Saudi Arabia's policy failures in Lebanon enhance most Lebanese parties’ incentives to co-operate with Hizbullah

Saad Hariri greets supporters in Beirut on 22 November 2017.

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On 4 November, Saad Hariri announced from Saudi Arabia that he was resigning as prime minister of Lebanon due to Iranian influence in the country and a “credible threat” against his life from Hizbullah. IHS Markit now assesses that the decision was forced, in content and in timing, by Saudi Arabia, notably Crown Prince Mohammad bin Salman, who is escalating a longstanding confrontation with Iran across the region (see Lebanon – Saudi Arabia: 17 November 2017: Lebanese PM's resignation paves way for extended political paralysis, facilitates political case for Israeli war). IHS Markit originally assessed that this would pave the way for extended political instability, as we had not anticipated that Hariri would revoke his resignation. Rumours of his resignation had been published in local media over previous months. Saudi Arabia’s detention of Hariri seems, however, to have backfired badly, with the unintended consequence that Hariri will probably be driven even closer to Hizbullah.

Saudi miscalculation

According to several foreign media reports and IHS Markit sources, countries with key stakes in Lebanon’s stability, such as France and the US, intervened to convince Saudi Arabia to release Lebanon’s Prime Minister and allow him to leave the country with his family. The US and France likely objected to the detention of Hariri on principle, and feared that instability in Lebanon would trigger an exodus to Europe by the million Syrian refugees in the country. It is not clear what Saudi Arabia sought by detaining Hariri. It may well have anticipated mass mobilisation against Hizbullah, or Hizbullah seizing the Lebanese government and triggering an Israeli escalation, or simply a political vacuum that would weaken Hizbullah and allow Hariri to escalate opposition against it and regain some of the popularity he lost by making compromises with it. Alternatively, it may well have been a tactic to pave the way for a crackdown on rival princes, as occurred within hours of Hariri’s detention in Riyadh.

Hizbullah, in the end, benefited from the event aligning with US and French demands that Saudi Arabia release Hariri, and presenting itself as a promoter of national unity demanding respect for Lebanese sovereignty. It appears that Saudi Arabia had badly miscalculated its escalation in Lebanon, failed to consult key allies and other interested countries, and instead strengthened Hizbullah by allowing it to present itself as a defender of Lebanon’s sovereignty. Moreover, Saudi Arabia alienated a significant portion of the Lebanese Sunni community by detaining Hariri without boosting support for its ostensible ally by successfully pushing Hariri to escalate pressure against Hizbullah and rally his base on a sectarian narrative. Instead, he was made to look even weaker when he rescinded his resignation.

Limited options

Although Saudi Arabia will remain an important player in Lebanon, its role is significantly diminished, at least until Hariri faces a crisis with Hizbullah and needs Saudi Arabian support. If Saudi businessmen were to divest from Lebanese enterprises they still own, they would potentially have to do so at ‘fire sale’ prices. Saudi Arabia can withdraw the USD860 million deposited in the Central Bank of Lebanon (Banque du Liban: BDL), but the BDL holds approximately USD40 billion in reserves, minimising the impact of such action. Saudi Arabia’s most substantial means of leverage is to threaten to expel Lebanese workers working there, in co-ordination with its partner the United Arab Emirates and Bahrain, which are effectively under a Saudi protectorate. This would significantly harm Lebanon’s remittances from the Gulf, which constitute approximately 3.5%–5% of GDP according to IHS Markit estimates based on publicly available information. However, it would also permanently reduce the leverage of Gulf Arab states over Lebanon, and leave the Lebanese with no option other than to back Iran or acquiesce to its influence. As such, Saudi Arabia is left with the option either of backing Hariri again, and accepting his rapprochement with Hizbullah, or, more likely backing his Sunni rivals such as Ashraf Rifi, with the risk of fragmenting the Sunni vote ahead of the 2018 elections and empowering Hizbullah further.

Hariri’s likely manoeuvres

Hariri acquiesced to the election as president of Michel Aoun, Hizbullah’s main Christian ally, most likely in response to Saudi efforts to destroy his company in Saudi Arabia. Hariri is likely to have calculated that agreeing to Aoun’s election in exchange for returning to the post of prime minister would bring back his political relevance to the Saudis. However, after the forced resignation episode, Hariri’s relationship with Saudi Arabia has deteriorated. Moreover, it is now unlikely that Saudi Arabia would back Hariri financially to help him re-establish his patronage networks in Lebanon, which is in our assessment a prerequisite for Hariri to improve his prospects in the May 2018 parliamentary elections. In order to regain popularity in Lebanon, Hariri now must regain his ability to distribute patronage. We assess that allowing government business to proceed, including in the energy sector, is critical to this.

Outlook and implications

Saudi Arabia and the UAE can escalate pressure against Lebanon in a number of ways, including by shutting down Lebanese bank branches in Saudi Arabia and the UAE, divesting from Lebanon fully, expelling Lebanese expatriates, and withdrawing deposits from Lebanon. This would risk it losing what remaining influence it has in Lebanon, even though it would cause immediate and lasting damage to Lebanon’s economy. However, IHS Markit assesses that such escalation is unlikely, due partly to US and European pressure seeking to maintain stability in Lebanon. The two main Gulf Arab powers and Bahrain are likely to restrict the entry of Lebanese Shia and Christians they view as supportive of Hizbullah allies, to add new Lebanese individuals and institutions to sanctions lists, and to refrain from providing aid to Lebanon.

It is now in Hariri’s best interest to expedite the exploration phase of Lebanon’s two offshore blocks in the Levant Basin. Yesterday (14 December 2017) the Cabinet approved the award of to a consortium made up of ENI, Novatek, and Total. Following its approval, more significant exploration can commence. The rights holders must prioritise local goods and service providers in awarding contracts, and at least 80% of employees must be locals. In order to secure patronage ahead of the May 2018 elections, the government is likely to seek to play an active role in approving key appointments. IHS Markit also anticipates that Hariri will promote awarding contracts in other sectors more easily. However, the government is extremely unlikely to address the public debt, which stands at 142% of GDP, corruption across all levels of government, or other structural issues.