OPINION: An unexpected shift in command at Brazil’s Petrobras rocked the financial markets this week, with investors digesting the surprising news and fearing that the days of political interference at the state-controlled oil giant are back.


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Brazilian President Jair Bolsonaro announced he was replacing Petrobras chief executive Roberto Castello Branco, a liberal economist with close ties to Finance Minister Paulo Guedes, with Joaquim Silva e Luna, a retired Army general.

The change was poorly received by most analysts and credit raters overwhelmingly downgraded Petrobras' stock on fears Bolsonaro could resort to populist tactics to try to influence the company’s fuel-pricing policy and undermine recent policies of prudent debt deleveraging.

Over the past four years, Petrobras has stuck to a strategy of allowing fuel prices to move freely with international crude rates, a move that ended government-imposed controls that led to losses to the company's coffers of nearly $40 billion in fuel import trade.

Castello Branco is a staunch believer in free market policies, adjusting fuel prices in line with oil price rises and the depreciation of the Brazilian real against the US dollar.

However, the successive price hikes took place at a critical political juncture when Bolsonaro was facing increased pressure from truck drivers upset with the high cost of diesel and their threats to paralyse the country with a new nationwide strike.

Even though Castello Branco can argue he was just sticking to agreed policy, it did not help his cause that he showed little empathy with the truck drivers.

Bolsonaro was stuck between a rock and a hard place: if he opted to back Castello Branco he would placate the markets but, with elections in mind, he knew he would risk facing a backlash from consumers and truck drivers for not taking action on their behalf.

By opting for a military man at the helm of the oil company, Bolsonaro has even invited comparisons with Venezuela, where a left-wing regime has put military leaders in charge of state player PDVSA.

In the eyes of investors, Bolsonaro has undermined the credibility Petrobras has spent years building up regarding its freedom from government influence.

(This is an Upstream opinion article.)