Iran building long-term influence in Syria

Recent weeks have seen the Syrian economy deteriorate further and the national currency, the Syrian pound, fall to an all-time low.

Four years of an uprising-turned-civil war have taken their toll on Syria’s economy and society. Following European sanctions on its oil sector and the takeover of all the main oil fields by ISIL and Kurdish groups, the government has stopped generating foreign currency receipts, while the destruction of most business activity has reduced fiscal revenues. Increasingly, the government is seeking the help of its allies, Iran and Russia, to fill the gap.

Iran, in particular, has taken a leading role in providing financial support to Damascus.

In January 2013, it extended a credit line of $1 billion. The Syrian government could use the money to pay for imports with the condition that 60 percent of these imports came from Iran. Since then many tenders issued by public sector companies have included the mention that bidding is open only to Iranian companies.

Then, in August 2013, Tehran provided another credit line, this time worth $3.6 billion, dedicated to the purchase of oil products, also mostly from Iran.

These two financial agreements helped Iran increase its share of Syrian imports to a third of the total.

Historical economic ties very weak

Prior to the uprising, and contrary to the depth of their security and political relations, economic and trade ties between the two countries were actually very weak. In 2010, for instance, bilateral trade reached only $320 million, compared with $2.5 billion for trade between Syria and Turkey and even $940 million for trade with the United States – in spite of long-standing sanctions imposed by Washington on Damascus for the latter’s alleged support of terrorism. Iranian investments in Syria also paled compared with those from the Gulf and the European Union.

The relative modesty of these ties was a consequence of several factors: trade networks between the two countries are historically limited compared, for instance, with those existing between Damascus and the Hijaz, and between Aleppo and Mosul or the Turkish hinterland; they have no common borders and are separated by Iraq with which both countries had conflictual relations and closed borders for decades. Finally the two economies are not complementary and none produces or trades products that are competitive in the other’s market.

In addition, after his arrival to power in 2000, Bashar Al-Assad built economic ties with Turkey and Arab countries in an apparent bid to balance the strategic ties existing with Iran. While Syria joined the Greater Arab Free Trade Area in 2005 and signed a free trade agreement with Turkey in 2007, it did not bother to do the same with Iran. The two countries signed a preferential trade agreement only in 2011, after the beginning of the uprising and the deterioration of relations with Turkey and the Arab world.

Finally, there was always an element of suspicion in these relations and one example is particularly telling.

In the summer of 2010, Syria issued a tender for the award of a third mobile phone licence in the country. The government received six offers from France Telecom, Saudi Telecom, Turkcell (Turkey), Q-Tel (Qatar), Etisalat (UAE) and Toseye Eatemad Mobin, an Iranian company believed to be tied to the revolutionary guards.

A few months later, and only weeks before the beginning of the uprising, the Ministry of Telecommunications announced its shortlist. It decided to prequalify five of the companies and to reject one… the Iranian company.

Iran capitalising on Syria’s weakness

Today, short of money, and of allies, the Syrian regime is left with little choice but to accept the conditions of the Iranians.

In the short-term, it is unlikely Iran will stop providing funds to Damascus, at least the bare minimum required to help keep the regime afloat – Tehran has simply invested too much in the Syrian war to give up now.

On 6 May, Adib Mayaleh, the governor of the Central Bank of Syria, told Bloomberg that Tehran was close to granting an additional $1 billion. The amount may have actually already been disbursed given that the Central Bank pumped dozens of millions of dollars in the first week of May to help prop up its currency.

However, for larger amounts of money, Iran is likely to capitalise on the weakness of its ally. Reports have emerged that the Iranians are seeking to obtain collaterals from the Syrian government in the form of real estate assets or other state properties.

What is clear is that the Syrian regime has become strongly dependent on Iran’s economic aid, which adds to its reliance on Tehran’s political and military support. This carries significant political risk because it makes the regime much less capable of resisting potential pressures from its ally.

If Iran were also to obtain collaterals for the aid it is granting, and therefore get hold of important Syrian assets, it would guarantee for itself significant political influence in Syria that would last long after the end of the regime.

This article was originally published in Middle East Eye on May 12, 2015

Mortgaging Syria’s future

Kobane_0Four years after the beginning of the Syrian uprising, now largely turned into a civil war and a proxy regional conflict, the state of Syria’s economy and society is dire.

A recent report, produced by the Syrian Centre for Policy Research, a Damascus-based organisation, with support from UNDP, puts numbers on this disaster.

In the past four years, the Syrian economy is estimated to have lost more than $200bn, or the equivalent of four times its gross domestic product the year before the uprising; unemployment is estimated to be above 57 percent, from 11 percent in 2010; four out of five Syrians now live in poverty; and, in the space of only four years, life expectancy has fallen from 75 to 55 years.

Some business sectors have been almost totally decimated, such as tourism and oil production, while manufacturing, which has suffered from tremendous destruction, theft and looting, is only worth a fifth of its value prior to the uprising.

This destruction is accompanied by profound changes affecting Syrian society including a massive migration of both financial and human capital, dramatic demographic shifts, a fragmentation of communities and social ties, a rise in criminality and a deep sense of loss of dignity.

In addition to the consequences of the conflict that are already felt, others have serious implications for the long term and are already mortgaging future recovery efforts.

The Syrian government, now largely unable to fund itself, is accumulating an increasingly significant debt in order to import oil products and grain, to pay the salaries of its civil servants and, mostly, to fund its war effort. Someday, this debt, both domestic and foreign, including from countries such as Iran, will have to be paid back by the Syrian people, on top of the massive financial effort that will be required for a reconstruction drive.

Physical assets that have been destroyed, including productive capacity such as factories, machinery, power plants, irrigation canals, tourist sites and residential buildings, will require a very long time to be restored given the decline in the financial capacity of the government and capital flight.

Many of the most prominent Syrian businessmen have now relocated across the region and in some cases they have started to play an important role in their host countries. In Turkey for instance, more than 25 percent of companies opened last year by foreign investors were by Syrian businessmen. Having invested money, built a workforce and opened new markets, many will find it difficult to return when the war ends.

Even more worrying is the disappearance of the Syrian middle class. Business managers, academics, doctors, engineers and professionals of all other specialities have found refuge in Europe or in the Gulf. Having established themselves in these new countries and in need of clear long-term prospects, they will be the most difficult to entice back. With their departure, Syria has lost a significant amount of accumulated human capital, which will need decades to recover.

One other burden for Syrian society will be to undo the many new activities and networks that have sprung up with the retreat of the rule of law and the decline of the central state. Massive interests have been built up around the war economy amongst the warlords, and the networks and the institutions it has created. This too will be difficult to reverse.

Finally, geographic and political fragmentation is becoming increasingly entrenched, breaking down traditional economic and trade networks. Many of what were temporary and shifting front lines have now become quasi-borders between different parts of the country. The division of the city of Aleppo since the summer of 2012, between a western part controlled by the government and an eastern part controlled by the opposition, is one of the best examples of this.

Another is the north of Syria, which is one of the most fragmented parts of the country, with the government, the Kurds, the Islamic State, the Nusra Front and various brigades affiliated to the Free Syria Army sharing territorial control. As almost all production has stopped in that region, it has largely turned to Turkey, rather than to other parts of Syria under government control, for the supply of essential goods. As a result, Turkish exports to Syria last year were close to their record level of $1.8bn reached in 2010.

This shift, together with the rising foreign debt, highlights the growing dependency of the Syrian economy towards external actors.

Given the magnitude of the Syrian catastrophe, it seems difficult to see any light at the end of the tunnel or to offer any policy advice other than asking for an immediate end to the fighting, a prospect that seems as far away as it has ever been since the uprising began.

To an important extent, the Syrian uprising was a revolt of the most fragile, disenfranchised and poor segments of its society. Four years after their cry for change, these parts of the Syrian population are also those that have paid the heaviest price of the war and have only become poorer, and more fragile and distressed. On today’s anniversary, there is very little to celebrate and, unfortunately, very little to hope for.

This article was originally published in Middle East Eye on March 15, 2015

Syria Liberalises its Oil Sector as its State Weakens and Regime Cronies Profit

The increasing difficulties faced by the Syrian government to import and subsidize oil products is leading to a rapid liberalization of this sector and to the end of the state monopoly that dates back to the arrival to power of the Baath Party in the 1960s.

Three and a half years after the beginning of the uprising, the challenges faced by the government in the oil industry include: low budget revenues; the devaluation of the Syrian pound relative to the dollar, which increases the cost of imports and the differential between the buying and selling prices of subsidised oil products; Western sanctions on the transport of petroleum products to Syria; and the end of the Iranian credit line that funded most oil imports in the last year.

As a consequence, since the beginning of October, the government has taken several measures to liberalize the oil sector.

In early October, it allowed the private sector to import and distribute mazout and fuel on the condition that they were sold exclusively to industrialists. Until then, the import of these products was the monopoly of Mahrukat, a company affiliated to the Ministry of Petroleum. The decision was justified by the need to ensure a regular supply of oil products to the industrial sector in order to end production stoppages in many factories.

Then, later that month, the government raised the price of these two products to their levels in world markets, ending, in practice, subsidies for the industrial sector – subsidies for households and other business sectors remained.

With the increase of prices and the authorization granted to the private sector to import, the oil market for the industrial sector is now almost completely liberalized. “Almost” because some restrictions remain. Before importing, traders need to obtain licenses from the Central Bank of Syria, from Mahrukat and from the directorate of industry in the governorate where they are based. These licenses are a means of selecting traders that will be allowed to import and, therefore, to favour regime cronies.

Then, in late November, Al-Watan, a well-connected daily, said that the Government was encouraging private investors to import crude oil, to refine it in one of the country’s two refineries of Banias or Homs and to sell it back in the local market or for export. It is not yet clear how the prices would be set or if the oil could only be sold to industrialists. The government would be paid by these investors either in cash or through the supply of some of the refined products.

Given the cost and the logistics required for this type of operations, only investors close to the regime, who can receive guarantees from the government that they will not face bureaucratic and other obstacles might be interested.

Although the Government retains a very important role in the oil industry, its growing reliance on the private sector is a reflection of the weakening of the Syrian State. For decades, control over the energy sector was perceived as a guarantee of national independence, as a means to encourage the development of a powerful industrial sector, and, through subsidies, as part of a policy to ensure social justice.

All of this is now crumbling, bit by bit, as the State relies more and more on regime cronies to support it.

Note: This article appeared first in December 2014 in The Syrian Observer

The Syrian Government is Endangering Local Industry

While the Syrian government claims that it wants to encourage local industrialists, its recent decision to change the country’s customs system is endangering one of the country’s most important manufacturing sectors, the garments industry.

Starting at the beginning of next year, the country’s customs system will have only five different tax rates on imported products, instead of 13 currently: 1%, 5%, 10%, 20% and 30%.

In other words, the 0% rate – meaning a total exemption from customs tariffs – as well as the highest rates of 80% and 150%, which were applied on garments and passenger cars respectively, are cancelled.

Until now, Syria was one of the countries that applied the highest customs duties on cars in the world. Meanwhile, the 80% duties on garments helped protect this industry, which employs dozens of thousands of people.

Officially, the objective of the government is to reduce corruption and bureaucratic hurdles by simplifying the system. Also, by reducing the level of taxes on imported products, the government hopes that more importers will stop evading taxes because they will have less interest in smuggling and under-reporting.

One additional reason for these reductions is the need to reduce the price of imported products, which have increased following the decline in the value of the Syrian Pound relative to foreign currencies. For example, an imported product that cost $10 was worth 500 Syrian pounds before the uprising. Now it is worth 2,000 pounds, because the Syrian Pound has declined from 50 pounds per dollar to 200 today. This four-time increase in the cost of imported products occurred while salaries have almost not increased in the last three-and-a-half years.

However, manufacturers in the garments sector are very unhappy, because the decline in customs duty will create more competition for them.

In addition, in an interview with Al-Thawra, a local daily, Firas al-Jajeh, the secretary-general of the Damascus Chamber of Industry, said that the customs duty on the intrants used for the production of garments will actually increase. Yarns, which are taxed 1% currently, will be taxed 5%, while fabrics, which are taxed 5% will be taxed 10%. Therefore, at the same time local manufacturers will face more competition and will have higher production costs. According to Jajeh, many manufacturers will now stop production and prefer to become importers of garments.

Given the fact that this sector employs dozens of thousands of people and that the government claims that it wants to encourage local industry, the logic behind the decision to reduce customs duties on garments is difficult to understand.

The debate between the priority to be given to trade or to local manufacturing exists in many parts of the world. However, this type of debate generally takes place as part of a broader debate on long-term economic strategies, not on a short-term basis and in a situation of war.

In Syria, in the last three-and-a-half years, the government has increased oil subsidies and then reduced them; it decided to suspend free trade area agreements with Turkey and Arab countries and implement one with Iran; it says it wants to protect local manufacturing but reduces duties at the risk of endangering jobs.

We already knew the Syrian government had no strategy, and no desire, to solve the country’s severe political crisis; it doesn’t seem to have any economic strategy either.

Note: This article appeared first in December 2014 in The Syrian Observer

Is the Syrian Government Trying to Reduce its Oil Dependency on both Tehran and…ISIS?

In the same week at the beginning of this month, the Syrian government increased the price of gas oil and gasoline, and allowed private traders to import various oil derivatives, ending a decades-old state monopoly on oil trade.

The increases of 33 percent in the price of gas oil and of 17 percent in the price of gasoline were expected given that Syria now imports most of its oil and that the decline of the Syrian Pound relative to the dollar increased significantly the cost of these imports.

However, the timing of the decision was strange because it occurred just a few days before Eid Al-Adha, the most important religious holiday in the country, and a period during which the government usually tries to appease its population, not burden it with a price hike.

The increase will likely have a significant inflationary impact. Last year, when the government also increased the price of heating oil, it announced at the same time a pay rise for public sector employees; not this time. The decision seem therefore to indicate some form of emergency, given also that it comes following the increase in the price of various products and services, such as bread, water and electricity, during the summer.

As to the decision to open the oil import trade to the private sector, it comes with some restrictions; traders can import only gas oil and fuel oil and are allowed to resell only to industrial concerns. Still, the move highlights the difficulties faced by state entities, most of which are under western sanctions, to buy from international markets. The Minister of Economy commented on the decision saying that it would reduce shortages faced by manufacturers.

The government requires that importers obtain various approvals and licenses granted by the Central Bank of Syria, Mahrukat and the Directorate of Industry in each Governorate before they can import. This is normally a good way to select traders in order to favor those most closely associated with security and other regime officials.

It may be a coincidence but the two decisions – to increase the price of oil products and to allow imports from the private sector – were taken only a few days after the US-led international coalition bombed most of the oil refineries handled by ISIS in the eastern region. There have been various reports in the last year that the government was buying some of its oil from ISIS and the fact that these two decisions follow the destruction of the refineries – which likely reduced overall supply in the market – will again raise speculations on this issue.

Another aspect must also be taken into account here. Since August 2013, Syria has been relying largely on Iran to buy its oil, thanks to a USD 3.6 billion credit line granted by Tehran to Damascus to finance its imports. In practice, Iran is not believed to be providing cash but rather to supply crude oil instead. It is not clear how much of this credit line is still available but it is likely that Tehran, which has its own economic difficulties, will not be able to forever support the Syrian government.

While the government’s twin decisions may appear as based on purely economic grounds, they may also be a means to bypass its dependency on both Tehran and…ISIS.

Note: This article appeared first in October 2014 in The Syrian Observer