Commentary

Sanction elites to stop Lebanon from becoming a failed state

Only coordinated US and EU sanctions may prevent Lebanese leaders from driving the country into the void.

August 24, 2023

Lebanon is four years into one of the worst financial crises in modern history, and in that time the country’s powerbrokers – the politicians, bankers and sectarian leaders – have been actively taking steps to speed the country’s descent into the abyss.

To be clear: Lebanon’s dissolution will entail rising radicalisation, expanded Iranian influence, and profound instability and criminality that will spread well beyond the country’s borders. If the West would like to avoid such a disaster at Europe’s doorstep, now is the time for expansive, coordinated financial sanctions to reign in the Lebanese elite who are driving the country off the cliff.

Since 2019, the value of Lebanon’s national currency, the lira, has collapsed 98 percent. The value of personal savings and earnings has evaporated. More than 80 percent of the population has been plunged into multidimensional poverty. Inflation is among the highest in the world. Public service delivery is in tatters. Most of the population now survives on aid handouts or money that they receive from family members living abroad.

While the elites who brought the nation to the verge of bankruptcy cannot agree on most things, they have found “political consensus in defence of a bankrupt economic system,” according to the World Bank, which has dubbed the continuing Lebanese crisis “the Deliberate Depression.”

Since 2019, we have seen political henchmen from various parties stall and derail the reforms needed to implement an IMF rescue plan, the central bank establish a parallel financial system to protect the wealthy, and an informal, cash economy, fertile for illicit activity, expand rapidly. In parallel, the political class has eluded culpability for the 2020 Beirut blast – the largest non-nuclear explosion since World War II – and sought to undermine the last vestiges of representative democracy in the country.

Riad Salameh, Lebanon’s former central bank governor, is the only prominent figure against whom international action has been taken. Earlier this month, the United Statees, the United Kingdom, and Canada slapped sanctions on the disgraced central bank governor for gross abuse of power. The measures also target four of his “close associates” who helped “conceal and facilitate” a plethora of financial crimes, according to the US Treasury statement. This is a step in the right direction. Nevertheless, Salameh and his underlings did not build Lebanon’s financial house of cards on their own. The net of international censure must be cast much wider to bring Lebanon’s elite to heel.

In July 2021, the European Union announced a framework for targeted sanctions that provides for the possibility of imposing sanctions on those who “undermine democracy or the rule of law in Lebanon”. As the first significant Western policy aimed at addressing Lebanon’s “grave financial, economic, social and political crisis” the framework should have helped keep elite misconduct in check. But despite conditions for sanctions repeatedly and blatantly being met by so many, the sanctions never came.

Recently, the EU Parliament passed a, non-binding, resolution calling on the EU Council to apply the sanctions framework, as well as extend it for another year. Lebanese civil society has also been extremely vocal on the sanctions issue, furnishing Brussels with ample evidence to support sanctions. Europe, however, appears unable to appreciate threats beyond the war in Ukraine and refugees that are “over there, and not here,” according to one high-level Brussels diplomat.

The lack of real action is nothing less than disgraceful, with the recent renewal of the EU sanctions framework’s serving as a hollow gesture of solidarity with ordinary Lebanese. For the moment, Brussels seems to be betting on the resumption of a political process whereby a new Lebanese president will be elected, though that seems unlikely after coordinated obstruction in parliament resulted in the 12th failed attempt this June. European passivity has handed Lebanon’s politicians and bankers – whose assets can be found all over the continent’s capitals and marinas – a green light to continue to pillaging their country as it dies.

Amid soaring public debt totalling more than $102bn for an economy of $20bn, hopes for an IMF rescue plan are hanging by a thread. Negotiations have stalled, with the IMF unimpressed with the persistent refusal of Lebanon’s ruling class to accept political and financial reforms. The elite’s obstinance is blatantly self-interested. The proposed reforms would dismantle the financial status quo by tearing down an arcane banking secrecy regime, restructuring the banking sector, reforming state-owned enterprises, implementing tax reforms, and cleaning up the civil service.

Since 2019, we have seen political henchmen from various parties stall and derail the reforms needed to implement an IMF rescue plan, the central bank establish a parallel financial system to protect the wealthy, and an informal, cash economy, fertile for illicit activity, expand rapidly.

None of these moves would bode well for Lebanon’s elites who are masters at playing at the margins to ensure nothing significant changes. For instance, in clear contravention of the EU sanctions regime, last May municipal elections were postponed due to a supposed lack of the $12m needed to cover administrative costs. Only weeks later, Parliament approved an injection of $400m to raise civil servant salaries – another self-serving move given that Lebanon’s dysfunctional state institutions are the primary means by which members of the political class dole out patronage and maintain the fealty of their respective sectarian constituencies. The preservation of these patronage networks has been underwritten by the central bank, which continually issues new lira to fund the civil servant salary increases. This, in turn, has spurred massive lira depression while simultaneously allowing select central bank clientele to earn billions of dollars from currency arbitrage.

Iran’s growing influence in the Levant has doubtlessly put Lebanon’s debacle on Washington’s radar. Thus far, however, the US has done much less than it could do in response. The US dollar accounts for almost 70 percent of transactions in Lebanon today. In the last decade, a single US Treasury edict brought down two Lebanese banks for suspected money laundering links with Hezbollah.The recent sanctions against Salameh notwithstanding, however, the US did nothing to address Lebanon’s current crisis beyond threatening widespread sanctions but targeting just a handful of Hezbollah-connected individuals.

Wary of the, albeit small, potential for US sanctions, the Lebanese central bank has already set up a system whereby it can clear dollar transactions without going through correspondent US banks. This has come in concert with a ballooning informal, dollarised cash economy, now valued at a minimum $10bn by the World Bank, or about half the post-crisis formal sector GDP. Much of this is funding elite survival and crony capitalism, with Hezbollah and their allies as notable benefactors. The Financial Action Task Force, the global money laundering and terrorist financing watchdog, meanwhile, recently granted Lebanon a one-year grace period to clean up its act or face possible repercussions.

Empty threats and selective action from Western powers will not be enough to save Lebanon. Lebanon needs the US and the EU to replicate the coordinated and targeted sanctions they imposed on Russian and Belarusian political elites following the invasion of Ukraine in February 2022. And it needs them now.

Without meaningful Western sanctions, the IMF plan is dead in the water and Lebanon will be on the way to becoming a failed state, with devastating repercussions both at home and abroad. By contrast, coordinated sanctions by the US and the EU would strangle the financial lifelines Lebanon’s elite depend on and, just perhaps, bring them to reason.

This article was originally published on the Aljazeera website, here.

Accountability Economic reform Financial crisis

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