Tuesday, January 31, 2017
A Corruption Investigation Clouds Brazil's Prospects for Economic Reprieve
A Corruption Investigation Clouds Brazil's Prospects for Economic Reprieve
The past few years have been difficult for Brazil's economy. But after two straight years of recession, things are looking up. By mid-January, the country's inflation rate had fallen to just below 6 percent, its lowest level since March 2014. Reduced inflation prompted the central bank to start cutting interest rates, which now stand at 13 percent. (Economists expect the rate to be under 10 percent by the end of the year.) Confidence in Brazil's manufacturing sector is on the rise, meanwhile, and its current account deficit dropped to $23 billion in 2016, down from $104 billion two years earlier. The Brazilian economy could even start growing again this year — so long as its domestic political affairs don't get in the way.
Brazil badly needs its economy to start growing again. A crash in commodity prices in 2014 diminished the country's export revenues and caused its real gross domestic product to contract by 3.8 percent in 2015 and by 3.5 percent in 2016, according to the International Monetary Fund. At the same time, rising fuel and electricity costs following years of government price controls sent inflation into the double digits over the past two years. The central bank also bumped interest rates up to 14.25 percent in early 2015.
To make matters worse, a corruption investigation dubbed Operation Car Wash plunged the country into turmoil when it was launched in 2014, ensnaring many of Brazil's top corporations, along with some of its most prominent politicians. Many of Brazil's biggest companies have had to pay billions of dollars in penalties over bribery cases uncovered in the investigation. The corporations have suffered other hardships as well, losing government contracts and access to credit. This has brought work on major construction projects, including refineries, nuclear power plants and roads, crashing to a halt. Adding to the upheaval, the investigation has brought down several political officials, such as former President Dilma Rousseff.
Turning a Corner?
But now, projections suggest that Brazil's economy will grow this year — for the first time since 2014 — by 0.2 percent. Acting President Michel Temer has been instrumental in turning the economy around. Despite his low public approval ratings, Temer has managed to pass critical economic measures, including a bill to cap spending and a regulation on pre-salt oil. In addition, the legislature is reviewing proposals for labor and pension reforms. Though the initiatives are unpopular with Brazilian voters, lawmakers have rallied behind them for fear that the necessary reforms would fall by the wayside once the next administration takes over in January 2019. Other factors bode well for Brazil's economy, too. For instance, Brazil will probably experience less fallout from the new U.S. administration's potential protectionist policies than Mexico will. Brazil has much lower trade and immigration exposure to the United States than does Mexico, and trade accounts for a lower portion of its GDP.
Still, a recovery is far from guaranteed, and new twists in the Operation Car Wash scandal could cloud Brazil's economic and political outlook this year. Construction firm Odebrecht — one of the largest enterprises not just in Brazil but in all of Latin America — was among the companies swept up in the investigation. After Brazilian, U.S. and Swiss authorities sued the firm for making illegal political donations and manipulating government contracts, the company agreed Jan. 21 to pay more than $2.5 billion in damages, the largest anti-corruption settlement in history.
Odebrecht's massive settlement is the least of the Brazilian government's worries, though. A plea bargain related to the case could implicate Temer, along with roughly 25 percent of Brazil's congress members, in accepting illegal donations from the firm. Testimony from the company's executives may well lead the Superior Electoral Court to rule that Temer received illegal funds for his vice presidential campaign and could take down essentially all of Brazil's mainstream politicians. If the court rules against Temer, he will have no choice but to resign, which would plunge Brazil back into political uncertainty and delay the economic measures that his administration has pursued. The decision would also change the playing field for Brazil's 2018 presidential election.
The recent death of Supreme Court Justice Teori Zavascki, who was overseeing the investigation, gave the government some hope that the court would delay its plans to make the Odebrecht testimony public in mid-February. In the meantime, Temer and Chief Justice Carmen Lucia began the process of replacing Zavascki on Jan. 23. (Presidential aides have said Temer will wait for a new rapporteur to be appointed before picking someone to fill the vacant seat.) On Jan. 30, Lucia ratified the plea bargain deal, though she ruled to keep the testimonies involved secret. Now the general prosecutor will review the testimonies to decide whether to open new cases.
Whatever the court decides, Brazil's political order and economic prospects hang in the balance. If Temer emerges unscathed, the resulting political stability would bode well for a return to growth. If, on the other hand, the acting president is implicated and forced to resign, the country will probably spend another year in recession.
RIO DE JANEIRO — Eike Batista, the fugitive oil-and-mining tycoon wanted in connection with Brazil’s far-reaching corruption investigation, flew home from New York on Monday and surrendered to the police, who placed him temporarily in a notoriously overcrowded prison.
Mr. Batista’s case has generated intense interest in Brazil, where he was once the richest man and is still a household name. TV Globo interrupted programming to show the arrival of his plane and the police placing him in a squad car, part of the convoy of vehicles that accompanied him to the prison as a news helicopter followed.
Mr. Batista was photographed looking tired and wan on the plane by the Rio newspaper O Globo, which reported he did not dine and just drank two glasses of milk. He took photographs with admirers and slept.
He had been considered a fugitive since Jan. 26, when the police went to arrest him at his Rio de Janeiro mansion as part of the national corruption investigation, which has entangled dozens of politicians and business leaders. Officers found he had left the country on Jan. 24 on a flight to New York.Continue reading the main story
His name was then included on an Interpol wanted list, a spokeswoman for Federal Police said.
Police investigators have said they suspect Mr. Batista paid $16.5 million in bribes to the former Rio state governor Sérgio Cabral, who has been incarcerated since November, accused of running a corruption ring.
Interviewed at Kennedy Airport in New York on Sunday night, Mr. Batista said he believed he had done nothing wrong, telling TV Globo that he was coming home to “help clean things up.”
“I am coming back to respond to the justice system, as is my duty,” Mr. Batista said. “I’m coming back because sincerely I am going to show what things are like. As simple as that.”
Mr. Batista’s flight to New York two days before the police sought to arrest him has raised questions over why he was even allowed to leave the country, given that the legal order for his arrest had been issued on Jan. 13.
The Federal Police spokeswoman, speaking on condition of anonymity in accordance with government policy, said officers had received the order the day before they sought his arrest.
The spokeswoman said Mr. Batista was taken to Ary Franco, one of the country’s most overcrowded and filthy prisons.
Gutembergue de Oliveira, president of the Rio penal system workers union, said that Ary Franco currently holds more than 2,000 prisoners, more than double its capacity of around 970.
“It’s like a dungeon. The light is bad, it’s old,” he said.
With his head shaved, Mr. Batista was then moved to another prison, the Bandeira Stampa Public Prison, also known as Bangu 9. “The conditions are better there,” said Mr. de Oliveira, adding that the prison does not suffer the same level of overcrowding and is not dominated by any one prison gang.
Fernando Martins, a lawyer acting for Mr. Batista, told the G1 news site that he had not yet been given access to his client.
Mr. Batista’s arrest punctuated a comedown for the billionaire, once seen as a shining example of a confident, booming Brazil. His ascent symbolized a developing country that had seemed to successfully combine private enterprise with social justice and was riding high on surging commodities prices.
The 2008 public offering of stock in Mr. Batista’s oil company, OGX, raised more than $3.6 billion. He assembled an empire that included mines, oil fields, electricity generating plants and even Rio’s landmark Hotel Glória.
Mr. Batista was feted by the former presidents Luiz Inácio Lula da Silva and Dilma Rousseff from the leftist Workers’ Party, as well as celebrities and sports stars. He received more than $4 billion in loans and investments from the national development bank, and his wealth reached $34.5 billion in 2012.
But Mr. Batista’s empire began to unravel when his oil fields delivered a fraction of the production promised and investor confidence in his network of companies nose-dived. His oil company went into bankruptcy protection proceedings in 2013.
Brazil’s fortunes have suffered along with Mr. Batista’s — the country has been mired in a recession for nearly three years, and the Workers’ Party and its former allies are entangled in the corruption scandal, which centers on the state-run oil company, Petrobras. Ms. Rousseff was impeached last August, accused of breaking budget laws.
Since the Petrobras investigation, known as Operation Car Wash, began in 2014, it has led to scores of arrests — including politicians, middlemen and business executives.
The investigation expanded to ensnare Mr. Cabral, the former governor, and his wife, Adriana Ancelmo, a lawyer, and both were imprisoned. Investigators say Mr. Cabral and his conspirators accepted bribes from some of the companies involved in the Petrobras scandal.
He and his wife are alleged to have spent millions of dollars on jewelry, luxury travel and clothes. The state of Rio is nearly insolvent, struggling to pay salaries and mollify enraged employees.
Mr. Batista was close to Mr. Cabral and came under scrutiny for permitting the former governor and his family to use his private jet in 2011.
This is not the first time Mr. Batista has faced legal problems. He was tried in 2014 on charges of insider trading and stock market manipulation, but the case was suspended in February 2015 after the presiding judge was filmed driving Mr. Batista’s seized Porsche.
The judge was removed from the case. In November 2015, regulators barred Mr. Batista from serving as a corporate officer for five years.
In another interview with Brazilian reporters from TV Globo and the O Globo newspaper at Kennedy Airport, Mr. Batista praised Operation Car Wash, which he said was “full of young, competent Brazilians.”
“What is happening will make Brazil a country that everyone wants to invest in. For this, once this difficult phase is past, in the future everyone will give a different note to Brazil in terms of transparency,” he said.
He added: “If mistakes were made you have to pay for the mistakes that you did. It’s like that.” But asked if he had made mistakes, Mr. Batista replied: “I don’t think so.”