As Rio Turns Into Shoot 'Em Up City...There's Even A Cloud Over Carnival

Rio de Janeiro, shaken by a wave of kidnappings, bank robberies, and machine-gun battles between police and drug traffickers, is resorting to a novel pitch to attract business: Things can only get better.

City leaders hope that's the case, because competition among major cities for investment is heating up as Brazil's economy booms. Rio, which is becoming as well-known for crime as for Carnival, is falling even further behind So Paulo, South America's largest city and Brazil's business hub. "Investment is going to So Paulo as if everything starts and ends there," says a frustrated Augusto Diniz, executive vice-president of the American Chamber of Commerce in Rio, which competes fiercely with its rival chamber in So Paulo. Companies that have cut or abandoned their Rio operations in favor of So Paulo in the past several years include United Technologies' Otis Elevator unit, French telecom-equipment maker Alcatel, Brazilian brewer Brahma, and department-store chain Lojas Americanas.

The exodus is making Rio business leaders defensive about their city. The main problem is image, they insist, arguing that for the average tourist or person doing business, Rio is no more dangerous than So Paulo, New York, or Madrid. While it's true that Rio's problems get more media attention, the reality in Rio is also more alarming. Even Mayor Cesar Maia, more honest than PR-savvy, says Rio is in a state of civil war--and that he doesn't feel safe in the city.

The federal government sent army soldiers with tanks to patrol the streets last November. The first stage of Operation Rio, lasting about two months, was deemed a partial success because drug gangsters laid low or slipped out of the city. The second phase, which began in late March, has been a disappointment, police admit. Traffickers armed with AR-15 assault rifles are fighting back against the police and army, demonstrating that they still rule Rio's 500 hillside slums, known as favelas, where they are based.

GRENADE SHOWER. Friday, Apr. 28, was the kind of day Cariocas, as residents of the former capital are called, are becoming accustomed to. Two police were killed and one was wounded in gunfights during which three drug traffickers were also killed. During a raid in one favela, a shower of grenades forced police to retreat. In another, hoodlums knocked down trees to block a road in a typically bold carjacking operation. Earlier in the week, four people were kidnapped, raising to at least 13 the number of abductions for ransom reported this year. (The real count is believed to be at least twice as high because many families don't report kidnappings to the police.) And then, on May 6-8, 67 people, mostly suspected traffickers, were massacred in Rio slums.

Not even Rio's famed Carnival, one of the world's most elaborate annual parties, is able to escape the grasp of criminals. This year, the city contracted out the parade, granting control to the League of Samba Schools, the organization of the 16 major parading clubs.

The problem is that the league is controlled by gambling chiefs whose money comes from an illegal lottery with revenues estimated at $2 billion annually. To the paraders, the gambling bosses are benevolent bad guys. They finance costumes and floats that the samba schools couldn't afford otherwise.

A dozen of the bosses were jailed last year on racketeering charges, but that didn't stop them from running the Carnival held last February. Records taken from the convicts showed that while behind bars, they were keeping control of samba-league finances and making contributions to prominent politicians.

Nevertheless, the gamblers ran this year's parade more profitably than did the city, which for years lost money or barely broke even on Carnival. Under the league's management, the city was able to collect $720,000 in taxes. The Samba League, though it spent millions, almost certainly reaped an even bigger profit. It sold $14.5 million worth of tickets for the parades on Feb. 26 and 27 at the 90,000-seat Sambadrome. And under its contract with the city, it kept a 51% share.