Dancing With the Devil in the City of God: Rio De Janeiro on the Brink

by Juliana Barbassa

  There was a punch line Cariocas invoked whenever there was a massive failure of infrastructure: when a hard rain turned town squares into Olympic-sized pools, or when the commuter trains broke down in triple-digit heat, someone inevitably would pipe up, “Imagina na Copa!” Imagine during the Cup, when this city, already at capacity, will receive millions of visitors as the world watches.

  Following the demonstrations on the news, the words came back to me. Imagine these scenes during the World Cup, or later, during the Olympics. Tens of thousands on the streets. Tear gas wafting into stadiums. Armed police bludgeoning protesters and journalists. I could see why the crackdown was so vicious. Authorities were desperate to stop this outpouring, by any means. They had sold the world a country that was democratic, stable, safe for investment. Angry protesters were not part of that picture.

  Government officials had deeper reasons for worry. These were revolts born of higher expectations, and were likely harbingers of more upheaval. But they came at a time when the economic landscape was dramatically altered. Just when the population wanted more, Brazil’s economy was stalling.

  Dilma was also caught off guard. Approval of her government had plummeted from a peak of nearly 63 percent in March to 31 percent in June 2013, when collective frustration had reached a boil.

  She addressed Brazilians directly on June 21, after weeks of protests. The goal was to connect with the population and reassure them she was listening, but her measured words sounded distant from the raw emotion in the streets. The determination she’d shown as a young militant had hardened into something unbending, unapproachable. Her hair was shaped into a lacquered helmet, her shoulders squared, all of her unyielding in appearance and tone. She met her electorate on television with cool caution, a Botox-smooth brow, and promises wedged between calls for restraint.

  “As presidenta I have the obligation to hear the voice of the streets and to dialogue with all segments, but all within the dictates of law and order, which are indispensable to democracy,” she said.

  She did make three concrete promises: to develop a national plan for affordable public transportation, to invest the expected oil royalties in public education, and to expand the capacity of the public health network by bringing in foreign doctors.

  Over the months that followed, the protests lost much of their initial force, but nonetheless persisted. Of the thousands that had marched on Rio’s governor, a few score held on, camped out in front of his Leblon apartment. Cabral’s approval rating sank to a dismal 12 percent. He would never recover, and he resigned before the end of his mandate.

  Dilma, who had one year to go until the next round of presidential elections, got busy pushing through the measures outlined in her speech. A controversial plan brought Cuban doctors to underserved regions; Congress approved a law that dedicated the bulk of oil revenues to education and health. She met with social movements, but the population was largely unmoved. Her popularity remained a fraction of what it had once been, and Brazil was still gripped by a volatile sense of dissatisfaction. Small but frequent violent protests flared across the country.

  Four months after the start of the demonstrations, she was back on television. This time the president would play her trump card, sharing with Brazilians a development that would bolster public accounts and allow the government to respond to their demands. This was the auction of Libra, the first of the deep-offshore oil fields open to exploration by foreign oil companies. In her own words, this would be Brazil’s “passport to the future.”

  Trapped underneath a layer of salt deposited during the evaporation of a prehistoric ocean, these vast deposits are estimated to hold up to 12 billion barrels of light crude. Altogether they are the biggest oil discovery in the Americas in a generation.

  Libra’s contents, together with the 15.4 billion barrels estimated to lurk within the rest of the pre-salt fields, plus the rest of the country’s proven reserves of 15 billion barrels, would be enough to hoist Brazil to new geopolitical heights. If these estimates proved true, Brazil could go from being the world’s fifteenth-largest oil producer to one of the top ten, catapulting over China, Qatar, Kazakhstan, the United States, and Nigeria and landing somewhere near Libya, with its 48 billion proven barrels.

  I followed the president’s words on television, along with millions of other Brazilians. Coming from an oil family, I was more aware than most of the commodity’s turbulent history, and the whiplash it had dealt Brazil not so long ago.

  A mismanaged energy policy had been an important trigger in Brazil’s downfall. In 1973 the country had been under the thumb of dictators but economically it flourished, feeding on cheap fuel from abroad to grow at rate of 10 percent a year. All went very well until October 16 of that year, when members of the Organization of the Petroleum Exporting Countries jacked up the price of a barrel of oil from $3 to more than $5 and pricked the balloon of the global economy.

  At the time, Brazil imported 80 percent of its fuel. Faced with the sudden hike in price, the government chose to borrow money and push ahead rather than cut oil consumption and rein in the galloping pace of development. It worked in the short term. As other economies, including the United States, dipped into recessions, Brazil continued to borrow and grow. Debt soared, and so did inflation. By the end of the 1970s, interest rates on the borrowed money were ratcheted up, and Brazil was taking on new debt just to pay the interest on the old. Nineteen eighty was the last gasp in this mad race; that year Brazil still grew an incredible 9 percent. By 1982 the country was broke. Brazil defaulted on its loans. Inflation climbed from peak to peak until it reached a dizzying record of around 2,500 percent in 1993.

  Now Brazil had its own source of oil. Deep within the complex geological formations of the pre-salt fields was the key to energy self-sufficiency and the solution to the country’s most intractable problems, Dilma said. Having followed petroleum’s bounty around the world during my childhood, I was keenly aware it was not always a blessing. For every Norway, with its generous social services, there were a handful of examples that showed the damage that mismanaged oil wealth could do. Sudden prosperity does not reform broken institutions or necessarily strengthen democratic channels. On the contrary, it often reinforces whatever social structures and power dynamics are in place. If these are corrupt and unequal, these traits can be exacerbated as well. It was still unclear how this revenue would play out in this shifting Brazil, but there were reasons to doubt it would do everything the president was promising.

  The first problem was timing. Brazil had been celebrating this oil boom since November 2007, when the discovery was announced. The auction offering up Libra was momentous, but it came more than six years after the initial discovery. The excitement that followed the initial declaration had dimmed, muddled by political infighting among Brazilian states and the federal government about how to share the profit. As the years passed, Brazil’s discovery was overshadowed by developments elsewhere, such as the exploration of shale oil and tar sands that had bolstered North America’s energy potential and again tilted the global energy tables.

  Lawsuits marred the run-up to the auction, and it took a task force of three hundred federal government lawyers to fend off the twenty-seven legal challenges. Protesters—from nationalist, it’s-our-oil types to striking Petrobras workers—gathered at the beachfront hotel where the auction took place and clashed with soldiers sent to contain them, enveloping surfers and sunbathers in a nauseous mix of chanting and tear gas.

  Then there was the way the auction was handled. With a focus on short-term gains, the federal government required participants to pay a mandatory signing bonus of $7 billion. This would bolster Brazil’s primary surplus in the year leading up to the election, but it was steep, even by international oil company standards. This and other restrictive conditions scared off giants in the business such as Chevron, ExxonMobil, and BP. Of the more than forty companies expected to take part in the auction
, only eleven confirmed their participation.I

  The result: the jewel of Brazil’s oil bonanza attracted a single bid. It was a consortium led by Petrobras with 40 percent participation, China’s CNOOC and CNPC with 10 percent each, France’s Total and the United Kingdom–based Royal Dutch Shell, with 20 percent apiece.

  Given the apparent lack of enthusiasm, Dilma’s first job was to reassure the population that the sale had been a success. Indeed, the consortium was a solid and politically palatable mix of foreign and domestic, public and private companies. Together they had the cash and the experience to develop Libra, an adventure expected to cost about $400 billion, according to IHS, the largest consulting firm in the sector.

  Also, under the terms of the agreement, approximately 85 percent of the revenue generated would revert back to Brazil, directly or through Petrobras. As promised, approximately $50 billion over ten years would be dedicated exclusively to two of the areas where protesters had clamored for investment: education and health.

  Federal policy also dictated that up to 70 percent of all the gas ducts, supporting ships, platforms, and other equipment necessary to produce this oil had to be made in Brazil. This hamstrung Petrobras and other companies involved, but it promised jobs and investment, much of it in Rio.

  But Dilma’s post-auction speech did nothing to assuage concerns about its most debated aspect: the heavy hand with which her administration had shaped the process, imposing restrictions and costs on participants to bolster public coffers during a politically sensitive year.

  This came at a time when investors were already wary of other interventions in the economy to keep up appearances. Inflation control was an example. By 2013, this old haunt was rearing its head again, though it remained just within the generous ceiling of 6.5 percent. The official inflation number was artificial, though, the result of price caps on costs the government could control, like fuel, electricity, and transportation. These fixed costs balanced other rising expenses. They also weakened some of the most important national companies, such as Petrobras and Eletrobras, by forcing them to sell their fuel and electricity at a loss.

  Dilma’s administration was increasingly reliant on this kind of intervention. It worked in the short term, but was unsustainable in the long run, injecting uncertainty into the market. How long would the price holds last? And when these expenses went up, as they would have to, what would they mean for household expenses, industrial costs, and inflation figures?

  These questions, together with the sluggish growth of recent years, cast doubt on the country’s direction and its long-term financial health.

  The international scenario that had helped in the early 2000s, with its high commodity prices and great demand for Brazil’s exports, was a thing of the past. The spending and credit access that had fueled the economy internally had run its course. There would be no new consumer run on televisions, cars, and washing machines. By the Libra auction, this growth model had played itself out, and it was starting to show. Two thousand thirteen was the third slow year in a row; Brazil was no longer a sure thing.

  That impression was nailed home by news that the oil firm OGX, crown jewel in pop-star billionaire Eike Batista’s coterie of companies, was filing for bankruptcy protection. It would prove the unraveling of his empire.

  I’d watched Eike since my return. He was the country’s wealthiest man, an inveterate self-promoter who put himself forward as the sun-kissed face of this can-do Brazil. He also identified closely with Rio, putting $11 million of his own money into the city’s Olympic bid and contributing $10 million a year to the UPP program, among many other projects.

  In a year and a half, he’d had gone from poster boy of the country’s economic turnaround to starring in the continent’s biggest corporate bust. His fall shook the oil world, but also reverberated well beyond it, raising more questions about Brazil’s economic fitness and the future of the city he was helping remake.

  The tale had the contours of a telenovela, the prime-time soaps that keep devotees entranced with hairpin plot twists and juicy make-out scenes. Eike was a self-styled leading man, with a chiseled jaw, gray-blue eyes set off by a dusting of gray at the temples, and a melodramatic lifestyle. He had been a powerboat racing champion and husband to Luma de Oliveira, a Playboy centerfold and actress who danced her way through the Carnaval parade one year wearing nothing but sequins, towering platform heels, and Eike’s name on a choker. They divorced in 2004, but not before bearing two sons named after Norse gods, Thor and Olin.

  Brazil’s superrich don’t usually flaunt it, out of safety concerns if nothing else. But Eike liked to traffic in superlatives. His private yacht was often seen hugging Rio’s sinuous coastline, and he had another, a 177-foot converted cruise ship kitted out as a party boat. A silver Mercedes-Benz SLR McLaren, one of his many cars, was often left on display inside his mansion’s living room.

  Beyond the gossip-magazine material, what made his story fascinating was the degree to which the billionaire’s rise paralleled Brazil’s own. Eike also owed much of his fortune to commodities. After trying his luck at several businesses and riding out a minor boom-and-bust cycle with a gold mining project, he started an energy company in 2001 and an iron ore firm four years later. Both went public. But it was the pre-salt finds that Lula called “a second chance for Brazil” that would be Eike’s ticket to the top.

  In July 2007, a month after Petrobras confirmed the pre-salt discovery, he launched OGX with the intention of going after any offshore fields Petrobras missed. He’d never worked in oil before, but by then no one doubted Eike’s golden finger. The firm’s initial public offering in 2008 was the biggest in Brazilian history and raised nearly $4 billion.

  Back then, Brazil was a party; investors who wanted to dance came to him—big names like BlackRock, Pimco, Mubadala, E.On, General Electric, ExxonMobil, IBM.

  At his peak, he was inescapable. The man tweeted like a teenager, entertained celebrities, wrote a book of corporate advice, posed for photos, and regaled journalists with quotable bites spiked with his trademark hubris: “My companies are idiot-proof,” or “The world belongs to the daring.” When Charlie Rose asked him what he wanted in the next ten years, he replied, “I want to be the world’s richest man.”

  Those who found his performance grating or his strategies reckless kept quiet, glad to be participating in the bounty. Critics were shunted out of sight.

  Eike projected himself onto Rio, remaking the city he loved in his own, larger-than-life image. Beyond donations to the Olympic bid and to the UPP program, he had stakes in the Maracanã stadium and contributed to cleaning up the lagoon by Ipanema. With loans from the national development bank, he began renovations of the old Hotel Glória, a handsome building with an Art Deco façade and known for its traditional Carnaval costume balls, and bought a twenty-four-story building with commanding views of the bay to transform into a hotel in time for the Olympics.

  His empire would come together at the super-port of Açú. Set in a remote corner of northeastern Rio state, it was, like everything he touched, meant to be better, bigger, grander. Its footprint was one and a half times that of Manhattan. Once it was completed and running the mega-operation would handle 350 million tons of goods a year and link Eike’s logistics, shipbuilding, energy, and oil ventures in a self-contained loop that would feed itself and mint money.

  When he hosted President Dilma and Governor Cabral in Açú in April 2012, the president put on the company’s orange jacket and gushed: “Eike is our standard . . . Brazil’s pride.”

  The plan behind Açú was brash and nakedly ambitious—pure Eike. All of it rested on his collection of start-ups, especially OGX and its promise of oil.

  So when, just over a year after the president’s visit, OGX announced its wells were duds, what could have been a contained disaster in the hands of a more cautious man instead brought down his empire. He was overleveraged, running
a business built largely on debt, charisma, and the promise of this new Brazil. When the bills came due, he couldn’t pay. Investors fled and prepared legal action.

  His projects around Rio were abandoned, visual cues of his spectacular crash: a UPP station was left, half built, in Batan. The Hotel Glória, which I biked past on my way to the Sunday farmer’s market, stood amid abandoned cranes. The twenty-four-story building in Flamengo was deserted, and the sight of its gutted and weedy carcass reiterated the question: to what extent had Eike represented Brazil, and Rio in particular? More important, how much would they share his fate?

  Lula, who’d famously said it was easy to help the poor, also said in 2010 that “it was rich people who made the most money during my administration,” making clear that Brazil under the Workers’ Party was very much open for business. Dilma had less compunction about making capital’s needs second to those of the state. The über-capitalist Eike had been the fig leaf that covered this up.

  Now Eike’s empire had crumbled, the government’s accounts were deteriorating, and investors scanning the world’s economies for a place to put their money began to pull away.

  Brazilians had noticed their buoyant economy was deflating, and that the years of plenty had not been used to invest in the economy or raise productivity. This was evident from the posters raised during the 2013 protests. As the tax burden grew and became one of the world’s highest, at 36 percent of GDP, the population did not receive better services or infrastructure for it. They just got a bigger bureaucracy.

  Transportation of goods, for example, was inordinately expensive because of poor roads, rail lines, ports, and airports; this jacked up the cost of living and made Brazilian products less competitive abroad. But the main federal program to improve infrastructure, the Programa de Aceleração do Crescimento, or Growth Acceleration Program, which was launched in 2007 and expanded in 2010, was very much behind schedule and over budget by 2013.