The Pandemic Depression
The Global Economy Will Never Be the Same
When Brazilian President Dilma Rousseff traveled to Cuba in 2012 to announce the biggest foreign investment in the island since Fidel Castro’s 1959 revolution, a man in his mid-forties stood discreetly at her side. Marcelo Odebrecht, the head of Odebrecht—the biggest construction company in Latin America, which was founded by his grandfather—had scored an almost $1 billion contract financed by a Brazilian public bank to modernize the Port of Mariel. In explaining the initiative after flying from Havana to Haiti with Rousseff, where his firm was also expanding investments, he summarized: “We act in alignment with Brazilian foreign policy.”
Fast-forward to January 2016. Odebrecht has been behind bars since June, accused of paying fortunes in kickbacks to politicians in exchange for contracts with Brazil’s national oil company, Petrobras. A number of his competitors and associates were also arrested because of their connection to the scandal.
For her part, Rousseff is fighting an impeachment process indirectly linked to the Petrobras scandal, and an ever-increasing number of her allies (including Vice President Michel Temer) are either siding with the opposition or are in jail. The speaker of the congress, who gave up a fragile alliance with the government to push for Rousseff’s impeachment, is fighting to avoid prison after prosecutors found two accounts under his name in Switzerland that had been allegedly fed with oil money. Likewise, the former leader of the government in the Senate was jailed for trying to block investigations. Meanwhile, the Brazilian economy shrank by 3.5 percent in 2015 and is expected to contract at least 2.5 percent in 2016, performing worse than Russia under Western sanctions.
And so, the days when business and government could work hand-in-hand on a strong regional policy seem long gone. Men like Odebrecht are no longer striking advantageous deals with the Cubans, backed by heavily subsidized and opaque credit from Brazilian public banks. In this sense, the Petrobras scandal has already deeply transformed Brazil’s global outreach.
Yet the most tangible damage of the turmoil to Brazil’s foreign policy can be seen in the ministry of foreign affairs’ budget. Initially Itamaraty, as the ministry is known, was literally running out of cash. After drastic budget cuts, Brazilian ambassadors from Tokyo to the WTO started missing rent and electricity and internet bills. According to the local media, the Brazilian government is studying “selective defaults” on financial commitments to international and regional organizations, including the United Nations and the Organization of American States (OAS). At the United Nations, Brazil’s debt—roughly $225 million in 2015—is second only to that of the United States (totaling $3 billion according to some sources, although the United States is also the organization’s largest contributor by far). In terms of its debt to the OAS, last January, after Brazil agreed to make a payment—of just one dollar—some Caribbean countries tried to push forward some form of punishment. Even after paying an additional $3.4 million since, Brazil still owes the organization $15.29 million.
After dramatic budget restructuring late last year, Brazil’s foreign ministry stopped missing payments on its embassies’ bills. But the debt to international organizations is still growing and, in November, Rousseff canceled at the last minute a trip to Japan and Vietnam and blamed it on fiscal constraints.
For a country that, not long ago, campaigned for a permanent seat at the UN Security Council by opening embassies throughout Africa and the Caribbean, new financial realities are a hard pill to swallow. Last month, Celso Amorim, who served as minister of foreign affairs during President Luiz Inacio Lula da Silva’s eight years in government and as Rousseff’s defense minister for two and a half years, bemoaned how the lack of funding is “eroding” the very foreign policy he helped conceive.
Specifically, while Amorim was touring to promote his latest book—which recounts how Lula’s government, along with Turkey’s, convinced Iran to swap low enriched uranium for nuclear fuel in 2010—Brazil lost its right to vote at the IAEA because it was not paying its bills. At any rate, the Obama administration has ultimately rejected the Brazilian–Turkish mediated offer, even though Lula’s moment in Tehran is portrayed in some circles in Brazil as the pinnacle of a successful effort to enter the realm of high politics through “South–South diplomacy.” This year, in the months leading to an actual deal between the P5+1, the UN nuclear agency, and Tehran, the Brazilian response was muted.
To be sure, Rousseff never thought that Brazil should get directly involved with intricate matters of international security, such as Iran’s nuclear ambitions, Syria, or Ukraine. Rather, she thought that Brazil would be better off adopting a radically risk-averse position on the global stage. An almost hyperactive foreign policy under Lula, her mentor, gave way to disengagement and silence. Rousseff never publicly explained why Brazil should adopt a more low-profile diplomacy, nor did she openly propose a different strategy. Under her government, foreign policy just went AWOL.
For example, when Brazil, the country with the largest Syrian diaspora in the world, was invited to the Geneva II Conference on the Syrian crisis, in early 2014, she ordered her foreign minister not to go, to the dismay of Itamaraty. A few months later, when asked by journalists during a G–20 summit in Australia about her position vis-à-vis Russia’s intervention in Crimea, she was painfully sincere: “Brazil doesn’t have a position on Ukraine.”
Some experts say that the strategic withdrawal from the international arena is partly a consequence of Ms. Rousseff’s personal disdain for the “fluffiness” of diplomacy. An über-bureaucrat who had never contested an election before becoming president, she spent about half the time that Lula did traveling abroad in her first term. In five years as president, Rousseff had three foreign ministers and didn’t get along with any of them. “The president never hid her despise for diplomacy and she ignores international issues, as if they were unimportant”, wrote Alexandre Vidal Porto, a diplomat, writer, and now a vocal critic of Brazil’s foreign policy. Rousseff also gave limited attention to more ambitious foreign initiatives, such as partnering with Germany at the United Nations to put Internet freedom higher on the international agenda following Edward Snowden’s revelations. As a result, they quickly lost momentum. “The world is not on the president’s agenda”, lamented another Brazilian diplomat.
Now that Rousseff is battling impeachment, a fiscal deficit that may reach ten percent of Brazil’s GDP this year, and a double-digit inflation rate, foreign policy is even less of a priority. Even in relation to neighboring Venezuela, where President Nicolas Maduro is about to water down an opposition triumph in recent parliamentary elections, Rousseff remains publicly silent.
Naturally, over the years, foreign policies do change. Budgets expand and contract. Recessions end, governments come and go. Although these challenges are dealing a blow to the country’s global strategy, they are not permanent in nature.
The story with the Petrobras scandal, though, is different. In the past two decades, one of the main engines of Brazil’s emergence, particularly in Latin America and Africa, was what scholar Matias Spektor has called the “internationalization of Brazilian capitalism”: big Brazilian firms, heavily subsidized by Brazil’s national development bank (BNDES) and other state-owned financial institutions, scoring juicy contracts to export goods and services. Operation Carwash, which exposed how politicians and businessmen had been preying upon Petrobras, has severely compromised this key foreign policy tool for Brazil.
At the forefront of overseas business expansion were the same construction companies now being prosecuted for giving billions of dollars in bribes to politicians in exchange for deals with the national oil company. The toxic environment has also contaminated lenders and the political conditions that enabled cheap and secretive public loans have vanished away. Under severe public pressure, BNDES, the Brazilian Development Bank itself agreed for the first time in June to release data on foreign lending. In August, congress opened an investigation on the bank’s “alleged irregularities” overseas and its loans to businesses involved in the Petrobras bribes scheme. And this is all happening at a time when the cost of capital has already spiked for Brazilian companies—in September, Standard & Poor’s downgraded Brazilian debt to junk status. In December, Fitch followed suit.
Subsidized credit given to a huge national firm was precisely the magic formula that enabled Brazil’s Odebrecht to become a leading player in Cuba’s economic transition. The Port of Mariel is key to Havana’s reform plans; Cuban President Raul Castro wants to make it a Chinese-style special economic zone. After BNDES agreed to release some data, Brazilians learned that the bank poured into the project $682 million in loans with a 25-year maturity and interest rates below 7 percent, far below the estimate market rate of 12 percent. In exchange, Castro promised to spend $800 million on Brazilian imports. Cuba will continue to look to Brazil for economic and political support, especially now that Venezuela looks to be on the brink of collapse. Yet Brazil has fewer carrots for Havana and will have to compete harder for space—most likely also against U.S. companies in the near future—in Cuba’s economic transition.
With billions in total from BNDES, Odebrecht also obtained contracts to build subway systems in Caracas, Quito, and Panama City, along with six hydropower dams and other multimillion-dollar infrastructure projects throughout Latin America and Africa. The other five big construction companies involved in the Petrobras scandal also launched huge investments outside Brazil supported by state credit. These deals elevated bilateral relations between Brazil and other developing nations to a new level, one in which commercial and political influence became almost indistinguishable. And money talks, also in Portuguese; In 2014, Equatorial Guinea enthusiastically joined the Community of Portuguese Speaking Countries (CPLP) that Brazil created in the 1990s, even though almost no one speaks Portuguese in the West African nation. The Brazilian foreign policy establishment rightly sees relations with emerging countries, so-called South–South diplomacy, as one of the pillars of Brazil’s global strategy. However, the crisis has reduced the country’s soft power and economic tools to attract these nations.
Rousseff has tried to control the damage on BNDES’ foreign lending by vetoing parts of a law that would impose almost full transparency on these dealings. But the broader political—and criminal—changes brought by Operation Carwash won’t be reversed anytime soon; the old formula cannot be replicated.
In a less divisive political environment, with or without Rousseff as president, Brazil could reclaim macroeconomic stability through smart policies. Foreign policy might then come to be viewed once more not as a diversion but as a powerful instrument to help improve conditions at home. But a better economic situation and the reprioritization of foreign policy won’t be enough to provide Brazil a winning global strategy. Government and business will have to come up with new, more transparent, and less contentious recipes for projecting its interests abroad.
After the Petrobras scandal and the poor performance of Rousseff’s government, public fury is justified. The easy response, frequently seen in the Brazilian press, is to demonize public credit as a foreign policy tool. In the long run, however, Brazil would be better off increasing oversight mechanisms on public lending, with strategic thinking replacing personal connections as the main driver behind this policy.
For now, generations of Brazilians have watched their country fail to leave the “middle power” category. As the old joke goes, “Brazil has always been the country of the future.” Only by learning from the dire present can it escape its old truths.