Identifier
Created
Classification
Origin
09RIODEJANEIRO190
2009-07-22 11:11:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Consulate Rio De Janeiro
Cable title:  

Petrobras Probe a Potential Political Free for All

Tags:  ENRG EINV PGOV BR 
pdf how-to read a cable
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R 221111Z JUL 09
FM AMCONSUL RIO DE JANEIRO
TO RUEHC/SECSTATE WASHDC 4961
INFO RUEHBR/AMEMBASSY BRASILIA 1279
RUEHSO/AMCONSUL SAO PAULO 5270
RUEHRG/AMCONSUL RECIFE 3514
RHEBAAA/DEPT OF ENERGY WASHDC
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UNCLAS SECTION 01 OF 02 RIO DE JANEIRO 000190 

SENSITIVE
SIPDIS

STATE FOR WHA/BSC, WHA/EPSC, EB/ESC

E.O. 12958: N/A
TAGS: ENRG EINV PGOV BR

SUBJECT: Petrobras Probe a Potential Political Free for All

Sensitive But Unclassified, Please Protect Accordingly.

UNCLAS SECTION 01 OF 02 RIO DE JANEIRO 000190

SENSITIVE
SIPDIS

STATE FOR WHA/BSC, WHA/EPSC, EB/ESC

E.O. 12958: N/A
TAGS: ENRG EINV PGOV BR

SUBJECT: Petrobras Probe a Potential Political Free for All

Sensitive But Unclassified, Please Protect Accordingly.


1. (SBU) Summary. On August 6, the Brazilian Senate will begin an
investigation (Comissao Parlamentar de Inquerito, CPI) into
allegations of corruption in state-controlled oil company Petrobras.
Members of the PSDB, the lead government opposition party, allege
that Petrobras engaged in tax and procurement fraud as well as
embezzlement. Petrobras denies any wrongdoing and claims the
proceeding is a "political witch hunt" designed to delay key energy
sector reform legislation. The GOB remains supportive of Petrobras
and President Lula has publicly voiced his opinion that the
allegations are motivated by political maneuvering by the opposition
in advance of the 2010 presidential elections. Run by allies of the
government, and with senators absorbed by almost daily revelations
of institutional malfeasance, the Petrobras CPI may drag on and
stall GOB plans to revamp the oil sector, but is unlikely to result
in significant harm to Petrobras or the GOB. End Summary.

Allegations
--------------


2. (U) In early May, members of the Social Democratic Party (PSDB)
issued a call for a congressional investigation (CPI) into charges
that Petrobras engaged in tax and procurement fraud resulting in the
4.3 billion reais (about USD 2.15 billion) in unpaid taxes. The
Federal Police, under a special operation known as "Operation Deep
Waters," released a report indicating potential fraud in the bidding
for the renovation of petroleum refining platforms. The Federal
Court of Accounts (TCU) also released findings noting irregularities
in the company's platform construction contracts. Other charges
include procurement fraud in the construction of the Abreu and Lima
refinery in Pernambuco, the use of illegal accounting tactics to
avoid 4.3 billion reais in tributary compensations, preferential and
unreported sponsorship in the amount of 609 million reais for labor
unions and cultural and social institutions historically tied to the
governing Workers' Party (PT),and the embezzlement of royalties.
In the last week, media revealed that, among the institutions that
allegedly benefiting from Petrobras sponsorship was the foundation
of Senate president Jose Sarney, who is currently under pressure to

resign over corruption charges that include the illegal use of
public funds and nepotism.

Accusers
--------------


3. (U) Members of the lead opposition party, the PSDB, are the major
backers of the investigation. Many analysts view this as a stalling
and political maneuvering tactic designed to frustrate Lula's plans
to pass key pieces of energy legislation and to damage the PT's 2010
presidential hopes. According to press reports, Petrobras officials
are worried that Lula's plan to revamp oil laws regulating sub salt
reserves, such as the plan to create a new state-owned oil revenue
centralizing company, will be significantly slowed or even stalled
given the potential for the CPI investigations to last up to a year.
Under this scenario, the end of the investigation would coincide
with the start of the presidential election season, making the
passage of any new legislation under the incumbent government
unlikely.


4. (U) The political jockeying worries some Petrobras officials,
including CEO Jose Sergio Gabrielli, who is quoted as saying that
this investigation could start a "political free-for-all." The
congressional inquiry could potentially reach the higher levels of
the GOB, up to the Presidential Chief of Staff and hand-picked Lula
successor, Dilma Rousseff, who currently serves as chairman of
Petrobras's Board of Directors.


5. (U) Political machinations have delayed the start of the
investigation four times since it was initially called for in May

2009. On July 14, two months after the approval for the inquiry and
in preparation for the mid-year recess, the Congress officially
announced the eleven members of the CPI, headed by PT Senator Joao
Pedro. It is widely believed that Sarney allowed the CPI to begin
work as a way of removing the limelight from his own troubles and
reducing opposition pressure for him to resign. The CPI includes
only three members of the major opposition parties, the PSDB and
Democrats (DEM). Ruling party control of the investigation allows
it to control who can be called to testify and to bar any attempts
on the part of the opposition to summon Rousseff. The alliance
between Sarney's PMDB and the PT make any investigation of
wrongdoing on his part or that of senior GOB officials unlikely.

Government and Petrobras Reactions

RIO DE JAN 00000190 002 OF 002


--------------


6. (U) On May 15, Lula publicly voiced his support for Petrobras,
calling the congressional inquiry irresponsible and unpatriotic at a
time when the country faces the challenge of a global economic
crisis and is trying to raise financing to develop large new oil
reserves. Lula also continues to publicly support Sarney, whose
party--the largest in Brazil--is viewed as a key ally in the PT's
2010 presidential campaign. Sarney's possible connection to the
Petrobras scandal will likely be the focus of the CPI initially,
even though the allegations only surfaced recently.


7. (U) The Finance Ministry announced on July 15 the resignation of
the head of the national tax authority, Lina Maria Vieira. The
ministry has declined to respond to media reports that Finance
Minister Guido Mantega asked Vieira to step down after the tax
authority launched an investigation and fined Petrobras without
Mantega's approval. The Ministry has not issued a reason for
Vieira's exit and has named Otacilio Cartaxo, the current deputy
secretary of the tax authority, as acting.


8. (U) For its part, Petrobras staunchly denies any wrongdoing and
has pledged to comply fully with the investigative process. CEO
Gabrielli expressed his worry that the investigation will have
serious consequences for the company in a public statement. In the
same statement, he attempted to assure investors of the solidity of
the company, asserting his belief that the probe will uncover no
evidence of fraud or corruption. Market indicators since the call
for the investigation was first announced point to continued
investor confidence in the company, but some analysts are worried
about the potential for the probe to reveal wrongdoing.


9. (SBU) Comment: Run by allies of the government, and with
senators absorbed by almost daily revelations of institutional
malfeasance (Brasilia septel),the Petrobras CPI may drag on and
stall GOB plans to revamp the oil sector. In our view, however, the
CPI might make life uncomfortable for some senior Petrobras
officials, and might even lead to resignations, but is unlikely to
result in significant penalties or damage to Petrobras or the GOB.
End comment.


10. (U) This message was cleared by Embassy Brasilia.

HOLM-OLSEN