Bolsonaro's arrest could trigger new US sanctions and increase the risk of an economic crisis.

The possible arrest of former President Jair Bolsonaro (PL) or a conviction in the trial at the Supreme Federal Court (STF), which begins on the 2nd, tend to heighten tensions with the United States and provoke unprecedented sanctions against Brazil, with serious economic impacts.

The situation has been complex since July, when the Trump administration announced tariffs on Brazilian products. "There is a real risk of sanctions, both personal—to ministers other than Alexandre de Moraes and his family—and more drastic economic measures," says Alessandra Ribeiro, director of macroeconomics at Tendências Consultoria.

In a gesture of strong alignment with Bolsonaro, President Donald Trump and members of his administration have signaled in recent weeks some additional measures that could still be adopted against Brazil:

• increase commercial tariffs;
• extend the effects of the Magnitsky Act; and
• exclude the country from Swift, the international banking payments system.

If any of these measures are confirmed, the effects should be heavier than the already applied 50% tariff increase, point out experts consulted by Gazeta do Povo .

STF and the banks' dilemma: between Brazilian law and US sanctions

The crisis between Brazil and the United States took on new dimensions when Justice Flávio Dino of the Federal Supreme Court (STF) ruled on Tuesday (19) that foreign laws do not automatically have validity in Brazil without judicial approval. The American embassy reacted immediately, warning that Alexandre de Moraes is "toxic" for companies and individuals seeking access to the US and its markets.

The US diplomatic mission also stated that those who offer support to human rights violators may also be subject to sanctions.

The Supreme Federal Court's ruling created a dilemma for Brazilian banks. If they comply with the court's ruling and maintain business ties with Moraes, they risk facing penalties in the United States. If they choose to comply with the Magnitsky Act and terminate contracts with sanctioned officials, they may be punished by the Brazilian justice system.

"You can't serve two masters at the same time," says economist Alexandre Schwartsman, former director of international affairs at the Central Bank.

There are also concerns that Brazilian banks operating in the US – including smaller ones – will have their operations affected by license suspensions, said the director of Tendências.

What are the effects of the American threats made before Bolsonaro's arrest?

The threats made by Trump and members of his cabinet, even before Bolsonaro's arrest, signal significant impacts that would be far greater than the tariff hike – which over ten years could represent the loss of R$110.4 billion in GDP and 618,000 jobs, according to the Federation of Industries of the State of Minas Gerais (Fiemg).

The effects of additional sanctions against Brazil would begin with an increase in risk perception, according to economists. Financial assets—stocks, the dollar, and interest rate futures—would be the first to be affected by uncertainty surrounding the Republican's measures.

The fall in stock prices would make it difficult for companies to raise funds, while the devaluation of the real would jeopardize the slowdown in inflation and the reduction of the Selic rate.

Rising future interest rates would raise the cost of credit for families and businesses, affecting consumption and investment, with repercussions for GDP and employment. External agents would tend to withdraw investments from Brazil, leading local investors to seek safer assets.

Higher tariffs would make exports to the United States unfeasible

An increase in tariffs to 100%, as considered by Trump in light of President Luiz Inácio Lula da Silva's threat to also retaliate against the Americans, would practically make Brazilian exports to the United States unviable, the second largest destination for the country's foreign sales and the main market for products from the manufacturing industry.

"It's a situation that would completely limit Brazilian exports to the American market, generating direct negative effects on the affected segments, on production and employment," explains Ribeiro.

Agribusiness may be even more affected, as the list of exemptions from the tariff hike favored higher-value products, such as commercial aircraft and their parts, and petroleum and its derivatives. In agribusiness, only orange juice was included.

According to Nathália Grizzi, a partner in the corporate law practice at Martorelli Advogados, if this prospect of a significant reduction in exports materializes without these products being sold to new consumer markets, it is possible to imagine an increase in the number of bankruptcy filings by affected companies, as this will place additional financial pressure on the capital-intensive agricultural sector.

Expanded application of the Magnitsky Act could have severe consequences for Brazilian banks

Another possibility, given further restrictive measures resulting from Bolsonaro's arrest or his conviction by the Supreme Federal Court (STF), would be the expanded application of the Magnitsky Act. This scenario could have severe consequences for the Brazilian financial system. Banks that violate US sanctions could face heavy fines, as has already happened to other institutions.

BNP Paribas was fined nearly $9 billion in 2014 for brokering transactions originating from Cuba, Iran, and Sudan. The transactions were processed through the American financial system. Half of the transactions involved expressly prohibited entities.

Brazilian financial institutions with operations in the United States risk having their licenses suspended or their dollar-denominated operations restricted. This would hinder access to the American market, which is essential for export credit lines and interbank transactions.

"The problem would be more operational and would impose significant operating costs on banks and, therefore, on companies," Schwartsman assesses. The impact would be on banks' ability to intermediate dollars for exporters and importers, affecting credit and access to foreign capital markets.

Experts consider it highly unlikely that this will lead to a systemic banking crisis with a bank run. According to the director of Tendências Consultoria, the Brazilian financial system is robust, banks are well-capitalized, and the Central Bank conducts regular stress tests.

Exclusion from the Swift system would leave Brazil isolated in the international financial system

The most extreme scenario, if Bolsonaro's imprisonment or his conviction by the Supreme Federal Court worsened the situation, would be Brazil's exclusion from SWIFT, the main global banking integration system. This would prevent financial institutions from making international transfers, halting exports, imports, investments, and remittances. The country would be virtually isolated from the international financial system.

The hypothesis was raised by the United States trade representative, Jamieson Greer, in an interview with the North American network CBS earlier this month: "Tariffs are actually lighter than a sanction – a sanction, you are excluding a country from your financial system."

The effects would be catastrophic, Ribeiro emphasizes. According to her, the situation would create a scenario with significant repercussions for the Brazilian economy. There would be immense difficulties in transacting, directly affecting the country's international trade and, consequently, domestic economic activity. The measure was applied against Russia due to the war it launched against Ukraine in 2022 and required discussions with European financial institutions.

The executive secretary of the Ministry of Finance, Dario Durigan, said he had received assurances from Hayden Allan, the consortium's global head of corporate affairs, that Belgium-based Swift would not comply with the US decision, as it follows the European legal framework and is not subject to arbitrary sanctions from specific countries.

Freezing Brazilian reserves in the US would be a catastrophe

Another possibility that could arise given the tightening of Bolsonaro's prison conditions would be the freezing of Brazil's dollar reserves, some of which are held in the United States. Schwartsman says such a measure would be something like an "atomic bomb," something the US doesn't usually trigger immediately.

The specific rules for an action of this magnitude are not entirely clear. The idea is raised by analogy with sanctions imposed on Russia, which had part of its reserves frozen.

If it were to occur, the freezing of Brazilian assets – specifically reserves in American securities held abroad – would mean that the Central Bank would lose the firepower to control exchange rate movements and access these resources, configuring an economic "catastrophe."