How a Small Car Wash Shop Made Brazil Collapse

(Published by Libel)

Before reading this blog post, I recommend spending two minutes at this link from the New York Times. It is a brief description of the corruption scandals in which all the Brazilian presidential line of succession is involved. A list of the richest businessmen in the country would look pretty much alike. Hereafter I don’t plan to explain either what’s going on in Brazilian politics or how deep our economic crisis is. I want to share how a local judge managed to investigate (and in most cases punish) the most powerful people of this exotic tropical paradise.

Sérgio Fernando Moro, 44 years old, was born in a middle-sized city in the southern part of Brazil. He was some kind prodigy during his studies. In 1995 he finished his bachelor in law and in 1996 he became a federal judge – a position that can only be obtained through a very strict technical competition involving written exams and oral presentations. In the following years he participated in a study program at the Harvard Law School, studied money laundering with the State Department of the United States, completed both a Master’s and a PhD degree and became a professor at the Universidade Federal do Paraná, a renowned institution near his home town. With this CV, he became quite popular by investigating crimes related to money laundering in his state, where he led major operations that resulted in more than 200 arrests related to economic crimes.

In 2008, Dr. Moro joined an investigation after a denouncement from a local businessman affirming that he was invited to help laundering money through a small car wash shop. When going through the evidence, his team noticed that some of the money passing through this shop was used to buy a car for Paulo Roberto Costa, a former director of Petrobras, which is a State-owned oil company and, also, the biggest firm in the country. Until 2014, 46 people were being judged for their participation in this car wash scheme.

In June, 2015, the Federal Police started investigating Mr. Costa’s family. That was when he decided to cooperate with the Brazilian justice. He presented evidence of a corruption scheme at Petrobras that involved mainstream politicians and at least 2,5 billion Euro. In October, in cooperation with the Swiss government, around 300 million Euro were recovered from more than 100 illicit bank accounts registered in that country.

In November, the Federal Police found out that the scandal resulted in a loss of 10 billion Euro to Petrobras. In the next month, the former president Luiz Inácio Lula da Silva testified on the case and the bank secrecy of Renan Calheiros, the upper legislative house’s speaker, was suspended.

At this point, while the presidency and the legislative were collapsing, Dr. Moro was being seen by most of the population as a star. Of course, supporters from the Workers’ Party (who are in government at the moment) were not his fans and started threatening him in every single way you can imagine, including public speeches from the Minister of Justice and the country’s president, Dilma Rousseff, demanding his arrest. Yes, Sérgio Moro’s arrest!

In March, 2016, senator Delcídio Amaral, former leader of the Worker’s Party in the upper-house was denounced for intervening in the investigations. A taped conversation has shown that he was pressing political leaders and other judges to move the case to the Supreme Court, where the party was capable of manipulating procedures and decisions. As the party rejected to help him, he did the same as Paulo Roberta Costa and said everything he knew, including strong evidence that may result in the arrest of Lula and the president Roussef.

In the past days, the whole country started collapsing. Some of its richest businessmen are in prison, sharing cells with former ministers, congressmen and party leaders. In the imminence of being arrested through a decision from Sérgio Moro, Lula requested Dilma to nominate him Minister. It would not stop the investigations but would move the decisions to the Supreme Court where, as I said, the party would be able to protect him.

As this became public, around 4 million protesters rallied on the streets of the whole country demanding the president’s impeachment. It pressed the Congress, which will take a vote on that in the next weeks; Sérgio Moro, who released several tapes of phone calls from Lula where he repeatedly conducted undemocratic and criminal practices; and Dilma, who nominated Lula her Chief of Staff – a position with ministerial status in Brazil. Since then, a judicial battle started as several federal judges are trying to prevent Lula from taking office.

All of that is, as you probably imagine, just a small part of everything that is going on in the country right now. Although it is still very shocking to me and pretty hard to process, I have two comments for you, who plan go deeper in your readings about Brazil: first, don’t even dare to compare us with House of Cards; we are much more into Game of Thrones stuff. And, second, no matter what people say, never, NEVER, get near to a car wash shop in Brazil. I heard they can be very dangerous sometimes…

7 vs. 1

(Published by Libel)

One of the hottest topics debated after the FIFA World Cup 2014 was the Brazilian defeat against Germany at an incredible score: 7 vs 1. It was surely a shock to most of us Brazilians, who were wishing to play (and win) the final game against Argentina. In the end, Argentina didn’t manage to become champion (and it was a relief due to our long date competitiveness against them) and, as usually, we used the topic to make fun of ourselves (a very typical behaviour of Brazilians and Latinos in general).

On the other hand, there was another 7 vs. 1 that was not forgotten after the games. The 7 percent of inflation combined with 1 percent of growth achieved by our economy in the last year. The comparison was made by the presidential candidate Aécio Neves – although a member of the social democratic party, the closest we had to a liberal candidate during the elections – when debating against president Dilma Rousseff in a live show on television.

Inflation is a big problem to Brazilians and most Latin Americans. It is true that we have managed to get over it two decades ago. Still, our memories about the chaos it generated in our lives continue very vivid. In the 1950s – I was not there, but grandparents and books tell – inflation achieved yearly rates above 100 percent per year. In the late 1980s and early 1990s, it reached 100 percent a month. It means that if you wanted to save money to buy a fridge after three months, you would surely have to multiply the planned price by three in order to have enough reserves to make your purchase. Also, it means that you had to buy all your food by the day you received your salary – so, if you are not familiar with it, try to imagine how supermarkets looked like in the first week of the months.

Some people are going to say that 7 percent is not much – even more when compared to what we had. But when we combine it with an extremely low growth and other negative factors, it creates serious conditions to a depression. That is what is happening in 2015. Dilma Rousseff, the socialist candidate, was re-elected but her popularity was seriously damaged during the electoral process. Several scandals appeared and the keep growing in 2015. The market value of our State-owned oil company, Petrobras, used to be around 115 billion Euros in 2010. Nowadays, after four years of scandals, it is around 36 billion Euros. The same happened to other public companies and private enterprises funded by BNDES, a State-owned bank for economic development.

It is true that some measures are being taken to solve the economic and political crises. Still, they are very far from being popular. To improve the image of public companies, Dilma fired Petrobras’s president but hired for her position the former president of a public bank where other corruption scandals used to take place. In order to reduce inflation levels, the government increased the interest rate to 12,25 percent per annum, cut labour benefits and raised taxes – reducing people’s propensity to consume, although public expenditure keeps growing.

In this scenario, people, the media and many congressmen started mentioning an impeachment as a solution. It wouldn’t be the first time as it has already happened in the late 1980s but we must be very cautious as Dilma’s second term has just started. Nevertheless, the president and her party must rethink their way of doing politics. After receiving 51 million votes, the opposition won’t wait for too long before formally proposing her removal.

The Brazilian electoral countdown

(Published at the Eurasia Review)

Formerly praised by international analysts as a paradise for investors that would like to flee the European crisis, Brazil seems to be having some troubles in sustaining its market beauty as mainstream media portals such as the Financial Times and The Economist have been dedicating big headlines to expose the presidential struggle in order to secure positive economic indexes.

Among the most alarming numbers, it is possible to highlight the negative result of a subtraction involving the inflation rate of 2012 and the respective economic growth – what means that, by the end of the year, the country’s development was not only below the government expectation but also negative, if relative data is taken into consideration.

Besides the risk of getting back to the years when economic instability haunted the country, the main concern that must be arisen accrue from the political scenario as Dilma Rousseff has just announced her intention to run for re-election right after Aécio Neves and Eduardo Campos, both popular and charismatic leaders, confirmed their intention of being the future Brazilian president.

Understanding it better, while Aécio Neves is the opposition leader, grandson of the first post-dictatorship civilian president and former Governor of Minas Gerais (Southeast region) with approval rates above 80%, the socialist Eduardo Campos dwells Dilma’s political ground, also being the grandson of a well-known politician and enjoying high approval ratings as the Governor of Pernambuco (Northeast region).

Wasn’t it hard enough, Mrs. Rousseff – even relishing great popularity rates – has been facing not only bad economic results but also several corruption crises inherited from Luiz Inácio da Silva, former president and her political sponsor.

As the elections are not far away, it means that the next 19 months are going to be replete – from both sides – with government overspending, populist proposals and protectionism (as it is how politicians manage to stimulate donations from large entrepreneurs).

Actually, the first step was already given: a new law is being proposed in order to loosen the restriction knots that regulate public budgeting and spending, allowing executive branches to increase their debts, among other issues related to fiscal responsibility.

The second one, personally announced by the president on all the open TV channels, calls for a reduction in energy expenses in the range of 20%. The problem lies on the fact that it aims to increase consumption in the exact moment when hydroelectric reservoirs are not being enough to provide energy to the country.

In the end, if the future follows historical trends, the country economy will not only be far from being the apple of big investors’ eyes, but it may also get back to the times when its people used to strive to calculate how much a bag of rice or a package of meat would be costing on the next day.

Why Long Term Investors Should Avoid The BRICS

(Also published on Eurasia Review)

A few days ago I have written an article on how bizarre Brazilian politics are. Well, it didn’t take long so that the president could confirm my theory. This weekend, as the official government newspaper informed, she vetoed 25 items of the Budgetary Guidelines Law (in Portuguese,Lei de Diretrizes Orçamentárias) – which is supposed to define the general lines to be followed by the Executive branch when drafting the annual budget.

This news, by it owns, would not be that strange as it is quite common to see Presidents, Governors and Mayors vetoing unpleasant proposals. Unfortunately, it comes with some external factors that evidence how bizarre our politicians are.

The first one is that Dilma Roussef counts with the majority on both Legislative houses – what would let her and her party influence the project enough to avoid any kind of unpopular veto. Considering this, we shall assume that her coalition is not as strong as it looks.

The second point shows that the problem doesn’t lie generally on her allied groups but in her own garden. The fact is that the Budgetary Committee is chaired by an MP of her party – who was the first one to discredit the president’s explanations for the veto.

As those 25 vetoes also include minor proposals that would probably not make a difference in the country’s future, I would like to focus specifically on the two that caught my attention most: (1) a project to boost government’s transparency, and (2) a conservative approach to the fiscal policy.

To understand the first one, we should get to know a little about its background before. There it goes:

As a result of an intense lobby both from the United Nations and several local NGOs, the Brazilian government adopted the Public Information Access Act on May 16, 2012, when it joined 90 other nations that, following the Universal Declaration of Human Rights, accepted to give publicity to numbers such as the general expenses and the payroll of public bodies.

The problem is that, differently than what was expected, the law had some gaps which allowed public enterprises inserted into competitive markets (such as educational institutions) to keep hiding their finances.

If the Budgetary Guidelines Law was approved, this gap would not exist anymore – at least for the year of 2013 when the congress would have the opportunity to deal about new amendments to solve it for the long run. However, it was vetoed by Mrs. Roussef under the excuse that “it would make it harder to fulfill the Public Information Access Act”.

In other words, the idea of making public information accessible was not a matter of ethics but just a way of looking better through the international community’s eyes.

Bizarre enough? Totally not! Going further, the second proposal have aimed to force the Government to maintain the restrictive fiscal policy so that a liquid reduction of the public debt could be achieved.

Again, let’s understand the background: during Luíz Inácio da Silva’s first term, about 8 years ago, his popularity was boosted after the announcement that the government managed to pay the public debt.

As you can imagine, different than what the population’s majority understood, it was referred to the interest and not to the whole public debt. Anyway, even if it was not the most ethical procedure, the merit should be given both to Silva and Roussef’s fiscal team as the same result was achieved in every year since then.

The point is that, as the economy is doing well and the Government is presenting record levels of tax collection, the Legislative decided to include a new line to the Budgetary Guidelines proposing a step forward on the fiscal policy which would be extremely favorable to the country on the long term.

The presidency, unfortunately, disagrees. As a short explanation to the veto, Dilma affirmed that the current strategy was enough to maintain a solid economy.

Even if a bit far from the Russian unwillingness to adhere to democratic standards and the Chinese lack of fiscal discipline, the Brazilian government is showing that the economic growth is not the only spot in common with its BRICS partners and, once again, I must underline that international investors have to keep an eye on the developing world’s politics before planning long term investments.

As the numbers show, they may get great returns in the short term, but our economies still quite far from the former Group of Seven’s – excluding Russia – political stability.

Economic Paradise versus Bizarre Politics

(Also published on Eurasia Review)

It became quite common to see Brazil stamped on the top international newspapers and magazines’ pages both as a good place to start businesses and as an underdeveloped land where bizarre stuff happens. As a Brazilian economist, I couldn’t agree more with both kind of analysis – even if it looks kind of odd to put them together.

The fact is that while our market is enjoying its first long term stability period since the colonization, our politicians keep acting as they used to do when the country was only a paradise for coffee and sugar cane producers.

This controversial scenario risks the bright future predicted by reports such as Goldman Sachs’ (2007) and PwC’s (2011) which pointed out that Brazil would reach the status of world forth biggest economy by 2050 – above superpowers such as Russia, Germany and Japan.

It is true that hosting the 2014 FIFA World Cup and the 2016 Olympic Games brought an enormous enthusiasm to international investors and some extra motivation to Keynesian politicians to boost the public spending, but the current growth started around two decades ago when the government managed to put an end to the two-digit inflation rate that used to destroy both the internal market and the external competitiveness. Those reforms helped not only the local entrepreneurs but also opened doors to international investors who have apparently gotten more motivated to join our country after the financial crashes in the North Hemisphere.

All those good winds, unfortunately, weren’t strong enough to blow our political sail that remained stagnant in the last century. The current power dichotomy experienced by the Palácio do Planalto (the Brazilian White House version) testifies it.

As John Rathbone wrote for the Financial Times one month ago, “former presidents are like Chinese vases: beautiful, valuable and near-useless [but] for some, the psychological comedown is too much”. That’s the case of Luíz Inácio Lula da Silva, former president, who insists to be one of the biggest problems faced by Dilma Roussef who tries to govern the country even if constantly bothered both by the opposition and her socialist partner.

If it is hard to manage a country with your party’s support, make a guess of how it is if even internally a consensus can’t be reached.

That is the fact that makes it almost impossible to conduct the needed reforms to prepare the country for all the predicted growth. In some issues, Brazil still being ruled by code of laws originated five decades ago during the military dictatorship.

One of those make it almost impossible to buy high status cars, as Kenneth Raposa reported to Forbes one week ago. As he mentioned, the same Jeep Grand Cherokee that can be bought in the US for 28,000 USD would cost 89,500 USD in Brazil due to an internal taxation above 50% plus trade tariffs.

If it is hard to buy one of those, make a guess on how it would be to get a BMW X5.

The point is that, as the world economy is struggling to recover itself, Brazil still a good option to international investors but the local politicians should start preparing the country for the future, when Europe and the United States are going to be fit again.

A Small World

It is interesting to notice by reading some of the main global media vehicles that the world is getting really small. Taking a brief look at the opinion pages of papers as China Daily, The Economist, Hurriyet Daily News, the New York Times and the Guardian we can notice that most of their articles are directed to similar stories.

During the first days of this week – and probably also the previous ones – the main theme discussed was the dialogue between the US, Europe, China and Iran. It was curious to see that editors and contributors were not commenting the possibility of a military intervention or the debates at the UN Security Council but the possible gains and losses that their economical ties could bring.

As the president of the European Council Van Rompuy wrote for the China Daily, “the world is going through rapid changes and global readjustments caused by globalization and increased inter-connectedness between countries and peoples (…) [bringing] us closer together”. The political scientist Garton Ash made this statement more clear by affirming in The Guardian that even the Chinese dynasty is getting “global” as their vice-president (and future leader) Xi Jinping has a daughter studying at the Harvard University while his sister is living in Canada.

Even so the world didn’t forget the Iranian question. Nevertheless, the talks seem to be going in the same gains and losses direction. Dennis Ross, a former assistant to Barack Obama for the Middle East, wrote for The New York Times that “Iran is ready to talk”.

As he said, Ahmadinejad didn’t change his mind about the “western danger”. In the contrary, he is afraid of the losses that getting far from the west may cause to his country’s economy. As Ross said, “Iran cannot do business with or obtain credit from any reputable international bank, (…) American penalties (…) have helped trigger an enormous currency devaluation” and Bashar Al-Assad, his last political partner, is failing as the Arab Spring advances.

The world is getting smaller and it is not due to a raising global culture. Even demanding similar life quality standards, each citizen of the world still have its own religion, personal habits and family background. Still, international trade and David Ricardo’s comparative advantage theory united people.

While a German businessman uses his Chinese umbrella in London, a Russian housewife is watching a Brazilian soap opera in a US-made television. As Thomas Friedman analyzed in his bestselling “The World is Flat”, all the nations became so dependant in international trade that closing borders started looking like the worst thing a government could plan.

Wars became really expensive not only because of arms costs but mainly due to the losses that a break in international trade may cause. Peace began to be seen as a profitable policy.

That’s why “Iran is ready to talk”. That’s why Xi Jinping is visiting the United States. And, even more, that’s why the future global leaders will need to find different solutions other than militarist policies.

Brazil: A Growing-Up Democracy

While the police strike is moving throughout the country, the Brazilian democracy seems to be growing up as its political parties’ answers are becoming less populist and more effective.

History shows that the Brazilian ruling party started to become a major political power due to its influence over unions and other social movements during the military dictatorship that ran the country until the mid 1980ies. After the end of the regime, many of the former communist guerrilla groups got together to create a moderate socialist party leaded by the unionist Luiz Inácio “Lula” da Silva that would become the country’s president in 2002 after four unsuccessful attempts.

Da Silva and his Workers’ Party became really famous not only because of their strong speeches in favor of a higher minimum wage and labor conditions but mainly due to their strength in controlling violent strikes all over the country. Even tough, it was not the workers’ class that managed to elect him.

After four attempts as a typical unionist leader, the Workers’ Party hired Duda Mendonça – that would become the Brazilian propaganda guru – to transform Lula in a new leader capable to win the national election.

An Armani suit, a well-shaved beard and a conservative speech mixed with some Keynesian ideas were the big moves to make him the new president (and, some years after, to elect the Peruvian radical Ollanta Humala as the president of his neighbor country).

This new style not only elected him, but also created a new image strong enough to let him govern the country for eight years and to elect Dilma Roussef – his main minister – as the new president in 2010.

After ten years ruling the country, Dilma’s government showed that the Workers’ Party grown up. A week after privatizing three airports – what would make them wrathful one decade ago – the neosocialist answer to the police strikers was not really different than the one usually given by right wing leaders: “My call to the policemen is directed to ask them to come back to work (…) and that we must sue and punish the ones who committed violence during the protests”, said Jacques Wagner, the Workers’ Party governor of Bahia.

Despite being a tough situation that must be solved as soon as possible in order not to hinder carnival celebrations, the police strike helped to show that the Brazilian democracy is going forward as its political leaders are aiming at efficiency State no matter if it means to cease with their famous populist speeches.

Many problems still need to be solved, but as politicians goes toward a new way of doing politics, a bright future starts to become possible.