Analysis: Arab sanctions close net on Syria trade

Until now Syria has been able to continue financing trade indirectly by depositing money in Damascus in subsidiaries of Arab banks.

Qatar PM, talks to Arab League Secretary-General (R) 311 (photo credit: REUTERS/Stringer )
Qatar PM, talks to Arab League Secretary-General (R) 311
(photo credit: REUTERS/Stringer )
AMMAN - Arab League economic sanctions against Damascus will jeopardize several billion dollars worth of Syrian trade finance carried out through Arab banks in the region, according to bankers.
They said Commercial Bank, Syria's largest state-owned bank which handles most public sector contracts, has relied increasingly on Lebanon's banking sector, as well as Jordanian and Gulf banks, to secure dollar-denominated lines of credit.
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Commercial Bank already faces US and European Union sanctions, preventing it from funding trade in dollars or euros, but has been able to continue financing trade indirectly by depositing money in Damascus in the subsidiaries of Arab banks operating in Syria, several senior bankers told Reuters.
Those banks open accounts in their home countries, offering finance for commercial transactions through 'account-to-account' transfers within the bank -- an arrangement which avoids sending the money through US clearing systems -- the bankers said.
They estimated that between $2 billion and $4 billion may have been placed in the banks, mainly in Lebanon but also in Jordan, Bahrain and Dubai, helping circumvent sanctions on US denominated and euro transfers.
Lebanese and Jordanian banks, which had started to compete with Beirut's traditional hold over Syrian business, had enjoyed margins of 25 percent on the Syrian operations, bankers said.
But Arab League sanctions announced on Sunday, including a halt in dealings with Syria's Central Bank and Commercial Bank, will put those arrangements under intense scrutiny.
"The risk of doing business with Syria has shot up and few banks will want to jeopardize their situation in a world where every transaction is being monitored," one banker said.
Another banker, based in Kuwait and involved in Syrian financing, said the sanctions would damage a lucrative business which he described as "an outsourcing of risk-free trade finance, with attractive margins".
A Lebanese lifeline?
Banks would not willingly halt such profitable operations, especially as Syrian President Bashar Assad's crackdown on eight months of protests has already curbed Syria's trade. The economy is predicted to contract this year up to 6 percent.
But authorities in Jordan, a US ally and recipient of hundreds of millions of aid dollars from Saudi Arabia, will not want to antagonize their anti-Assad allies and patrons.
That leaves Lebanon, which has some of the strictest banking secrecy laws in the region and which did not support the Arab decision to impose sanctions.
Syria ended nearly three decades of military presence in Lebanon six years ago. But its continued influence was shown in January when pro-Syrian parties including Hezbollah toppled the government and brought Lebanese Prime Minister Najib Mikati to power.
Mikati has said his country will not stand against an "Arab consensus", but his foreign minister bluntly said Lebanon would not implement sanctions and Central Bank governor Riad Salameh said this week authorities were not required to act because Syria had no state funds with the bank.
"The Syrians will have only the Lebanese banks who will take the risk, and Lebanon will be the financial conduit of Syria," said Jordanian economist and former banker Mifleh Aqel.
The United States sent a senior Treasury official to both Lebanon and Jordan three weeks ago. In Beirut he stressed "the need for authorities to protect the Lebanese financial sector from potential Syria attempts to evade US and EU financial sanctions," according to a US embassy statement.
Bankers say Lebanese banks could circumvent the sanctions, although bigger institutions with interests in the Gulf would be under pressure to curtail the trade finance for fear of losing influential Gulf clients, one senior Qatar-based banker said.
Dissenters in the Arab League
In trade terms, Lebanon accounts for 10 percent of Syrian exports, second only to Iraq which took 30 percent of Syria exports last year, according to the International Monetary Fund.
Those countries were the only dissenters in the Arab League vote against Syria, and their opposition is likely to dilute any impact from the Arab measures.
"It's one thing to announce all these sanctions, another thing is how effective they are," said Said Hirsh, Middle East analyst at Capital Economics in London.
"In Iraq the regime lasted 13 years, even though it was surrounded by unfriendly countries," he said, referring to Saddam Hussein's survival through a decade of international sanctions imposed for Iraq's 1990 invasion of Kuwait.
Syrian economist Samir Seifan said that the concentration of Syrian exports on the Arab market -- which he said accounted for sales worth $5 billion last year compared to $3 billion to Europe -- could give some bite to the Arab measures.
But Syria could also circumvent those measures by exporting goods via companies in Lebanon or Jordan. "There is no way of telling the source of the goods was Syria if (they) go through a Lebanese or Jordanian port," said one Jordanian banker.
But assuming Assad remains in power and sanctions continue to escalate, Said predicted a further 10 percent contraction in Syria's economy next year,
Turkey, another major commercial partner with $2.5 billion of trade with Syria, followed the Arab League move on Wednesday, suspending credit and freezing Syrian government assets.
Further tightening pressure, the European Union plans to impose sanctions on Syria's General Petroleum Corporation (GPC), diplomatic sources said, aiming to force European oil firms operating joint ventures in Syria to declare force majeure on their production.
EU sanctions on Syrian oil exports have already cut off its main crude export market, depriving Damascus of up to $400 million a month unless it can find alternative buyers.
The crisis has forced Syria to eat into foreign currency reserves -- estimated at $18 billion before the unrest erupted in March -- to pay for imports and support the Syrian pound.
Central Bank governor Adeeb Mayaleh said last month Syria had spent $1.2 billion financing investment projects after international financing was withdrawn. Authorities had also spent $3.7 billion financing imports, using money from a special fund set up for that purpose, he said.
Syria's official exchange rate has slipped 8 percent from 47 pounds to the U.S. dollar to nearly 51 pounds. But the Central Bank has also started holding weekly auctions of foreign currency, selling last the dollar last week at 53 pounds. On the black market, Syrians say the
dollar fetches 56 pounds.
"I suspect this new round of sanctions will lead to more pressure on the currency," a Lebanese banker said.