New US sanctions set to hit Syria likely to have knock-on effect in Lebanon

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Lebanon’s frail economy now faces another potential blow from the implementation of wide-reaching US sanctions targeted at the Syrian regime set to take effect next week.

The Caesar Act will begin to take effect on June 17, threatening sanctions against all those who “provide significant support or engage in a significant transaction with the Syrian government or those acting on behalf of Syria, Russia, or Iran,” the legislation says.

The Lebanese government, which currently faces a collapsing currency and dire economic situation, has not yet taken an official stance on the act, with a government committee set to meet Monday to discuss it.

Lebanon and Syria’s economies are inextricably linked, with money and goods moving across the border – legally and illegally – and Lebanon’s political class is divided between pro- and anti-Syrian regime camps.

“Lebanon and Syria are very much hooked at the waist when it comes to the impact of these sanctions,” Firas Maksad, a Washington-based consultant on Middle East policy and adjunct professor at George Washington University’s Elliot School for International Affairs, told Al Arabiya English. That opens up the potential that “the impact Caesar will have on Syria will pull Lebanon down with it,” he said.

Some analysts linked the sudden acceleration in the devaluation of the Lebanese currency on the black market over the past few days to anxieties about the upcoming Caesar implementation, as Syrians worried about an impending squeeze on foreign currency have been buying up dollars in Lebanon.

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With US sanctions on horizon, Syrian economic meltdown speeds up

The Lebanese-Syrian borders and Hezbollah’s priorities

“Panic is now rife now because of the impending implementation of the Caesar Act. People are trying to hedge against inflation and the depreciation of the Syrian pound,” economist and former Minister of Economy and Trade and Minister of Industry of Lebanon Nasser Saidi told Al Arabiya English.

The Lebanese lira, officially valued at around 1,500 to the dollar, had been going at around 4,000 to the dollar on the black market, when suddenly the rate spiked to above 5,000 Thursday.
Maksad noted that, in addition to the fluctuations of Lebanese and Syrian currencies impacting each other, the smuggling of imported commodities like fuel and wheat from Lebanon to Syria has put further pressure on Lebanon’s dollar reserves.

Read more: Lebanon gov't will dump dollars into market: Minister

More electricity shortages could be on the horizon

The threat of sanctions could also impact Lebanon’s power supply. With long running chronic shortages in its own electricity system, Lebanon imports up to 276 megawatts of power from Syria.

Without that potential supply, Lebanon would have to rely more heavily on the diesel generators that provide power for most of the country when state-provided electricity is cut, noted Marc Ayoub, a researcher in the energy policy and security program at the American University of Beirut’s Issam Fares Institute for Public Policy and International.

During the summer, when demand usually spikes, Ayoub said, the country might see an additional 100- to 150-megawatt power deficit if the option to import from Syria is not there. As of now, there is no option to fill that gap apart from relying on costly generators.

“And if there is another problem with the fuel and diesel imports because of the financial situation, this means that we will be facing a very bad situation in terms of supply,” he said. “…We will be having more electricity shortages and cutoffs, etc., because the diesel generators will not be able to supply this unmet capacity.”

The sanctions could also halt plans to reactivate a gas pipeline running from Egypt to Syria and then to Lebanon, Ayoub noted.

It remains unclear whether the electricity sector might be exempted from the Caesar sanctions.

A US State Department spokesperson declined to comment on the question but said in an emailed statement that the law “seeks to deny the Assad regime the financial resources that his regime uses to fuel its campaign of violence and destruction that has killed hundreds of thousands of civilians, and is meant to send a clear signal that no external actor should enter into business with or otherwise enrich such a regime.”

Read more: Syrian pound plummets as US sanctions loom and Rami Makhlouf saga alarms investors

Maksad said any proposed exemption would likely be reviewed by attorneys before a political decision was made but added, “I’d have to say that the political climate in DC is not conducive for trying to help the Lebanese government out.”

Increasing hardline on Hezbollah

The US has taken an increasingly hard line on Hezbollah, an ally of the Syrian regime which, along with its allies in government, including the Free Patriotic Movement headed by former Foreign Minister Gebran Bassil, has been pushing for Lebanon to normalize political relations with the Syrian regime. With the Caesar Act now in play, that looks less likely, analysts said.

“I think politically this will make it incredibly difficult now for Hezbollah, or Gebran Bassil, for that matter, to continue pushing for normalization with Syria,” said Maha Yahya, director of the Carnegie Middle East Center.

She noted that the sanctions will also stymie Lebanese businessmen who had set up companies in hopes of profiting from the post-war rebuilding of Syria.

Read more: Inside Assad’s palace: Rami Makhlouf, money, power and the future of Syria

Nasser Yassin, interim director of AUB’s Issam Fares Institute, said while the Lebanese government may be reluctant to announce that it will cooperate with the Caesar Act in practice, “they have no choice.”

“I think they’re going to come up with the usual gray language about ‘we take note of it,’ but deep inside, I guess they have to [comply].”

Meanwhile, given Hezbollah’s ties to Syria and Iran, there are questions as to whether the sanctions might be applied to politicians and government ministries controlled by Hezbollah and allies.

When asked about the potential for sanctions against party members, the State Department spokesperson said Hezbollah’s actions “demonstrate that it is more concerned with its own interests and those of its patron Iran, than what is best for the Lebanese people,” adding, “US sanctions targeting Hizballah and other corrupt actors are undertaken in solidarity with the Lebanese people who since October of last year have called for leaders to implement reforms and to fight corruption.” 

Read more: Hezbollah, ally embroiled in Lebanon’s ‘defective fuel’ scandal as electricity fails

The mass protests initially brought together people of all sects and political leanings, but since then, tensions between protesters and counter-protesters have taken on a sectarian element at times. Last week, after a protest in which some groups participating called for Hezbollah to be disarmed, clashes broke out between protesters and supporters of Hezbollah and allied groups and later between Sunni and Shia youth in some Beirut neighborhoods, raising fears of an escalation of sectarian violence.

While on Thursday night, Hezbollah supporters joined protesters from other groups expressing outrage over the currency crisis, Yassin said that the Caesar Act could play into increased tensions in the future.

“With all this pressure, the economic pressure, with all this political instability…and an inability to come up with something, a way out from this big hole we are in, I’m sure it’s going to be translated on the streets,” he said, with potential outbursts of localized violence.

But he added, “I don’t see a fullscale civil war. Civil war needs money, it needs financing. We don’t have the recipe for a civil war. Or we have it – all the elements are there, sadly – but we don’t have the means.”