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POLITICS

Robbery, Lebanese style: why a formerly successful country cannot avoid being sucked into a death spiral of state collapse

Anna Volkova

Since 2019, Lebanon, often called the «Switzerland of the Middle East,» has plunged into one of the worst economic crises in world history since the 19th century. The country's economy was built on the principle of a financial pyramid, and as soon as the money ran out, it collapsed. The crisis led to a humanitarian disaster: the country has almost no electricity, no gasoline, and no medical supplies. In addition, Russia's invasion of Ukraine has also negatively affected Lebanon's food market. The roots of the problem lie in the very structure of the state. The Lebanese are demanding radical political change, while the government continues to plunder the country, and the international community can only offer economic measures of questionable effectiveness.

ALL CARDS
  • Crisis After Crisis After Catastrophe

  • Robbery instead of rebuilding

  • Only a temporary solution to the problems

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Crisis After Crisis After Catastrophe

«To hell, of course,» was Lebanese President Michel Aoun's answer to journalists' questions about where the country was headed during his September 2020 speech on the challenges of forming a new government. The previous one had resigned because of the Beirut port explosion. Two years later, it is finally clear: this is the only promise the Lebanese government has kept.

By 2022, the man-made crisis, for which the Lebanese authorities can safely be blamed, has only worsened. Economic indicators reflect only one side of the collapse: inflation in 2022 is expected to be 178%, on top of nearly 155% in the previous year. Lebanon's poverty rate has doubled, from 42% in 2019 to 82% in 2021. Consumer prices have risen several times, the official exchange rate and the black market exchange rate differ by a factor of 20. Bread prices, already subsidized by the state, have more than doubled in six months since March 2022 due to the wheat market situation caused by the Russian invasion of Ukraine. The state is able to provide no more than a few hours of electricity a day or a month, depending on the region of the country. Fuel prices in Lebanon, which depends entirely on imports, have skyrocketed: while before the crisis a ride on a shuttle bus cost 2,000 Lebanese pounds, today it costs 40,000 pounds.

By 2022 the man-made crisis, for which the Lebanese authorities can safely be blamed, has only worsened

Lebanon was hit by the biggest wave of emigration since the civil war of 1975-1990. Among those leaving the country are all sorts of sought-after professionals, including medical staff. According to the WHO, about 40 percent of doctors have left for good or are temporarily working abroad. But the total collapse of the state hinders emigration: it is impossible to get a new identity document in the country, because passports have simply run out.

On October 17, 2019, anticipating the crisis and furious at the absolute inaction of the authorities, hundreds of thousands of people took to the streets in all cities of Lebanon and demanded radical changes. Many observers had high hopes for the protest, which took place simultaneously with rallies in other Middle Eastern countries. Their vibrant feminist and anti-capitalist character and the anti-sectarian unity of the protesters against the Lebanese establishment gave many a hope for the emergence of new independent political forces and civil society leaders. Calling their movement a revolution, the Lebanese demanded an overhaul of the current political system, the departure of the old leaders, and total economic and social reforms. After 12 days of protests, Prime Minister Saad Hariri resigned. But the revolution never materialized. The leaderless protest did not create an alternative structure that could replace the current government. The army resorted to excessive and disproportionate brutality to disperse protesters.

During the protests, in which a quarter of Lebanese population participated, the normal economic activity came to a halt. Investors, fearing losses due to instability, withdrew funds, and the entire financial system, against whose dismal state the protesters had been railing, collapsed under a mountain of debt accumulated over decades of corruption and cronyism. The banks literally ran out of dollars. They closed for weeks during the protests, and when they reopened, Lebanese found their deposits frozen without any legal basis. The attempt to prevent a banking panic was fatal to people’s confidence in the banking sector: normally, banks or authorities can restrict cash withdrawals and transfers abroad to stop the outflow of money from the country, but that did not happen in this case. For example, Nadi Salameh, son of the head of the Central Bank of Lebanon, alone transferred abroad $6.5 million from his accounts. Lebanese have every reason to believe that their savings have disappeared, and they are not ready to part with their money once more. The amount of funds «stuck» in the Lebanese banks is estimated at more than $100 billion. A black currency market emerged simultaneously with the rapid depreciation of the Lebanese pound.

The Lebanese financial system collapsed under a mountain of debt accumulated over decades of corruption and cronyism

On top of this, the COVID-19 pandemic began in March 2020, further worsening the socio-economic situation. A few months later, one of the most powerful non-nuclear explosions in history occurred, destroying a third of central Beirut. It was the government's corruption, cronyism, and negligence that resulted in a catastrophe that none of them could have imagined. On the evening of August 4, a fire broke out in one of the warehouses in the Beirut port, and a few minutes later there was an explosion. It caused huge destruction in the capital: the port is in the heart of Beirut, just a few kilometers from densely populated residential areas. More than 200 people died, several thousand were wounded and 300,000 people were left homeless.

The results of the investigation into the explosion are shocking with evidence of trivial negligence. The dangerous cargo had been in the port since 2013, when the port authorities arrested the cargo vessel Rhosus because of technical problems and non-payment of port dues. The crew, left without pay, abandoned the ship. Correspondence between port officials and the authorities examined by OCCRP revealed that the port authorities had been concerned about the explosive cargo and had been trying to get rid of it. But after trying unsuccessfully to do something, they simply forgot about it. Tons of saltpeter were stored together with fuel and fireworks. Not a single perpetrator has been brought to justice, and the politicians have made every effort to obstruct the investigation. Lebanon's capital suffered billions of dollars in damages, and it was Lebanese and foreign volunteers and NGOs, not the state, who helped the residents and rebuilt the city.

Robbery instead of rebuilding

The collapse of Lebanon is a story of how a reconstruction project for a country that was once considered an island of tranquility and prosperity in the region was derailed by corruption and embezzlement by sectarian elites. The processes that created the crisis were set in motion decades ago and are rooted in the very foundation of Lebanon's state structure. After the civil war of 1975-1990, control of the state's resources was seized by those who decided that it was more profitable for them to plunder the treasury together rather than fight each other for control over it. This is exactly what they did about the projects for post-war reconstruction of the country.

The standard of living of the Lebanese and the corresponding economic indicators rose between 1990 and 2000, and even the international crisis of 2008 did not affect the country's economy. But along with prosperity, public debt and economic inequality were growing. By financing the reconstruction with loans, the authorities accumulated one of the world’s largest external debts relative to GDP. Lebanon's banking sector operated according to the classic principle of a Ponzi scheme, where very favorable but obviously impossible conditions are offered, and the money comes from constantly inflow of new participants. The banks offered unprecedentedly high interest rates on foreign currency deposits. The Central Bank used the deposits of individuals to finance the government budget, full of corrupt schemes and embezzlement. The money simply ran out, an absolutely predictable outcome. The public sector debt reached such levels that a default was inevitable, and it did happen in March 2020.

Lebanon's central bank used the deposits of individuals to finance the government budget full of corrupt schemes

Lebanon, as a country that imports 80% of all its consumption, needs dollars to maintain its trade balance. The Lebanese economy is highly dollarized, but the sources of dollars are few. There has been no growth in the real economy for ten years, and the only serious export is human capital. Lebanon got the dollars it needed from tourism, from income earned by the port of Beirut, from aid supplied by other countries, but primarily from Lebanese abroad sending money to families back home. For the past decade, such remittances have averaged 15-20% of Lebanon's GDP.

Such a fragile system, relying on outside funding by ordinary people, is subject to shocks from random events. The outbreak of civil war in neighboring Syria, which has close economic ties to Lebanon, was one such shock. The flow of capital into the country ebbed. The state was practically without governance: Lebanon had no president from 2014-2016, and the 2018 elections were five years late. The more Hezbollah and Iran's influence increased, the less financial aid was provided by Saudi Arabia, Iran’s rival. Western countries provided grants for specific infrastructure projects, but it often turned out that the money ended up stolen and the declared projects never materialized - they were simply invented to obtain funds.

As a result of the liquidity crisis, several different exchange rates have been set in the country: the official unchanged rate of 1,500 pounds to the dollar, the «dollar» costing 8,000 pounds, a fixed rate at which Lebanese can convert their frozen currency deposits into Lebanese pounds, and the «fresh dollar,» the black market rate at which it is possible to buy cash, this year between 23,000 and 34,000 pounds to the dollar. It’s the rate at which apartments are rented and goods are priced.

As a result of the liquidity crisis in Lebanon, several different exchange rates have been set

Lebanon's unique system of political organization developed after independence in 1943, when political representation was organized on the basis of confessional groups, and took its present form after the civil war. The seats in parliament are equally divided between Muslims and Christians. The president of Lebanon, according to the constitution, can only be a Maronite Christian, the prime minister a Sunni Muslim, and the head of parliament a Shiite Muslim. Each region is prescribed a certain number of parliamentary seats for each of the many denominations, depending on demography.

On the face of it, this system seems to be built on an equal political representation of all Lebanese, but in reality it is an attempt to divide spheres of influence among elites. Parties see state institutions as a source of profit and vie for control over resources rather than for religious values. The most powerful and armed of these parties, Hezbollah, is considered by many to be responsible for Lebanon's troubles. Of course, Hezbollah's role in the country's collapse is not denied: the organization has de facto control over the Lebanese-Syrian border and the port - it was Hezbollah politicians who most obstructed the investigation of the Beirut port explosion. At the same time, Hezbollah has many allies among the country's political forces. But it is not the only paramilitary organization in Lebanon: Christian, Sunni Muslim, and Druze parties also have armed wings, however small and informal. The main current politicians of all ethno-religious groups are former leaders of civil war militias or their sons. That is why one of the main slogans of the October 2019 protests was «Everything Means Everything.»

Only a temporary solution to the problems

For the last three years, hardly anyone has governed Lebanon: the interim party administrations, which kept resigning one after the other, have not taken any steps to bring the country out of crisis. The country's future depends on whether Lebanese politicians can form a government, elect a president and carry out the reforms upon which the International Monetary Fund has conditioned its continued financial assistance. The traditional donors have made it clear that without major changes, Lebanon will receive no more money.

Under the April 2022 agreement between the IMF and the Lebanese government, the organization will provide access to about $3 billion in the first phase of a larger program to rescue the Lebanese economy. Among the conditions set by the IMF are reductions in government spending, such as food subsidies and public sector wages, as well as tax increases, privatization and currency devaluation. Such measures will hit the country's most economically vulnerable even harder.

The conditions imposed on Lebanon by the International Monetary Fund will hit the most economically vulnerable even harder

The International Monetary Fund's proposal may seem like the only and final option for Lebanon, but it is a temporary solution to the problem whose roots haven’t even been addressed. The system of theft, bribery and impunity will not go away and is likely to continue the vicious cycle that led the country to a critical situation. Such a mechanism has already been applied without much success in several other countries, such as Greece, Egypt and Argentina. The ideas of international leaders and organizations about the necessary reforms and changes are at odds with what Lebanese opposition activists are demanding, and even more so with the interests of the authorities.

In May 2022, the first elections were held since the start of the crisis, but the formation of a government and the election of the chiefs of state have been delayed once again - there is no clear winner in parliament. Earlier, Hezbollah's largest bloc lost its majority: the organization retained its seats, but its Christian allies, the Free Patriotic Movement, lost the vote. The position of the largest Christian party went from Hezbollah’s allies to their opponents, the Lebanese Forces party, which is supported by the United States and Saudi Arabia. Also elected were 13 independent candidates affiliated with the civil movement that had emerged in the wake of the massive 2019 protests. Delays in forming a government in Lebanon are the rule rather than the exception: the previous government was formed after 13 months of negotiations that were constantly being stalled.

The foreign policy developments do not add to confidence in Lebanon's bright future either. The conclusion of the protracted negotiations for the resumption of the Iranian nuclear agreement is approaching. If the agreement is reached, Iran will have to curtail its nuclear program in exchange for the removal of Western sanctions. This would allow Iran to make much more profit from its oil exports, and thus send more money to its allies and proxies, including Hezbollah. That’s why Israel, which is supposed to be interested in Iran being a nuclear-free country, opposes the deal. At the same time, Lebanon and Israel are trying to reach an agreement on maritime boundaries for the development of gas fields in disputed waters. Offshore gas extraction could help Lebanon cope with its energy and economic crisis. Hezbollah head Hassan Nasrallah has threatened Israel with escalation if Lebanon does not gain the desired control of the gas field in negotiations with Israel.

Offshore gas extraction could help Lebanon deal with the energy and economic crisis

Paralyzed without a clear majority, the parliament will face another test in October 2022, when parliamentarians will have to elect a new president. This could further exacerbate socio-economic tensions. The daily lives of Lebanese depend on the ever-changing and global fuel and food markets, more volatile than ever before because of Russia's invasion of Ukraine. The number of clashes between rival communities has increased. The constant stress over the shortage of almost everything leads people to the brink, they go on desperate sprees, and these tensions can turn into small but armed escalations. For example, one Lebanese man took hostage employees of a bank branch in Beirut. He entered the premises with a rifle and spilled gasoline, demanding that the bank give him the money frozen in his account. He shouted that he needed it to pay for his father's medical treatment. Outside the bank, people chanted, «You're a hero!»

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