Iran showdown threatens Lebanon’s economy | Executive Magazine

Executive Magazine

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 November 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 wind-down 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 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.

We still do not know what, if anything, was agreed upon at the Trump-Putin 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 feasibility, 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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