Syria Insight: Syria's collapsing economy threatens Assad's rule

New protests have broken out in Suweidah against the government and there are more vocal grumblings about the financial situation among regime loyalists.

Assad still has the power to make and break businesspeople - as Syriatel head Rami Makhlouf recently discovered - but even he is running out of options to save the country's failing economy.

With new US sanctions against regime officials due to be implemented in mid-June - through the Caesar Act - Syria's economy could worsen in the coming months, depending on the scale and scope of the sanctions.

"Just over the past five months, the economic impact has weakened Assad a lot. However, our experience from other countries is that governments become more aggressive and belligerent when under sanctions," said Karam Shaar, non-resident scholar at the Middle East Institute, told The New Arab.

"It is like when you see a cornered cat, it looks more like a tiger. It is fighting for life and I think this will happen in Syria."

The financial situation for ordinary Syrians looks even grimmer. The Syrian pound is now below 2,300 liras to the dollar on the black market, while around 80 percent of Syrians are living in poverty. 

Shaar said that the Syria is not far of a state of hyperinflation, standing at 20 percent in May, which is putting basic goods - such as bread - out of the reach of many Syrians.

The lockdowns implemented due to Covid-19 have also had a devastating impact on the private sector, with curfews essentially freezing business activity over the past two months.

It is like when you see a cornered cat, it looks more like a tiger. It is fighting for life and I think it will happen in Syria - Karam Shaar, non-resident scholar at the Middle East Institute

In addition, the Syrian regime's revenues have been significantly hit by economic troubles in Iran - the biggest backer of the Assad regime, in terms of manpower and finances.

Tehran has been troubled by its own Covid-19 outbreak, crippling US sanctions, and low oil prices, and unable to keep the Syrian economy afloat.

"Iran is struggling at the moment and this has impacted on the amount of money the Assad regime and Hezbollah received from Iran," said Shaar.

"Iran's support for the Assad regime [during the war] is estimated to be between $30 and $50 billion, while Russia has not really contributed that much to Assad financially."

Banking crisis

Troubles in neighbouring Lebanon have also contributed to the economic crash in Syria.

Over the past nine year, Lebanon has also been a place of refuge for Syrian money but Beirut too is on the verge of economic collapse.

"The interconnectedness between the two countries, particularly the banking sector, cannot be exaggerated," Shaar said.

"Estimates for the amount of Syrian deposits in Lebanese banks is estimated to be around $50 billion," Shaar said, who estimated only a fraction of that figure to be deposited in Syrian banks.

After nine years of war, Syrians have little faith in the local banking sector and those with the means to do so have deposited their savings in Lebanese banks.

Recent capital controls and extreme dollar shortages in Lebanon have seen Syrians accept "haircuts" of up to 30 percent when withdrawing their savings in US dollars, Shaar said.

With this money supply from Lebanon now drying up, Syria is suffering an acute dollar shortage, which had led to the collapse of the Syrian lira.

Damascus fixed the official rate at 700 liras to $1 (around four times lower than the current black market rate) in January. It also introduced stiff penalties of seven years hard labour for anyone dealing in foreign currencies unofficially, in an effort to centralise dollar exchanges through government channels.

— justice for families (@justiceforfami1) May 27, 2020" style="color:#fff;" class="twitter-post-link" target="_blank">Twitter Post No #COVID19 case has been reported in #holcamp but nothing can be sure because of test deficit. NE #Syria has the 2nd lowest number of tests in the world. if Covid-19 hits the camp then children and elderly people will be extremely vulnerable. #JFFhttps://t.co/PNpjV1kKJd — justice for families (@justiceforfami1) May 27, 2020

"They are trying their best to keep the official exchange rate unchanged and have people use official channels to send money to Syria," said Shaar.

"Keeping the official exchange rate for remittances at the same level - even though the rate on the black market is skyrocketing - is effectively a tax.

"Now the government is trying its best to keep that exchange rate fixed by closing money transfer exchanges and telling those who deal with dollars on the black market they will be prosecuted under anti-terrorism laws."

Another concern for the Syrian regime is its woeful balance of payments, with imports far exceeding exports.

As a way around this, the government is looking to introduce an import substitution programme and encourage domestic factories to produce goods typically imported.

The government's more interventionist policies and a move towards "self-sufficiency" will resonate well with the public, Shaar said, but will likely worsen the already dire economic situation in Syria.

"These policies have been implemented in many other countries before - especially the USSR - and they failed miserably," said Shaar.

"Current theory stipulates that you are much better off focusing your production on the things you are good at producing, and trading other items."

The Syrian regime aims to cut imports by up to 80 percent by raising tariffs on foreign goods, easing the strain on local factories by cutting taxes, and lowering the costs of importing machinery for producers.

"The situation is terrible, the solution is really, really bad. However, I don't think they have any solutions, so it is just the lesser of many evils," said Shaar.

"What will happen is these producers will be incapable of producing good-quality products, because they are not specialised in making them, and they don't have the machinery or economies of scale, so I think it's going to fail miserably."

The result could be that more local businesspeople will liquidate their assets and move abroad, further worsening the brain drain and flight of capital out of Syria.

Analysts say that Russia, Iran, and Assad's inner circle are already carving up what is left of Syria's remaining profitable businesses.

The upcoming Caesar Act - due to be implemented in mid-June - will likely further drain money entering Syria's economy.

They squeezed people to the bone. They've pretty much exhausted all these options and so this is why we saw the in-fighting beginning. - Bente Scheller, head of Middle East and North Africa Department, Heinrich Boll Foundation Berlin

Shaar said that the impact of the sanctions will likely depend on how deep the US goes and where the cut-off point will begin.

Assad has survived the war years by creating new business classes, who are able to circumvent sanctions, and then dumping them whenever they outlived their usefulness.

"Some are quite lucky to have stayed in place for a couple of years, like [Samer] Foz and [Hussam] Katerji... Sanctions will target new names that you and I have never heard of."

Cronyism

Some of the new business elites are suspected of being involved in smuggling and drug trading, the latter industry said to be an increasingly valuable source of income for the Assad regime due to sanctions.

Bente Scheller, Head of Middle East and North Africa Department, Heinrich Boll Foundation Berlin, said that the list of often previously unknown names, who have been added to EU sanctions lists, highlights the rapidly changing fortunes of key regime figures.

The Caesar Act means another reshuffle of the elite is likely due, but it is not a system that continue indefinitely.

"You can't expand that circle forever. You have a limited number of people you can trust, or are in a position to access outside Syria, so you can't just take anybody," Scheller told The New Arab.

"Everyone will now be suspicious of dealing with Syrians and the sanctions list over the past few years has show it is not easy for Assad just to replace people. Syria is scarce of businesspeople who are not currently under sanctions."

As with the Iran embargo, it could mean that few European and other banks and businesses will be willing to risk possible penalties affixed to breaking US sanctions and deal with Syrians.

— Eye on Iraq (@Cedocamena) June 4, 2020" style="color:#fff;" class="twitter-post-link" target="_blank">Twitter Post #The_NewArab Charting the dramatic collapse of Syria's national currency https://t.co/Dnu0jIZzQ6 #Iraq — Eye on Iraq (@Cedocamena) June 4, 2020

It could also further entrench endemic cronyism and increase illegal business activity inside the regime.

"The secondary sanctions of the Caesar Act will affect anyone who deals with the regime so I think that will make things more difficult, but both countries [Lebanon and Syria] are used to war economies, and all the shady ways in which money can be transferred, so in the end I think it will be even more expensive for the regime to get funds in, but it will not completely drain the flow for Lebanon," said Scheller.

Extraction

While the regime and businesspeople are hard hit by the economic situation, ordinary Syrians will likely fare worse.

"Syria has been struggling financially for quite some time but it's only recently that we saw basic goods becoming very scarce and very expensive, one of the main things being bread," said Scheller.

"There are several factors behind the collapse of the Syrian economy, but chiefly the nine-year war has crippled the private sector and dominated government spending."

The Syrian regime has for years looked at every way to extract money out of their citizens to fund its military campaign against the opposition.

During the war, it has done this through changing number plates, increasing taxes and other fees, opening smuggling routes with besieged opposition areas, trading oil with Kurdish or former Islamic State group entities, and confiscating goods and property from exiled Syrians.

"If you look at besieged areas, this was something they used to generate money. By besieging them the people inside needed goods so the regime checkpoints would benefit from them," said Scheller.

"They squeezed people to the bone. They've pretty much exhausted all these options and so this is why we saw the in-fighting beginning."

The Caesar Act will likely force the regime to rely further on smuggling from Kurdish areas, which will not be impacted by sanctions.

It could also empower the Syrian Democratic Forces, who late last year appeared to be willing to capitulate to the Assad following the withdrawal of US forces and subsequent military operations by Turkish forces.

"It gives the Kurds an additional bargaining chip with the regime because before it looked like the Kurds would be left on their own and would not have anything to bargain with Assad about their future status. This might change that equation," said Scheller.

In almost all regime areas outside Damascus, direct government control remains weak and rife with corruption, human rights abuses, and instability.

A patchwork of foreign armed groups and local militia maintain control, increasing tensions with locals - particularly in Daraa where a low-level insurgency has broken out.

"There is a high level of tensions in Syria, because of issues not being resolved," Scheller commented. "People are abusing their power locally and therefore the economic hardship might contribute to this."


Paul McLoughlin is a news editor at The New Arab. 

Follow him on Twitter: @PaullMcLoughlin