazil's political future. Lula was considering running for president again in 2018 (apparently he can do that). Evidence of his involvement in the Petrobras scandal makes it harder for him to win; an arrest would make it harder still (to put it mildly).

This matters greatly. Lula, Rousseff, and the Workers' Party have spent the past 14 years enacting a left-wing populist agenda. If Lula, or the party more broadly, is discredited, Brazil could lurch to the right.

"There is much more at stake in these investigations than just Lula's personal reputation," the BBC's Daniel Gallas explains. "In order for his political project to survive, he will have to clear his name and his party's."

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