VZCZCXRO3407
RR RUEHRG
DE RUEHRI #0190/01 2031111
ZNR UUUUU ZZH
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
RHEHNSC/NSC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC

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