Not Quite a Lebanese-Israeli Entente

The two countries are participating in talks – though without actually talking to each other.

By: Caroline D. Rose

On Oct. 14, a delegation from the Lebanese government travelled by helicopter to the town of Ras Naqoura, just north of the Lebanese-Israeli border, and entered a room at the United Nations Interim Force in Lebanon headquarters, where Israeli officials were waiting to discuss a decadeslong maritime dispute between the two countries. It was a remarkable event – the first time Israel and Lebanon have met for face-to-face talks on a civilian matter since 1990. But because they have no official diplomatic relations, their representatives spoke to each other only through U.S. and U.N. mediators in a terse exchange that lasted no longer than an hour.

At first glance, the timing of the meeting may seem peculiar. After all, Lebanon is in the middle of an economic crisis, while clashes between Hezbollah and Israel continue along the Lebanese and Syrian borders. Deep-held imperatives brought Israel and Lebanon to the negotiating table, but peace was not their primary goal. Rather, Israel sees a window of opportunity – while Beirut is weak and leaderless – to pressure Iran in Lebanon and score points with potential regional allies. 

For Lebanon, the talks are financially motivated. With soaring debt (over 170 percent of gross domestic product), a spiraling currency and a dismal credit rating, it’s in desperate need of cash. If it manages to redraw maritime boundaries in its favor, it could tap into the Mediterranean’s rich natural gas deposits and attract foreign investment.

Origins of the Dispute

The two countries have long sparred over their borders. In 2000, the U.N.-administered “blue line” was established to define the line of withdrawal for Israeli forces in southern Lebanon, which has prevented large-scale cross-border incursions ever since, though occasional clashes have taken place between the Israel Defense Forces, the Lebanese army and Iran-backed militias. That arrangement, however, didn’t settle the spat over their maritime boundaries – a dispute that was aggravated by a series of natural gas discoveries off the coast of Israel, Cyprus and Egypt in the 2010s.

The discoveries introduced the possibility that Lebanon could tap into substantial natural gas reserves that potentially equaled those of its Mediterranean neighbors. After signing a delimitation agreement with Cyprus in 2007, Lebanon submitted its claim to an exclusive economic zone to the U.N., but it was undermined nearly a year later by an Israel-Cyprus deal that demarcated EEZs that overlapped with Lebanon’s own. 

In 2011, the U.S. sent Ambassador Frederic C. Hoff to mediate the dispute. He established the “Hoff Line” that would have given Lebanon 550 square kilometers (210 square miles) of the 860 square kilometers Lebanon considered its territorial waters, but the talks soon fizzled out.

For Israel, the dispute hasn’t been too costly; it already produces more natural gas than it can use domestically or export. However, the lack of progress has irritated Lebanon, which so far has found no gas deposits in its waters. 

In 2018, Lebanon signed drilling contracts for two blocks – Block 8 and 9 – with energy giants Novatek, ENI and Total. But the dispute over maritime boundaries – and the companies’ concerns about angering Israel – have stalled exploration operations that were scheduled to be completed by May 2021.

Israel’s Other Objectives in Lebanon

For Israel, the Lebanese talks fit in to its recent thawing of tensions with other Middle Eastern nations. After signing normalization deals with the United Arab Emirates and Bahrain, it’s hopeful that other countries will also come to the table. 

Though technically still at war with Lebanon, it sees public talks with Beirut as a way of building trust among other countries in the region, such as Oman, Sudan and Morocco, and neighbors with which it also has border disputes, such as Jordan.

But it also has broader objectives within Lebanon. Following the Beirut explosion in August and Prime Minister Hassan Diab’s resignation (he remains in his post until another leader can form a government), the Lebanese government is in a precarious position. By holding negotiations at this time, Israel is trying to take advantage of the power vacuum to reshape the power dynamics in the country – especially with regard to Iran-backed Hezbollah, one of the most powerful forces in Lebanese politics.

Israel and the U.S laid the groundwork for discussions with a series of punitive measures against Hezbollah. In September, the U.S. sanctioned two former Lebanese government officials, a Hezbollah Executive Council official, and two Lebanese companies accused of transferring funds and material to Hezbollah leaders. Just days later, U.S. Assistant Secretary of State David Schenker said Lebanon and Israel were “getting closer” to a framework for talks.

Publicly, of course, Hezbollah and its Shiite ally, the Amal Movement, criticized the negotiations, threatening to obstruct future talks and pressuring the government to change the composition of the Lebanese delegation hours before they were scheduled to take place. But privately, Hezbollah’s leadership had little choice but to agree to negotiations. 

Its position was already weakening, with waning credibility, new sanctions and a teetering Lebanese government, not to mention dwindling funding from Iran (which was facing U.S sanctions of its own), increasing pressure from the pro-democracy, and overstretched resources following conflicts on the Israel border and the civil war in Syria. 

The talks with Israel could add to its problems, making Hezbollah look “soft” on Israel, forcing it to make concessions and denying it justification for initiating future large-scale clashes.

But Hezbollah still wields considerable influence in Lebanon’s crippled government – enough to force President Michel Aoun to tighten the parameters of the talks by dropping civilian experts from the delegation and issuing statements that the negotiations were strictly about protecting Lebanon’s sovereignty. 

Prime Minister Hassan Diab also expressed concerns about the delegation – saying it was selected without his approval and therefore violated the constitution – broadening the criticism across party lines and raising the risk that they could break down in the future.

Even if that happens, Lebanon and Israel have already signaled a pivot in their national strategies. Lebanon and Hezbollah have softened their stance on Israel, and Israel has extended an olive branch – though with the hope of further hurting Hezbollah’s credibility. 

The two countries may not be speaking to each other directly, but it is notable that they sat at the table for talks in the first place.

The calm after the storm 

Wall Street says it is braced for losses. Now what? 

One question is what they do with their earnings

Most bankers have been working frantically for the past six months. Traders handled record-high volumes in choppy markets. Their colleagues issued mountains of equity and debt as companies sought to withstand the economic downturn by amassing capital. 

Commercial bankers offered forbearance to struggling borrowers, and were forced to write down the value of loans as the likelihood of being repaid fell. As a result, investment-banking revenues soared in the first half of the year, and most commercial banks suffered losses as they set aside provisions for bad loans. 

That made for slender profits at Bank of America, Citigroup and JPMorgan Chase, the big hybrid banks. Goldman Sachs and Morgan Stanley, which are more skewed towards investment banking, posted stellar profits. Wells Fargo, a mostly commercial lender, lost money.

The third-quarter earnings reported by five of these banks on October 13th and 14th tell a different story (the sixth, Morgan Stanley, was due to report on the 15th, as The Economist went to press). Investment bankers were still busy—trading revenues were up by around 20% compared with the third quarter of 2019, and Goldman’s profits doubled on the year. 

But the pace of activity was leisurely compared with the second quarter, when trading revenues were up by 60% over the same period in 2019.

Banks also think they are now largely prepared for losses. In the first half of the year the big five booked $60bn-worth of provisions for bad loans. But those in the third quarter were skinnier, at just $6.5bn, not far off those in the third quarter of 2019 (see chart). 

The stock of allowances for bad loans adds up to $106bn, about 2.8% of banks’ loan books. Non-performing assets are creeping up, but are still far from the levels that would wipe out provisions. Jennifer Piepszak, the chief financial officer of JPMorgan, said that customers were “holding up well”.

As the perils of higher provisions and the spoils from market volatility became less dramatic, investors’ attention turned towards a more prosaic influence on earnings: banks’ net interest incomes, or the difference between the interest collected on loans and other assets and the interest paid on deposits and other funding. 

These have been squeezed by interest-rate cuts by the Federal Reserve and low long-term bond yields. America’s five large banks earned $44bn in net interest income in the third quarter, 13% less than in the same period last year. 

All together, reduced interest income, calmer trading revenues and subsiding credit costs meant that profits were lower than they were a year ago, but less starkly so than in the second quarter. Profits fell by 11% across Bank of America, Citigroup and JPMorgan in the third quarter, compared with a drop of 56% in the second.

The question now is what banks will do with their earnings. Regulators, still scarred by the global financial crisis of 2007-09, want well-padded shock absorbers. On September 30th the Fed said that the 33 banks with more than $100bn in assets would remain barred from buying back shares in the fourth quarter. Dividend payments are allowed, in contrast to Europe, but capped. 

As a result many banks are accruing capital. JPMorgan’s common-equity capital ratio rose to 13.0%, from 12.3% in the third quarter last year. At Bank of America the ratio climbed to 11.9%, from 11.4%. That is about $35bn above regulatory requirements, Paul Donofrio, its chief financial officer, told analysts.

With buy-backs off the table, bosses can either spend or save the cash. Some are splashing out. Bank of America said it had invested in adding branches in the third quarter, pandemic notwithstanding. Others are acquiring new businesses. On October 8th Morgan Stanley announced that it was buying Eaton Vance, an asset manager, for $7bn. That came just days after it completed its purchase of E*Trade, an online trading platform.

The extra capital could also come in handy if the economy fares worse than even the dismal scenarios baked into loan-loss provisions. Banks’ bosses sounded cautiously optimistic that this would not be the case. But investors have their doubts. Banks’ share prices are still a third below their levels at the start of the year.

Biden risks being a lame duck president

The real lesson from Tuesday’s hotly contested vote is that the US is almost ungovernable

Edward Luce

Joe Biden would be lucky to push through even the incremental parts of his agenda © Kevin Lamarque/Reuters

Damaged liberal hearts may briefly be lifted by the fact that Joe Biden received more votes than anyone in US presidential history — until they find out Donald Trump came in a historic second. 

He even exceeded Barack Obama’s peak 2008 tally. The real lesson from Tuesday’s record turnout and the continuing vote counts is that America is bitterly, energetically and almost evenly divided.

A President Biden would at best have an equivocal mandate. The question is what he could do with it. The answer is much less than even he — the most moderate of Democratic contenders — would have hoped. Barring a serious upset, Republicans will retain control of the US Senate. 

Mr Biden would be lucky to push through even the incremental parts of his agenda, such as a public option for US healthcare insurance, big investments in green technology and free tuition for middle-class college students.

Tuesday night left the epoch-changing hopes of American progressives in tatters, and of course the votes are still being counted in key swing states.

There is no chance Mr Biden would be able to abolish the Senate filibuster, add new states to the US, such as Puerto Rico and the District of Columbia, or expand the size of the Supreme Court. Should a vacancy come due in the 6-3 conservative-majority court, Mitch McConnell, the Republican Senate leader, can simply block Mr Biden’s nominee. The best for which Mr Biden can hope is a modest stimulus package.

In the meantime he would have to contend with the current White House occupant. If Mr Biden confronts the spectre of being a lame duck, Mr Trump threatens to invent a different version of the species — a wounded duck prone to lashing out. The chances that Mr Trump would concede defeat are slim. 

He could tie up narrowly lost states in recounts and litigation for weeks. And he would be unlikely to extend the hand of co-operation during the 11 weeks of transition.

Mr Biden would have to prepare for office sight unseen. This could have material consequences. It is doubtful, for example, that Mr Trump would want to share records of his “operation warp speed” on the coronavirus vaccine. The best for which Mr Biden could hope is that Mr Trump goes quietly having shredded forests of White House documents.

A Biden presidency risks being caught between two irreconcilable forces — a stubbornly entrenched Trumpian right and an embittered Democratic left. The sobering counterpoint to Mr Trump’s likely narrow defeat is that almost none of his co-conspirators met the same fate.

Lindsey Graham, the senator from South Carolina, was comfortably re-elected, as was Mr McConnell. Democrats may well have lost seats in the House of Representatives. The Republican newcomers are more Trumpian than Mr Trump. 

One of its intake is Marjorie Taylor Greene, who is an avowed supporter of QAnon, the far-right conspiracy group. Any chance this election would break the Republican fever, as Mr Obama once put it, has been dashed.

So what could a President Biden do? The short answer is that he would strive to find an American middle that no longer seems to exist. Deals struck with Mr McConnell would alienate the Democratic left. Yet in the absence of an attempt at bipartisan co-operation, little can be accomplished.

That gives Mr McConnell the upper hand. Some things, such as a federal coronavirus plan, can be done by executive order. Others, such as big appointments, will have to meet with Senate approval. It would be wise for a President Biden to appoint at least one or two Republicans to his cabinet. The left would hate that.

Only in foreign policy will the next president have freedom of manoeuvre. Therein lies a paradox. US democracy has taken a reputational battering on the world stage. The 2020 election is unlikely to reverse that. Foreigners know that US politics is trench warfare in which each side grinds out tiny gains at great expense. Big realignments are a thing of the past.

Yet the world would feel America’s change more than most Americans. Mr Biden has pledged to undo half of what Mr Trump has wrought. He would rejoin the Paris accord on climate change, the World Health Organization and possibly the Iran nuclear deal. 

But his chances of raising the US minimum wage would be close to zero. Higher taxes on America’s wealthy are off the menu. 

The ghost of Mr Trump would stalk a Biden America.

The Stability of Foreign Policy Amid Political Chaos

By: George Friedman

In the 1970s, President Richard Nixon stepped into the political and social chaos wrought by the Johnson administration and compounded it substantially. Hence, when I visited Europe during the late Nixon years, all of the talk was about the decline of the United States. 

This was partly due to the Vietnam War, but it was also due to political crises such as Watergate. From the European perspective, defeat in a seven-year war, coupled with deep divisions in American politics, could only mean America’s decline. (Recall that many Americans continued to support Nixon up until the end, accusing the media and his enemies of trying to bring him down.)

At the same time, Nixon was laying the foundations of a foreign policy that would remain in place until the end of the Cold War. It had three elements. The first was the entente with China. The Vietnam War had weakened the U.S. military. Nixon countered that by entering into a relationship with China. 

The Chinese had been fighting the Soviets in battles along the Ussuri River. They were as alarmed by the weakening of the United States as were the Europeans. Whatever was secretly agreed to, the Soviets had to assume that it included a degree of coordination.

The second foundation was detente with the Soviet Union. Earlier in the 1960s, the U.S. and the Soviets had played a reckless game. The understanding that was reached with the Soviets did not contradict the relationship with China and, in fact, was built on it. 

If the U.S. had an understanding with China, the Soviets needed one as well, or else they could be trapped between the U.S. and China. The detente created channels to de-conflict the two countries, and formed an understanding, mostly followed, to avoid conflicts that could escalate into confrontation.

The third foundation was creating a framework for peace between Israel and Egypt that made a conventional Arab-Israeli war impossible. This was precipitated by Egypt and Syria’s attack on Israel and the conclusion of a war that required a direct meeting between Egyptian and Israeli officers, with Henry Kissinger present. 

Egyptian President Anwar Sadat was the architect, but the Americans were critical guarantors. This led ultimately to the Camp David Accords, the withdrawal of Israel from Sinai, and the positioning of U.S. troops based in Sinai as a buffer.

The agreement with China remained in place well after Mao Zedong’s death. (Arguably, it lasted until very recently.) Detente between Washington and Moscow remained in place until the Soviet Union collapsed. 

The Egyptian-Israeli agreement continues to be the guarantor of what stability there is in the region. Much of this emerged over time, but the foundations were laid in the Nixon years, in spite of all the political chaos and the imminence of his impeachment.

Such moments of restructuring do not come often. After the fall of the Soviet Union, a foreign policy of universal understanding that existed under President Bill Clinton collapsed in 2001. Under President George W. Bush, the focus of the United States was on al-Qaida and its potential benefactors. U.S. policy in the rest of the world was largely on autopilot, or shaped to focus on the threat of radical Islam.

It was not until President Barack Obama that the leisure and need for a new foundation was laid. The first foundation was the end of or at least a dramatically reduced U.S. presence in Afghanistan and Iraq, and a refusal to similarly enter into conflict in the region. 

The U.S. would remain politically involved but obviously, without a military presence, political involvement meant less. For Obama, the core problem was U.S. exposure to events in the region, not the events themselves.

The second foundation was to confront Russia without risking war with it. In particular, it wanted to limit Russian influence, especially in Europe. This was triggered by the 2008 Russian war with Georgia, a conflict that signaled a dramatic shift in Russian policy. The American response was to impose sanctions on Russia and to support anti-Russian movements in countries like Ukraine.

Finally, on China, Obama initiated a policy of challenging Beijing on matters such as access of U.S. goods to the Chinese market, Chinese manipulation of the value of its currency, and a range of other issues. The Chinese were not cooperative, but during his administration, a series of tense meetings led to open tensions in U.S.-China relations. Obama did not act on these tensions but laid the foundation for events if China remained rigid.

It is not clear how long these foundations will last. Like Obama, President Donald Trump has reduced U.S. military involvement in the Middle East, with some exceptions. He has continued the policy of imposing sanctions while supporting anti-Russia countries such as Poland and Romania. Trump has extended Obama’s position on China by imposing tariffs, a move that was considered but not executed by Obama.

As with the Nixon foundation, Obama’s foundation was laid at a time when political instability was bubbling beneath the surface, as evidenced by the election of Trump. And it was derived from the pressing agenda facing the nation rather than from whim or ideology. He lifted the U.S. footprint in the Middle East, used limited tools to contain Russia, and confronted China. 

For all the drama, Trump has simply built on these foundations. Many of his supporters would deny vehemently that Obama crafted the most important aspects of his policies, just as Trump’s enemies would deny that Trump’s policies in any way resemble Obama’s. But then, President Jimmy Carter really didn’t want to admit that the Camp David Accords were spawned by Nixon.

There is what is necessary for a nation’s foreign policy and what is necessary for its domestic politics. They create a great tension, which is viewed from the outside as the end of American power. It is actually one of the roots of its power. The foreign policy the U.S. conducts is shaped by the reality of the world. The politics it engages in is based on the social realities. 

It is hard to see it when it happens. But when we look back at Nixon, and remember that it was a time like ours, we can see it in action. But at a time of mutual loathing and contempt, as there was in the late 1960s and 1970s, the idea that a criminal like Nixon, or his vicious enemies, could act prudently is unacceptable. 

But in this world some things are impossible and some things are not, and the world is not subtle. No matter how many impossible things are attempted, the most corrupt or virtual soul will eventually try something possible.

There are three points I am making. The first is that the United States’ political turmoil is not incompatible with a stable foreign policy. The second is that there is more continuity in foreign policy than might be expected over time. The third is that, two recent examples aside, we have seen such continuity after World War II with intermittent political turmoil. 

Inside, America might seem to be in flames. Outside, it can be deceptively stable. 

Obviously, there is an enormous number of other issues on the table at any one time, but few that define generations.

The US Rediscovers North Africa

Washington has new concerns that have reignited its interest in the region.

By: Hilal Khashan

Earlier this month, U.S. Secretary of Defense Mark Esper visited Tunisia, Algeria and Morocco on a diplomatic tour of North Africa. The trip, one month before the U.S. presidential elections, was significant because it came amid a recent escalation in terrorism that accompanied the COVID-19 pandemic, as well as increased Chinese and Russian naval exercises in the Mediterranean.

The United States has long considered North Africa a friendly region. But the perception of North Africa started to shift after the 9/11 terrorist attacks. In 2007, President George W. Bush announced the establishment of the United States Africa Command in response to the rise of al-Qaida in the Islamic Maghreb, a group that originated in Algeria, that same year. 

In August 2014, President Barack Obama held in Washington the U.S.-Africa Leaders Summit, where economic and security cooperation dominated the agenda. Notably, this was a time when competition between Africa’s fast-growing economies was rising and Islamic militancy in the Sahel region was surging. 

The focus in these interactions was security and counterterrorism efforts. Following Esper’s visit, however, the U.S. appears to be shifting its attention in its relations with North Africa to other global challenges, namely China and Russia.

Keeping Others at Bay

While in North Africa, Esper signed separate 10-year military cooperation agreements with Tunisia and Morocco, and discussed cooperation on a number of defense matters with the Algerian president. The partnerships are ostensibly about fighting terrorism and finding areas for collaboration with countries that Washington sees as key to establishing security in Africa, but they’re also aimed at keeping China and Russia at bay. 

Indeed, the U.S. is concerned about Russian, Chinese and, more recently, Turkish efforts to expand their naval presence in the Mediterranean and boost their economic and military influence in the region. Russia is already a major supplier of military hardware – including Su-35 fighter jets, S-400 surface-to-air missiles and Iskander-E ballistic missiles – to Algeria, and China is its top supplier of imports. 

In 2015, Russia and China began organizing joint naval exercises in the Mediterranean, and in 2017, they held live-fire drills. The two countries are also trying to find a location to use as a port of call in the Mediterranean or the Atlantic off the coast of either Morocco or Mauritania.

Their involvement in North Africa is motivated by different objectives, however. Russian President Vladimir Putin wants to restore Russia’s past glory in which access to the Mediterranean was central to achieving great-power status. China, on the other hand, is far more ambitious: It’s trying to acquire blue-water capabilities to help protect its access to sea lanes, and North Africa’s Mediterranean waters and Atlantic coastline are part of this global strategy. 

Its push into the Mediterranean is critical for the success of the Belt and Road Initiative. It has already invested in expanding Greece’s Piraeus Port, and its Cosco shipping company signed agreements to operate the Tangier Mediterranean Port Container Terminal and Algeria’s Cherchell Port.


China's Mediterranean Port Investments

Washington’s top concern, therefore, is Beijing, whose growing influence in North Africa is a result of both the lack of Western backing for countries in the region, at least according to them, and Beijing’s desire to expand and promote its own industrial base.

In Morocco, King Mohammad VI has been exasperated with the lack of U.S. support for his country in the dispute over Western Sahara and Washington’s unwillingness to provide missile systems that would put Morocco’s defense capabilities on par with Algeria’s. 

He has therefore looked elsewhere – namely, to Beijing – for assistance. Following the king’s visit to China in 2016, Morocco purchased the WS-2 400 mm multiple-launch rocket system and Sky Dragon 50 surface-to-air missile system from Beijing. 

China is also competing with France, which has invested heavily in Morocco’s infrastructure since the country gained independence in 1956, for a contract to construct the Marrakech-Agadir high-speed rail line. China Communications Construction Co. has also expressed interest in investing $10 billion to build the Tangier Tech City project. But Morocco has yet to decide on the offer given the level of Western opposition to Chinese incursions into the West’s historical sphere of influence.

Chinese Foreign Direct Investment in North Africa

Attitudes Toward China

Many in North Africa, however, still prefer partnering with the West over China because of concerns over Beijing’s long-term objectives. Tunisia, for example, signed on to Beijing’s Belt and Road Initiative in 2018 but has yet to translate this into any actual partnership deals. Though China is now the third-largest supplier of imports after France and Italy, the political elite appear unwilling to open up to China beyond providing rhetorical support. 

They, like others in North Africa, are skeptical of China’s charm offensive and question its goals in providing substantial sums of cash for development projects. 

They’re also wary of the cultural differences between themselves and the Chinese that could make cooperation difficult. (One example of this culture gap comes from Algeria, where locals objected to the presence of Chinese construction workers in a suburb of Algiers and disapproved of their culinary habits that conflicted with Islamic norms.)

Still, Algerians and Moroccans find China’s pragmatic, business-oriented approach appealing. Both countries’ governments appreciate Beijing’s emphasis on economic development and willingness, unlike Western countries, to eschew political intervention and human rights issues. Indeed, China is now the top economic partner for both Algeria and Morocco. 

What concerns them, however, is that accepting Chinese investment could backfire in the future. China has tried to allay these fears, arguing that as a victim of the Opium Wars, it cannot imagine becoming a colonial power itself. It has also reminded Algerians of the tremendous political support it gave to Algeria’s National Liberation Front during its independence war against France in 1954-62. (China’s treatment of Uighur Muslims in Xinjiang, however, casts doubt over Beijing’s claim to be an ally.)

It’s unlikely, however, that the U.S. will allow Morocco to become a Chinese satellite state and to participate in the Belt and Road Initiative. Washington trusts Algeria’s independent foreign policy and ability to keep its distance from Beijing. Esper’s recent visit to North Africa seems to have opened a new chapter in U.S. efforts to contain China’s global economic offensive. 

There is no reason to assume that China’s economic activity in North Africa will achieve better results than it has had in any other region of the world. Moreover, China is likely incapable of using whatever inroads it makes in North Africa to increase its footprint in Africa’s heartland.