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The Wages of Destruction

In an interview with Michael Young, Joseph Daher examines the multiple factors that have brought about the collapse of the Syrian economy.

Michael Young: What are the main reasons for the collapse of the Syrian economy?


Joseph Daher: Alongside the consequences of the war and its destruction, the reasons for the collapse of the Syrian economy are both structural and some are more currently rooted.


The massive depreciation of the Syrian pound reflects in many ways the destruction of the Syrian economy. In general, Syrian government revenues have shrunk considerably in the past few years. First, the oil industry and tourism - major sources of foreign currency prior to the 2011 uprising - have suffered from massive destruction. Second, foreign direct investment, which between 2005 and 2011 had totalled more than $8 billion - ended after 2011, reinforcing the depreciation of the Syrian currency. Finally, the massive destruction in the manufacturing and agriculture sectors led to a shattering of local production capacity and a decrease in the volume of exports. Therefore, the country lost this source of revenue and had to increase its imports to cope with local demand.


In addition, Syria presently has limited means to access foreign markets. This despite the reopening of the Nassib border crossing with Jordan in mid-October 2018, and of the Boukamal crossing with Iraq on October 1, 2019. The balance of trade has continued to be profoundly negative. This has translated into constant pressure to purchase foreign currency, especially on the black market, which has increased the downward pressures on the Syrian pound.


One of the more direct consequences is definitely the financial crisis in Lebanon. Throughout the war, Syria witnessed a significant flight of capital, probably in the billions of dollars. The amounts are difficult to quantify as Syrian capital outside the formal banking system existed before the war. In this regard, since October 2019 the Lebanese crisis has played a role in the further depreciation of the Syrian pound, notably after Lebanese banks imposed severe restrictions on obtaining and withdrawing U.S. dollars. With Western sanctions imposed on Syria, Syrian businessmen and traders had relied on neighboring Lebanon and its banking system to pursue their economic activities, especially trade and smuggling.


Finally, the 'Caesar Act' came into effect on June 17 ("It places anyone who does business with 39 named individuals and regime entities in the cross hairs of the US Treasury", Guardian 17 June 2020). This only expanded the unwillingness of countries to deal with anything related to Syria, directly or indirectly. Generalized sanctions, including the 'Caesar Act' (as opposed to targeted sanctions against specific repressive actors in Syria), have increased economic difficulties.


The possibility of rapid and medium-term returns and profits on investment in Syria is very limited at present for political and economic reasons. So there is no incentive to invest, whether from inside or outside the country.


MY: What are the likely consequences of the Caesar Act, which imposes sanctions on Syria's government and those doing business with it?


JD: Contrary to the claims repeated on an almost daily basis by Syrian government officials, sanctions and so-called “foreign conspirators” are not the main reasons for the socioeconomic problems in the country. The Assad regime is mainly responsible for this situation thanks to its economic policies and the destruction it caused during the war, alongside its allies Russia and Iran.


At the same time, while it is important to reiterate these realities about the Syrian regime’s role, we should also acknowledge that the Caesar Act and general sanctions could—and probably will—contribute to intensifying socioeconomic problems in Syria. They could lead to the deepening impoverishment of some sections of the population and represent a further obstacle to economic recovery.


For example, Syria lacks enough oil and gas for local consumption. In light of this, the possibility of sanctioning any entity supporting the expansion of the country’s production of oil and gas, as well as hindering imports, will create even greater shortages of these resources and increase their price. This will have dire consequences for ordinary Syrians, as well as increase production costs for manufacturing and agriculture, both highly dependent on oil and gas. The deepening of broad and general sanctions through the Caesar Act will, significantly affect the recovery of both sectors, which have already been targeted by sanctions imposed by the United States and the European Union.


There are humanitarian exemptions that exist under the current sanctions. However, because of a lack of clarity, risk-adverse banks, insurance companies, and shipping companies, as well as sellers of goods serving humanitarian purposes, have usually preferred not to engage with anyone or anything related to Syria. Moreover, overlapping sanctions regimes have created so much doubt and uncertainty in terms of compliance, that banks, exporters, transport companies, and insurance companies have almost completely refused to conduct business in Syria—including with nongovernmental organizations, both local and international, providing assistance to Syrian civilians. The Caesar Act will only reinforce this “chilling effect” regarding Syria.


At the same time, there are no signs that these sanctions will push the Syrian government to negotiate or concede on political issues, even if they have a severe impact on its economic and political capacities. That said, regime cronies and elite networks will in all likelihood continue to benefit from economic agreements with the authorities and privatization in the framework of deepening neoliberal policies. They pursue or intensify their influence by expanding the black market and smuggling, thereby reinforcing their domination of the economy. Historically, sanctions have rarely succeeded in changing a state’s behavior. At the same time, Russia and Iran will not stop supporting the Syrian regime.


MY: How do you foresee the Syrian-Lebanese economic relationship after Lebanon’s financial crisis, and now in the shadow of the Caesar Act?


JD: There is a lack of certainty regarding the Syrian-Lebanese economic relationship in the future. Lebanon has been an important intermediary for Syria in terms of trade, smuggling, and finance. However, all these elements are threatened today. Lebanon’s economic crisis and the capital controls that Lebanese banks have imposed have negatively impacted Syria’s economy and businesses and Syrians with bank accounts in Lebanon. In addition, the Caesar Act might create further and larger problems. Banks in Lebanon will be even more unwilling to have Syrian depositors, fearing possible links or operations linked to the Syrian government.


The Lebanese banking sector and its branches in Syria must also be careful. Since 2011, Lebanese banks in Syria have officially been different entities than their parent banks in Lebanon—they are managed by private companies and independent management boards. However, these parent banks nevertheless remain shareholders in the Syrian branches. That is why they must be cautious in their relations with the Syrian Central Bank, which the Caesar Act targets.


The Caesar Act will also probably push the Lebanese government to stop importing electricity from Syria, while smuggling will in all likelihood be boosted to the detriment of official trade, which is also relatively low. Since 2011, the volume of formal trade has decreased, while informal commerce has expanded. Syria is not even in the top ten countries taking in Lebanese imports.


Finally, the Caesar Act will prevent Lebanese private companies from profiting from a possible reconstruction process in Syria, which still appears to be far in the future. More generally, the lack of clarity and the nature of U.S. sanctions mean that nearly anyone who sells to Syria can be hit with sanctions—even if a product isn’t on the sanctions list or even if merchants have a license. Many have avoided dealing with Syria for fear of the possible repercussions.


MY: Is there anything that Russia and Iran, the main allies of the Assad regime, can do to ameliorate the economic situation?


JD: They hardly have any the means of improving Syria’s economic situation. Both countries are facing very significant economic problems at home, which were deepened following the fall in oil prices, the effects of the Covid-19 pandemic, and sanctions. They have had, and will continue to have, increasing difficulty in maintaining their levels of financial and material support for Syria. Iran has already reduced its economic assistance to the Syrian government. The Iranian rial hit its lowest value against the U.S. dollar in mid-June, while Iran’s oil revenues were only €7.9 billion between March 2019 and March 2020. This compares to its record of €105.6 billion between March 2011 and March 2012.


This said, both states will continue to support the Assad regime politically, diplomatically, and military. Syria is geo-strategically very important for them and they will not abandon President Bashar al-Assad after years of support. Moscow and Teheran deployed their forces to save the Syrian regime and to protect and advance their own interests in Syria. At the same time, their deepened involvement made it such that they eventually felt they had an even greater stake in the regime’s survival than at the beginning of the uprising.


MY: How might Syria’s economic situation affect President Bashar al-Assad’s future?


JD: With the continuous deterioration of the economic situation, criticism of the authorities will increase, as will various forms of dissent. That is what we have just witnessed with the demonstrations since June 7 in the city of Sweida, where people protested because of declining socioeconomic conditions and the high cost of living. However, this time they included slogans attacking Assad directly, calling on him to step down and calling for Iran and Russia to leave Syria. Protests have also taken place in the city of Dar‘a and several of its surrounding towns, as well as in the town of Jaramana, southeast of Damascus, with similar complaints about the socio-economic crisis and the Syrian government’s handling of it. The demonstrations have continued in Dar‘a Governorate and to some extent in Sweida.


At the same time, the gradual elimination of any political and social alternative to the Syrian government, accompanied by the destruction of wide sectors of the economy, has reinforced the role of state institutions as the main providers of services and the principal employers. Large segments of the Syrian population are dependent on the state for wages or assistance.


The resilience of the Assad government with the assistance of its foreign allies has not signaled an end to the problems that Damascus will face. On the contrary, the government must address the political and socioeconomic challenges in Syria, often without having sufficient resources to do so. While the government’s survival has been secured somewhat, mainly as a result of support from the foreign allies, its ability to maintain a form of passive hegemony over large segments of the Syrian population has not. This creates a situation of continuous instability.


Joseph Daher teaches at Lausanne University in Switzerland and is a part-time affiliate professor at the European University Institute in Florence, Italy, where he works on the Wartime and Post-Conflict in Syria Project. Daher completed a doctorate in development studies at London University’s School of Oriental and African Studies in 2015, as well as a doctorate in political science at Lausanne University in 2018. He is the author of Syria After the Uprisings: The Political Economy of State Resilience (Pluto Press and Haymarket, 2019) and Hezbollah: The Political Economy of Lebanon’s Party of God (Pluto Press, 2016). He is also the founder of the blog Syria Freedom Forever.


Diwan interviewed Daher in mid-June to discuss the collapse of the Syrian economy and the impact of the Caesar Act, U.S. legislation to sanction the Assad regime and its networks, as well as those working with them. This interview first appeared on the Carnegie Middle East Center website. Reproduced with permission.


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