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Petrobras Scandal Threatens Brazil's Political, Business Elite

Police officers stand in front of the Petrobras headquarters during a protest in Rio de Janeiro, March 4, 2015.

A corruption scandal at state-run oil company Petrobras has entered a volatile new phase that could lead to jail for some of Brazil's best-known politicians and business leaders while making a likely recession even worse.

A prosecutor's motion Tuesday to open investigations against 54 individuals, reportedly including the leaders of both chambers of Congress, means a swath of Brazil's political elite now feels threatened.

The real-world consequences were made clear right away, as the head of the Senate lashed out by cancelling a presidential decree critical to President Dilma Rousseff's plans to close a gaping hole in her government's budget.

Financial markets plunged, with the real dipping below 3 per dollar for the first time in a decade, as investors feared political volatility could cause Brazil to lose its investment-grade credit rating and worsen an economy already expected to post its biggest contraction in a quarter-century in 2015.

The more serious threat to Brazil's stability may come not from the politicians, but from people who are already in jail because of the case.

About a dozen executives from some of Brazil's biggest construction and engineering firms have been under "preventive arrest'' since late last year.

Sinking revenues

Their companies, which prosecutors suspect helped corrupt Petrobras executives and politicians misappropriate billions of dollars, have seen revenues plunge as a direct result of the scandal.

The executives believe that, for all the unrest in Brasilia this week, the politicians are still likely to get off easy in comparison, a political source who has had contact with some of the firms told Reuters.

No actual charges were filed Tuesday, despite expectations to the contrary just weeks ago.

Under Brazilian law, senior politicians can be tried only by the Supreme Court, a process that most experts believe would take five to seven years, or longer, before anyone was jailed.

The source said the executives feel ''abandoned'' and more inclined to cut plea bargains that would result in less jail time in return for telling everything they know about the graft scheme at Petrobras, whose formal name is Petroleo Brasileiro SA.

Two executives for Camargo Correa, one of the firms being investigated, already agreed to such a deal last week. That could lead to even more new evidence and accusations in the case.

The executives "believe they are being made to be the scapegoats,'' the source said. "They don't want to accept that.''

Saving the companies

Meanwhile, there is the separate question of how to save the companies, which are already banned from taking new contracts with Petrobras and have had access to credit dry up.

That could involve a different kind of deal to essentially halt the scandal's spread and, in time, allow the companies to resume business with Petrobras and others. Such leniency accords are negotiated with the office of Brazil's comptroller general, who is appointed by the government.

Rousseff's government, worried that the companies will otherwise resort to massive layoffs and abandon infrastructure projects, has shown willingness in recent weeks to help them reach such an accommodation, said a lawyer representing one of the companies.

Luis Inacio Adams, the administration's top lawyer, has made recent statements defending leniency deals.

The companies' proposal of what a deal would look like has also evolved, the lawyer representing a company said. They hope to pay fines and admit wrongdoing without admitting criminal behavior, which because of clauses in their bonds would be financially disastrous.

Examples from U.S.

Another lawyer working on the Petrobras case cited post-Enron corruption cases in the United States, such as a 2008 settlement involving German engineering group Siemens, as models because they involved stiff punishment but did not destroy the companies.

However, as with many aspects of the Petrobras scandal, much is beyond the control of Rousseff or any one group.

Under Brazilian law, criminal wrongdoing by individuals is not covered under corporate leniency deals. That means the executives now in jail face the prospect of staying there.

A leading prosecutor also filed an injunction last month to stop the government from brokering precisely the kinds of deals the construction companies want.

While the motion's effect is unclear, it signals that Brazil's prosecutorial bodies, which enjoy near-total independence from politicians, will push back hard against any agreement.

Many Brazilian voters oppose a deal that would let the accused off easy. Demonstrations planned for March 15 to demand Rousseff's impeachment have some politicians fearing a repeat of 2013, when anti-government protests swept the country.

The prevailing view is that the scandal has taken on a life of its own and will spread further if any of the numerous parties under pressure buckle.

"The corruption case has contaminated everything,'' Rubens Bueno, a legislator for the opposition Popular Socialist Party, told Reuters. "There is no end in sight.''