Iran War Strains Brazil's Fiscal Framework as Petrobras Royalties Surge

The war in Iran continues to shape Brazil's economy, pressuring prices, redistributing fiscal revenues, and testing the resilience of a financial system that is simultaneously contending with internal turbulence of considerable magnitude.

Domestic markets reacted with some relief on Tuesday following the previous session's stress, when the dollar closed 0.5% higher at R$5.180 — the highest level since March — and the Ibovespa fell 0.21% to 168,669 points, dragged down by the escalation of the conflict between Israel and Iran. In Tuesday's session, the index advanced toward the 170,000-point mark and the real partially recovered, tracking the retreat in oil prices and the perception that an agreement between Washington and Tehran may be closer at hand. Futures rates also eased, in a move described by Valor Econômico as technical relief after the recent stress.

The cost of the conflict, however, is already baked into projections. Economists have raised their estimates for both the Selic rate and inflation in 2026, worried about the war's impact on fuel, fertilizers, and logistics costs. The IGP-DI decelerated to 0.87% in May, from 2.41% in April, but came in above expectations and accumulates 2.53% over 12 months, according to FGV. For consumers in São Paulo, food prices rose 3.9% in the first five months of the year — more than double the average inflation of 1.9% over the same period, according to Fipe data.

It is precisely the conflict that explains one of the few tailwinds for public accounts: oil royalties hit a record in May, surpassing R$8 billion, driven by the rise in crude prices after the war broke out. The extraordinary revenue benefits the federal government and should allow Rio de Janeiro to close the year with a deficit substantially below forecast. But the same expensive oil that fills government coffers threatens consumers' wallets — which is why President Lula met on Tuesday with representatives from the sugar-and-ethanol sector to discuss raising the ethanol blend in gasoline from 30% to 32%. In parallel, the government regulated a subsidy of R$1.12 per liter of diesel, and the Receita Federal notified 61 companies in the fuel sector under the Habitual Debtor Law, demanding R$30.7 billion in accumulated tax liabilities.

On the broader fiscal front, the Tribunal de Contas da União will include qualifications in the government's 2025 accounts, to be judged on Wednesday, due to the use of funds and state-owned enterprises to circumvent budget limits — a practice that, according to an earlier Folha de S.Paulo survey, raised Treasury loans skirting the fiscal target to R$307 billion. Finance Minister Dario Durigan made a direct appeal to lawmakers not to vote on fiscally damaging measures, signaling that fiscal fragility remains a central concern less than four months before the presidential elections.

The financial system, meanwhile, is going through a moment of institutional pressure rarely seen. Banco de Brasília is undergoing a "liquidity run," in the words of its own president, Nelson Antônio de Souza, who admitted to Valor Econômico that there had been "robbery, isolated fraud, and reckless management" at the institution, and announced legal action against former executives. The BRB crisis is directly linked to losses tied to Banco Master, whose funds are also waiting to recover R$1.4 billion injected by Rioprevidência, the pension fund of the State of Rio de Janeiro. Cade itself approved this week the acquisition of 11.9% of Oncoclínicas by the Quíron and Tessália funds, controlled by Master — consolidating the group's footprint in the healthcare sector even amid the crisis.

In the face of the turbulence surrounding Master and judicial challenges to regulatory decisions, six financial-sector associations — including Febraban and Abranet — published a joint note in support of the Banco Central as regulator. Officials at the central bank itself went further, releasing an open letter to the Senate defending the vote on the constitutional amendment granting the BC financial autonomy and the preservation of Pix. The authority has also promised to publish a new code of conduct by the end of July.

On the corporate front, Raízen is moving forward with what would be the largest out-of-court restructuring in Brazilian corporate history, with 75% of creditors already adhering to the plan that envisages converting 45% of R$66 billion in debt into equity, with Shell injecting R$3.5 billion. To raise cash, the company agreed to sell its Argentine assets to Swiss trading house Mercuria for US$1.4 billion. Braskem, another giant in restructuring, completed the renewal of its board under manager IG4 and is seeking a deal with creditors still in June. Embraer, by contrast, showed signs of operational strength: CEO Francisco Gomes Neto reported that the planemaker has cut commercial aircraft production time by 28% relative to the 2021 bottleneck, even as Latam Airlines unveiled the first E2 jet in its fleet — although the carrier has pre-announced a 3-percentage-point reduction in third-quarter capacity, given the war's impact on costs.

For agribusiness, the horizon has darkened further. Beyond the European ban on Brazilian beef — which the European Union said was avoidable, according to its trade spokesperson Olof Gill — and the structural threat posed by China's food self-sufficiency plan, Citi analysts warn that the 2026/2027 crop will be pressured by the arrival of El Niño, with above 80% probability of developing between June and August. The sector also faces higher fertilizer costs, eroding Brazil's historic competitive edge against American producers.

What to watch in the coming sessions: the TCU's judgment of government accounts on Wednesday, the final deadline for ratification of the R$515 billion mega energy auction — whose validation is suspended by a federal injunction — and the evolution of trade negotiations between Brazil and the United States, with Minister Durigan expected at the next round of tariff talks. The decision on raising the ethanol blend, if confirmed, will move both the sugar-and-ethanol sector and fuel distributors — and will have direct repercussions on the inflation that economists are already projecting higher.