Lebanon, Hizbullah and Financial Lessons of the Past

Alongside the military response of the Israel Defense Forces (IDF) to the barbaric attacks on Israel by Hamas in early October, international diplomacy has been working to prevent the conflict drawing in other state and non-state actors that might seek to profit from the situation.

Of most concern has been the possibility that Hizbullah, long embedded in Lebanon as a state-within-a-state – including as a political party, provider of social services and a military organisation – might seize the opportunity posed by instability in Israel to launch a concerted attack on the country across its northern border.

Created in the early 1980s, Hizbullah has adopted Lebanon as its parasitic host, and while the group relies significantly on Iran for its funding, Hizbullah’s future is also substantially tied to that of Lebanon. Put simply, Hizbullah – certainly from a territorial perspective – needs a functioning Lebanon. And herein lies the group’s vulnerability – a vulnerability that could be exposed by the current conflict in Israel, should it seek to mobilise and launch an opportunistic attack.

Finance plays a central role in security. Since the 9/11 attacks on New York and Washington DC, understanding the financing of terrorist groups has been a core pillar of the international security response. Groups such as al-Qa’ida and the so-called Islamic State require funding not only to mount their attacks, but also to plan and manage their operations. Different financial models exist. Those groups that control territory, such as Hamas and Islamic State, seek to raise funding via the exploitation and extortion of the businesses and populations they control; others survive on state sponsorship, acting as proxies for their financial masters; others still operate as cross-border financial businesses, generating revenue from the trafficking of narcotics or other illicit activity, along with soliciting donations.

Hizbullah has successfully built a financial empire that draws on all three methods. As the US State Department noted in its 2021 Country Reports on Terrorism, ‘Iran continues to provide Hizballah with most of its funding, training, weapons, and explosives, as well as political, diplomatic, monetary, and organizational aid. Iran’s annual financial backing to Hizballah – which has been estimated to be hundreds of millions of dollars annually – accounts for the overwhelming majority of the group’s annual budget’. It notes further that ‘Hizballah also receives funding in the form of private donations from some Lebanese Shia diaspora communities worldwide, including profits from legal and illegal businesses. These include smuggling contraband goods, passport falsification, narcotics trafficking, money laundering, and credit card, immigration, and bank fraud’. Hizbullah’s presence in the Lebanese government also prevents any effective domestic action being taken against the group.

Hizbullah and Lebanon’s Financial Security are Inextricably Linked

But the intertwined nature of Hizbullah and the Lebanese state presents the group with challenges that would only escalate if it chose military action against Israel. Hizbullah is part of the Lebanese government, which the people of Lebanon hold responsible for the benighted state of the country’s economy, with unemployment, debt and poverty rising dramatically in recent years. For example, according to the UN, the number of people living beneath the poverty line in Lebanon rose from 25% in 2019 to over 80% in 2022.

The IMF has also pointed to the fact that Lebanon’s ‘lasting political crisis and resistance from vested interests to reforms’ is inhibiting the country’s ability to make progress on much-needed improvements. Its stark assessment is that ‘the public sector is failing, the provision of public services is almost nonexistent, and the banking sector has collapsed’. Worse may be to come if international companies investing in Lebanon’s energy sector – a critical element of any Lebanese economic recovery – were to withdraw in the face of any military escalation by Hizbullah.

The Cost of Escalation

Since 7 October, the Lebanese economy has reportedly already taken a hit. Restaurant business is down 80%, and tourism – a key contributor to the state’s coffers – has been hit badly as other countries have advised their citizens not to visit Lebanon. However, this is nothing compared to the ruin it would face from a renewed Hizbullah war with Israel.

The 2006 war wrought significant destruction in Lebanon. Nearly a million citizens were displaced, and the government estimated the damage from the war to be $2.8 billion, with a resulting loss of output and income for 2006 of $2.2 billion. The direct cost to the government was $1.75 billion, with a resulting reversal of the previously forecast 5–6% growth, which was instead replaced by a 5% loss for that year – economic decline that Lebanon could ill afford in 2006.

Lebanon’s economy has shown remarkable resilience in the face of repeated challenges that many thought would prove too much, but there is reason to fear that the impact of a Hezbollah-triggered war with Israel could be the final straw. Given the military advances on both sides since 2006 and the destructive tactics employed by the IDF in Gaza, which could well be repeated in Lebanon, the immediate damage is likely to be significantly greater than in 2006. On top of that, the impact on key revenue-earning businesses such as tourism, the immense strain a war would place on medical and other social services required to support the significant displacement of people, the spiralling of unemployment and poverty, and the likely impact on inflation and collapse of the exchange rate, would present an existential challenge to an economy already in a parlous state.

In 2021, the World Bank’s Lebanon Economic Monitor assessed that Lebanon was sinking into the ‘Top 3’, noting that the country’s GDP ‘plummeted from close to US$ 55 billion in 2018 to an estimated US$ 33 billion in 2020, with US$ GDP/capita falling by around 40 percent’ and ranking its economic crisis ‘in the top 10, possibly top three, most severe crisis episodes globally since the mid-nineteenth century’.

As he weighs his options, Hizbullah leader Hassan Nasrallah would do well to recall his expressions of regret following the 2006 war. Despite its international networks and Iranian state support, today, as a state-within-a-state – including elected officials and responsibilities to the citizens of Lebanon – the stakes are far higher for Hizbullah given its reliance on Lebanon as a territorial base. Beyond the inevitable destruction of infrastructure and services that would follow any renewed Hizbullah-led war with Israel, conflict would only further accelerate the collapse of the Lebanese economy, compounding the destitute state of the country’s citizens and diminishing Hizbullah’s strategic and parasitic hold on the country.

The views expressed in this Commentary are the author’s, and do not represent those of RUSI or any other institution.

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