The economic crisis in Lebanon has been deepened by an energy crisis following the drying up of imported fuel into the country. This energy crisis has made life in Lebanon acutely difficult as it has wider ramifications in the ongoing wider financial crisis which has seen the Lebanese pound depreciate by more than 90% since 2019.
While friends and neighbours have offered help, it is however mostly aimed at helping themselves.
Background of the energy crisis
For decades the Lebanese have passed the buck on the economic management of the country blaming their political system for nepotism, rampant corruption and cronyism, for gross mismanagement which has resulted in Lebanon accumulating one of the “world’s highest public debt-to-gross domestic product ratios,” which has risen by more than 150%, even “as it takes on more debt to plug budget holes”.
What drew the world’s attention is not the humongous national debt, but the energy crisis which has engulfed the country resulting in the power generation of the country standing at 34% of available capacity causing severe hardship to the common man. Since April, blackouts of more than 15 hours have become a common occurrence with even private generators struggling to secure sufficient fuel to power bulbs. Not to mention the full blackouts Lebanese faced on October 10 for example.
According to the World Bank’s rankings, Lebanon’s financial mess is “in the top 10, possibly top 3” most severe crises globally “since the mid-nineteenth century.” The World Bank also notes that there have been “deliberate inaction” by political actors who have contributed to Beirut’s inability to steer itself out of the ongoing socio-economic meltdown.
In a country where political leaders of various sects battle for influence, efforts to resolve the energy crisis have become divisive; while friends and neighbors have agreed to help ease it, there appears to be greater regional dynamics at play than meets the eye.
Iraq to the rescue
On July 24, 2021, Iraq signed a government-to-government $360 million deal with Lebanon wherein Baghdad pledged to provide 1 million tons of crude oil to Beirut for over a year. The deal essentially grants Beirut a 1-year a deferred payment while the proceeds remain deposited at the Lebanon’s central bank – Banque du Liban.
Given Lebanon’s dwindling foreign currency reserves, from $38 billion towards the end of 2019 to $15 billion this June, it was agreed that Baghdad will exchange the proceeds solely for Lebanese goods and services, with Lebanon’s central bank paying beneficiaries at the “Sayrafa” platform rate (12,000LBP/$) or the parallel market rate (18,000LBP/$); Baghdad has made it clear that if Beirut chooses to use the Sayrafa route, the rate should not to be below 15% of the market rate. Lebanon’s official exchange rate is still pegged at 1,515LBP/$.
In all practical purposes, Iraq sees the deal as a gift to Lebanon. Not only is Lebanon also short on goods, it could leverage its services, especially in the fields of banking, insurance and medicine, but such an exchange is squarely aimed at Iraqi domestic consumption, especially since parliamentary elections are just a month away.
Lebanese officials understand this unspoken aspect of the deal well, and know that in the worst case scenario, if Beirut decides to default on the payments, Baghdad will accept and write off the debt. If this happens, it will not be the first time that Lebanon has defaulted on the repayment of debt. Beirut has already defaulted on the repayment of Eurobonds.
Accordng to Lebanese Energy Minister Raymond Ghajar, the fuel from Iraq will add to around 9 to 10 hours of electricity supply to the grid for the first 4 months.
Factional politics
While the deal looks good on paper, the devil is in the details. Having principally agreed to the deal, the Iraqi government is reluctant to be seen as helping Lebanon’s pro-Iran factions. As a result, it delayed signing the deal for months. Even the visit of Abbas Ibrahim, Lebanon’s spy, who is widely seen as the deal’s original broker, and who is no stranger to deal with Iraqis, did not amount to anything significant.
Iraq’s hesitation can be viewed as an act of caution since it will certainly not like to get caught up in a fiasco similar to the tainted fuel scandal which ensnared Algeria’s Sonatrach.
Only time will tell how Baghdad distances itself from Beirut’s deal-making practices. As far as Iraqi Prime Minister Mustafa al-Kadhimi is concerned, he has emerged as a clear winner scoring points with both Washington and Tehran following his strategically timed, signing of the deal, days before his meeting U.S. President Joe Biden on July 27, in what is probably an attempt to bolster his image as a regional deal-maker.
The deal however gave Iran’s allies in Lebanon little to trumpet about. As a result, Iran-backed Hezbollah launched its own initiative to arrange for Iranian crude oil for Lebanon. Grabbing this opportunity, Iranian foreign minister, Hossein Amir-Abdollahian, was quick to promise more fuel shipments, which will be shipped to Syria and then transported overland to Lebanon.
Incidentally, Iranian crude is escorted by the Russian navy, protecting it from any surprise Israeli attacks.
While this emerged as a possible solution to Lebanon’s energy crisis, but as you may have guessed, there are no quick solutions to issues plaguing Beirut. Washington and its allies want to be seen as winning the public relations game.
Just a day before handing over his resignation to Lebanese President Michel Aoun, former Prime Minister Designate Saad Hariri, who is US and Saudi aligned, went to Egypt to get Egyptian gas to Lebanon.
Gas from Egypt
Earlier last week, Egypt’s Energy Minister along with his Lebanese counterpart said, the two countries are finalizing arrangements to mitigate the energy crisis in Lebanon.
The talks are a culmination of an agreement that was announced last month, wherein Egypt had agreed to supply natural gas to Lebanon via a pipeline that passes through Jordan and Syria. The deal, agreed by all four countries, is part of a U.S.-backed plan to address Lebanon’s power crisis.
Earlier last week, Lebanese Energy Minister Walid Fayad said, Egypt was ready to supply more gas than was originally anticipated without spelling out any details on the arrangement.
“Egypt offered … helping in the energy sector through the possibility of offering extra quantities of gas,” said Fayad at a joint press briefing with Egyptian counterpart Tarek El-Molla in Cairo after a meeting.
He went on to add, “We will have another discussion on this”.
“God willing, we can finish the measures related to the deal within the few coming weeks,” said Molla without mentioning when the gas supplies would actually begin.
Geopolitical calculations
On September 8, energy ministers from Jordan, Egypt, Syria and Lebanon agreed to a roadmap for supplying Egyptian gas to Lebanon through Jordan and Syria in a ministerial meeting which took place in Amman. During the meeting, a plan was also approved which sees Jordan supplying electricity at a later stage to Lebanon through Syria.
The meeting had the expressed backing of the United States: on August 19, a statement from the Lebanese presidency said, Washington had provided support for the plan in a phone call to Lebanese President Michel Aoun. According to a source who preferred the condition of anonymity, the idea was proposed by King Abdullah of Jordan during his visit to the White House in July 2020.
The meeting at Amman also saw Jordan’s Minister of Energy and Mineral Resources Hala Zawati announce that Egyptian gas will flow into Lebanon, via an existing pipeline that passes through Jordan, and Syria, as soon as the Syrian government rehabilitates its section of the pipeline.
In a report Syria’s Al Wattan newspaper quoted Syrian Minister of Electricity Ghassan Al-Zamel as saying, the country’s electricity grid would cost $3.5 million to rehabilitate.
The Amman meeting was seen as a diplomatic breakthrough for the Syrian regime which has faced political isolation from the majority of Arab countries since the eruption of the Syrian uprising in 2011.
The Egyptian gas supply plan to Lebanon, which was conceived King Abdullah of Jordan, is essentially a new diplomatic vehicle addressed to uplift the Syrian economy which has been battered by more than a decade of war and US sanctions.
To mitigate potential headwinds in the form of US sanctions against Syria, King Abdullah spoke to US President Joe Biden and flew down to Moscow on August 23, to meet Russian President Vladimir Putin to address the Syrian conflict.
This has sparked discussions of a potential shift in US policy on Syria, which revolves around Lebanon’s economic crisis. While the US continues to impose sanctions on parties related to the Syrian uprising, sources say, the Biden Administration has assured Abdullah that Washington is willing to waive sanctions on certain dealings with the Syrian regime.
On top of these layers of geopolitics, on August 14, Hezbollah Secretary-General Hassan Nasrallah added a further layer, which will inevitably complicate matters given US-Iran relations, that Tehran was ready to send oil tankers to Lebanon to help its energy crisis. It is likely that Washington will take steps, overt, covert and diplomatic, to derail Nasrallah’s attempt to make Lebanon less dependent on Tehran.
On September 4, a high level ministerial delegation from Lebanon visited Syria, a first in a decade, to iron out burrs in the Egyptian gas supply dal to Lebanon as well as get approval for the supply of Jordanian electricity. Damascus was only too happy to help given its economic and diplomatic benefits from the deal.
Malek Haddad, a former Minister of Transport from Jordan, was quick to point out that the Amman meeting is a step aimed at exempting Jordan from US sanctions, specifically the Caesar Act. On September 9, in an article on Ammaonnews.net he wrote, the deal would help Jordan resume trade ties with Syria and enable it to participate in its reconstruction.
Beyond the economic impact of the deal, Jordan would also benefit from normalization of ties with Syria which in turn will lead to re-engagement with the United States and Russia in efforts to find a political settlement to the Syrian conflict.
The deal also aims to lure Assad away from Iran, which is Egypt’s Jordan’s and Israel’s interest.
In fact, both Jordan and Egypt, aim to bring back Syria and Iraq to the Arab fold. To this end, both have formed an economic bloc with Iraq in what has been described by Iraqi Prime Minister Mustafa al-Kadhimi as “a new Levant”. This economy bloc, which is supported by Washington as long as it distances Baghdad from Tehran among other criteria, has also left the door open for Syria to join in the future. The US stance is in contrast to previous administrations, which had sought to isolate the Syrian government and impose sanctions campaign against Damascus.
Incidentally, on the same date of the Amman meeting, Assad’s forces took back the city of Daraa following weeks of siege. Moscow negotiated a deal with the Syrian rebels so that government troops can take control of the city peacefully.
With Daraa under the control of the Syrian government, the fruition of implementing the Egyptian gas deal becomes a possibility since a major portion of the gas pipeline traverses through the Daraa province on its way to Lebanon.
A boon for Syria
Given this state of flux, Washington has adopted a cautious policy of disassociation even as it largely sticks to the agenda of Egyptian gas for Lebanon while juggling with options on ways to respond to Hezbollah’s plan to ship sanctioned Iranian fuel to Lebanon.
Washington also finds itself in an awkward position after giving the go-ahead for greater cooperation between its Arab allies with Bashar al-Assad’s regime in Syria.
According to Natasha Hall, a senior fellow with the Center for Strategic and International Studies, the Egyptian oil deal for Lebanon “represents a golden opportunity for Damascus to become part of the fold again”.
In fact, many of Washington’s allies in the Middle East seem eager to bring Syria back into the regional fold. Jordan, which mooted the idea of the deal, is eager to deepen economic ties with Damascus and fully reopen a key border crossing.
In his trip to Washington, King Abdullah, a staunch US ally, impressed on the Biden Administration that Assad’s regime was “there to stay” and emphasized the need for dialogue with Damascus.
Jordan is not alone in the need to reopen ties with Syria, in 2020, UAE’s Foreign Minister Sheikh Abdullah bin Zayed was very vocal against US sanctions imposed on Syria, saying they were adding to headwinds to normalize diplomatic and economic relations with Damascus, and making it more difficult for Syria to return to the Arab League.
Since the deal has US backing, Washington is helping negotiate in financing the cost of transporting Egyptian gas to Lebanon, given its myriad logistical challenges.
For Syria, this is hugely beneficial since it will gain access to funds to rehabilitate the pipeline as well as its electric grid; it is also expected to seek a hike in hike in wheeling fees – the cost paid to transmit the power to Lebanon.
There also have been concerns among certain sectors on Damascus’ ability to cut off electricity and gas to Lebanon given that it controls key transit points. These concerns stem from the fact that Syria had occupied Lebanon from 1976 to 2005 and sought to wield influence over its small neighbour. Further, the Syrian government is also allied with Hezbollah which has its own plans on bringing sanctioned Iranian oil to Lebanon.
For Iran, the Egyptian gas deal for Lebanon represents both, an opportunity as well as a challenge. Following a decade of isolation, Syria, its ally, is finally on the threshold of being brought back into the Arab fold and as a result will gain precious new revenue streams.
“Hezbollah likes the fact this is going through Syria, but this could be a big PR win for the US if they can provide electricity,” said Hage Ali. “For Hezbollah, this mixes things up.” In this opaque mesh of geopolitics on which the future of Lebanon’s economy hangs in the balance, one aspect of the Egyptian gas pipeline project that is clearly emerging is that, among other things it is also a vehicle for Syria to free itself and come back into the Arab fold while scoring diplomatic points and adding new revenue streams to its sanctioned economy.
