Will Fresh US Sanctions Crush Lebanon’s Regional Hub Status?

For all its instability and struggles with corruption, Lebanon has traditionally occupied an outsized role in the Middle East. Its mature banking sector, multilingual population and its region-leading universities give Lebanon a competitive advantage as a gateway for international investors looking to access Middle Eastern markets. 

Yet recent US moves to sanction key politicians risk upending Lebanon’s hub status and its fragile political equilibrium. On Friday 6 November 2020, the US Office of Foreign Assets Control (OFAC) added senior Lebanese politician Gibran Bassil to its sanctions list, under the Global Magnistky Act. This is the first time the act, which OFAC can use to sanction individuals it considers guilty of corruption or human rights abuse, has been used in Lebanon. In Bassil’s case, OFAC cites his “role in corruption in Lebanon” as the reason for his designation, but observers believe Bassil’s links to Iran-backed Hezbollah were the true cause.  

Shortly before Bassil’s November 2020 designation, several other Lebanese politicians with Hezbollah affiliations were sanctioned. On 8 September 2020, two former government ministers Yusuf Finyanus and Ali Hassan Khalil were sanctioned owing to their alleged provision of material support to Hezbollah.  

These and other recent sanctions represent a marked shift in US policy, which has gone from focusing on Hezbollah officials and their established commercial interests to pursuing Hezbollah’s political allies in other political parties (all three of those recently designated belong to different political parties). Apart from sending shockwaves through Lebanon’s political circles, the policy shift has unsettled many local and regional investors with interests in Lebanon. 

Lebanon’s political landscape defies easy summary, but rests on an uneasy balance between its main religious sects -  including Maronite Christians, and Sunni and Shia Muslims - and their complex historical relationships with outside powers. OFAC-sanctioned Hezbollah looms large over this landscape as the key champion of the Shias.   

Summary of Lebanon sanctions 

Over the past decade the US has implemented sanctions sparingly on Lebanon, choosing generally not to disrupt the delicate balance of fierce sectarian tensions and geopolitical interests that plague the country’s modern political history.  

There are exceptions, all targeting the axis of Iranian and Syrian interests in Lebanon. In 2007 the US issued Executive Order 13441,  a series of sanctions targeting officials with close ties to the Assad government in Syria. This was on the back of the Lebanese Prime Minister Rafik Hariri’s assassination in 2005. The assassination is widely believed to have been carried out by pro-Syria elements in Lebanon, and many have explicitly alleged the Syrian government’s direct involvement, a claim the Syrian government denies.  

And then there is Hezbollah. Hezbollah was first designated a Foreign Terrorist Organization by OFAC  in January 1995, in response to Hezbollah operatives’ increasing anti-US belligerence.  

Hezbollah are close allies of Iran and the Assad government in Syria. After the collapse of the Iran Nuclear Deal under the Trump administration in May 2018, there was a marked rise in US-Iran tensions. These rising tensions filtered through into various aspects of US sanctions policy across the region, in Syria, Lebanon, Iraq, and Yemen. In Lebanon, this has manifested itself in sanctions of unprecedently high-profile politicians who, like Bassil, have entered into political alliances with Hezbollah.  

Hezbollah presents unique difficulties to those in charge of setting international trade sanctions regimes. In contrast to the US, the UK, EU, and much of the wider international community long upheld a distinction between Hezbollah’s military and political wings, generally excluding the latter from sanctions. The guiding principle behind this distinction is that Hezbollah is not only a military group, but an important political party representing the interests of Lebanon’s Shia Muslims, and to sanction Hezbollah is to risk alienating Lebanon’s Shia minority.  

Over the past few years, there have been increasing calls for the EU to broaden sanctions against Hezbollah’s political branch, as well as those identified as commercial associates of the group. The US has led these efforts, designating over 90 Hezbollah-affiliated individuals and entities since 2017. It has pushed its allies to follow suit, with some success. 

The UK extended its Hezbollah sanctions in January 2020, with Germany following in April 2020. The EU still upholds the distinction between Hezbollah’s military and political wings, but with an increasing number of member states joining US efforts, this might not be the case for much longer.  

Thinking about risk 

Hezbollah-related sanctions have presented a major compliance risk for Lebanese business ventures for at least a decade. Yet the recent expansion of the sanctions programme, and adjacent sanctions in Syria, have made the picture increasingly complicated for those working in Lebanon or with Lebanese nationals.  

What remains to be seen is whether the Biden administration will continue in this vein. The Biden administration has a markedly less aggressive stance on Iran than Trump, and has already expressed its willingness to resuscitate the Iran nuclear agreement. In keeping with this, the Biden administration has revoked sanctions on Iran-backed Houthi rebels in Yemen. Equally, however, Biden appears to be abiding by the strict policy towards Hezbollah and Syria, and so the ramifications for Lebanon remain unclear.  

There is no one size-fits-all insurance to mitigate these risks, although an awareness of certain general principles can help. Foremost, investors working in Lebanon must be wary of political exposure: Lebanese politics and business are intimately intertwined. If the recent sanctions policies are an indicator, investors must extend their scrutiny beyond immediate economic associations to include an understanding of their partners’ political affiliations.  

Lebanese sanctions are replete with grey areas, and navigating them is often difficult. But if investors  are to continue reaping the rewards of Lebanon’s privileged historical position, they must take all necessary measures to understand its unique and complex risk profile.