Syria's economic woes threaten support for regime

Business elite turning backs on Assad as international boycott expands, economists and political analysts say.

Syrian President Bashar Assad 311 (R) (photo credit: REUTERS/SANA/Handout)
Syrian President Bashar Assad 311 (R)
(photo credit: REUTERS/SANA/Handout)
The wall of boycotts and sanctions gradually being erected around Syria could lead to a double-digit drop in economic output this year and remove a critical source of support for the beleaguered regime of President Basher Assad, economists and political analysts say.
The Arab League decision over the weekend to suspend Damascus and its threat to impose economic sanctions not only strikes at the country’s foreign trade, which in recent years has exceeded more than 40% of gross domestic product, but at foreign investment and tourism, both of which are highly reliant on the Arab world.
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If sanctions are imposed, they will buttress an economic blockade that includes long-standing US bans on doing business with Syria and a growing array of European Union sanctions. On Monday, the EU added 18 people to its list of Syrians subject to economic sanctions.
The combined effect could bring the Syrian economy to its knees, undercutting support that the Assad regime has enjoyed until now from Syria’s powerful business community, analysts said.
“Their interests have been threatened by the boycotts and sanctions and the downturn of the economy,” Ibrahim Saif, an economist at the Carnegie Endowment for International Peace’s Beirut office, told The Media Line.  “So far they have stayed on the fence, but I wouldn’t be surprised if they change their view, at least by distancing themselves from the regime in preparation for what could come in the future.”
The business elite encompasses Assad’s fellow Alawites, a minority sector who have enjoyed favored treatment during four decades of Assad family rule, but more importantly Syria’s Sunni majority. It is Sunnis who have been at the forefront of the eight-month-old rebellion.
The government imposed a ban on all imports carrying a tariff rate of 5% or more on September 22 in an effort to save foreign currency, even though it had claimed to have reserves of $18 billion. Twelve days later, facing a huge outcry from businesspeople and consumers, it reversed the decision.
Jihad Yazigi, the editor of The Syria Report newsletter, said the flip-flop created a crisis of confidence among Syrians in the regime’s ability to handle economy. Media reports, a drop in the black market rate of the Syrian dinar as well as anecdotal evidence suggest that many Syrians are smuggling their money out of the country.
In August, the government imposed a $2,000 a year limit on foreign currency purchases.
But figures published by the Damascus Securities Exchange shows that Syria’s main private banks saw customer withdrawals grow by hundreds of millions of dollars in the third quarter. Economists say that is a sign that wealthy Syrians with foreign bank accounts are moving their money abroad.
Not everyone who watches developments in Syria is convinced the business elite are ready to turn on Assad. Marcus Marktanner, who studies Arab economies at Kennesaw State University in the US, said Syria’s rich and powerful are too closely intertwined with the regime to dare turn on it.
“Liberalization [in the economy] that has occurred so far has mostly benefited those who are close to the regime. None of these cronies will turn against Assad. They would lose everything if the regime changed,” Marktanner told The Media Line by e-mail. “The biggest threat to Assad is the army. Better than sanctions against the regime would be economic rewards for defectors in the army.”
Nevertheless, the unrest has by all accounts taken a heavy domestic toll on the economy by bringing economic life in many urban areas to a near halt. The International Monetary Fund said last month that Syria’s $60 billion economy might contract by 2% this year, but optimistically projected a rebound in 2012.
Now, London-based Capital Economics said in a report released on Monday that Syria’s GDP could shrink by 10% over the next 10 months under the weight of international boycott as exports plunge by 50%. It said tourism, which accounts for about 12% of the economy, will fall substantially while foreign direct investment, which has risen 12-fold over the last decade thanks in large part to capital from the Gulf.
Although not regarded as an open, trade-oriented economy, Syria has in fact become more reliant on imports, exports and foreign investment. The 18-country Greater Arab Free Trade Area agreement went into force in 2005 and Syria signed a free-trade area agreement with Turkey in 2007. Tariff duties on imports from countries around the globe were also lowered, including for consumer items such as cars and garments.
“The difficult economic situation alone will not topple the Assad regime but it will constitute a very important component of the regime-toppling process,” Samir Seifan, a Dubai-based Syrian economist, said in a comment in the British Telegraph newspaper on Tuesday. “The regime has ceased to be a source of benefits for the groups that are loyal to it. Instead, it is becoming a source of economic crises, unrest and trouble.”
One ray of hope for Damascus is the piecemeal nature of the sanctions. Russia and China have blocked efforts to impose them via the United Nations. Neighboring Turkey, an important trade partner for Syria before the revolution broke out, hosts the main Syrian opposition, offers refuge to defecting Syrian soldiers and bars arms sales, but talk earlier this month about placing general sanctions on Syria has not led to a decision.
The EU has slapped asset freezes on some Syrian companies and entities, and imposed an embargo on Syrian crude oil exports. Royal Dutch Shell and Total have reportedly slashed oil production in Syria because US and EU sanctions have warded off normal buyers of Syrian crude, causing storage tanks to fill and forcing cuts in output.
Even in the Arab League, the decision to isolate Syria was not adopted unanimously, with Lebanon and Iraq voting against measures. That could be critical because Iraq took about 30% of Syrian exports last year and Lebanon another 11.7%, making them bigger trade partners than EU members Germany and Italy or Saudi Arabia.
“So long as Iraq keeps its border with Syria open, that will provide a lifeline for Syria’s economy,” said Carnegie’s Saif. “Also Lebanon is quite open. The size of trade with Lebanon is small but financial services are important for Syria.”
Syrian Economy and Trade Minister Mohammad Nidal Al-Shaar told the Egyptian newspaper Al-Alam Al-Youm on Tuesday that the Syrian economy is holding up well, with only European oil investments badly hit. He said Syria was looking to boost trade with countries that have not imposed sanctions.
"We have a lot of options ... including Mercosur [the Latin American trade bloc] countries, Russia, Belarus, Kazakhstan, Africa and some countries from Southeast Asia,” he said.