Previous Quarterly Editions
Expropriation Risk: 66 69 69 71 ▲Political Violence Risk:68 68 68 68 ► Terrorism Risk:45 46 48 50 ▲Exchange Transfer and Trade Sanction Risk: 91 82 91 82 ▼Sovereign Default Risk:92 83 92 92 ►
TREND ▼
Geopolitical alignmentEast 1 2 3 4 5 West
Alignment five years agoEast 1 2 3 4 5 West
Degree of contestationSettled 1 2 3 Contested
Saudi Arabia, the United Arab Emirates, and, to a lesser extent, Qatar, have shown little interest in helping Lebanon out of its current financial and political crisis. At the same time, geopolitical interest in Lebanon from non-Western countries such as Russia and China is increasing.
China’s main interest in Lebanon lies in protecting its significant economic interests and less in mediating internal political conflicts. Russia, for its part, wants to fill the vacuum left by receding U.S. and Gulf presence in Lebanon. Russia is also pursuing economic interests. Russian company Novatek is part of a consortium that has started offshore oil and gas exploration on behalf of the Lebanese government. Russia has also shown interest in rebuilding the Beirut port. In 2019, Russia’s Rosneft signed a 20-year agreement with Lebanon which would ensure the operational management of oil storage facilities at the port of Tripoli.
Regionally, Russia aims partly to control the eastern Mediterranean by reducing competition from rival pipelines, such as the proposed Friendship Pipeline between Iran, Syria, and Iraq. In 2013, Russia and Syria signed an agreement allowing Russia to explore gas off Syria’s Mediterranean coast in exchange for Russian efforts to protect President Bashar Al-Assad’s regime in Damascus. New agreements were signed in 2021 allowing Russian firms to begin oil and gas exploration off the Syrian coast. This agreement pits Russia directly against the countries of the Eastern Mediterranean Gas Forum. Russia sees this as strategic leverage in negotiations over the hydrocarbon future of the region.
In light of the Russia/Ukraine crisis, Russia’s operations in Lebanon have been scaled down. Russia is playing no significant role in resolving the ongoing government formation in Lebanon and the power struggle over the presidency, which remains unresolved as of late September 2022. This is likely to remain the case for the duration of the war.
TREND ▲
Expropriation risks from the state are minimal. Expropriation as a direct result of the financial crisis and banking sector turmoil will not affect foreign investors, who are unlikely to use local banks. However, some Arab investors may choose to use Lebanese banks. Moreover, Lebanese clients could easily default due to the banking situation, exposing investors to risk. In March 2022, one of Lebanon’s largest banks was closed following a judicial order. In September 2022, several heists from frustrated customers who are unable to access their funds have forced more banks to close. A complete collapse of the banking sector is possible.
The political and economic crisis is negatively affecting foreign direct investment (FDI) in Lebanon. FDI decreased from USD2.6 billion in 2018 to USD2.1 billion in 2019, with further decreases projected for 2021 after a small increase in 2020. In March 2020, Lebanon announced its intention to default and restructure its nearly USD31 billion of dollar-denominated debt. The ensuing downgrade of its sovereign debt rating continues to affect investor confidence. In September 2022, the value of the Lebanese pound dropped to a new low of 35,000 to the U.S. dollar.
Lebanon continues to suffer from the economic slowdown of the Gulf Cooperation Council, the effect of the Syrian crisis and the inability of refugees to return home from Lebanon, the fragile macroeconomic situation, high unemployment, brain drain, energy supply shortages, and regulatory obstacles. The combination of COVID-19-related lockdowns, the legacy of the political logjam, and rampant currency devaluation has further weakened otherwise growing sectors in information, technology, and industry, and is hampering the potential of a Westernised and highly skilled workforce. Green energy projects are waiting in the pipeline but need a political environment conducive to direct foreign investment.
TREND ►
Political protests began in October 2019 but retreated in March 2020 due to COVID-19 lockdowns. Sporadic riots, gunfights over petrol, road blockages, and bank heists have become regular occurrences and are likely to increase. Military leaders have criticised officials for lacking a response to address the spreading social chaos resulting from the economic crisis. In areas of tight sectarian political control, notably the Bekaa Valley and South Lebanon including the southern suburbs of Beirut, riots are less likely. Northern Lebanon and Beirut are particularly vulnerable to political violence.
Hezbollah has introduced their own financial institutions, food markets, and pharmacies with parallel imports from Iran and Syria, to shelter their constituency from state breakdown. In other areas, particularly Tripoli and northern Lebanon, the lack of similar formalised patronage leaves many people in desperate situations. The poorest communities including Syrian and Palestinian refugees are the most likely to stage bread riots, which could become increasingly difficult to control. In the absence of a resolution to the political crisis over the presidency and government formation, political violence between rivalling groups is very likely.
Islamic State is known to stage a resurgence when central government is weak and when sectarian tensions can be exploited. Deteriorating living conditions, protests, and the pandemic have depleted Lebanese army resources and could make it easier for militants to re-enter Lebanon. The situation in Afghanistan, now that the Taliban is back in control there, may give Islamic State in the Middle East renewed energy and resources. In 2022, there have been reports of growing Islamic State presence in the Palestinian camps, and in August, a Fatah leader was killed by suspected Islamic militants.
Since October 2019, Lebanon’s financial sector has imposed ad hoc capital controls, preventing most Lebanese from transferring money abroad, despite 75% of accounts in Lebanese banks being dollar-denominated. Small savers have generally been restricted access while larger account holders with political connections have been able to transfer savings, leading to billions of dollars in capital flight. This situation has created a thriving parallel informal financial sector run by criminal networks and partly controlled by Hezbollah.
The government has been unable to stop capital flight, nor put an end to capital controls as part of measures to tackle a severe liquidity crisis. Even if a new government is in place by the end of the year and an agreeable presidential candidate found, fiscal austerity, persistent capital controls, further devaluation, and potential impairment applied to wealthy depositors to recapitalise the banking sector seem inevitable. This will undermine Lebanon’s potential as an investment destination, degrading its position further.
TREND ►A new government will be forced to reach an agreement with the International Monetary Fund (IMF) to stave off a complete economic collapse. IMF intervention could restore confidence in the currency by introducing a new monetary policy framework and a fiscal adjustment programme. The IMF has developed the framework for such reforms following the 2019 Paris II donor conference, where economic reforms were made conditions for loans. Talks are ongoing in September 2022 but are unlikely to lead to a formal agreement until after a new government is formed.
Meanwhile, although Russian and Chinese influence is growing, they do not have the political will or capacity to deliver significant funds to Beirut.
The Miqati-led government has not been able to meet any reform demand. It has been stymied by political elites including director of the Lebanese Central Bank Riad Salameh, who remains locked in conflict with the public prosecutor. Discussions between the central bank and the IMF stalled in December 2020 at the diagnostic stage and international donors may demand the replacement of Salameh, a demand President Michel Aoun would strongly back. It is unclear whether General Joseph Aoun, should he take over from his namesake, will be equally inclined to replace him. In case Salameh stays in place, Fund talks would move ahead very slowly.
The situation is increasingly desperate. Central bank reserves are low. Consumer prices are expected have risen further because of the Russia/Ukraine crisis, as Russia and Ukraine account for 70% of Lebanon’s wheat import. Ongoing public investigation of fraud in the banking sector is leading to closure of banks and uncertainty about the country’s main financial institutions. This contributes to a difficult environment for the negotiations with the IMF.
Much depends on a new government and its ability to bring about a new political leadership open to making the necessary concessions to the IMF. While reformists surprisingly won 15 seats in the May 2022 elections, they have failed to form a united front. Hezbollah’s block, despite losing its majority, looks set to continue its domination, and Lebanon looks set for a continuation of the rule of the traditional elite.
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