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On January 1, 2015, Brazilian President Dilma Rousseff began her second term marred by the corruption scandal at Petróleo Brasileiro S.A. or Petrobras, the state-run oil giant and largest company in the nation. During her address before the National Congress, President Dilma affirmed her commitment to “rigorously investigate all the wrong done and strengthen [Petrobras] even more… and know how to punish [those involved], without weakening Petrobras, or diminishing its importance for the present and the future.”

The Petrobras corruption scandal erupted in March 2014 with the Federal Police money-laundering sting, codename Operation Car Wash, executed across six states and the Federal District (Brasília). They seized R$5 million (US$1.9 million) in cash, 25 luxury cars, jewelry, paintings, and weapons. Among the seventeen people arrested was Alberto Youssef, a black-market money dealer and suspected leader of the scheme.

Three days later, the Federal Police arrested Paulo Roberto Costa, ex-director of Petrobras’ refining division from 2004 to 2012, suspected of destroying and hiding incriminating documents of the scheme. After receiving a luxury car in March 2013 from Youssef, Costa became a person of interest.

Costa was also under investigation by the Federal Public Ministry for irregularities in the 2006 Petrobras purchase of the Pasadena Refinery in Texas, USA. What began as a US$360 million deal with the Belgian owners ended as a US$1.24 billion loss for Petrobras.

Pasadena Refinery owned by Petrobras –Texas – USA
Photo Credit: Business Week

In exchange for leniency, Youssef and Costa signed plea bargains, agreeing to provide details of the money-laundering scheme. Costa’s testimony revealed much more. He confessed to his role in orchestrating a massive kickback scheme involving Petrobras and Brazil’s largest construction and engineering companies (see list), with contracts ranging from refineries to offshore drilling rigs valued at R$59 billion (US$22 billion). In turn, these companies diverted three percent of the inflated value of their contracts into slush funds for politicians and their political parties.

President of the Tribune of Accounts of the Union, Minister Augusto Nardes, considers the Petrobras scandal the greatest corruption scheme yet discovered in Brazil. Operation Car Wash uncovered a money-laundering scheme that diverted R$10 billion (US$3.8 billion) from Petrobras. The Minister believes it will be difficult to combat corruption without improving governance. “Corruption is difficult to remove from humanity. But without organization the existence of fraud becomes much easier.” He has proposed the creation of a network against corruption in Latin America, to be launched in Peru.

The corruption scandal, compounded by the global decline in crude oil prices, has contributed to almost a 50 percent reduction in Petrobras’ shares on the stock market. Valued at US$84.7 billion at the end of 2013, Petrobras’ market value has fallen to US$49.4 billion with debt liquidity of over US$91 billion.

Will Petrobras regain the confidence of investors? Will the fallout of the corruption scandal lead the country, already facing a stagnant economy, into recession? With the Russian economy heading for a deep recession, what lies ahead for the BRICS New Development Bank?