FACTORS OF INSTABILITY IN LEBANON Warnings and Indicators

Date: 1 May 2016 Course: SIS-793 Intelligence Analysis Prepared By: Samantha Monk, Justin Davis, Talley Lattimore, Taylor Budak, Susan Calhoun, John Miller, Ibrahim Nasr, Laura Pintar, Mike Waalkes, and Jennifer Rimer

INTELLIGENCE ANALYSIS (U) LEVANT BRANCH

1 May 2016

(U) Summary This report aims to identify warnings and indicators of instability in Lebanon. The report is divided into five sections: Syria, Political, Social, Economy, and Military. In each section, instability is defined as the movement of each indicator toward the worst-case scenario. A risk/probability rating is assigned to each section to provide an overall measurement for instability. The report begins with an introduction to the current situation in Lebanon and neighboring Syria. The Risk Probability and Impact Gauge (RP/IG) that we used to measure instability in each section is explained next. Then, warning and indicators for each of the five sections are explained section-by-section. Finally, we offer a list of recommendations for the United States to consider at the end of the report.

(U) Syria Section In the Syria section, the worst-case scenario is defined as the spillover of conflict from Syria into Lebanon. A rating of low probability/high impact was assigned to Syria using RP/IG. In order to come to this conclusion, we considered how an opposition offensive could lead to renewed fighting along the Lebanese border; how shifts in Russia’s involvement could impact the conflict going forward; how high-level casualties could lead Iran and Hezbollah to rethink their involvement in the conflict; and how losses of territory by the Islamic State in Iraq and the Levant (ISIL) could lead to terrorist attacks in Lebanon. We found that it is in Lebanon’s best interest for the border areas to remain stable and under the control of Bashar al-Assad, and that the actions of Iran, Russia, and Hezbollah will determine the future trajectory of the war.

(U) Political Section In the political section, the worst-case scenario is defined as militant groups consolidating power within the central and municipal government(s). A rating of high probability/medium impact was assigned to Hezbollah, and a rating of low probability/medium impact was given to Sunni militant organizations using RP/IG. In order to come to this conclusion, we considered the potential impact of presidential front-runner candidates; how high citizen dissatisfaction with municipal governments throughout Lebanon, especially in the north, is indicative of the governments’ inability to provide services; how this inability to provide services leads to denationalization of services and opportunities for third-party actors to fill the void; and how decreased funding by Saudi Arabia and increased funding from Iran could affect Hezbollah’s ability to consolidate power. We found that Hezbollah is more likely to consolidate power than Sunni militant organizations due to its structure as a political party, service provider, and militant organization. We also found that the failure of the government to provide social services leads third-party actors to gain influence at the local level. The district of Akkar in Northern Lebanon, in particular, is vulnerable to the influence of such militant groups.

1

(U) UNCLASSIFIED

(U) Social Section In the social section, the worst-case scenario is defined as the spread of vulnerability throughout Lebanon, which creates areas prone to child labor, child marriage, radicalization, and tension between population groups. A rating of high probability/low impact was assigned using RP/IG. In order to come to this conclusion, we considered how the influx of refugees to Lebanon from Syria has strained social services that were already deficient before the Syrian Civil War; increased tension between population groups; and pockets of vulnerability throughout Lebanon. We found that the North and Bekaa Valley were the most vulnerable regions and the government’s inability to manage the influx of refugees has not only deepened existing pockets of vulnerability throughout Lebanon but also created the possibility that vulnerability from these regions could spillover and spread throughout the country.

(U) Economic Section In the economic section, the worst-case scenario is defined as the collapse of the economy. A rating of low probability/high impact was assigned using RP/IG. In order to come to this conclusion, we considered how an increase in government expenditures and a decrease in overall growth could lead to an increase in borrowing and government default. We also considered how an increase in money laundering and non-performing loans affect the banking sector; how a decrease in remittances could lead to unintended economic consequences; how the security situation in Lebanon could lead to a potential decrease in foreign direct investment (FDI) and tourism; and how a credit downgrade could affect the ability of Lebanon to attract foreign investors. We found that fiscal reforms and international assistance are key to preventing government default and that the macroeconomic stability of Lebanon depends on the ability of the banking and financial sector to attract foreign deposits.

(U) Military Section In the military section, the worst-case scenario is defined as the collapse of the Lebanese Armed Forces (LAF). A rating of low probability/high impact was assigned using RP/IG. In order to come to this conclusion, we considered how the overall public approval rating of LAF is high throughout Lebanon but is low in the north; how shifts in the demographic breakdown of the officer corps and the number of desertions could contribute to instability within LAF rank-andfile; how the absence of standardized practices in the realm of procurement lead to corruption and harm the ability of LAF to acquire the military assets it needs; and how fluctuations in the level of military aid, specifically from Saudi Arabia, could impact the financial stability of LAF. We found that the strong reputation of LAF remains its principal asset and that the demographic balance in the officer corps is mission-critical to maintaining stability within the military.

///END SUMMARY/// 2

(U) UNCLASSIFIED

(U) Introduction Lebanon has been profoundly affected by regional trends, from the ongoing war in neighboring Syria to the regional proxy conflict between Iran and Saudi Arabia. The question remains if Lebanon will weather this ongoing volatility and avoid the violence that has affected so many of its regional neighbors. For the U.S., this is a vital question, as Lebanon’s geopolitical importance is undeniable. Located between Syria, a failed state, and Israel, an essential U.S. ally, Lebanon’s stability is key to ensuring the security of American regional interests. In this report, we will explore potential sources of destabilization in Lebanon. Through research and interviews, we have identified trends and indicators that we assess are necessary to consider in ensuring Lebanon’s stability. Members of our team interviewed and spoke with current and former U.S. government officials, as well as academics and think tank professionals in the Washington, DC area to develop a well-rounded picture of internal and external threats to Lebanon’s stability. Since 2011, Lebanon’s politics have reflected the destabilizing course of the Syrian conflict, initially polarizing into two factions, with pro-Assad forces coalescing into the March 8th movement and its opponents forming the March 14th coalition. As the Syrian conflict continues, this polarization has resulted in a new political paralysis, as the government has gone without a president for two years and has, thus, been unable to accomplish significant legislation. Internationally, Saudi Arabia and the Gulf states have enacted punitive policies against Lebanon in retaliation for its ties to Iran - policies that will continue to have damaging effects on all aspects of the country. At the same time, the Syrian conflict has sparked an influx of refugees into Lebanon, further straining the already under-equipped central and municipal governments to provide necessary social services and threatening tension and demographic challenges. In addition, marginalized refugee populations carry the potential for radicalization, an additional security risk Lebanon may be ill prepared to manage. The Lebanese economy has also suffered from the effects of the conflict, with certain sectors declining over the course of ongoing violence. Important industries such as real estate and tourism have suffered as a result of the perceived security threat in Lebanon, and the near-term future does not appear hopeful for improvement. Government debt is mounting, and the possibility of a credit downgrade looms on the horizon. In addition, the threat of economic retaliation by Saudi Arabia and other Gulf states has emerged in recent months, and could threaten a significant deterioration in the Lebanese economy due to its reliance on Gulf funding across many sectors. There are, however, some bright spots. LAF remains an important source of state legitimacy, due to its fairly representative, co-sectarian nature and relative competency in ensuring border security. However, LAF faces significant security threats, most notably the possibility of crossborder incursions from terrorist groups, Jabhat al-Nusra (JaN), and ISIL. This threat will pose a significant challenge for the often-underfunded LAF, which historically relies on foreign aid and funding to enhance its capacity.

3

(U) UNCLASSIFIED We divided this report into five sections to assess the impact of the Syrian Civil War and the level of instability in the political, social, economic, and military sectors of the Lebanese state. In each section, we defined instability as the movement of each indicator toward the worst-case scenario and used the Risk Probability and Impact Gauge (RP/IG) to analyze the likelihood and threat of each worst-case scenario. We followed a simple risk assessment framework of high, moderate, or low probability and its corresponding impact. A high probability indicates a circumstance that is either already occurring or is highly likely to occur, with a low as its opposite and moderate as a more uncertain probability. For the impact of the scenarios, we assessed high impact as a scenario that would drive Lebanon toward failed state status, moderate impact as a scenario that would move Lebanon toward instability, but is unlikely to lead to failed state status, and low impact as a scenario that is unlikely to have a significant destabilizing impact on Lebanon.

(U) Syria Section: Avoiding Conflict Spillover is Key The Syrian Civil War began with protests against the government of President Bashar al-Assad in March 2011, which escalated into violence and, eventually, war. On the ground, the war is being fought by four broad groups: The Syrian Arab Republican Government, heavily backed by Hezbollah, Iran, and Russia; a diverse opposition with various groups supported by the U.S. and Gulf countries; a number of Kurdish groups in the north; and ISIL. Depending on the circumstances, these groups occasionally fight alongside each other. Most notably, the Assad government has reportedly aided the rise of ISIL in order to paint the conflict as a war between the government and a terrorist organization.1 The Syrian government retains control of the populous eastern part of the country including Damascus, Homs, Hama, and parts of Aleppo. The opposition controls areas in the northwest including Idlib and parts of Aleppo, as well as in the south around Daraa. The Kurds control most of the northern border with Turkey, while ISIL controls the largely empty eastern half of the country along with Raqqa and Deir-Ezzor. Lebanon was most directly affected by the conflict in August 2014 when fighters from the alQaeda affiliate JaN and ISIL captured the town of Arsal in northwest Lebanon. Arsal is a Sunni town that is squeezed between the Syrian border and predominantly Shi’a parts of Lebanon. The spillover occurred during the Syrian Arab Army’s (SAA) first Qalamoun offensive where it pushed JaN-led opposition groups out of all population centers in the area of the Qalamoun Mountains.2 The fighting in Arsal sparked violence in other parts of Lebanon as well, including a bomb that went off near an LAF patrol in the coastal, Sunni city of Tripoli.3 Russia’s intervention in summer 2015 dramatically changed the conflict, as Russian air and ground support allowed the government forces to reverse opposition gains, nearly surround Aleppo, and cut a key opposition supply line from Turkey.4 After announcing that it would withdraw most of its forces, Russia was heavily involved in SAA’s recapture of Palmyra from

1

Michael Weiss & Hassan Hassan. "Revolution Betrayed." In Isis: Inside the Army of Terror, 131-52. New York: Regan Arts, 2015. 2 Bassem Mroue. "Lebanese Army Battles Syrian Rebels Holding Town." Lebanese Army Battles Syrian Rebels Holding Town. August 4, 2016. 3 Perry, Tom. "Bomb Goes off in Lebanon's Tripoli, Kills One." Reuters. August 06, 2014. 4 Barnard, Anne. "Syrian Forces Press Aleppo, Sending Thousands Fleeing." New York Times, February 5, 2016.

4

(U) UNCLASSIFIED ISIL. Recent reports indicate that Russia is shifting its men and artillery back west, a sign that they are likely preparing another offensive on Aleppo.5

(U) Worst-Case Scenario: Conflict Spillover (Low Probability/High Impact) Amongst the myriad problems Syria poses to Lebanon, direct spillover of fighting from Syria into Lebanon has the potential to destabilize the country and start another civil war. We assess there is a low probability of spillover of fighting into Lebanon, but that spillover would have a high impact on Lebanon. When the fighting in Arsal occurred in 2014, many of the areas along the border were in dispute, and Hezbollah and the SAA were working to push out ISIL, JaN, and opposition groups. Since then, pro-Assad forces have controlled most of the border. As a result, there is a significantly lower risk of cross-border violence than in 2014. However, should opposition forces contest these areas again, it would raise the likelihood of cross-border violence and increase the flow of refugees into Lebanon. The following warnings and indicators could signal this dynamic is shifting.

(U) External Indicator: Russian Air Presence So far, the Russian “withdrawal” has amounted to little more than a shift in focus. Reports indicate the Russians withdrew approximately one-third of their fixed-wing aircraft (FWA) from Syria, but have deployed 7 more rotary-wing aircraft (RWA), including adding advanced Mi28N Havoc and Ka-52 Hokum-B helicopters.6 The shift away from FWA and toward RWA is indicative of a shift from strategic bombing to close air support. Russia also appears to have shifted east, as evidenced by the increase in aircraft at Tiyas (T4) airbase between Homs and Palmyra and al-Shayrat south of Homs.7 However, this geographic shift, which weakened the government presence around Aleppo, appears to have been only temporary.

(U) External Indicator: Opposition Launches Offensive As negotiations break down, we now see a return to pre-ceasefire levels of violence. After the Russian intervention, the government, and its allies pushed the opposition back and effectively cut off their northern supply route from Turkey. In addition to territorial losses, they suffered heavy causalities from airstrikes and are struggling to maintain captured territory. In this case, the probability of fighting returning to the Lebanese border is minimal. Recent reports of Russian military personnel and assets shifting back toward Aleppo make an opposition offensive even less likely.8 However, an opposition offensive could lead to fighting near the Lebanese border, increasing the possibility of conflict spillover and leading to a spike in refugees fleeing the country.

5

Goodman, Peter S. "Russian Military Buildup Near Aleppo, Syria, Threatens Truce, Kerry Warns." The New York Times, April 22, 2016. 6 Jeremy Binnie & Sean O'Connor. "Analysis: Russian Air Group in Syria Remains a Powerful Force." IHS Jane's, March 24, 2016., Tim Ripley. "Mi-28N Helicopters Go into Action in Syria." IHS Jane's, April 1, 2016., and Nikolai Novichkov. "Russia to Deploy Ka-52 Helicopters to Syria." IHS Jane’s, January 15, 2016. 7 Jeremy Binnie & Sean O'Connor. "Russia Forward Deploys New Attack Helicopters in Syria." IHS Jane's, April 8, 2016. 8 Peter S. Goodman. "Russian Military Buildup Near Aleppo, Syria, Threatens Truce, Kerry Warns."

5

(U) UNCLASSIFIED

(U) External Indicator: Iranian Withdrawal If Iran follows Russia’s lead and withdraws from Syria, it could cause the pro-government coalition to falter, and Assad will be forced to negotiate or lose the war. The SAA is exhausted and reliant on the equipment, air power, and, increasingly, the manpower of foreign actors.9 The Iranians have been providing support in the form of advisors, soldiers, and credit lines totaling 4.6 billion USD.10 Without this, it is unlikely that the SAA would be able to maintain its territory. Iran has limited its risk by sending mainly refugees from Afghanistan, who have been promised citizenship upon their return. Still, at least 340 Iranian troops, including 7 generals, have been killed in Syria.11 As propping up Assad is an expensive endeavor for a country trying to rebuild its economy as sanctions are lifted, the toll in blood and treasure may soon become too much to support a stalemate.

(U) External Indicator: Increase in Hezbollah Losses Hezbollah’s presence in Syria is a significant departure from their founding goal of fighting Israel. This departure is not universally supported by Lebanese Shi’as, but the intervention has been tolerated.12 This support is unlikely to last if Hezbollah soldiers die in Syria in increasing numbers or if Hezbollah gets pushed back. At least 880 Hezbollah fighters have been killed in Syria, with estimates indicating that number is likely higher.13 If these losses continue indefinitely or increase, support for Hezbollah could falter. Hezbollah could also see a significant increase in losses if Russia or Iran withdraws, or if a new force enters on the side of the rebels. If Hezbollah withdraws from Syria, it could lead to renewed fighting along areas of the border that are abandoned.

(U) External Indicator: ISIL Loses Territory While a primary goal of the U.S.-led coalition in Syria and Iraq is to deprive ISIL of its caliphate, it is not without side effects. In order to maintain its status as the pre-eminent jihadist group in the world, ISIL will likely respond to a loss of territory by launching terrorist attacks outside of Syria. We saw this last November when key ISIL losses in Syria and Iraq were immediately followed by terrorist attacks in Paris and Beirut.14 A string of ISIL attacks in Lebanon could threaten the relative stability the country has enjoyed. 9

"Iran and Hezbollah Controlling Assad's Army, Say Syrian Defectors." Middle East Eye. November 18, 2015. Sylvia Westall. "Syria Ratifies Fresh $1 Billion Credit Line from Iran." Reuters. July 08, 2015 11 Robin Wright. "Iran’s Generals Are Dying in Syria." The New Yorker. October 26, 2015., Adam Chandler. "An Iranian General Is Killed in Syria." The Atlantic. October 9, 2015., Bill Roggio. "Islamic State Kills Iranian General in Syria." The Long War Journal. October 9, 2015., Sam Wilkin. "Iran Brings Home Body of Top General Killed in Syria." Reuters. June 13, 2015., Saeed Kamali Dehghan. "Elite Iranian General Assassinated near Syria-Lebanon Border." The Guardian. February 14, 2013., and Caleb Weiss "Iranian Basij General Killed in Aleppo." The Long War Journal. October 16, 2015. 12 Marisa Sullivan "Hezbollah in Syria." Institute for the Study of War. April 2014., and Nicholas Blanford. "Is Syria's Long War Wearing down Key Assad Backer Hezbollah?" The Christian Science Monitor. October 04, 2015. Accessed April 20, 2016. 13 Ali Alfoneh. Hezbollah Fatalities in the Syrian War." Washington Institute for Near East Policy. February 22, 2016. 14 Andrew Watkins "Losing Territory and Lashing Out: The Islamic State and International Terror." Combating Terrorism Center at West Point. March 17, 2016. Accessed April 20, 2016. https://www.ctc.usma.edu/posts/losingterritory-and-lashing-out-the-islamic-state-and-international-terror. 10

6

(U) UNCLASSIFIED

(U) Political Section: Countering Third Party Influence in Government Lebanon’s political sphere is host to a multitude of problems, including widespread corruption, poor government service provision, and a polarizing electoral system. The parliamentary deadlock has persisted for nearly two years, paralyzing state institutions and preventing efforts aimed at reform and development. The lack of governance in Lebanon poses problems, particularly in terms of the radicalization of Lebanon’s Sunni population. Areas with little government presence or control on the municipal level are vulnerable to radicalization, allowing extremist actors to recruit and operate with little monitoring by the government. Hezbollah represents this dilemma at its most extreme, as it has consolidated political power in part through its exploitation of a lack of government presence in Shi’a areas. In addition, the political ascendancy of pro-Assad and pro-Hezbollah presidential candidates continues to contribute to Sunni marginalization and Hezbollah’s consolidation of power. Shifts in external funding to Lebanon are also likely to further empower Hezbollah, especially as Gulf States withdraw financial and political support from the government and the mainstream Sunni political movement.

(U) Worst-Case Scenario: Militant Organizations Gain Influence in the Central and Municipal Government(s) (High Probability/Moderate Impact) We developed a theoretical model, identifying areas that are vulnerable to the possibility of militant15 organizations consolidating power within the central government and among local authorities. As a result of Hezbollah’s integration into Lebanon’s official political institutions at the local and central government, Hezbollah is likely to continue to build power within the central government. However, we assess this would have a moderate impact, as Hezbollah’s current political threshold has not proven dramatically destabilizing. The ability of Sunni militant organizations to gain operational control over local territories is projected as a low probability, despite the disruptive and destructive impact on Lebanon’s social fabric. At-risk areas, such as the district of Akkar and the districts around Tripoli, are susceptible to recruitment and operations by Sunni militant organizations, but intra-sect competition over welfare distribution does limit the creation of one Sunni power base for militants to co-opt. The main factor contributing to creating an area at risk of increased militant authority is the state’s abdicated governance.16 In Lebanon, these are areas with weak local and state institutions that are unable to provide their communities with basic services, degrading popular support for the government and undermining its credibility as a viable authority. Alternative service providers include political parties’ charities, Islamic and Christian charities, and other nongovernmental organizations. Further, as Saudi Arabia withdraws funding from the state and the Sunni Future Movement, Hezbollah stands to gain in status, particularly as its funding from Iran could escalate.

15

Note: The term “militant” is used to describe political organizations that have a military component. Though some militant organizations may not actively counter the government, the persistence of a militia wing contests LAF’s monopoly of force. 16 Steven Boraz, Peter Chalk; et al. “Ungoverned Territories: Understanding and Reducing Terrorism Risks.” RAND Corporation: Project Air Force. 2007.

7

(U) UNCLASSIFIED Some of the local Sunni militant groups to watch include the Abdul Azzam Brigades (AAB) and local Salafist movements.17 AAB, a known al-Qaeda affiliate active in Lebanon since 2005, calls for the overthrow of the Saudi government and an uprising in Lebanon, and voices support for the Syrian opposition.18 Operating primarily out of Northern Lebanon as spillover from Syria, extremists such as Jabhat al-Nusra provide an additional means for retaliation against Hezbollah. The AAB conducted 11 attacks against Hezbollah between December 2014 to March 2014.19 Additionally, from July 2013 to February 2014, with assistance from JaN elements, AAB and ISIL operatives claimed a total of six attacks in South Beirut.20

(U) Internal Indicator: Political Affiliation of Presidential Front-Runner Candidates Pro-Syrian government politicians increasingly dominate Lebanon’s elite political coalitions. Since 2015, the Sunni Future Movement Party has backed Suleiman Frangieh, a member of the Hezbollah-controlled March 8th coalition, historically aligned with the Syrian government. Hezbollah has also backed another March 8th coalition candidate, Michel Aoun. The lack of an anti-Syrian government candidate is a sign that Sunni interests are under-represented in the government. Considering the Sunni community’s support of the opposition in Syria and distaste for Iranian intervention, this foreshadows future marginalization and discontent with the state, as well as with Hezbollah’s increasing control of the central government.21

(U) Internal Indicator: Citizen Dissatisfaction with Municipal Services Continued inefficiency and deficiency in the state’s provision of services weaken the state’s legitimacy as a responsible authority. Lebanon is poorly decentralized, as the central government officially has administrative prerogative over multiple industries.22 However, these sectors are mostly run by private sector or civil society groups due to notorious inefficiency and corruption.23 There are three administrative levels below the central government: Governorates (Muhafazat), Districts, and Municipalities, as well as small villages without municipal governments whose services fall at the district-level jurisdiction.24 While municipalities are charged with numerous public safety and health responsibilities,25 even in 2001, most failed to 17

Popular Salafi clerics in Lebanon known for antagonism towards Shi’ite Muslims include Sheikh Salman al-Awda and Sheikh al-Ar’our; Saoud Almawla, “Salafis in Lebanon: New Manifestations of a Movement,” Arab Center for Research and Policy Studies, Jan. 2015. 18 “Abdul Azzam Brigades,” Terrorism Research and Analysis Consortium, N.p., 2016. Web. http://www.trackingterrorism.org/group/abdullah-azzam-brigades-aab 19 "The Evolution of Sunni Jihadism in Lebanon Since 2011." The Jamestown Foundation. N.p., Oct. 2015. Web. http://www.jamestown.org/single/?tx_ttnews%5Btt_news%5D=44540&tx_ttnews%5BbackPid%5D=7#.Vxd59QrLcu 20 "The Impact of the Syria Conflict on Salafis and Jihadis in Lebanon." Middle East Institute. N.p., Apr. 2014. Web.http://www.mei.edu/content/impact-syria-conflict-salafis-and-jihadis-lebanon 21 Robert G Rabil. “In Lebanon: From Apoliticism to Transnational Jihadism,” Georgetown University Press: 2014. 22 This includes agriculture, industry, education, tourism, environment, transportation, and housing; Mona Harb and Sami Atallah, “Local Governments and Public Goods: Assessing Decentralization in the Arab World,” LCPS, 2015, pg. 197. 23 Ibid. 24 Alexander R. Dawoody, ed. Public Administration and Policy in the Middle East. Springer, 2015. 25 Note: Access to public hospitals, kindergartens and public schools, vocational training centers, providing infrastructure, and public housing; “About Administrative Decentralization in Lebanon,” Lebanese Center for Policy Studies, 2015.

8

(U) UNCLASSIFIED do more than clean roads and provide local licenses.26 By 2011, public administration was perceived as the second-most corrupt sector in Lebanon.27 There is a higher risk in Akkar and North Lebanon that weak state service provision could lead to a void of authority due to the already high levels of dissatisfaction with local state institutions. Survey research in 2015 in the city and surrounding areas of Halba, Akkar indicated that only 8 percent of respondents would rely on their municipality if in need of assistance.28 While there has been an influx of international funding to support municipal capacity-building under the Lebanese Crisis Response Plan, data collected in expectation of the 2016 May municipal elections details the highest level of dissatisfaction at 73.16 percent, with municipal performance worst in Akkar and North Lebanon.29

(U) Internal Indicator: Denationalization of Services The negligence of local governments in providing basic services allows non-state actors to become the primary service providers at the local level, providing a delegitimizing mirror to the government. The measurement for non-state service providers’ legitimacy can be understood through public approval polling, measuring the capacity of service provision of a specific charity, or the creation of charity networks. In predominantly Shi’a areas, Hezbollah’s charities are the main providers. Examples of this include Hezbollah’s Martyr’s Institution, which provides housing, education, clothing, health services, and other social services to the families of “Resistance” fighters.30 The Hezbollah-run Islamic Emdad Charitable Committee, which was made a public welfare association in 1994,31 also provides for orphans and families in severe poverty from all sects and exemplifies Hezbollah’s consolidation of power in the government. In predominantly Sunni areas, there are numerous organizations providing services. The Future Movement’s social assistance program, the Hariri Foundation, provides financial and material assistance to individuals, often covering the costs of medical treatment or supplies. 32 Measuring the Hariri Foundation’s capacity and integration into the community can be correlated to the physical presence of service dispensaries in an area.33 As of 2008, the Hariri Foundation was based in the Sunni neighborhoods of Aisha Bakkar and maintains main branch offices in Tripoli, Akkar, Baalbek, Sidon, Batroun, and Jbeil.34 26

Sami Atallah, “How Well Is Lebanon Fiscally Decentralized,” MDF4 Workshop: Empowering Local Government Institutions in MENA Region, 2002, pg. 6 27 Sofia Wickberg. “Overview of Corruption and anti-corruption in Lebanon,” Transparency International. Oct. 2012, pg. 4 28 Levant7 CVE labs. "Drivers of Instability, Conflict and Radicalization: a snapshot from Akkar." 2015. 29 "Citizens Satisfaction with the Municipality's Performance." Lebanese Association for Democratic Elections. 2015. http://lebanonelectiondata.org/ 30 Melani Cammet, Compassionate Communalism: Welfare and Sectarianism in Lebanon, (Ithaca: Cornell University Press, 2014) pg. 152. 31 “Emdad Committee for Islamic Charity,” Al Mashriq, 32 Cammet, Compassionate Communalism, 141. 33 Melani Cammet, & Sukriti Issar, “Bricks and Mortar Clientelism: Sectarianism and the Logics of Welfare Allocation in Lebanon,” World politics. 2010;62(3):381-421. 34 Cammet, Compassionate Communalism, 141.

9

(U) UNCLASSIFIED At least 6,000 Islamic charities are registered within Lebanon, hundreds of which offer services to Lebanese Sunnis. Since the start of the Syrian civil war, two networks of Sunni Islamic charities separated from the Dar al-Fatwa’s control, indicating an increase in each network’s capacity. Those charities remaining under Dar al-Fatwa mainly work in Greater Beirut and Mount Lebanon, but have very little control over the charities, which receive funding directly from international donors. Ittilaf began as a coalition of twenty charities, supposedly affiliated with Salafism, in North Lebanon and Akkar who combined resources to account for municipalities’ inability to provide for refugees. The other network is Ettihad, the charity wing of the Muslim Brotherhood and union of over 100 charities, include some secular and Druze associations. As of 2013, it ran over 50 hospitals, 15 camps, camp management, medical care, psychosocial support, and a loan program.35 Social assistance from non-state organizations is substantial, with approximately 52 percent of respondents in a recent survey indicating they had received some form of aid. Overall, 26 percent benefited from food and cash handouts, of which 63 percent reported that it came from a political organization, and 34 percent received financial aid for medical care.36 In 2015, there were roughly 1,500 civil society organizations working throughout Lebanon, over half of which operate across Lebanon with 17.1 percent, the majority, operating in North Lebanon and Akkar.37 Given this, aid given from charities to the poorest in Lebanon can indicate an underreliance, further mistrust, and de-legitimization of the Lebanese Central Government. Ultimately, Sunni militants from groups like AAB, ISIL, and JaN are unlikely to gain control of territory outside of the Palestinian refugee camps in Lebanon. This is due to the structure of the Sunni authority. Much like AAB, ISIL, JaN, Sunni welfare provision is horizontal. The Hariri Foundation, the Muslim Brotherhood, and Salafi charities often compete over ideology and politics. Despite that Hezbollah’s consolidation of power in the central government is highly likely to continue, since Hezbollah represents a status quo, the effect on the stability of Lebanon is moderate and dependent on the reaction of other actors.

(U) External Indicator: Foreign Aid The ongoing proxy conflict between Iran and Saudi Arabia poses profound challenges for Lebanon’s political stability. In its foreign policy, Lebanon must carefully balance the interests of these two powers, as both maintain significant influence on Lebanon’s internal politics. From the Saudi perspective, Lebanon failed to condemn the recent storming of their embassy in Iran. In retaliation, Saudi Arabia and other Gulf states have cancelled 3 billion USD in military funding, reduced their diplomatic presence in Lebanon, instituted a travel advisory for their citizens, and officially designated Hezbollah as a terrorist organization.38 Retaliatory measures by Saudi Arabia have continued to escalate in recent months, as Gulf regimes have expelled

35

Sarah Hasselbarth, "Islamic Charities in the Syrian Context in Jordan and Lebanon." Friedrich Stiftung. 2015. Robert G. Rabil. Salafism in Lebanon: From Apoliticism to Transnational Jihadism. Print. 37 “Mapping Civil Society Organizations in Lebanon,” Civil Society Facility South, March 2015 [report] 38 David Schenker. “Saudi Arabia Rethinks Its Commitment to Lebanon”. Washington Institute for Near East Policy. 25 February 2016 36

10

(U) UNCLASSIFIED Lebanese citizens from their countries, accusing them of being a part of Hezbollah.39 If this retaliation continues to escalate, it would prove a sign of a destabilization in Lebanon. When considering U.S. interests, the Saudi shift is a warning sign for Lebanon’s future, as Saudi Arabia’s retreat from Lebanese politics indicates Iran’s growing status and the corresponding gain in power for Hezbollah. An example of this is seen in Iran’s public statements, which promise to make up the gap in funding.40 Additionally, the Gulf Cooperation Council’s (GCC) recent decision to formally designate Hezbollah as a terrorist organization threatens to further inflame tensions and dangerously polarize internal sectarian politics. Already, public opinion toward Hezbollah is sharply divided along sectarian lines. Polling in 2014 found that while 86 percent of Lebanese Shi’a approve of Hezbollah, only 31 percent of Christians and 9 percent of Sunnis felt the same.41 The moderate, and particularly Sunni, Lebanese political leaders would become increasingly sidelined, as public opinion may shift against Saudi-backed groups. This is especially problematic for the Sunni Future Movement, which is already struggling for funding and is the primary Sunni political force in the country. While on the surface, Saudi Arabia may be signaling its disengagement from Lebanese politics, it is probable that it intends to use its financial leverage to contain Iran and Hezbollah and to pressure Lebanon. By pulling its funding and support, Saudi Arabia is demonstrating the economic and political consequences of aligning with Iran and pushing the Lebanese state and public to move away from Hezbollah. It remains to be seen whether this shift in strategy will work to Saudi’s advantage or merely push the state and its populace further into Iran’s orbit. It is likely that Iran will use the Gulf’s decline in influence as an opportunity to embolden Hezbollah despite a recent decline in funding. In the past year, there have been indicators that the decline in Iranian funding was a result of the global decline in oil prices and Iran’s already high investment in stabilizing the Assad regime in Syria.42 As such, a potential increase in funding from the current status would likely not have a dramatic effect on Lebanon’s stability, instead merely allowing Hezbollah to maintain its capabilities.43 Despite this, Iran is likely to take advantage of the opportunity to secure a sphere of influence from Tehran to Beirut. If Iran uses its newly unfrozen assets to significantly increase funding to Hezbollah, it would likely have a dramatic effect on the organization’s position in the Lebanese political sphere. For the interests of the U.S. and its regional allies, a strengthened and legitimized Hezbollah is a destabilizing prospect that threatens Israel and the overall balance of regional security.

(U) Social Section: Syrian Refugee Influx Strains Social Services The refugee population in Lebanon has increased from 10,000 mostly Iraqis before the Syrian Civil War to 400,000 Syrian refugees in 2013 and a million Syrian refugees in early 2014.44 With 39

Sami Aboudi. “Lebanese Expats Fearful as Gulf Expels Dozens Accused of Hezbollah Links”. Reuters. 8 April 2016 40 “Iran Declares Its Readiness to Replace Saudi Arabia in Funding to the Lebanese Army”. RT.com. 23 February 2016. (trans. From Arabic). 41 “Concerns About Islamic Extremism on the Rise in the Middle East”. Pew Global Research Center. 1 July 2014. 42 Jeff Neumann. “Is Hezbollah Going Broke?” Newsweek. 15 January 2015. 43 Matthew Levitt. "Hezbollah Finances: Funding the Party of God." Terrorism Financing and State Responses: A Comparative Perspective. Ed. Jeanne Giraldo and Harold Trinkunas. Stanford UP, 2007. 44 UNHCR. “Syrian Refugees in Lebanon.” March 2015.

11

(U) UNCLASSIFIED more than 1.2 million Syrian refugees registered in Lebanon, refugees now make up more than 25 percent of Lebanon’s overall population.45 The influx of refugees in Lebanon has consequently strained social services that were already deficient before the Syrian Civil War, increased tension between population groups, and created pockets of vulnerability throughout Lebanon.

(U) Worst-Case Scenario: Increasing Vulnerability (High Probability/Low Impact) Increasing poverty risks creating areas prone to tension between population groups, child labor, child marriage, and radicalization. We assess the worst-case scenario is highly probable, as some pockets of vulnerability already exist in Lebanon, but is likely to have a low impact on Lebanon’s overall instability, especially given measures taken to counteract these effects by both the Lebanese government and international actors.

(U) Internal Indicator: Access to Social Services The influx of Syrian refugees to Lebanon since the beginning of the Syrian Civil War in 2011 has strained what were already deficient social services in Lebanon. The following service sectors have been particularly degraded due to the refugee crisis.

Education Although public schools in Lebanon are not generally overcrowded, public schools have become overcrowded and under resourced since 2011.46 Despite that approximately 66 percent of Syrian refugee children are not in school, approximately 70 percent of Lebanese children are estimated to attend private institutions.47 As private schools are traditionally higher in quality than public schools, the gap has increased between more economically advantaged youth and their poorer peers.48 Given that drop out rates are highest in public schools, and are worst in the North and Bekaa Valley where unemployment is also high,49 this gap increases the risk of vulnerability in these areas, as low education historically correlates with poverty and child marriage.50

Healthcare The influx of refugees is reportedly straining the health care system, evident by “increased demand for health care services, increased unpaid commitments of the Ministry of Public Health (MOPH) to contracted hospitals, shortages of health care workers including specialists and nurses, a sharp rise in communicable diseases and the emergence of previously absent diseases,

45

International Labour Organization. “Assessment of the Impact of Syrian Refugees in Lebanon and their Employment Profile.” 2014. 46 Ghanem, Esperance. “Lebanon’s Schools Do Double-Duty to Educate Both Syrian, Lebanese Students.” 30 October 2015. 47 European Commission. “Lebanon: Syria Crisis.” 2016. 48 U.S. Agency for International Development. “USAID/Lebanon: Country Development Cooperation Strategy (CDCS) 2014-2018.” 49 Ibid. 50 UNICEF. “Ending Child Marriage: Progress and prospects.” 2014.

12

(U) UNCLASSIFIED such as leishmaniasis, and increased risks of epidemics such as water-borne diseases, measles, and tuberculosis.”51 52

Water With less than half of Lebanese connected to the formal water infrastructure, one in three Lebanese must find alternative sources of potable water in light of an additional estimated water demand of 7 percent compared to pre-crisis demand.53 With a markedly visible decline in the level and quality of solid waste management and water services provided by the Lebanese government, those who cannot afford water must rely on poor-quality water.

Solid Waste Management The increase of refugees in Lebanon has resulted in solid waste build-up, with some municipalities facing a 30 – 40 percent increase in solid waste.54 This increase has not only strained budgets, but has also resulted in a lack of adequate staffing to collect or transport garbage.55 The initial failure of the government to find a solution for trash disposal led to a series of protests demanding the government to resign.56 These protests began as part of the “You Stink” campaign and have now grown into the “We Want Accountability” campaign, which encompasses the growing public frustration with the poor condition of the state’s power infrastructure, frequently resulting in power cuts. While trash is now being removed from the streets, these incidents are indicative of the government’s inability to counteract the strain on social services in Lebanon.57

(U) Internal Indicator(s): Location of Refugees and Reported Incidents of Tension Although Lebanese have historically welcomed Syrians, the influx of refugees has increased competition for jobs and has ultimately increased tension between Lebanese nationals and refugees, as Syrian refugees are willing to work for 25 – 50 percent lower wages.58 While the increase of cheap labor is beneficial to some Lebanese employers, it has also resulted in a 60 percent decline in overall wages and has severely limited job opportunities.59 In 2014, the American University of Beirut conducted a study in which 90 percent of Lebanese participants 51

The World Bank Group. “Promoting Poverty Reduction and Shared Prosperity: A Systematic Country Diagnostic.” 2015. 52 The World Bank. “Lebanon: Economic and Social Impact Assessment of the Syrian Conflict.” September 2013. 53 The World Bank Group. “Promoting Poverty Reduction and Shared Prosperity: A Systematic Country Diagnostic.” 2015. 54 International Labour Organization. “Assessment of the Impact of Syrian Refugees in Lebanon and their Employment Profile.” 2014. 55 Ibid. 56 Hwaida Saad. “Clashes Break Out During Protests Over Trash Crisis in Lebanon.” The New York Times. http://www.nytimes.com/2015/08/24/world/middleeast/lebanese-protest-as-trash-piles-up-in-beirut.html?_r=1 57 AFP. “Lebanon Activists Block Ministry in Protest.” Al Arabiya. 2015. http://english.alarabiya.net/en/News/middle-east/2015/09/29/Lebanon-activists-block-ministry-in-electricityprotest.html 58 International Labour Organization. “Assessment of the Impact of Syrian Refugees in Lebanon and their Employment Profile.” 2014. 59 Food and Agriculture Organization of the United Nations. “Agricultural Livelihoods and Food Security Impact Assessment and Response Plan for the Syria Crisis in the Neighboring Countries of Egypt, Iraq, Jordan, Lebanon and Turkey.” 2013.

13

(U) UNCLASSIFIED viewed Syrian refugees as a threat to economic security.60 In addition, the UNHCR has documented instances where refugees were assaulted or threatened with violence or death. In a survey conducted in June and July of 2014, 61 percent of the 446 host communities surveyed had witnessed refugee-related incidents of tension or violence in the six months immediately preceding the survey.61 Given that refugees are concentrated in the most economically depressed and impoverished regions in Lebanon, these regions have become increasingly prone to tension, especially in Akkar and the Bekaa Valley.62 As tension between host communities could upset the confessional balance within Lebanon, we assess that an increase in the number of refugees to these vulnerable areas or an additional increase in the decline of wages could also move Lebanon toward greater instability.

(U) Internal Indicator(s): Poverty and Unemployment Rates According to the IMF in July 2015, approximately 32 percent of those residing in Lebanon live in poverty.63 While this rate increased by approximately 4 percentage points from 28.5 percent in 2008 and by 5 percentage points from 27 percent in 2011, poverty incidence has remained mostly unchanged over the past 25 years with overall poverty at an average 28 percent and extreme poverty ranging from 7-10 percent.64 However, as 86 percent of the 1.2 million Syrian refugees in Lebanon reside in impoverished neighborhoods, regional disparities are striking.65 It is estimated that the 242 localities in Lebanon containing 2/3 of poor Lebanese also contain 4/5 of Syrian refugees registered with the UNHCR, with the neighborhoods in the North, South, and Bekaa Valley as the most vulnerable.66 Moreover, with a labor force that is 50 percent larger than before the Syrian Civil War, overall unemployment has doubled to 20 percent since 2011 and one-third of youth are unemployed – a 50 percent increase since 2011.67 As unemployment is high among the poor and the poor are mostly unskilled workers, these areas have become increasingly vulnerable to child labor and radicalization. While each of the indicators identified in this section have the potential to move Lebanon toward the defined worst-case scenario, what is most notable are the areas of vulnerability in the North, South, and Bekaa Valley, indicated by high poverty and unemployment rates. The North and Bekaa Valley are the same areas with the highest drop out rates, low levels of education, and the highest number of reported incidents of tension between host communities and refugees. These are also the same areas with high citizen dissatisfaction, as discussed in the political section, and low levels of public approval of the Lebanese Armed Forces (LAF), one of the most trusted institutions in Lebanon, which will be discussed in the military section of this report. We assess that these indicators increase the probability of the worst-case scenario, as the government’s inability to manage the influx of refugees not only deepen existing pockets of vulnerability in the

60

Charles Hard and Rim Saab. “Social Cohesion and Intergroup Relations: Syrian Refugees and Lebanese Nationals in Bekaa and Akkar.” American University of Beirut (Save the Children Report). May 2014. 61 Khatib, Lina. 2014. “Repercussions of the Syrian Refugee Crisis for Lebanon.” Carnegie Middle East Center. 62 United Nations Development Program. “Poverty, Growth & Inequality in Lebanon.” 2007. 63 International Monetary Fund. “The Impact of the Syrian Conflict on Lebanon,” Selected Issues Paper (IMF Country Report No. 14/238). 2015. 64 United Nations Development Program. “Poverty, Growth & Inequality in Lebanon.” 2007. 65 Lina Khatib. “Repercussions of the Syrian Refugee Crisis for Lebanon.” Carnegie Middle East Center. 2014. 66 Government of Lebanon and the United Nations. “Lebanese Crisis Response Plan 2015-2016.” 2014. 67 Ibid.

14

(U) UNCLASSIFIED North and Bekaa Valley, but also create the possibility that vulnerability from these regions could spillover and spread throughout Lebanon.

(U) Economic Section: Runaway Public Spending and Reliance on Banking With all indicators of growth and production in decline, the economic outlook of Lebanon does not forecast a promising future.68 An increase in Debt/GDP ratio demonstrates the government’s inability to control its spending, while political gridlock has prevented approval of a new budget. This ratio has increased and uncertainty has resulted from both internal and external complexities. The internal political gridlock has realized little change in fiscal policy since 2005. The parliament was able to pass an increase in the legal spending limit of government expenditures in 2012, but suggested reforms by the World Bank and International Monetary Fund (IMF) have not yet been addressed.69 70 The current budget, last passed in 2005, still has significant subsidies directed toward the energy sector, as well as a proposed public sector salary increase. With the increase in uncertainty, the Banque du Liban, Lebanon’s Central Bank, was able to use monetary policy to stimulate the real estate sector, a major driver of the Lebanese economy. The regional complexities stemming from the Syrian Civil War have led to greater uncertainty in the Lebanese economy due to the influx of refugees and a reduction in FDI. The refugee influx has impacted the low cost labor market with a reduction in wages.71 This has allowed agriculture, manufacturing, and construction companies to maintain costs, but has resulted in an increase in Lebanese unemployment rates. The combined concerns of internal and external instability led to a decrease in FDI and capital inflows. Foreign investors have been less likely to invest in Lebanese industry, real estate, and tourism, which are major drivers of the Lebanese economy, since 2010.72 The banking sector has maintained stability and remains supported by remittances through the large expatriate Lebanese community.73

(U) Worst-Case Scenario: Economic Collapse (Low Probability/High Impact) Given the historical resilience of the Lebanese economy and the government’s reliance on internal debt, the likelihood of an economic collapse is low. The following indicators have identified time series patterns that demonstrate a negative economic trend that, if continued, would be highly detrimental to the public and private sector.

(U) Internal Indicator(s): Increased Government Expenditure and Debt/GDP Ratio The Lebanese government has a history of a high Debt/GDP ratios and has relied on international support in the form of the Paris conferences to mitigate economic crises. This support has been coupled with a requirement for fiscal reform (e.g. Lebanon’s tax structure), 68

“World Development Indicators,” The World Bank. 2016. “Lebanon Economic Monitor: The Economy of New Drivers and Old Drags,” The World Bank. April 20, 2015. 70 “Lebanon,” International Monetary Fund. July 2015. https://www.imf.org/external/pubs/ft/scr/2015/cr15190.pdf (accessed March 11, 2016). 71 “Lebanon: Economic and Social Impact Assessment of the Syrian Conflict,” World Bank. September 20, 2013. 72 “Lebanon Real Estate Sector: A Weakening Demand in a Buyer’s Marker,” Bank Audi. September 23, 2015. 73 “Lebanon Banking Sector Report,” Bank Audi. September 4, 2015. 69

15

(U) UNCLASSIFIED energy subsidies. Continued trends of budget mismanagement and limited fiscal reform could be indicative of a potential government default. Lebanese government expenditures have continued to rise while revenue inflow has stagnated. This current trend has led to a forecast of the Lebanese debt service reaching 9 billion USD and Debt/GDP increasing to 179 percent by 2020. This is a significant increase from current debt service at 4 billion USD and a Debt/GDP of 144 percent. Lebanon’s historical economic position has experienced similar levels, however, upcoming challenges could push the government toward a default. Without reform, government expenditures will continue to increase due to Electricité du Liban’s (EDL) financial transfers and a proposed public sector salary increase. The energy sector is a liability with a negative value-added to GDP of negative 3 percent. The treasury’s transfers share in GDP and in total budget expenditures increased from 3 percent and 12 percent in 2010 to 5 percent and 22 percent in 2012, respectively. Energy subsidies were 2 billion USD in 2012, but have since fallen to 888.37 million USD in 2015 due to the decrease of oil prices. This accounted for 13.6 percent of expenditures in 2015. An increase in international oil prices could increase EDL transfers to 2009 levels, thus increasing the energy bill to 4 billion USD, which can account for 30 – 40 percent of government expenditures.74 Furthermore, government expenditures are forecasted to increase due to a proposed 2 billion USD raise in public sector salaries. This raise would increase expenditures by 400 million USD/year.75 Thus, government debt is estimated to reach 110 billion USD in 2020. Unit root and co-integration tests performed by Professor Simon Neaime reveal that the spending and public debt strategy of Lebanon is unsustainable.76

(U) Internal Indicator(s): Public Revenues and Rollover Debt Risk For FY 2016, the government deficit was 4.5 billion USD. An additional 1 billion USD in revenue is needed to pay salaries for 5000 new public sector personnel. Due to the deficit, the government continues to rollover its debt. If expenditures increase dramatically, as forecasted above, with no allocation of additional revenues, the debt service is forecasted to rise from roughly 100 million USD in 2016-2017 to 300 million USD in 2019-2020.77 If interest rates rise adversely, the government will be forced to refinance their debt at a higher rate and incur additional interest charges in the future. Rollover of debt was also utilized by Argentina, which contributed to its default in 2001.78

(U) Internal Indicator: Increase in Non-Performing Loans The backbone of the Lebanese economy is the banking and financial services sector. This sector accounts for 39 percent of Lebanese employment and holds the majority of Lebanese debt. The banking and financing services sector utilizes capital inflows in the form of non-resident deposits

74

Riwa Daou, “Debt Sustainability Analysis for Lebanon 2015-2020”, BloomInvest Bank, June 6th 2015. Ibid. 76 Simon Neaime, “Sustainability of budget deficits and public debt in Lebanon: a stationarity and co-integration analysis”, Review of Middle East Economics and Finance, 2004, VOL. 2, NO. 1, 43–61. 77 Ibid. 78 J.F. Hornbeck, “Argentina defaulted on sovereign debt: Dealing with the holdouts”, CRS, February 6th 2013. 75

16

(U) UNCLASSIFIED and remittances to finance this debt.79 The indicators below identify areas of concern for the future of this debt strategy. The threat of non-performing loans (NPLs) is forecasted to grow from 5.4 percent of the total loans in 2015 and to 7 percent in 2016. This rate is higher than the regional percentage of 4.6 percent. There are also concerns over increasing non-performing personal loans amounting to 27.8 percent of the total loans. Of these non-performing personal loans (NPPLs), 16.1 percent are housing loans, as Lebanese are struggling to keep up with payments due to increased unemployment.80 Since local residents are driving the real estate sector a significant increase in NPPLs could have a drastic impact on the economy.81 Further, an increase in NPLs will affect the profitability of banks and, thus, impact their capability to generate revenue, which in turn could inhibit their ability to support government debt.

(U) Internal Indicator: Increased Exposure to Sovereign Debt Lebanese banks have increased their exposure to sovereign debt compared with the total foreign currency deposits with an increase from 13.4 percent in 2012 to 15.7 percent in 2013. Lebanese Pound (LBP) deposits also increased from 39.6 percent to 41.5 percent in the same time period. This prompted global assessment institutions to decrease the credit rating of some major banks. Continued exposure of Lebanese banks to sovereign risk will remain a source of credit risk, leaving them susceptible to sovereign event risk.82 Since Lebanon is a developing country, sovereign debt is a high-risk investment. High-yielding government debt accounts for a large part of Lebanese bank balance sheets and profits. Sovereign and central bank exposures account for nearly 60 percent of total sector assets at Lebanese banks, partly because of their role in financing the government deficit by channeling deposit inflows into the government bond market.83 A government default will likely result in a sovereign debt crisis due to the inability of the issuer to repay its obligations and, thus, banks will notice a decline in assets prices and experience losses.

(U) Internal Indicator(s): Reduction and Restrictions on Capital Inflows from Gulf According to the World Bank, remittances from the Lebanese diaspora increased from 7.86 billion USD in 2013 to 8.9 billion USD in 2014.84 Remittances amounted to 16 percent of GDP as of 2014, of which 58 percent originated in Gulf countries. Remittances are expected to decrease to almost 7 billion USD in 2016 due to low oil prices.85 Remittances flowing to Lebanon are channeled through the domestic banking system in the form of “non-resident deposits,” which is currently 35 billion USD. These inflows resulted in an increase in the capacity of the Central Bank and other commercial banks to lend money to the government. Lebanese relations with the Gulf countries have become strained with the ascendance of King Salman of Saudi Arabia. If tensions continue to rise, these countries may restrict visas and ban 79

Report, “Lebanon: 2015 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director”, International Monetary Fund, July 2015. 80 Ghazi Wazni, “Tough road ahead for Lebanon’s banks”, Al Monitor June 3rd 2015. 81 “Lebanon Real Estate Sector: A Weakening Demand in a Buyer’s Marker,” Bank Audi. September 23, 2015. 82 Ghazi Wazni, “Tough road ahead for Lebanon’s banks”, Al Monitor, June 3rd 2015. 83 Eric Dupont, “Fitch: Sovereign and domestic exposures key for Levant banks”, Fitch ratings, Feb 11th 2016. 84 Report, “Remittances to Lebanon increased to 8.9 billion in 2014”, The Daily Star, April 20th 2015. 85 Report, “Remittances to Lebanon: Economic impact and the role of banks”, ESCWA.

17

(U) UNCLASSIFIED capital inflow to Lebanon, damaging the banking sector. This will likely lead to a deposit decrease in Lebanese banks and reduce banks’ ability to lend money to the government. Therefore, interest rates on T-bonds will rise, capital outflows could increase, and a default on debt payment is high likely to lead to wider economic collapse.

(U) Internal Indicator: Rate of Money Laundering Incidents The Hezbollah International Financing Prevention Act of 2015 passed by the U.S. Congress is aimed at restricting Hezbollah money laundering activities within Lebanese banks. Given the Lebanese economy’s reliance on its domestic banking sector, the discovery of significant money laundering schemes in local financial institutions would be detrimental to Lebanon’s economic and financial stability. U.S. blacklisting of Lebanese banks could lead toward sanctions and isolation from the international financial system, as demonstrated by the U.S. Treasury’s blacklisting of a Lebanese-Canadian bank in 2011.86 This would limit foreign capital inflows, deposits, and hamper the ability to finance the Lebanese government. Sanctions could also impact the value of the local currency given its dollarization. If Lebanese banks are sanctioned by the United States, an outflow of U.S. currency could occur, which may trigger a devaluation of the LBP leading to a monetary crisis.

(U) External Indicator: Increase in Syrian Refugees Currently, Lebanon spends 1/3 of its GDP on Syrian refugees.87 An increase in the influx of refugees into Lebanon will require the Lebanese government to increase its public spending, as evidenced by an increase in electricity expenditures, which will boost the public deficit and contribute to an increase in public debt. The Lebanese treasury is unable to finance without borrowing more money. If the security status is challenged, this could trigger a loss of confidence from investors further decreasing FDI in Lebanon. This reduction could reduce reserves, which will make it harder for banks to lend money to the government to finance expenditures and service debt.

(U) External Indicator: Credit Rating Downgrade Before the Syrian Civil War, Lebanon held a “B” as a credit rating. Standard and Poor’s rating agency stated: “The Syrian Civil War has led to a steady deterioration of Lebanon’s macroeconomic fundamentals, including its “fiscal balances and growth prospects.”88 Currently, Lebanon’s credit rating is cut to a “B-” with a negative outlook. Given the protracted political instability and concerns over regional security, a continuation of the present situation could affect economic growth and limit policymakers’ ability to implement macroeconomic reform. If macroeconomic reforms are not introduced, it is likely that Lebanon’s credit rating will be cut to “CCC.” This investment grade reflects that Lebanese treasury bonds are viewed as Junk Bonds, which carry a high risk of government default. The government’s inability to finance its debt thus increases, and banks will hesitate to lend money, which likely amounts to a government default on its debt. 86

Report, “Treasury defines Lebanese Canadian bank SAL as a “Primary money laundering concern, U.S. treasury, 2011 87 Report, “Smallest country in the Middle East Lebanon spent 1/3 of GDP on Syrian refugees”, Sputnik International, September 2015 88 Report, “S&P cuts Lebanon’s credit rating by one notch to B-, outlook negative”, Al Arabiya, November 2013.

18

(U) UNCLASSIFIED

(U) External Indicator: Reduction of Foreign Direct Investment Lebanon has experienced a reduction in FDI since the beginning of 2010, however a recent 6 percent increase was experienced in FY 2014 when compared to FY 2013. Regional FDI inflows have experienced a downward trend as a result of global and regional complexities, such as the Syrian Civil War. Although Lebanon has fared better than most in the region, the country has experienced a significant reduction in FDI since 2007.

(U) Military Section: LAF Remains Only Institutional Bright Spot The LAF is one of the most trusted public institutions in Lebanon. LAF is trusted by 80 percent of the population,89 overcoming problems of public perception faced by other public institutions in the face of sectarian divisions. The Internal Security Forces (ISF), by comparison, is trusted by less than half of the population.90 The approval ratings for other public institutions such as the State Security Directorate and General Security Directorate are even lower.91 This puts LAF in a unique position to act as a stabilizing force in an otherwise polarized and dysfunctional Lebanese state. The LAF did not start out as the unified fighting force it is today. During the Lebanese Civil War (1975-1990), LAF was a divided fighting force that was made up of Christian and Muslim officers serving in homogenous brigades.92 At the onset of hostilities in 1975, LAF fragmented along confessional lines. Several attempts to restore the military during the 1970s and 1980s failed and hundreds deserted.93 Although LAF survived the war, it emerged as a fractured, undermanned, and ill-equipped organization unable to maintain order or national defense. The post-war reconstruction of LAF focused on creating a unified fighting force that equally represented the religious demographics of Lebanon. Over the 1990-2004 period, LAF adopted a quota system that equally distributed the Christian and Muslim rank-in-file in the military’s officer corps. This 1:1 ratio of Christians to Muslims in LAF leadership laid the foundation for stability in the military. LAF efforts to communicate ongoing operations and policies through its public relations office and the media also led to greater trust in the military. Today, LAF is a cornerstone of stability and the centerpiece of U.S. foreign policy towards Lebanon.

(U) Worst-Case Scenario: Collapse of LAF (Low Probability/High Impact) As the most trusted public institution in Lebanon, maintaining stability in LAF is mission-critical to avoiding the worst-case scenario. The worst-case scenario is a collapse of LAF reminiscent of the Lebanese Civil War. The probability of this occurring again is low due to reforms in the military’s officer corps, which were instituted during the 1990s and early 2000s. The impact of a

89

Chuter, David. "Perceptions and Prescriptions: How Lebanese People View their Security.” International Alert, February 2015, p. 5. 90 Ibid. 91 Ibid. 92 Barak, Oren. “Towards a Representative Military? The Transformation of the Lebanese Officer Corps since 1945,” The Middle East Journal, Vol. 60.1, Winter 2006, p. 89. 93 Ronald McLaurin, “Lebanon and its Army, Past, Present and Future,” in Edward Azar (Ed.), The Emergence of a New Lebanon, New York: Praeger, 1984, p. 79-113.

19

(U) UNCLASSIFIED collapse of LAF would nonetheless have a high impact. The following warnings and indicators are divided into internal and external factors, which indicate instability in LAF.

(U) Internal Indicator: LAF Public Opinion The reputation of LAF remains its primary asset. Deteriorating public opinion of LAF will undermine its ability to act as a stabilizing force. Although public approval for LAF is 80 percent on average, public approval by district varies. In Shi’a dominated southern districts of Lebanon (e.g. Tyre, Saida, Nabatiye, and Bint Jbeil), public approval for LAF is 90 – 100 percent.94 In Sunni dominated northern districts (e.g. Tripoli, Minié, Akkar, Denniyé, and Bécharré), public approval for LAF is 40 – 50 percent.95 These same districts also have the highest rates of dissatisfaction of municipal governance and the highest number of refugees from Syria. An overall disparity in public approval for LAF by district not only highlights the nuanced nature of public support for the military, but also the vulnerability of northern districts.

(U) Internal Indicator(s): Demographics and Desertions The quota system established in the aftermath of the Lebanese Civil War was designed to prevent another breakdown of the military along confessional lines. While open source data from 2010 confirmed that the quota system maintained a 1:1 ratio of Christian to Muslim officers, data from 2014 suggests that Muslim officers and enlisted now outnumber their Christians counterparts. This disparity is problematic because demographic equality is one of the key pillars of LAF legitimacy as a public institution96. Desertions were a key driver to the collapse of LAF during the Lebanese Civil War. At the beginning of the conflict, LAF had an estimated 20,000 men. By 1984, however, governmental collapse led LAF to disintegrate along confessional lines. This led to internal rebellion, shortlived insurrections, and revolts, which prompted mass defections and desertions.97 Thus, a sudden or gradual increase in desertions from LAF is a key indicator of instability in the military. There is no open source data indicating an increase in desertions from LAF. The Lebanese Defense Attaché (DATT) to the United States stated that LAF had not experienced any desertions in recent years. Although “two or three” soldiers had “escaped” from the military, they did not “desert.” According to DATT, soldiers who did escape later returned to duty.98 This statement runs contrary to media reports, which have highlighted occasional desertions of LAF service members to jihadist groups. Any increase in the total number of desertions has troubling parallels to the mass desertions that led LAF to collapse during the Lebanese Civil War.99

94

Geha, Carmen. "Citizens’ Perceptions of Security Institutions in Lebanon.” International Alert, February 2015. Ibid. 96 Nerguizian, Aram. 2015. “Between Sectarianism and Military Development: The Paradox of the Lebanese Armed Forces”. In The Politics of Sectarianism in Postwar Lebanon, 108–35. Pluto Press. 97 Knudsen, Are J. "Lebanese Armed Forces: A United Army for a Divided Country?" CHR. Michelsen Institute. November 2014. 98 "Interview with Lebanese Defense Attaché: Georges Chreim." Interview by Ibrahim Nasr. April 15, 2016. 99 Aziz, Jean. “Officials Mum on Lebanese Soldier’s Defection to Jabhat al-Nusra” Al Monitor. July 2014 95

20

(U) UNCLASSIFIED

(U) Internal Indicator(s): Procurement and Corruption The rate of corruption in LAF was lower than the country’s other institutions, but it has deteriorated since 2013. LAF received a “High” or a “D” rating of corruption in 2013.100 LAF received a higher rating of corruption – “Very High” or “E” – in 2015.101 The central government has failed to approve a defense budget since 2005, relying on informal negotiation to shape the debate on successive budgets.102 A formal report on defense spending has not been released since 2012.103 These factors are the primary drivers behind increased rates of corruption within LAF. There are several factors contributing to the lack of transparency and corruption in procurement within LAF. There are laws that exempt LAF (and ISF) from full disclosure of defense related procurements. LAF also lacks specialized training and procurement staff. There are few laws that mandate compliance with contracts or stipulate delivery measures for defense contractors. The lack of quantifiable tendering requirements leads procurement to occur on an ad hoc basis, furthering waste and corruption. This combination of factors degrades the ability of LAF to procure the military assets it needs to operate as an effective fighting force.

(U) External Indicator: Military Aid The U.S. has increased military aid to Lebanon since Syria’s withdrawal from the country in 2005 and LAF began increasing counterterrorism operations against the Fatah El-Islam terrorist group. In October 2015 the United States approved an aid package for the LAF worth 150 million USD.104 An additional 2.7 million USD for exchange and specialized training programs was also approved.105 Strengthening the ability of the LAF to provide the country with security from extremist organizations including ISIL, Al-Nusra, and eventually, Hezbollah, remains the primary objective of this military aid. The level of military aid indicates stability for LAF cash-flows, which are dependent on foreign donors. A decrease in foreign aid will degrade the ability of LAF to pay for its operating costs. This budget squeeze will further limit the ability of LAF to procure new equipment and supplies needed to maintain combat readiness. Thus, foreign aid from the United States and other GCC players play a key role in maintaining the combat readiness of LAF. A shift in military aid indicates LAF realignment with other regional and global powers. The current gap left by the temporary suspension of 4 billion USD in military aid from Saudi Arabia will affect U.S. interests in Lebanon. Former Lebanese Prime Minister Saad Hariri recently visited the Kremlin in Moscow. This signifies that Lebanon is seeking to build relationships with other countries that are willing to provide military aid. In the wake of that visit, reports from the 100

"Government and Defence Anti-Corruption Index." Regional Results: Middle East and North Africa (MENA). 2013. 101 "Government and Defence Anti-Corruption Index." Regional Results: Middle East and North Africa (MENA). 2015. 102 Ibid, 2015. 103 Ibid, 2015. 104 "Why Lebanon Is the 6th Largest US Military Aid Recipient in the World." Gulf News: Lebanon. October 31, 2015. Accessed February 24, 2016. http://gulfnews.com/news/mena/lebanon/why-lebanon-is-the-6th-largest-usmilitary-aid-recipient-in-the-world-1.1609449. 105 Ibid.

21

(U) UNCLASSIFIED media suggest that Russia is willing to provide military aid to Lebanon.106 Between 2006-2013, U.S. military aid was 72 percent of overall military aid to Lebanon,107 but a 4 billion USD contribution by Saudi Arabia could shift that balance.

(U) Conclusion: Cautious Optimism Our analysis indicates that although several paths exist that could lead Lebanon toward instability, Lebanon is likely to weather these difficulties. Many of the problems facing the country are not new; the country is no stranger to political gridlock or tensions between population groups. Lebanon’s historical resilience leads us to be cautiously optimistic regarding the future of the country. The horrors of the civil war in neighboring Syria and memories of their own civil war are likely to increase Lebanese desire to preserve peace within the country. Table 1: Key Takeaways Section-by-Section • Syria

• •

Failure of government to provide services ultimately leads to potentially destabilizing 3rd party actors gaining influence at the local level

•

Increasing number of refugees strains government’s ability to provide basic social services Influx of refugees has created pockets of vulnerability that coincide with already disenfranchised areas

Political

Social

• •

Economic

Military

It is in Lebanon’s best interest for the border areas to remain stable and under regime control The actions of Iran and Hezbollah will likely determine the trajectory of the war

• • •

Fiscal reforms and/or international assistance are key to preventing government default Macroeconomic stability depends on the banks’ ability to attract foreign deposits Strong reputation of LAF remains its principle asset. Demographic balance in officer corps is mission-critical to maintaining stability between Christian/Muslim rank-and-file

(U) Recommendations 1. Resume Registration of Syrian Refugees in Lebanon In 2014, the Lebanese government mandated the UNHCR to no longer register refugees residing in Lebanon. As the data collected from registration is necessary to ensure adequate support to 106

Narnet Newsdesk. “Report: Lebanese Army to Receive Boost from Russia,” Narnet. April 2017, 2016. http://www.naharnet.com/stories/en/208028 107 U.S. Congress. Senate. Statement before the U.S. Senate Foreign Relations Subcommittee on Near Eastern and South and Central Asian Affairs. Lebanon at the Crossroads. By Aram Nerguizian. S. Rept. Center for Strategic and International Studies.

22

(U) UNCLASSIFIED both Lebanese and Syrian refugees, as well as the security of Lebanon, we recommend the international community encourage the Lebanese government to resume the registration process.

2. Ensure Equal Support of Lebanese Citizens and Refugees As most international attention in Lebanon and the surrounding region has focused on Syrian refugees, tension has increased between the refugees and their host communities. As such, we recommend that, in conjunction with any measures taken to ease the social burden of Syrian refugees, the international community should also equally support host communities to mitigate the impact of refugees and mitigate the potential for increased tension between the population groups.

3. Adjust Electricity Tariffs to Compensate for Increased Cost of Production Lebanon’s electricity tariffs cover an oil price of only $25/barrel. Electricity tariffs have remained unchanged since 1996 and a significant portion of generated electricity remains unbilled due to technical losses, illegal consumption, or overall inefficient management of the sector. These indicators required the government to provide energy subsides to EDL. However, governmental subsidies have contributed to a widening budget deficit. Therefore, increasing electricity tariffs to compensate for the increased cost of production is necessary in order to reduce governmental subsidies.

4. Re-impose Taxes on Gasoline Governor of the Central Bank Riyadh Salameh proposed to re-impose a tax on gasoline after the tax was abolished in 2012. The proposed gasoline tax is valued at 3000 LBP or 2 USD. Local gasoline consumption is around 2 million tons per year, which is equivalent to 2 billion USD. Should the Lebanese government decide to impose a 2 USD gasoline tax, it could generate around 300 million USD per year if the prices remain below 50 USD per barrel. If oil prices increase to above 50 USD levels, the tax could be abolished due to local populace pressure.108

5. Match Foreign Funding to LAF to Ensure Continued Influence Recent events suggest that other regional and global powers may be exploring avenues for gaining influence in Lebanon, including Russia, Iran, and Saudi Arabia. Historically, the U.S. has provided the bulk of foreign military assistance to Lebanon (72 percent of financing between 2006 and 2013). However, if Saudi Arabia does come through with the currently suspended 4 billion USD aid package, U.S. contributions will lose significance. The U.S. could counter the rising influence of other states by increasing funding to LAF and the Internal Security Forces (ISF). Continued or increased aid that is focused on maintaining border security, particularly in the northern districts, could serve the dual purpose of maintaining U.S. influence and preventing spillover of the Syrian Civil War into Lebanon. Strengthening the capabilities of LAF could also help boost the public perception of LAF, particularly in areas where that perception is lower than the national average. Foreign funding could also be directed through the International Military Education and Training (IMET) program, which provides technical training and assistance to 108

Maurice Matta, “The government will take advantage from low oil prices to tax gasoline for additional revenue generation”, Al Nahar, January 2015.

23

(U) UNCLASSIFIED foreign militaries. We suggest that IMET grants are used to improve procurement practices and transparency, as discussed in Recommendation 5.

6. Restore Military-to-Military Exchanges Between U.S.-Lebanon Each year, the Near East South Asia (NESA) department of the National Defense University (NDU) funds and hosts a delegation of officers from LAF Command and Staff College (CSC). This trip creates personal relationships between senior U.S. and LAF military officers, provides the officers with a positive image of U.S. culture, and allows LAF officers to speak openly about issues they may not typically speak openly about in Lebanon. While in the U.S., LAF officers are exposed to new perspectives on regional issues. Specifically, they usually attend a panel on the Arab-Israeli conflict where they hear the U.S. perspective, but also voice their own opinion. In recent years this trip was cut from 14 days to just 5 days. This is not enough time to build personal relationships, gain an appreciation of U.S. culture, and gain exposure to U.S. perspectives on regional issues. We recommend extending this exchange to its original 14 days in order to maintain close and continuing ties with LAF, particularly at a time when Russian and Iran are vying for influence.

7. Provide Training Assistance in Procurement and Acquisition The lack of regulations and Standard Operating Procedures (SOP) in procurement and the absence of specialized skills in that area lead to waste, fraud, and abuse that could erode the positive public perception of LAF. The U.S. could direct grants through the IMET program to provide acquisition training to mitigate the problems in LAF procurement systems. It may also be possible to encourage reform by attaching stipulations to other traditional aid packages. Millennium Challenge Corporation (MCC) grants often follow this model to encourage policy reform in countries that have demonstrated a commitment to political, economic, and social reform.109 While MCC grants are typically applied to infrastructure, the model could be adopted to encourage improvement in LAF procurement packages. IMET training could provide another opportunity for military-to-military exchanges between the U.S. and Lebanon.

///END REPORT/// 109

Tarnoff, Curt, and Marian Leonardo. Lawson. Foreign Aid an Introduction to U.S. Programs and Policy. Washington, D.C.: Congressional Research Service, Library of Congress, 2009.

24