US sanctions strangling a Lebanon in crisis

This picture, taken on August 4, 2020, shows a general view of the scene of an explosion at the port of Lebanon’s capital Beirut. STR/AFP via Getty Images.

As Lebanon Faces Multiple, Overlapping Catastrophes, U.S. Policies Are Making Them Worse
The Lebanese economy crashed into the equivalent of a brick wall sometime in the last few months of 2019. The Lebanese pound (or lira), which was pegged to the dollar and appeared to be stable for well over two decades, started to decline at a rate that threatened the complete collapse of the economy. In the meantime, the Trump administration had been busy building a “Great Wall” of sanctions around Lebanon, even as the country as a whole was drowning in a mountain of debt.

The first to be impacted was the powerful financial sector — the crown jewel of the Lebanese economy — which effectively shut down, fearing a run on the banks by panicked depositors seeking to withdraw their life savings, a large bulk of which was in U.S. dollars. Thousands of businesses closed down, laying off hundreds of thousands of workers. Shortages of essential items like fuel and wheat led to long lines at bakeries and gas stations, as the majority of households (around 60%, by some estimates) fell below the poverty line.

The dysfunctional and crisis-ridden Lebanese state was completely incapable of coping with the crisis. By that time, Lebanon was deeply indebted to international lenders and local banks to the tune of $80-plus billion (one of the highest debt-to-GDP ratios in the world), most of which was supposedly spent on reconstruction after a 15-year civil war that completely devastated the country’s infrastructure and economy. In fact, much of that money was either outright stolen by politicians or terribly mismanaged.

Lebanon’s electrical power sector is perhaps the most obvious example of the level of corruption and negligence that marked the post-war reconstruction period. A full 30 years after the civil war ended in 1990, Lebanon still suffers from daily blackouts of up to 16 hours in most areas. Even with this extreme rationing of electricity, it still costs the government nearly $2 billion every year to cover a shortfall in the power bill.

The most immediate causes of the current crisis began to appear around 2016, when perennial head of the Lebanese central bank, Riad Salameh, a powerful figure backed by Washington, began what he called “financial engineering” measures to increase the central bank’s hard currency reserves. Since his appointment in 1993, after having worked for Merrill Lynch, Salameh’s prime directive has been to maintain the lira peg to the dollar at all costs.

But by the late 2010s, Lebanon was already a country of runaway consumption, importing roughly $20 billion and exporting approximately $3 billion. To cover such a huge trade deficit and pay off the ballooning foreign debt, while also maintaining a stable lira, Salameh offered high interest rates to attract billions of dollars to Lebanon’s banks.

Already, Lebanon enjoyed several significant streams of hard currency that helped Salameh in his herculean task. The largest of these was remittances from Lebanese working abroad, mainly in the Gulf and West Africa, who sent home around $8 billion annually (not counting what is estimated to be an equivalent amount that came into the country by other means). Billions more came from exports, tourism, international aid and loans, and Arab — particularly Syrian — capital deposited in Lebanese banks.

In 2016, due to a variety of reasons, the flow of hard currency started to dry up at a frightening pace, prompting the central bank’s “financial engineering” measures. This only had the effect of kicking the problem down the road in the hope that the coming years will bring about some sort of reprieve. Instead, the country’s economy continued to deteriorate, and pressure on the lira intensified, until the inevitable reckoning arrived in the final months of 2019.

U.S. pressure, in the form of a wide array of sanctions and increased scrutiny of Lebanon’s financial system, was one decisive factor that made many Lebanese abroad — and any foreign investor, for that matter — think twice about sending money home or depositing it in Lebanese banks. Washington claimed that the Lebanese resistance party Hezbollah and the Syrian régime, both under U.S. sanctions, were using Lebanese banks to launder money or funnel dollars from abroad to fund their activities.

Given that Lebanon’s financial system is heavily dollarized (75% of bank deposits are in U.S. dollars), Washington’s influence over the sector is near total. In just one example, two well-established financial institutions sanctioned by the U.S. Treasury Department — the Lebanese Canadian Bank (accused of laundering drug money for Hezbollah in 2011) and Jammal Trust Bank (alleged to have facilitated the financing of Hezbollah in 2019) — were liquidated without hesitation by the central bank, and without the slightest protest from Lebanese officials.

Sanctions against Hezbollah and Syria have been around in one form or another for decades, but the Trump administration has taken them to new heights. Since launching its “maximum pressure” campaign against Iran in 2018, the administration has unleashed a relentless barrage of wide-ranging and crippling sanctions against Tehran’s allies in Iraq, Syria and Lebanon. Iran and Syria, with their relatively closed and largely state-run economies, are better able to cope with sanctions than a laissez-faire country like Lebanon that is integrally tied to Western capital.

When Salameh’s sacred peg finally fell and the lira began its descent, popular protests against corruption and mismanagement broke out across the country on October 17 of last year. Washington and its local allies could smell blood in the water, and immediately set about to direct people’s anger against Hezbollah by portraying the group as being responsible for the dismal state of the economy.

Alongside this strategy, the Trump administration sought to tighten the economic noose further by making negotiations with the International Monetary Fund (IMF) the only option for the government to receive any kind of relief, on the condition of course that “reforms” must first be implemented. No one questions the need for deep and structural change in the Lebanese economy, but the IMF’s usual fare of austerity and privatization has often resulted in countries falling deeper into a cycle of debt and dependency, while increasing the risk of further social discontent.

Ironically, it took the “nuclear” explosion in Beirut’s port on August 4 to open up some cracks in the siege that Washington has been busy weaving over the last few years. The blast exploded over 2,000 tons of ammonium nitrate stored in Beirut’s busy port for several years, killing and injuring thousands and laying waste to several nearby neighbourhoods. The sanctions régime was already beginning to bite, not in bringing Hezbollah or the Syrian régime to their knees, nor in inciting revolts against them, but in driving ordinary Lebanese to economic destitution.

U.S. economic sanctions, no matter how “smart” Washington claims them to be, have rarely — if ever — brought down the targeted régime or group. In most recent cases, they have had the opposite effect of strengthening the hand of the state by impoverishing the population and making it more dependent on government support and assistance.

One only has to look at the 13-year international economic blockade against Iraq after Saddam Hussein invaded Kuwait in 1990. All studies of its impact on the Iraqi population show a deterioration in just about every quality-of-life indicator, including increasing rates of malnutrition. In the end, it took a costly and devastating U.S. military invasion and occupation of Iraq to finally topple Saddam Hussein.

The U.S. stands at a crossroads on how it wants to deal with Lebanon. The coming days will reveal how far Washington wants to take the confrontation with Hezbollah, and at what cost to the rest of Lebanese society. To date, the sanctions have done little to weaken the Lebanese resistance — politically as well as militarily. The question is, especially after the near-apocalyptic scene around Beirut’s port: Can the rest of the country withstand America’s siege?

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