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The Caesar Act adds more uncertainty to the already fragile Lebanese economy

Will the Caesar Act place further pressure on the fragile Lebanese economy? The Caesar Act introduces broad sanctions.

16 June 2020

BEIRUT – Amid a deepening economic crisis, Lebanon awaits to discern what might be the repercussions of the American Caesar Act, which takes effect tomorrow, and imposes sanctions on the Syrian government, as well as companies, institutions and individuals that do business with it

Unlike the European Union sanctions targeting specific individuals tied to the Syrian government, the Caesar Act introduces broad sanctions, thus creating uncertainty regarding who will be targeted.  According to Syria Report, a specialist economic publication, in 2011 and 2012, the US passed secondary sanctions that were not always implemented. This time sanctions are mandatory.

Although the Syrian regime is the ultimate target of these sanctions, Lebanon is also in the spotlight given the growing role and influence of Hezbollah in the government, the ties between the Lebanese and Syrian banking systems and the smuggling routes along the two countries’ shared border.

A gateway to circumvent sanctions

Lebanon has historically been a gateway for Syria to avoid Western sanctions. Damascus has been subjected to US sanctions since 1979, when the country was listed as a state that sponsors terrorism.” Today, Lebanon remains “very important for Syria to do a lot of things that they can not do from their territory any longer, through middlemen in Lebanon,” Bente Scheller, Head of the Middle East and North Africa Department at the Heinrich Boll Foundation, told Syria Direct. With the activation of the Caesar Act, “things will become a bit more complicated,” she added.

“The Syrian regime and particularly Hezbollah will not stop trying to use Lebanon as their way to bypass sanctions, including the Caesar Act,” said Makram Rabah, Lecturer of History at the American University of Beirut.

Hezbollah, meanwhile, tries to downplay the effects of the new sanctions.  “We have been under direct sanctions from the Americans and under indirect sanctions through the sanctions targeting the Iranians, and we have coped and survived, nothing impacted our will to stay allies with the Syrians,” Aya Ali Ahmad, spokeswoman of the Hezbollah Media Office in Beirut told Syria Direct.

While the new sanctions aim to halt any normalization efforts between foreign countries and Syria, Rabah also ruled out any progress in the near future between Beirut and Damascus. “Normalization has been promoted under the premise that this will help in the return of refugees and that is not something on the table at the moment,” he said.

Nonetheless, Hezbollah, a key ally of the Assad government, is pushing to reestablish ties with the neighboring country. “Lebanon should normalize its relations with Syria, not because of Syrian benefit but because of the Lebanese benefit; we count on the Syrian border to export our products in the agriculture sector,” said Ali Ahmad. 

The elephant in the room

The current Lebanese government led by Hassan Diab is backed by Hezbollah, among other political forces. Since 2012, the Lebanese Shia militia has been supporting Bashar al-Assad militarily in Syria.  The deep ties between Hezbollah and the Syrian government “gives U.S. officials an opportunity to sanction Lebanese individuals, channels, and instruments that Hezbollah and Damascus use to keep the regime afloat,” pointed out Hanin Ghaddar in her Policy Analysis published by the Washington Institute.

“If the Lebanese government and its various entities continue to support Assad as they have done in the past they are certainly under the risks of being included in the sanctions list,” said Rabah, adding, however, that the Lebanese government may as well be considered “too big to fail and too big to be sanctioned.” 

Conversely, although Scheller doesn’t perceive “a big political will in the US to go after Lebanon and put it under pressure,” she doesn’t discard the idea either because the sanctions are formulated in very broad terms. Hezbollah – designated as a terrorist group by the US – is already under US sanctions. The European Union distinguishes between the political and military wing of Hezbollah, sanctioning only the latter. 

The possibility of seeing the Lebanese government  getting sanctioned under the Caesar Act risks deepening the fragile political equilibrium in Lebanon. “Other actors in Lebanon could become very critical of this vulnerability and of Hezbollah bringing additional risks for the country, so we may see deepening political divides,” Scheller pointed out.

With the Lebanese pound in free fall and the country suffocated by a public debt equivalent to 170% of its GDP, Diab’s government has requested a $10 billion aid package from the International Monetary Fund (IMF). “The IMF will not be operating under an umbrella by a government that is under risks of sanctions,” said Rabah. 

On the other hand, Scheller didn’t see “indications” that the Caesar Act will derail talks with the IMF, an entity that is considered by many the last resort for the indebted Lebanese economy.  “Everything that happens through the IMF or other big international institutions might be the least affected,” Scheller said.  

Syria Direct has reached out to the press office of Prime Minister Diab’s cabinet but they declined to comment on this issue, although the Information Minister had previously said that this topic was on the agenda of Monday’s ministerial committee meeting.  

Banks, trade and smuggling

Lebanese banks will be targeted by the Caesar Act “if they are tied in any way to logistical support for Hezbollah military operations in Syria,” wrote Ghaddar in her analysis, a sentiment echoed by Scheller, who sees a possibility that “the US will consider the Lebanese banks too close in connection with Syrian banks and therefore the sanctions may hit that sector.”

Depositors in Lebanon are already struggling with informal capital controls in banks due to the dollar scarcity in the country. “If the banking sector is really affected [by the Caesar Act] that will probably have the biggest effect because that affects all life and business in Lebanon,” said Scheller.

In terms of trade between Syria and Lebanon in 2019, there was a total of $92 million in imports and $190 million in exports, according to the Lebanese Customs Administration. While trade of goods is not per se targeted in the Caesar Act, many Lebanese businesses depend on the route via Syria to export their products to Jordan or Iraq.  “These businesses need to be reassured that Caesar is not meant to target them or further damage the fragile economy,” Ghaddar pointed out. 

The off-the-books trade, that is, smuggling, is a delicate issue. Last May, the Lebanese government announced a “crackdown” on illegal imports and exports towards Syria. Fuel smuggling to Syria is controversial because, currently, Lebanon allows fuel importers to acquire dollars at the official rate, which means it is de facto subsidizing 60% of the fuel import costs. But part of that fuel, instead of being consumed in Lebanon, is being smuggled to Syria, thus aggravating the economic situation in Lebanon.

In her analysis, Ghaddar urged US officials to pressure the Lebanese government to tighten border controls so “Hezbollah would be less free to exploit national institutions in support of the Assad regime next door.” The spokeswoman of Hezbollah denied the accusations that Hezbollah was behind the smuggling routes and said that “it is the government responsibility to make sure the border is secure.”  

Cracking down on long-established smuggling routes is no easy task. Given that they operate under the radar, it will be difficult to identify them and then establish if their goods will end up in the hands of the Syrian government or not, and thus should or should not be sanctioned under Caesar Act.  

The Caesar Act also aims to hinder reconstruction efforts at the service of the Syrian government. Although the ‘boom’ of the reconstruction business in Syria doesn’t appear to be happening in the near future, Lebanon could be key in this sector, not only because its construction sector is “significant,” but also due to its geographical position, as the port of Tripoli (north Lebanon) could play a vital role in transporting materials into Syria, reminded Scheller.  

Beyond who is or is not included on the sanctions list, the risk of over-compliance looms large. “It is not only about the political will to use the sanctions, but it is also about the hesitance and the fear to risk a conflict with the US that third parties may have,” explained Sheller. Foreign banks, companies or international organizations may be hesitant to deal with a Lebanese partner if they fear it may be affected by sanctions. 


This article reflects minor changes made on 6/17/2020 at 11:37 am.

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