Iran conflict forces Brazil to shelve fuel subsidy decision mid-week

The conflict between Washington and Tehran entered its third consecutive day of strikes on Thursday, and its effects landed squarely on the desk of Brazil's finance minister — forcing Dario Durigan to postpone one of the week's most anticipated fiscal decisions and laying bare Brazil's vulnerability to geopolitical shocks that, until recently, seemed too distant to disrupt Brasília's calendar.

Oil climbed nearly 2% in Thursday's session — the day of Iranian supreme leader Ali Khamenei's burial — with Brent pushing back toward US$80 a barrel following the escalation of mutual strikes and the near-total paralysis of tanker traffic through the Strait of Hormuz. The impact on fiscal planning was immediate. Durigan had signaled he would announce this week the end of the gasoline subsidy — estimated at R$0.44 per liter — after already removing R$0.35 per liter of the diesel subsidy last week. With crude on the rise again, the minister backed off: the decision will now wait until next week, "partially or fully," depending on price behavior. Middle East volatility has turned what was meant to be a carefully choreographed fiscal normalization into something closer to slow-motion crisis management. In parallel, the government is weighing whether to keep the 12% export tax on crude oil — whose provisional measure expires Thursday — while also delaying a decision on raising the mandatory ethanol blend in gasoline from 30% to 32%, fearing any move would trigger renewed pressure from Congress for additional subsidies.

Geopolitical uncertainty is echoing through domestic markets, but in a curiously contained way. The dollar opened slightly lower at R$5.14 in a thin-liquidity session on account of São Paulo's Constitutionalist Revolution holiday, and the Ibovespa advanced to 171,300 points in step with Wall Street. Futures rates retreated modestly — the January 2027 DI held steady at 14.04%, while longer contracts eased marginally — giving back part of the sharp stress from the previous session, when surging oil pressured the entire curve. The recovery is tentative, however. The fixed-income market remains on edge, fueled by recent cancellations of government bond auctions and by the debate, raised by National Treasury Secretary Daniel Leal, over the distortion caused by income-tax-exempt securities. Leal's critique carries weight: tax-exempt papers drain demand from conventional government bonds, driving up the Treasury's funding cost at a moment when public debt already demands heightened attention. Dollar inflows in the first half were the largest since 2018, a data point pointing to a structural improvement in the trade balance — but one that coexists with the prospect of futures rates remaining elevated for an extended period.

On the fiscal front, beyond the fuel-subsidy saga, the government is moving forward on other costly fronts. Durigan confirmed that in the coming days he will issue a provisional measure to renegotiate rural debt, with an estimated additional impact of R$2 billion to R$3 billion per year for the Treasury, over a stock of operations that could reach R$100 billion. Agribusiness wanted broader terms; the government proposed limiting the renegotiation to producers with weather-related losses, but ended up partially accommodating the rural caucus by also including producers hit by market swings. Rates may reach 12% per year, with terms of up to ten years. The dispute mirrors a permanent tension in Brazilian fiscal policy: the government has to signal responsibility to the market while negotiating concessions with organized interests in Congress.

Geopolitics disrupted more than just fuel policy. Russia has banned diesel exports through the end of the month — an effect of refineries hit by Ukrainian drones — and Brazil, the second-largest importer of the Russian derivative, is monitoring the situation closely. Turkmenistan has emerged as an alternative source of fertilizers: the Central Asian country supplied 1.3 million tons of potash to Brazil in the first half, compared with virtually zero in the same period a year earlier. The Senate, for its part, approved an additional R$15 billion for the Plano Brasil Soberano, created to support exporters affected by geopolitical tensions. It is a fitting response to the moment, but it comes as Brazil's commercial relationship with the United States hits its worst historical mark: one year after the 50% tariff hike announced by Donald Trump in July 2025, the US share of Brazilian exports fell to its lowest level since 1997. US Trade Representative Jamieson Greer warned on Thursday that a final decision on the tariffs — with a proposed 25% levy on Brazilian products — will be announced "very soon," with the legal deadline closing on July 15. Brazil is pursuing diversification, including in the financial arena: the issuance of panda bonds in yuan is advancing as an alternative to traditional funding sources in New York and Europe, inserting the country into a broader reconfiguration of the international financial architecture.

The IMF raised its growth forecast for Brazil from 1.9% to 2.4% in 2026 — the second-largest upward revision among all countries — defying both the domestic market consensus and the perception that the Middle East conflict would inevitably drag on the global economy. Global growth was cut marginally, to 3%, while world inflation jumped to 4.7%. For Brazil, the IMF's number is a vote of confidence, but the domestic backdrop remains complex: Oncoclínicas failed to secure quorum even to discuss its out-of-court restructuring covering R$1.5 billion in debentures; Ambipar advanced an agreement with creditors to restructure its international Green Notes, with financing from Itaú BBA International; and the private payroll-loan market is grappling with rising delinquency owing to a technical glitch in the automatic credit-migration system when workers change jobs — an operational problem generating real losses for both banks and borrowers.

In the days ahead, the market awaits the definitive decision on fuel subsidies — and with it a clearer read on the government's fiscal commitment — the outcome of tariff negotiations with Washington before July 15, and the evolution of the Middle East conflict, which remains the variable most disruptive to Brasília's plans.

**Vale (NYSE: VALE)** — CVM opened proceedings to investigate a possible irregularity in Daniel Stieler's resignation from the chair of the board, under pressure from Previ, the Banco do Brasil employees' pension fund; the miner confirmed the payment of financial compensation to the former board member, while denying that his departure was contingent on any prior arrangement. Vale also ren