The Brazilian Political Crisis Deepens: The Centipede’s Shoes are Dropping Globally


2017-05-25 by Kenneth Maxwell

In a highly globally interactive world, crises in one part not only have an impact elsewhere, but can have an unanticipated set of impacts.

This is clearly the case of Brazil and its deepening political crises, which given the importance of the Brazilian economy and global ties, will have accelerating impacts worldwide.

This has already been seen in France where an investigation is underway with regard to the impact of corruption in Brazil on a submarine contract.

This is hardly where President Macron would like to start his mandate, but many other global leaders will be waking up to the knock on consequences of the deepening Brazilian crisis.

The Brazilian crisis is clearly deepening and rapidly so.

On Wednesday evening, 17th May, 2017, the Rio de Janeiro newspaper “O Globo” dropped a bomb-shell on Brasilia.

Its columnist, Lauro Jardim, reported on an explosive denunciation made by Joesley Batista, co-owner of JBS, which is Brazil’s largest private sector company.

During a meeting with Michel Temer, the president of Brazil, held late in the evening of March 7th at the Juburu Palace (which is the official residence of the vice-president, but where Temer prefers to live), the two men discussed the payment of hush money to Eduardo Cunha, who is currently imprisoned for 15 years and four months in Curitiba by Federal Judge Sérgio Moro in the ongoing “Lava Jato” (“car wash”) mega-corruption scandal.

This scandal involves kickbacks paid by Petrobras, the mega-Brazilian multi-national state controlled petroleum company, in bribes or inflated overcosts paid to Brazilian politicians, political parties and the political electoral campaigns, and to favored corporations for bloated and corrupt special deals.

Eduardo Cunha is the former president of the lower house of congress who orchestrated the impeachment last year of Temer’s predecessor, Dilma Rousseff.

Joesley told Temer that the bribe was intended to buy Cunha’s silence in the ongoing “car wash” (lava jato) anti-corruption investigation.

Joesley also said he had paid bribes to a federal prosecutor to receive inside information on the “lava jato” probes, and that he had two federal judges also providing him with inside information.

The president did not object at any point to this information.

Nor did he inform the judicial authorities that the conversation had taken place, or what they had discussed.

Joesley had turned secretly recorded tapes of the discussion over to the Attorney General on April 7th.

The day after “O Globo” published these recordings on 17th May, on Thursday, 18th May, Supreme Court Judge Edson Fachin, responsible for overseeing the “car wash” (lava jato) proceedings, which has already seen many Brazilian politicians and businessmen jailed for corruption, released the audio tapes.

In these tapes, President Temer said in response to being told of the bribe to Eduardo Cunha: “You’ve got to keep this up. OK?”

The audios are now available to anyone who wants to listen on the internet.

But more was to come.

Judge Fachin also released videos implicating Senator Aécio Neves, the leader of the PSDB, and former PSDB presidential candidate, who was narrowly beaten by Dilma Rousseff in the last presidential election, in bribe taking.

The videos showed the first installment of a large bribe being delivered to an intermediary for Andrea Neves, Aécio’s sister.

In an ongoing operation following the methodology used by the FBI for surveillance of the Mafia, the Brazilian Federal Police and the Attorney General followed and recorded the first payment of R$ 500,000 (in numbered notes and with a chip) part of a R$2 million bribe, being delivered by Frederico Pacheco de Medeiros, a cousin of Aécio Neves and the former coordinator of Aécio’s campaign.

There is a very heavy symbolic meaning to these revelations.

Aécio Neves is the maternal grandson of Tancredo Neves, the first president elect (by indirect vote) of the newly restored democracy. Tancredo Neves died before he could take office. But he has become a symbol of probity and democracy in Brazil.

By the end of the day Senator Aécio Neves had been “suspended” from the Senate by the Supreme Court and Andrea Neves was arrested and jailed in Minas Gerais.

President Temer appeared later that same evening in a nationally broadcast televised address to the nation: He declared angrily: “I will not resign, I say again, I will not resign.”

It was too Nixonian to be believed.

The only missing figure in the background was that eternal Nixonian eminence gris, Henry Kissinger.

JBS is the largest family owned private sector conglomerate in Brazil.

It began as a small butcher’s shop and slaughter house in Anapolis, in the interior of the interior state of Goiás in 1953. By 2016 it had a turnover of R$170 billion. 40 major Brazilian companies and brand names are part of its corporate business.

It is Brazil’s major beef and beef products exporter to 150 countries, and has 230,000 employees worldwide, with major markets in Europe, the Middle East, Africa and Asia.

It is the largest producer of beef products in the world.

In 2007 JBS bought US based Swift & Company, one of the world’s major beef brands, for US$1.4bn. And in 2009 acquired the US chicken producer, Pilgrim’s Pride for US$2.8bn. Joesley Batista’s brother, Wesley Batista, is chief executive and head the holding company.

(Brazilians have a habit of adopting English pre-names, though it is very doubtful if the founder of Methodism, Charles Wesley, would have approved of Wesley Batista or his brother).

JBS grew and thrived during the construction of Brasilia, Brazil’s new interior capital, in the 1960’s, by catering for the workers.

Its operations expanded exponentially during the years of the Worker’s Party (PT) governments under president Luis Inácio Lula da Silva (2003-2010) and president Dilma Rousseff, (2011-2016). JBS benefited as a  “national champion” from soft loans from the Brazilian Development Bank (BNDES).

The operations of BNDES, which is larger than the World Bank, was the remaining  “black hole” of the Brazilian corruption investigations.

The BNDES saw a dramatic increase in its financial resources after 2005 when the development bank was “internationalized” providing the financing for large scale overseas investments in Africa, Latin America, and in Europe.

Demonstrators protest Brazil’s President Michel Temer in Rio de Janeiro, Brazil, Thursday, May 18, 2017. Brazil’s political crisis deepened sharply on Thursday with corruption allegations that threatened to topple the president, undermine reforms aimed at pulling the economy from recession and leave Latin America’s largest nation rudderless. (Silvia Izquierdo/Associated Press)

BNDES provided JBS with R$8bn in loans and equity and raised its stake in JBS from 15% to 30%.

In 2014 JBS was the major donor to political parties and candidates in Brazil, spending R$391 m in support of 164 federal deputies, 6 governors, and the presidential campaign of Dilma and Temer.

JBS has been involved in the alleged bribery of government inspectors to issue health certificate for meat. The scandal had a major impact on Brazilian meat exports.

And JBS lost half of its value on the São Paulo Stock Exchange.

44.15% of JBS is owned by the Batista family. Temer said in his defense that Joesley had come to him to discuss the federal action against JBS, but the actions of the Federal Police (Carne Fraca) had in fact taken place ten days before, and JBS was under investigation for its connection to pension funds and loans from the Brazilian Development Bank (BNDES).

This past week seven executives of JBS and its holding company J&F investments, agreed to pay fines of R$225m (US$68m) and to tell prosecutors all they know about corruption in Brazil in exchange for leniency.

The “delações premiadas” (plea bargaining) of the owners and executives of the other great Brazilian multinational private sector conglomerate, Odebrecht, has already led to many Brazilian politicians and businessmen being charged and jailed for corruption involving the the huge kick backs and bribery schemes at Petrobras, the state controlled petroleum multinational corporation, including Eduardo Cunha, the object of Joesley and Temer’s solicitous discussion during their secretly taped (by Joesley) late night session at the Juburu Palace.

The “delações pemiadas” of the JBS Batista brothers has already (according to leaks in the press) involved former President Lula, former president Dilma Rosseff, as well as the former PSDB presidential candidate and senator José Serra, and the former president of the senate Renan Calheiros (PMDB), in addition to Aécio Neves. The Federal police have been taping the Batista bothers for months.

The videos of their interrogations have also now been released.

On Friday, Rodrigo Janot, the Brazilian Attorney General (procurador geral da república) charged President Michel Temer with “corruption, obstruction of justice and criminal organization.” Judge Fachin opened an inquiry against Temer, Aécio and congressman Rocha Loures, the intermediary in the bribe transaction, and the man who has been Temer’s close aide both before and after he assumed the presidency.

On Saturday, “O Globo” in an editorial called for the resignation of President Temer and also condemned the “mega-businessman” (that is Joesley Batista) “who is subject of 5 operations by the federal police over millions of bribes paid to to public authorities.”

In the meantime, Joesley Batista of JBS a week before left for New York City on his private jet and was holed up in New York City, in his luxury apartment in the Baccarat Residences on Fifth Avenue at 53rd Street, overlooking the Museum of Modern Art.

He has apparently now left for another (undisclosed) location.

The reaction of the financial markets, both in Brazil and internationally, has been immediate following the publication of Temer’s comments. The São Paulo stock market (Bovespa) tumbled, losing 10.47 per cent of its value, and market regulators triggered a circuit breaker.

The value of the Brazilian currency, the “real”, slumped by nearly 8 per cent. The fear was that the reform package Temer was pushing though the Congress would stall.

The legislation was intended to curb the huge deficits in the social security and the generous Brazilian pension schemes and reform workers rights. There have already been (at times violent) protests against these reforms on the streets and from public sector workers, as well as from the police, the armed forces  and prison officers.

Temer’s popularity (at 9%) is already at a historical low.

The São Paulo stock market and value of the Brazilian currency had recuperated by the end of the week. But the one month implied volatility of the currency, an indication of how much investors are willing to pay to insure against the real’s swing over the next thirty days, surged by over 70%.

The only Brazilian billionaire to benefit from the fall in the value of the real was Eduardo Saverin, whose net worth increased. Saverin was the Brazilian co-founder of Facebook with his Harvard classmate Mark Zuckerberg in 2004. He has since left the company and was the subject of the movie “social network.” He was worth US$8.6bn in 2017. Facebook in fact has become a major source in Brazil and beyond for information on the developing Brazilian crisis.

Will the crisis in Brazil get worse?

Undoubtedly it will.

One thing is certain.

Michel Temer’s presidency is now hanging by a thread.

He is now a Zombie president. His critics have long compared the 76 year old a butler in the film Dracula.

But to find a constitutionally acceptable successor is not at all straight forward.

If Michel Temer resigns he could well be arrested: As president he is at least protected from this eventuality.

The next in line of succession is the president of the lower house of congress, Rodrigo Maia, followed by the president of the senate (Eunicio Oliveira), and then by the head of the Supreme Court (Carmen Lúcia).

Another name mentioned is Henrique Meirelles, the economy minister, responsible for the pension reforms, and a candidate preferred by the bankers, investors, and the big Brazilian and foreign business interests. Meirelles lived for many years in US and was an executive of Bank of Boston and ended up as the head of Bank of Boston. He then headed of the Brazilian Central Bank under president Lula. He is a man with his own political ambitions.

But when he left the Central Bank he was recruited by the Batista bothers to become chairman of J&F their holding company. During Joesley Batista’s tapped conversation with Michel Temer the two men had discussed means of  bringing pressure to bear on Meirelles.

There are other “delações premiadas” bombshells yet to come: From the executives of JBS, as well as the continuing investigations by Judge Moro in Curitba into the sprawling “lavo jato” cases.

The arrest and imprisonment of Sergio Cabral, the former governor of Rio de Janeiro, revealed more sordid details of the millions skimmed off in the cozy relationships between politicians and businessmen over the years. More revelations involving the major Brazilian pension funds, banks, and possibly military procurement, can all be expected in these metastasizing corruption scandals. Including above all the case of former president Lula and former president Dilma Rousseff.

Lula was according to the testimony of Renanto Duque, the former Petrobras director of services the”big chief” of the whole operation. Antonio Palocci was the “operator.”

That is the only one authorized to act of Lula’s behave in the Petrobas corruption scheme. Dilma was well aware of the scheme according to Duque, which is no surprise given the fact that she was the head of Petrobras, was the former minister of mines and energy, was the former chief of staff to Lula and was president of Brazil. And JBS also says that an offshore account was opened for Lula and for Dilma.

While Oberbrecht provided valuable unpaid work for Lula on the Atibaia estate where he and his wife enjoyed the swimming pool among other “free-bees.”

Judge Moro will be hearing testimony about the actions of Antonio Palocci in the coming week.

Pallocci has many secrets to spill if he strikes a plea bargain with Judge Moro. He was many years years Lula’s closest aide, is a former minister of the economy, was the intermediary in these dealings, as was his successor as minister of the economy, Guido Mantega.

Aécio Neves has denied the accusations against him and has requested his banning from the senate be lifted by the Supreme Court.

But on Monday 22 May, Neves left his position as a weekly columnist for “Folha,” the São Paulo based newspaper, and the major Brazilian mainstream media competitor of the Rio de Janeiro based “O Globo”, which first broke the Temer story.

President Michel Temer has also returned to the television to say that the Joesley tapes had been “doctored”, and that he had been a “ingenue” to have allowed Joesley to speak with him at the Juburu palace. And that he is the victim of “a conspiracy by subterranean interests.”

But if Temer is anything he is certainly no “ingenue.”

Like his former colleague the jailed Eduado Cunha, Michel Temer has been a permanent fixture and power broker in the back backrooms of Brasilia politics for the past thirty years. Over the weekend the Brazilian Bar association weighed into the dispute.

A day after Temer has rounded on his chief accuser, the bar association voted by 25 to 1 in favor of requesting that the congress begin impeachment hearings against Temer.

But the role of the judiciary has also come under question.

Particularly the actions of several judges on the supreme court have been questioned.

Supreme Court justice Gilmar Mendes.

Particularly the role of Supreme Court justice Gilmar Mendes.

He has called the federal prosecutors “a bunch of incompetent young boys” and he granted “habeus corpus” to Eike Bastita and José Dirceu, allowing both men to be released from custody over the objections of Supreme Court Justice Fachin who oversees the “lava jato” investigations for the Supreme Court. These two men are both central figures in the Brazilian corruption scandals. Eike Batista was the favorite poster boy of the boom years under Lula when he was (temporarily as it turned out) Brazil’s richest men. José Dirceu was the eminence grey of the Lula presidency.

A former radical student leader released from jail during the military regime as part of an exchange of the kidnapped American Ambassador. He then lived in Cuba and was infiltrated back into Brazil under an assumed name. He handled Lula’s (successful) approximation with the Brazilian and international business and financial elites after Lula’s election to the presidency, and he was the principal “fixer” and mastermind behind the buying off of congressmen and political parties during the first (the mensalão scandal) Lula presidency. The dispute has become very nasty with various judges being accused in leaks to the press of having relatives working for the accused, as indeed they do.

And the first interrogation of Lula by Judge Moro in Cuitiba made for dramatic video watching, but was inconclusive.

But no-one should have been surprised by this. Lula is a past master rhetorician. He was in any case appealing to his supporters outside Judge Moro’s courtroom. And he blamed any “irregularities” on Marisa Leticia, his late wife, who died last February 3 in São Paulo.

“Lula,” as Lula calls himself, said he knew nothing.

What is certain?

The crisis in Brazil will get much worse in the coming days and there is no clear path out of it.

The next deadline will be June 6th, when the superior election court is scheduled to rule on the validity of the election of Dilma/Temer in the last presidential election.

Temer’s election (as the vice-president on Dilma Rousseff’s presidential ticket) could be “cassado” (declared invalid). In which case Rodrigo Maia would assume as interim president for 30 days before indirect elections in the congress which would chose a new president to serve until December 2018. Direct elections would need the intervention of the Supreme Court, or a change in the constitution.

Former president Fernando Henrique Cardoso (FHC) has evidently decided that Temer will not survive the political tsunami. He has begun “articulating” (which is a marvelous Brazilian euphemism for back room deal making) an alternative.

His choice is Nelson Jobim, a lawyer originally for Rio Grande do Sul, former minister of justice under FHC who appointed Jobim to the Supreme Court where he served from 1997 to 2011 ending as the president of the Supreme Court. He then became defense minister under Lula and Dilma (until he was sacked by Dilma.) Jobim has warned of the “intolerance and hatred which prevents dialogue.”

FHC believes Jobim could (potentially) bridge the chasm between the political parties in Congress. But FHC and Lula remain part of the problem. They both represent the great divide in Brazilian  politics.

Both represent the different political coalitions which have dominated Brazilian politics over the past forty years. Both men are despised or loved in equal measure by their supporters and by their opponents.

Both are believed or disbelieved in equal measure.

They are unfortunately part of the “fear and loathing” and the suspicion and paralysis which gripes Brazil

But the stresses nevertheless have already led to violent protests in Rio de Janeiro and in Brasilia.

On the 25 May rioters demanding the repeal of the social security and labor reform measures, led by the labor unions, and calling for Temer’s ouster, stormed along the esplanade of ministries, the grand central boulevard of the capital,  attacking and burning of part of the ministry of agriculture as well as invading the ministries of health, planning, culture where the demonstrators destroyed documents and computers, and the ministry of the economy, tourism, and mining and energy.

The staff had already been evacated.

Most  ominously the innvoction by president Temer evoked his special “public order powers” powers.

The army was deployed to protect government buildings (the powers last until the end of the month).

In the Congess  meanwhile a session of one of the senate committee’s presided over by the new head of the PSDB, the senator  from Ceará, Tasso Jereissati, who had succeed Aecio as head of the PSDB in the Senate, and is one of the possible PSDB  Senators mentioned as a possible successor to Temer if he falls from power, descended into chaos,  as did a session in the lower house of the congress where opposition deputies stormed the presiding officers podium, demanding the resignation of Temer(“Fora Teme”).

One Brazilian has compared the investigations to a centipede with boots.

Each boot falling on an unsuspecting head.

And more boots continue to fall.

This week two former governors of Brasilia were arrested as the result of “plea bargains” by executives of Andrade Guitierrez, another major Brazilian construction company, involving vast over-payments for the construction of Brasilia’s “Mane Garrincha” football for the World Cup.

Judge Sergio Moro apparently took as his model the Italian magistrates who conducted the anti-mafia investigations during the 1990’s. It is in fact twenty-five years ago this week (May 23rd) that Giovanni Falcone was assassinated in Sicily while leading a successful anti-mafia campaign which brought hundreds of mafia members to trail, conviction, and long jail sentences.

And the Milan district attorney in the “clean hands” (“mani pulite”) operation, which used “preventative detention” to unravel the network of corrupt bribes and kickbacks between politicians and businessmen which had for decades underwritten the whole post-war Italian political system.

The political parties which had dominated Italian politics, the Christian Democrats and the Socialists, were destroyed as a result of the magistrates activities.

But one of the results was the rise of the populist Silvio Berlusconi, and the power of the magistrates was increasingly perceived as being an exercise in arrogance.

The risk in Brazil is not so much the immediate political struggle over Temer’s future, serious though this certainly is, but the result will only be a temporary stop-gap.

It is the prospect for the next presidential election in 2019 that is the real challenge.

The leading potential candidates are both outsiders.

Which may well be their attraction to a public tired of the chronic corruption of the present political system: Joao Doria, the newly elected mayor of Sao Paulo, and Jair Bolsonaro, a Rio de Janeiro congressman.

Joao Doria is a wealthy entrepreneur, publicist and television personality. He ran the Brazilian edition of “The Apprentice.”

But his American model is Michael Bloomberg, who he visited (with television cameras) recently in New York City.

Jair Bolsonaro is a extreme right wing nationalist and a former army major (he was a parachutist), who many Brazilians claim is homophobic, misogynistic, and racist. He is a vocal supporter of the military regime.

When he voted for the impeachment of Dilma Rousseff he praised Brilhante Ustra, who headed the notorious DOI-CODI where Dilma was tortured.

Editor’s Note: There will be many shoes falling from this centipedes feet. Pierre Tran of Defense News has reported on one of these in a recent Defense News article.

French legal authorities are conducting an inquiry into alleged corruption tied to the 2008 sale of Scorpene attack submarines to Brazil, French media reported.

“The national financial prosecutor has been investigating since autumn 2016 an arms contract between France and Brazil based mainly on five submarines,” daily Le Parisien reported May 20.

The preliminary inquiry concerns an alleged “corruption of foreign public officials,” relating to a Dec. 23, 2008, contract for Scorpene submarines, the report said. French judges are seeking to determine whether bribes were paid relating to the submarine sale with some of the money allegedly sent back to France in a “retrocommission.”

A DCNS spokesman told Defense News: “DCNS strictly abides by the provisions of international treaties and local laws in every country in which the company operates, as well as the highest level of compliance.”

In the deal with Brazil, DCNS agreed to the sale of four Scorpene boats, technology transfer and help to build the conventional part of a planned nuclear-powered submarine.

DCNS’ local partner, Odebrecht, is under investigation by Brazilian officials for alleged corruption. Executives of the Brazilian building company disclosed the name of the French partner, the weekly paper Journal du Dimanche reported.