The Financial Side of the Libyan Conflict and its Security Implications

While the Government of National Accord’s (GNA) funding appears to be sustainable, the Libyan National Army’s (LNA) funding relies heavily on informal measures. These are unlikely to be sustainable and provide for the eastern government and the LNA in the medium-to-long term.

The predatory economic activities of the LNA are a symptom of its degraded financial situation and will likely erode the LNA’s internal support, a significant risk faced by the stability of the eastern Libyan system.

Unless the LNA has or finds access to other sources of funding, its financial performance might jeopardize the stability of eastern Libya and the effectiveness of its military units engaged on the Tripoli front.

The Current Stalemate

The lack of a decisive military superiority between the LNA and the GNA has resulted in a military stalemate in the fight for dominance of Tripoli. If the foreign military assistance to the two parties remains in equilibrium the solution to the conflict can only be political.

However, currently, the two parties are unwilling to negotiate. The GNA requires the LNA to withdraw from the suburbs of Tripoli as a necessary condition to restart the diplomatic dialogue.

The internal and foreign support for Haftar is reliant on the outcome of the Tripoli offensive, thus he is likely to maintain the military pressure to the bitter end unless a negotiated solution is found. From a medium-to-long-term perspective, the economic sustainability of the military effort becomes vital to understand how the Tripoli conflict will evolve.

The GNA’s Finances

In early October, the Tripoli Central Bank released figures relating to the economic performance of the GNA between January and September 2019.

The total revenues of the GNA amounted to LYD 35.1 billion (USD 8.77 billion with a black market exchange rate of 4:1), USD 5.67 billion was derived from oil exports. The GNA’s total expenditures (excluding September’s salaries) amounted to USD 7.3 billion. The remaining US $1.45 billion is likely enough to cover the GNA’s September salaries, meaning that the GNA’s finances seem to be sustainable.

The National Oil Corporation (NOC) has also recently launched 2 projects to increase the productivity of the Sarir and Nafoura oilfields, which will further contribute to the finances of the GNA.

Libya’s oil production is currently 1.14 million barrels per day and is expected to increase after these projects are implemented. On November 5 the NOC also opened a new gas well at the Wafa field.

OPEC members production in September and October 2019 (source: Platts)
OPEC members production in September and October 2019 (source: Platts)

Unless the oil output is subject to major disruptions, there is no apparent reason why the situation might change. It should be noted that all the Libyan oilfields are under the control of the LNA, which constitutes a significant element of vulnerability for the GNA (see image below).

However, while the GNA keeps sharing part of the oil revenues with the eastern government (likely in the form of salaries and social services) the LNA is unlikely to halt the oil output.

The fact that the GNA can count on an internationally recognized central bank allows it to procure foreign investments, foreign currency, and by extension, military equipment (in violation of the UN embargo).

Territorial control map of Libya also showing oil and gas infrastructure (Source: Intelyse Information Services Platform)

The LNA’s Finances

The situation for the LNA is different. The central bank, affiliated with the eastern government, is not recognized by the international community and, therefore, cannot easily procure foreign currency and strike deals with international investors.

However, it still must pay for public sector expenses and the military effort in the Tripoli suburbs. The geographic extension of LNA-held territories entails more substantial expenses for logistics, security, and administration compared to the GNA. To face these economic challenges, the LNA and its affiliated government are relying on several unconventional sources of funding.

Unofficial Currency Printing

The main source of funding for the LNA is likely an unofficial Libyan currency printed in Russia. Between February and June 2019, the Benghazi Central Bank printed in Russia about 4.5 billion Libyan dinars (USD 3.22 billion at the official exchange banking exchange rate, USD 1.1 billion at the current black-market rate) in 20 and 50 dinar banknotes.

On November 1 Malta seized an additional supply of cash destined to the LNA which was being transported in two 40’ ISO containers on a cargo ship. The unofficial and official currencies can be distinguished by the signature on each banknote (see image below).

A document circulated on November 9 shows that on October 13 the Head of the GNA, Fayez Serraj, urged the Tripoli Central Bank to declare the unofficial currency printed in Russia as illegal.

This means that the eastern and western Libyan economic and financial systems are now technically based on 2 different currencies. The economic and commercial discrepancies caused by the use of two different currencies escalate the political division of Libya and further complicate the chances of achieving a political solution to the conflict.

Official (left) and Russian-printed LYD 50 banknotes (right) – (Source: International Banknote Society)

The implications of declaring the Russian-printed currency illegal could be even more widespread.

Intelyse previously reported on the functioning of the Libyan banking system specifying that, to procure foreign currency, the breakaway Benghazi Central Bank relies on three commercial banks (Commerce & Development Bank, Wahda Bank and National Commercial Bank) which are included in Tripoli’s electronic banking system.

The three banks’ reserves of official Libyan currency are being exchanged for foreign currency with the Tripoli Central Bank on behalf of the LNA. The three banks are also used by the LNA to conduct transactions that must occur within the electronic banking system run from Tripoli.

Since the Russian-printed currency was not illegal until November 9, it is likely that the three commercial banks accepted it as a payment from the LNA to mitigate the substantial outflows of official currency required to procure foreign currency on behalf of the LNA.

According to data released by the Tripoli Central Bank on October 31, between January 1 and October 31 2019, the National Commercial Bank, the Trade & Development Bank, and the Wahda Bank bought from the Tripoli Central Bank USD 1,488,311,075; USD 588,201,077 and USD 2,034,893,176 respectively.

Showing the official (top) and translated (bottom) document “Foreign exchange sales to commercial banks of the Tripoli Central Bank, 1 January – 31 October 2019” issued by the Tripoli Central Bank (Source: Central Bank of Libya)
Showing the official (top) and translated (bottom) document “Foreign exchange sales to commercial banks of the Tripoli Central Bank, 1 January – 31 October 2019” issued by the Tripoli Central Bank (Source: Central Bank of Libya)
Showing the official (top) and translated (bottom) document “Foreign exchange sales to commercial banks of the Tripoli Central Bank, 1 January – 31 October 2019” issued by the Tripoli Central Bank (Source: Central Bank of Libya)

This stratagem allowed the banks to slow down the drainage of official currency reserves, which explains why they still have not defaulted despite the rapidly depleting reserves outlined in the previous Intelyse report.

However, now that the unofficial currency has been declared illegal, it is not clear whether the three banks will keep accepting it. Even if it is accepted, it is unlikely to be integrated into the official financial system and instead used to pay salaries of LNA fighters outside the official system.

Be that as it may, the outflow of official currency will become even more unsustainable than before and the three banks’ reserves will deplete more rapidly.

If the deposits of official currency held by the three banks at the Tripoli Central Bank drop below 20% of their total capitalization, the Tripoli Central Bank can prevent them from purchasing foreign currency, which would severely undermine the LNA’s ability to procure foreign currency and sustain its military effort in Tripoli.

It should also be noted that eastern Libyans holding Russian-printed currency will have difficulties integrating this currency in the official banking system, with repercussions on their living standards.

Illegal Oil Sales

As a source of funding the LNA is also selling oil illegally, undercutting the internationally recognized Tripoli-based National Oil Corporation.

The LNA established a parallel board of directors for the eastern branch of the Brega Oil Marketing Company. This branch started operating independently and outside the jurisdiction of the NOC.

Allegations of the LNA selling oil illegally have also been made by the NOC Chairman, Mustafa Sanallah. It is unclear whether the LNA is able to export oil. It is more likely that the LNA is selling most of the oil or oil products internally, which means below the subsidized fuel prices set by the Tripoli NOC. The oil sales of the LNA are however believed to be generating important and independent revenues.

On October 20 the Benghazi Chamber of Commerce revealed a project to build a 300,000 barrel/day refinery in Tobruk, to complement the existing one.

According to the eastern Libyan government, the refinery will be built by the al-Rahila Oil Services Company on a build-operate-transfer (BOT) basis. This means that al-Rahila will build, operate and profit from the refinery for a set period of time and will subsequently hand it over to the eastern Libyan government.

The LNA is investing in the eastern Libyan oil sector to strengthen its self-funding capacities, however, the benefits will only materialize in the medium-to-long term. This means that the LNA potentially sees the illegal export of oil as a long-term source of revenue. The implication would be that it does not wish to or does not believe it can achieve a rapprochement with the GNA.

Predatory Economic Activities

The LNA is resorting to predatory economic activities to fund itself. These activities are undertaken by two main quasi-legal entities managed by the LNA:

  • The Military Investment and Public Works Committee
  • The General Mobilization Authority

There have been reports of LNA officials belonging to the Military Investment and Public Works Committee expropriating private property (for example warehouses) to dismantle them and sell the parts off as scrap metal.

Unconfirmed sources reported that the scrap metal is being sold for US $150/ton (with international market prices ranging from $230 to $290). The Military Investment and Public Works Committee is said to receive between US$ 50 and US$ 70 per ton exported, which would potentially generate millions of dollars annually for the LNA. However, these practices are likely to undermine the support for the LNA among lay Libyans.

The General Mobilization Authority was reportedly established by the LNA to acquire control of the tax and customs revenues of state-owned enterprises in LNA-held territories. These include ports, airports and telecommunication companies.

The Tobruk based Parliament lamented that the LNA created this entity without the endorsement of, or consulting with MPs. Unconfirmed reports from reliable sources claimed that the General Mobilization Authority has already seized LYD 150 million from an account of Libyana, a subsidiary of the telecoms holding LPTIC, at the Wahda Bank’s branch in Benghazi. An additional LYD 1 million was seized from Libyana’s bank account at a branch of the Commerce & Development Bank.

It should be noted that the Wahda and Commerce & Development banks are two of the three which are procuring foreign currency for the LNA via the Tripoli Central Bank. This proves that the two named banks are in deep collusion with the LNA or that senior members are subject to significant coercion.

The General Mobilization Authority also allegedly tried to seize LYD 200 million from an account of the Brega Oil Marketing Company, after having established a parallel board of directors. The general trend is of an LNA powerbase utterly focused on near term financial necessities and paying little heed to the reputational consequences for future internal or foreign investment from the private sector.

Unconfirmed reports also stated that in mid-November 2019 Haftar ordered to limit the jurisdiction of the General Mobilization Authority to areas of western Libya. This might be an indication of the discontent caused by its activities in eastern Libya. If the reports are confirmed, it will also mean that the General Mobilization Authority will have less resources than before to draw from.

What Does the Future Hold for Libya?

In a medium-to-long term perspective, the GNA seems to be better financially positioned than the LNA to face the ongoing conflict in Tripolitania. This gives the GNA an advantage as the conflict drags on, in that it only needs to keep repelling the LNA attacks without maintaining long supply lines and administering extensive territories.

Haftar’s supporters are so heavily invested in the LNA that they are unlikely to allow it to go bankrupt and withdraw from the Tripoli frontline. However, as the conflict continues and no clear political solution is close at hand, the LNA foreign supporters’ ‘return-on-investment’ ratio appears to keep worsening. Moreover, their financial support is not sufficient for the LNA to stop its predatory activities and maintain an acceptable quality of public services in eastern Libya.

This suggests that the LNA and the eastern Libyan leadership may become destabilized from an internal lack of support among citizens and LNA commanders before going bankrupt and/or being abandoned by their foreign supporters.

In light of these considerations, it is worth investigating what the LNA might do to significantly alter the situation in its favor. Unconfirmed reports during the weekend claimed that the presence of Russian military contractors in Libya has increased significantly in the last weeks, going from about 140 to several hundred. This might be interpreted as a sign of urgency from the LNA and its foreign supporters.

In case the LNA fails to take Tripoli in the short term, it should be noted that the water wells Tripoli draws its water from are all in LNA-held territory, as well as the Libyan oilfields (see image above). The LNA might try to halt the water flow to Tripoli, although this would utterly undermine General Haftar’s image internally and raise the reputational cost for the LNA’s foreign supporters to a level which they might not agree to.

Alternatively, and more likely, should the LNA find itself on the edge of bankruptcy, it might try to halt oil output to obtain a higher share of the oil revenues from Tripoli or to cripple the GNA’s income. The resultant shock to the global oil market would be significant and unpopular with a number of supporters especially the USA, which on November 14 officially called on the LNA to end its offensive on Tripoli.

In all likelihood, the military status quo will be maintained as long as the quantity of money and materiel supplied to both sides by their foreign supporters remains in equilibrium. This is judged to be a short to medium-term reality and, therefore, only a successful political dialogue will enable peace in this timeframe, although it is considered unlikely.

The medium-long term reality may see 3 scenarios:

  • Increased military and economic support for the LNA. This would likely incentivize GNA supporters to escalate their military and economic assistance as well, which would prolong the conflict in Tripolitania
  • A loss of domestic trust and support in the LNA offensive on Tripoli, due to financial or military failure. This might destabilize the eastern Libyan system and the credibility of Haftar, creating the preconditions for power struggles within the LNA ranks and unrest in eastern Libya.
  • The achievement of an internal power shift which will negate the equilibrium of military power. Haftar has proved several times that he can achieve these power shifts inside Libya. However, the fact that he has not achieved it so far, and the longer he fails to achieve it, probably means that this option will become more and more elusive.