Le­banon cast adrift

Iran show­down threat­ens Le­banon’s econ­omy

Executive Magazine - - FRONT PAGE - By Jeremy Ar­bid

It is com­mon knowl­edge that Le­banon is in an eco­nomic rut.

The six-year war in neigh­bor­ing Syria has neg­a­tively im­pacted the lo­cal econ­omy, just as do­mes­tic pol­i­tics, par­tic­u­larly the two and a half year pres­i­den­tial void, eroded con­fi­dence and piled on pres­sure. While govern­ment for­ma­tion fol­low­ing May par­lia­men­tary elec­tions has car­ried on through the sum­mer, the ex­pec­ta­tion is that the next cab­i­net will at least partly en­dorse re­forms promised at this year’s CEDRE con­fer­ence in order to un­lock donors’ pledges for in­fra­struc­ture in­vest­ment.

Com­mit­ments made at CEDRE, held in Paris in April, may be nec­es­sary to keep the Lebanese econ­omy afloat—if waves from re­gional dis­tur­bances do not sink these plans first. A July re­port from credit rat­ing agency Moody’s fore­cast only “a mod­est rise” in Le­banon’s GDP growth, to 2.5 per­cent this year, up from 1.9 per­cent in 2017. But the ac­com­pa­ny­ing press state­ment also sug­gested that geopo­lit­i­cal un­rest could dam­age con­fi­dence and dis­rupt Le­banon’s CEDRE dreams. Syria’s civil war may be all but over, but a po­ten­tial show­down be­tween the United States and Iran may hurl swells Le­banon’s way.

THE DON­ALD EF­FECT

In May, US Pres­i­dent Don­ald Trump an­nounced that his coun­try would with­draw from the Iran deal, for­merly known as the Joint Com­pre­hen­sive Plan of Ac­tion (JCPOA), and would be­gin uni­lat­er­ally reap­ply­ing sanc­tions against Iran that had been re­moved as part of the deal. Amer­i­can sanc­tions will be re­in­stated over two “90-day and 180-day wind-down pe­ri­ods for ac­tiv­i­ties in­volv­ing Iran,” ac­cord­ing to the US Trea­sury Depart­ment web­site. The first wind-down pe­riod ends on Au­gust 6, with sanc­tions re­sum­ing on cer­tain Ira­nian ac­tiv­i­ties.

But it is the sec­ond wind-down pe­riod, which will end on Novem- ber 4, that has greater im­pli­ca­tions for Le­banon and the global econ­omy. This pe­riod will see Amer­i­can sanc­tions reap­plied to key Ira­nian trad­ing and en­ergy ac­tiv­i­ties, tar­get­ing: Ira­nian port op­er­a­tors, ship­ping com­pa­nies and ship­builders; pe­tro­leum-re­lated pur­chases from Iran; pro­vi­sion of un­der­writ­ers, in­sur­ance, and rein­sur­ance; and Iran’s en­ergy sec­tor. On No­vem­ber 5, the United States will for­mally re­voke govern­ment au­tho­riza­tion for Amer­i­can com­pa­nies to do busi­ness in Iran, and will reim­pose sanc­tions on en­ti­ties that were re­moved in 2016 from the SDN list— the Spe­cially Des­ig­nated Na­tion­als list, pro­duced by the US Of­fice of For­eign As­sets Con­trol, which names in­di­vid­u­als, groups, and en­ti­ties whose as­sets are blocked by the US and with whom US na­tion­als are gen­er­ally pro­hib­ited from deal­ing. Amer­i­can and for­eign en­ti­ties cur­rently do­ing busi­ness in the spec­i­fied ar­eas of ac­tiv­ity are, ac­cord­ing to an FAQ pub­lished by the Trea­sury, “ad­vised to use these time pe­ri­ods to wind­down their ac­tiv­i­ties with or in­volv­ing Iran that will be­come sanc­tion­able at the end of the ap­pli­ca­ble wind-down pe­riod.” Those that do not com­ply with the Amer­i­can direc­tive could be sanc­tioned them­selves or tar­geted by US law en­force­ment.

UNITED WE STAND?

The United States wants to sig­nif­i­cantly re­duce Iran’s crude oil sales. US Sec­re­tary of State Mike Pom­peo has said the Trump Ad­min­is­tra­tion wants to curb ex­ports of Ira­nian oil from some 2 mil­lion bar­rels of oil per day to “as close to zero as pos­si­ble” by the end of 2018. But can this hap­pen uni­lat­er­ally?

If the United States is to pres­sure Iran ef­fec­tively, it will need other coun­tries to com­ply with Amer­i­can di­rec­tives. So far, there have been mixed sig­nals from gov­ern­ments around the world about fol­low­ing the lead of the US, and the pri­vate sec­tor has its own in­ter­ests.

Turkey has al­ready said it may not rec­og­nize the reim­po­si­tion of Amer­i­can sanc­tions. “The de­ci­sions taken by the United States on this is­sue are not bind­ing for us,” Ni­hat Zey­bekci, Turkey’s econ­omy min­is­ter, said, in com­ments pub­lished by Hür­riyet Daily News in late June. Turkey shares a land bor­der with Iran and was al­legedly fa­cil­i­tat­ing gold trans­fers to Iran (gold is not regis­tered in the bank­ing sys­tem) to by­pass sanc­tions.

Who­ever is will­ing to cross the US and con­tinue to deal with Iran, how­ever, must also be able to pro­tect them­selves from Amer­i­can sanc­tions and risk a pos­si­ble down­turn in their re­la­tions with the US. It re­mains to be seen whether any coun­tries are ca­pa­ble of do­ing so. The In­dian govern­ment has said it may not com­ply with uni­lat­eral Amer­i­can sanc­tions. In­dia does not al­ways align with the United States geopo­lit­i­cally, hav­ing struck some Rus­sian mil­i­tary agree­ments in the past. But its pri­vate sec­tor may have other in­ter­ests. Like­wise, de­spite Euro­pean Union lead­ers want­ing to keep the Iran deal alive, EU com­pa­nies have been flee­ing the Ira­nian busi­ness scene in droves be­cause they do not wish to jeop­ar­dize their stand­ing, as­sets, hold­ings, or ac­tiv­i­ties in the Amer­i­can mar­ket. China is posited as one pos­si­ble sav­ior for Tehran, if the Euro­peans are un­able or un­will­ing to sal­vage the Iran deal—but will China have the ap­petite to ab­sorb Ira­nian oil and in­vest where West­ern

Geopo­lit­i­cal un­rest could dam­age con­fi­dence and dis­rupt Le­banon’s CEDRE dreams.

com­pa­nies pull out? A Lebanese se­nior pub­lic bank­ing of­fi­cial told Ex­ec­u­tive that it does not seem likely the Chi­nese will be wholly ca­pa­ble of fill­ing the void left by the likely Euro­pean ex­o­dus, and spec­u­lated that be­cause of on­go­ing nu­clear weapons ne­go­ti­a­tions be­tween the US and North Ko­rea, and the specter of a trade war be­tween the US and China, the Chi­nese may not wish to fur­ther an­tag­o­nize the Amer­i­cans at this stage.

THE PRICE OF OIL

Data from the US En­ergy In­for­ma­tion Ad­min­is­tra­tion (EIA) shows Iran’s oil ex­ports in­creased by 70 per­cent af­ter sanc­tions were lifted. In 2015, Iran ex­ported over 1.1 mil­lion bar­rels per day, and by 2016 it was ex­port­ing al­most 1.9 mil­lion. Ex­ports reached 2.13 mil­lion bar­rels per day in 2017, ac­cord­ing to the Ira­nian oil min­istry’s news agency, Shana. In July, Shana re­ported the pre­vi­ous month’s ex­ports at 2.28 mil­lion. If the United States is suc­cess­ful in cut­ting down Iran’s oil ex­ports, who can fill the gap to keep global oil prices sta­ble?

It will not be easy to fill the sup­ply gap pro­duced if the Ira­ni­ans are forced to give up mar­ket share, says Mona Sukkarieh, a po­lit­i­cal risk an­a­lyst and a fre­quent con­trib­u­tor to Ex­ec­u­tive on oil and gas top­ics. Sukkarieh says sup­ply dis­rup­tions from other oil pro­duc­ers may make it dif­fi­cult to cover an Ira­nian sup­ply gap, point­ing specif­i­cally to the on­go­ing po­lit­i­cal and eco­nomic cri­sis in Venezuela that has af­fected that coun­try’s pro­duc­tion and ex­ports. Ups and downs in Libyan pro­duc­tion has also proven dif­fi­cult to ad­dress, she tells Ex­ec­u­tive. At the June 2018 OPEC/ Non-OPEC meet­ing, it was agreed to boost sup­plies by bring­ing over­all com­pli­ance to the ini­tial pro­duc­tion ad­just­ment reached on No­vem­ber 2016 to 100 per­cent, af­ter it had reached 147 per­cent in May. But the cri­sis in Venezuela, sanc­tions on Iran, fur­ther dis­rup­tions or de­clines in pro­duc­tion here and there, pos­si­ble geopo­lit­i­cal shocks, and so on mean that fur­ther ef­forts will be re­quired. The dy­nam­ics will start to emerge to­ward the end of the year, in time for the next OPEC/Non-OPEC meet­ing.

MAR­KET DIS­RUP­TION

If the Ira­nian oil sup­ply to the mar­ket is dis­rupted, it could cost price shocks and keep the cost of a bar­rel of oil high. Reuters’ most re­cent poll of oil an­a­lysts and economists (con­ducted and pub­lished in June) saw fore­casts of in­creased fu­ture oil prices. The re­spon­dents thought the cost of oil would stay above $70 per bar­rel, cit­ing the same rea­sons that Sukkarieh gave Ex­ec­u­tive.

If the US is suc­cess­ful in cut­ting down Iran’s oil ex­ports, who can fill the gap to keep global prices sta­ble?

We still do not know what, if any­thing, was agreed upon at the TrumpPutin sum­mit held in Helsinki in July, but any agree­ment be­tween Rus­sia and the United States re­lated to the Mid­dle East is likely to be partly shaped by Rus­sian ef­forts to limit Ira­nian pres­ence in the south and south­west of Syria. The Is­raelis have been lob­by­ing against hav­ing any Ira­nian pres­ence near their bor­der for some time, and the coun­try re­port­edly se­cured se­cu­rity guar­an­tees from the US and Rus­sia at the Helsinki sum­mit.

A tri­par­tite deal in­volv­ing Rus­sia, the United States, and Saudi Ara­bia may also be in the works. As long as the Saudis and Amer­i­cans can work to­gether re­gard­ing oil pro­duc­tion, they might strongly co­or­di­nate global oil prices. The ex­pe­ri­ence of 2014 and 2015 was that the Saudis were dis­pleased with the ratch­et­ing up of oil shale in the US. The in­crease in pro­duc­tion due to shale ex­trac­tion was ac­cel­er­ated by its tech­ni­cal fea- sibil­ity, and this was in­stru­men­tal in push­ing oil prices be­low $50 a bar­rel. The Saudis, by main­tain­ing their pro­duc­tion lev­els, kept global prices low and sought to force shale ex­trac­tors to halt their de­vel­op­ment of pro­duc­tion ca­pac­ity, which came at high cost to the king­dom and be­came un­sus­tain­able around 2015. Af­ter Trump’s in­au­gu­ra­tion in early 2017, there was sud­den out­burst of oil driven friend­ship be­tween his ad­min­is­tra­tion and Crown Prince Mo­ham­mad bin Sal­man (known as MBS), who was ap­pointed heir to the Saudi throne around the same time. It may be pos­si­ble that a co­or­di­na­tion of in­ter­ests be­tween Trump and MBS could be di­rected against Iran, to make sure there is a bal­ance of what­ever pres­sure is placed on Iran to limit oil trad­ing in global mar­kets.

Do­mes­tic reper­cus­sions in Iran as a re­sult of the sanc­tions are also un­cer­tain. It is true Ira­ni­ans con­tinue to protest the wors­en­ing eco­nomic sit­u­a­tion in the coun­try, but it is ques­tion­able and maybe wish­ful think­ing by ob­servers that this street pres­sure could lead to regime change. There may not be enough in­ter­nal mo­men­tum. The Ira­ni­ans are still try­ing to sal­vage the JCPOA and com­ply with its re­quire­ments. Euro­pean an­a­lysts think that the coun­try is play­ing the wait­ing game, and prob­a­bly pray­ing that Trump will not be re­elected in 2020.

If Amer­i­can sanc­tions do curb Ira­nian oil ex­ports, a ris­ing oil price could prove pos­i­tive for Le­banon given that so many of its na­tion­als work in oil-pro­duc­ing coun­tries in the Gulf and send cash back home in the form of re­mit­tances. How­ever, higher oil prices could off­set these gains by ris­ing in­fla­tion and higher govern­ment ex­pen­di­tures for fuel pur­chases to pro­duce elec­tric­ity. It is still too early to say what will hap­pen re­gard­ing Iran, or how Le­banon might be af­fected. In a worst-case sce­nario, any wide scale mil­i­tary con­fronta­tion against Iran by the US would par­a­lyze Le­banon’s politi­cians and sink CEDRE plans.

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