Petrobras sinks as Brazil moves to ease legal protection company

(Bloomberg) — Oil producer Petroleo Brasileiro SA plunged Wednesday after Brazilian lawmakers approved changes to a law that offers some protection against political interference in state-controlled companies.

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The lower house passed a bill on Tuesday evening, by 314 votes to 66, which greatly facilitates the appointment of politicians to key roles in state companies. The proposal stipulates that participants in political campaigns must undergo a single month’s quarantine before being appointed to an executive position or to the board of directors of such companies, down from the current three-year period.

The change, introduced at the last minute in another bill under discussion by lawmakers, needs the support of senators before it can be signed. Senate President Rodrigo Pacheco said party leaders are discussing whether to put it to a vote again on Wednesday. The mood in Congress suggests swift approval of the proposal, despite the controversy.

“It’s an unspeakable setback,” Petrobras board member Francisco Petros told Bloomberg News of the proposed amendments. The move would represent “an inexhaustible source of conflicts of interest between political parties and state-owned enterprises”.

Taken by surprise

Petrobras was the worst-performing name in Brazil’s 92-member Ibovespa benchmark stock index Wednesday, with preferred shares tumbling more than 9% as of 2:40 pm in Sao Paulo. Other state-owned companies were also down: Banco do Brasil fell by 5%.

“The speed with which the change occurred took us by surprise,” Banco BTG Pactual SA analysts Pedro Soares and Thiago Duarte wrote in a note. “This is unquestionably bad for Petrobras (and other Brazilian state-owned enterprises) and eliminates one of the main defense mechanisms against the company’s political influence.”

Petrobras has come under intense pressure since Lula was elected, with investors spooked by the prospects of new management and an anticipated shift into investments in low-yielding assets such as refineries. Bradesco BBI dropped its buy-equivalent rating for the stock on Tuesday, saying the news flow surrounding the company was “deteriorating by the day.”

While outgoing President Jair Bolsonaro said in August that his economics team had the green light to plan a potential sale of Petrobras, Lula said on Tuesday that the privatizations would end up in his government.

Petrobras, while considered one of the most technically savvy national oil companies, also has a history of government interference and corruption. A huge pay-to-play scandal known as Carwash that erupted in 2014 centered around Petrobras.

Fernando Haddad, who was named Lula’s economic czar last week, said Wednesday that Brazil’s state-owned companies need strict compliance rules.

–With assistance from Simone Iglesias, Peter Millard and Martha Beck.

(Update stock movement in fifth paragraph and Fernando Haddad’s comments in last paragraph.)

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