The Unintended Consequences of the Unilateral Measures on the Syrian Economy and Its Small and Medium Enterprises
Samir Aita
November 2020
The Carter Center
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© 2020 by The Carter Center. All rights reserved.
Acknowledgement
This paper and the research behind it would not have been possible without the exceptional support of colleagues at the “Cercle des Economistes Arabes” and the availability of data from the MGAL (MENA Geopolitical Analytical Lens – Independent Consultancy), especially in conducting some of the field interviews. The author is grateful to Rabie Nasr and the Syrian Center for Policy Research (SCPR) as well as for the NGO REACH for their inflation data. The author is also grateful to individuals interviewed and to the reviews made in different chapters during the process of elaboration.
The results of some interviews are reproduced as is, unaltered, in separate boxes, and do not necessarily represent the views of the author or The Carter Center.
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Author
Samir AITA is President of the “Cercle des Economistes Arabes”, former Editor in Chief and General Manager of “Le Monde diplomatique éditions arabes”; lecturer of political economy at the University of Paris Dauphine, Paris II Sorobonne and Saint Joseph, Beirut; and consultant in Economy, finance, labor and urban planning. Born in Damascus (Syria) in 1954; studied at Ecole Polytechnique and Ecole Nationale des Ponts et Chaussées; postgraduate degree from the “Ecole des Hautes Etudes en Sciences Sociales”, the “Institut National des Sciences et Techniques Nucléaires” and HEC Executive Management (CPA-HEC). He is currently senior consultant with UN agencies (UNHabitat, UNDP, ESCWA) and other international organizations, mainly on the Middle East, including Iraq, Syria and Libya.
About the Report
The devastating explosion at the Port of Beirut on August 4, 2020, and its drastic humanitarian consequences have shed light on the deteriorating social and economic situation in Lebanon, and its impact on Syria.
Even before the explosion, Lebanon, which hosts around 1.5 million Syrian refugees, was suffering from a major financial crisis that depleted the savings of many Lebanese and Syrians who trusted the Lebanese banking system with their assets. Because of the unilateral economic sanctions imposed on Syria by the United States and the European Union, Beirut’s port became the lungs of Damascus. It was the main point of entry for humanitarian aid provided by UN agencies and INGOs, as well as the aid needed to sustain a minimally functioning Syrian economy. The Port of Beirut was essential to the livelihood of Syrians living in government-controlled areas in Syria.
Sanctions have been imposed on Syria since the 1970s and increased in 2003 following the invasion of Iraq through the “SALSA Act” and intensified during the 2011 uprising. Most of the sanctions targeted individuals accused of committing human rights violations and were not intended to target supplies of food and medicine.
The report titled “The Unintended Consequences of the Unilateral Measures on the Syrian Economy and its Small and Medium Enterprises”, written by Syrian economist Samir Aita for The Carter Center, shows how these unilateral measures have had a severe impact on Syria’s economy and population, in addition to the impact of the ongoing conflict. It introduces technical elements to the controversial debate between those praising sanctions as a tool to weaken the Assad regime on one side and those criticizing them as a weapon of “war on Syria” on the other side.
Based on statistics and interviews, the study examines the ways in which unilateral measures exacerbate economic problems in Syria and inflict suffering on common citizens at least as much as on the regime. The study looks at the direct impact unilateral measures have had on Syria’s foreign trade, mainly with the U.S. and Turkey, and on imports and exports. It also highlights the indirect impact of these measures on Syrian politics and the “de-risking” and overcompliance measures foreign partners have taken to avoid being sanctioned as a result of covert pressure, such as the Caesar Act. These indirect effects go far beyond the text of the sanctions.
The report highlights how crucial economic sectors have suffered under the unilateral sanctions, and how their mechanisms were disrupted. Sectors covered include agriculture, internal trade and food security; micro, small and medium enterprises (MSMEs); and the banking and financial sector. It further outlines how the unilateral measures affected the response to the COVID-19 pandemic. The report concludes with policy recommendations.
Despite its deeply entrenched corruption, mismanagement and favoritism, Syria had long enjoyed food security and medicine sufficiency prior to 2011, with no need for imports except for specialties. The unilateral measures made the Syrian population deeply dependent on trade with Turkey and Lebanon, on substantial foreign aid and on rainfall, putting them at risk in the event of a prolonged drought.
As for the energy sector, Syrian oil production was already declining significantly prior to the conflict. The balance of trade in oil and oil derivatives plunged from a US$1.2 billion surplus in 2011 to a $4.4 billion deficit in 2012. The scarcity and high prices of fuel affected small and medium enterprises, as well as the general population, by curtailing electricity generation, tap water production, and farm irrigation. The U.S. ban on Syrian imports of oil and its derivatives left the country fully dependent on Iranian and eventually Russian supplies. Out of necessity, all actors, including the SDF (Syrian Democratic Forces) and OAG (Opposition Armed Groups), smuggled oil out of ISIS-controlled territory.
The unilateral sanctions halted the growth of the private banks leading the Syrian banking sector. Even when the private banks were not specifically listed in the sanctions, most of those linked to Lebanese and Jordanian banks lost their Western correspondent relations due to de-risking and overcompliance. During this time, traditional and Islamic Persian Gulf banks took the lead in the sector, despite their recent arrival in the market and the sanctions imposed on some of their shareholders or associated exchanges.
The unilateral measures on the Central Bank of Syria and the Commercial Bank of Syria led INGOs to channel foreign funds through the informal “hawala” money transfer system; at the same time, sanctions fueled the uncontrolled financing of combatant groups through the same system.
The unilateral measures played an indirect role on the early stages of the conflict by facilitating the rise of extremist groups. The sanctions also led to the development of illegal trade networks controlled by the security services responsible for the repression. The deteriorating livelihood of the population in the early stages of the conflict resulted in an increased reliance on external financing through remittances from Syrians abroad, funding of armed groups, looting, or international aid.
During the later stages of the conflict, the unilateral measures played a significant role in fueling the war by indirectly generating, through informal war economics, significant financial resources to armed groups on all sides; as one example, extremist groups wound up controlling more than $1.5 billion in imports from Turkey to the whole of Syria.
In 2019, the financial crisis in Lebanon increased these effects by blocking around $30 billion of Syrians’ savings and working capital for small and medium enterprises. This led to the collapse of the Syrian pound’s value. The Covid-19 crisis and lockdown measures further fueled this crisis. The meager revenues of the population and the weakened capacity of local productions led to an even worse humanitarian crisis.
The report argues that the Caesar Act does not add any substantial tools to existing US executive orders combined with the overcompliance measures taken by third parties. It is mainly a public policy tool.
The report concludes with recommendations for adding mechanisms that can tackle the direct and indirect effects brought by broadly applied de-risking practices and overcompliance.
The mechanisms to be implemented, most preferably under UN auspices, must target agricultural production and food security, MSME activities, and the involvement of the banking sector in financing rather than “hawala” and other informal systems. The implementation of such mechanisms is of most importance today given the current Lebanese and Covid-19 crises, and before Syria experiences a drought with lasting and devastating consequences.
Read the Executive Summary
Executive Summary
This report analyzes the effects of U.S. and European unilateral measures (sanctions) imposed upon the Syrian economy since 2011 ― more specifically, the impact on its agricultural, small and medium private enterprises (SMEs), and private banking sectors. The report does not address the unilateral measures imposed on individuals, but those related to state institutions and networks of the Syrian private economic sectors. The report assumes that the impact of unilateral measures on the Syrian economy and livelihood was unintended.
Through the analyses of each sector’s evolution since the early 2000s, the report attempts to distinguish between the various influencing factors in order to demonstrate where the principle of “no harm to the population” was breached.
The Direct Economic Impact of the 2011 Unilateral Measures
The 2011 unilateral measures led to a sharp decline of all Syrian private sector exports, including non-oil exports. Imports also declined, but not as rapidly. While the declining oil production (including other fuels) prior to 2011 was not disclosed, Syria became a net importer of oil and its derivatives in 2012, with a deficit amounting to US$4.4 billion, which was gradually declining due to import barriers and lower consumption. However, the import of oil and its derivatives remained around 40% of the total, leading to Syria’s increasing dependency on Iran. The lack of fuel had a significant negative impact on electricity production, transportation, heating, and pumping for agricultural irrigation.
Despite the 2003 U.S. unilateral measures, U.S. exports to Syria, mostly corn and soybeans, increased significantly to reach US$500 million by 2010. But after 2011, imports declined to less than US$20 million. Even exports of seeds and pharmaceuticals, officially allowed, declined to near insignificant amounts. Worth noting within the same context is the fact that U.S. policies prior to 2011 prevented Syria from procuring airplanes and power plants.
The unilateral measures transferred a large part of Syrian imports to the informal sector, as most foreign banks and companies adopted a de-risking overcompliance practice, spontaneously or following covert pressures. The share of “non-identified country of origin” in relation to Syrian imports increased from 1% in 2010 to 40% in 2018.
In addition to oil, the unilateral measures resulted in making Syria largely dependent on imports from Turkey, which represented one-quarter of the total Syrian imports during the conflict. More importantly, these imports were made through border crossings controlled by armed opposition groups (AOG), including jihadist and terrorist organizations according to UN Security Council resolutions, on one side and pro-government of Syria (GoS) militias on the other. They represented a major source of revenue for both sides, fueling the prolongation of the conflict.
The Indirect Impact of 2011 Unilateral Measures
The 2011 unilateral measures led to the transformation of large parts of the economy into informal sectors, increasing the economy’s “transaction costs,” which were borne by the population, profiting the repressive forces and armed groups on all sides. Consequently, these measures played a significant, although indirect, role at the early stages of the conflict in weakening the Syrian uprising, transforming it into a chaotic armed conflict, with the rise of extremist groups. The lack of controls over funding the extremist groups had a severely detrimental effect.
During the later, more intense stages of the conflict, the unilateral measures played a significant role in endlessly fueling the war and indirectly generating significant financial resources for the combatants on all sides through informal economies. This is especially true as a large part of the population and the Syrian pound (SYP) exchange rate became strongly dependent on the flow of foreign aid and the financing of combatants.
Despite a certain level of recovery between 2017 and 2019 ― during the last stages of the conflict before the imposition of the Caesar Act ― the unilateral measures led the Syrian economy to also become strongly dependent on the Lebanese economy. Thus, the financial crisis that emerged in Lebanon in October 2019 harshly impacted the Syrian economy. The addition of the Caesar Act in this context led to deepening the crises in Syria and Lebanon. The Lebanese crisis is expected to be long, generating the risk of major deprivation (famine) and chaos in Syria.
The complexities of the compliance procedures with the unilateral measures are another reason for the significant “transaction costs” eventually borne by the population. Moreover, de- risking and overcompliance imposed by foreign banks and companies led to major difficulties in provisioning of non-designated products. No effective system was put in place to deal with the consequences of de-risking and overcompliance practices for humanitarian goods, even in relation to UN agencies and INGOs.
The Impact on Agriculture and Food Security
The scarcity and high cost of fuel for pumped agricultural irrigation resulted in a major reduction of irrigated planted land and crop production. This significantly affected food security in the country, as agriculture became highly dependent on volatile rainfall.
The drop of yields in irrigated wheat production as a consequence of unilateral measures, resulting from the high costs of fuel, fertilizers, and other products, brought Syrian production below its needs in terms of bread and food security as the strategic reserves were either looted or depleted. This made Syria dependent on wheat imports, partly met through Iranian or Russian credit lines.
The unilateral measures led to an almost complete halt of fertilizer imports into Syria. Combined with challenges facing the local production of fertilizers, this led to abandoning the use of fertilizers in agricultural production, especially for wheat production, resulting in the decline of yields to almost half for irrigated land.
There was also a significant decrease in lamb meat production and consumption, and consequently a fall in revenues for Syria’s sheep owners. This in turn led to the loss of an important source of Syrian exports. The value chain of cotton was also dramatically disrupted with the rise of irrigation costs. A major input to the local private industry and source of exports declined drastically.
Vegetables and fruits were also reduced in value and were no longer being exported in the same capacity and regularity. As local consumption decreased and prices increased, farmers became more dependent on informal export networks.
The unilateral measures and their selective application to different zones of control in Syria changed the distribution and production of cumin in the country, making cumin part of the economic war as a political bargaining chip between the players. This was also the case for wheat, but on a larger scale.
The Impact of the Unilateral Measures on MSMEs
The unilateral measures, more than the conflict itself, constitute a major cause for the creation of illegal trade activities, as well as activities related to the illegal refining and smuggling of oil. These unilateral measures are also responsible for the loss of jobs, the decline in the development of micro-enterprises, and smuggling.
The conflict and the unilateral measures combined led to a major slowdown in the establishment of new industrial micro, small, and medium enterprises (MSMEs) in Syria. New projects focused mostly on food production following the difficulties experienced in the food chain.
MSMEs, like most of the population, were hindered by the lack of electricity in the country. This limitation came as a result of damage caused by the conflict, and also because of the impact of unilateral measures on oil, gas, and electricity trade with neighboring countries, as well as because of restrictions on importing capital and spare parts for power plants.
The production of tap water also suffered from shortages of fuel for pumping, as well as from shortages of pumps, spare parts, and equipment to repair damaged plants at the source and along the distribution networks. This could also be accounted for as an “unintended” consequence of the unilateral measures.
Syria lost its pharmaceutical production security for basic generic medicine and its related sector for exports. Moreover, imported medicines were no longer available.
The Impact on Private Banks and Exchange Rate
The unilateral measures led to a reduced role for the public Commercial Bank of Syria, to a decline in the growth of private banks, and to the prevalence of the Arab Gulf’s traditional and Islamic banks in the Syrian banking market. These Gulf banks were mostly able to maintain some relations with corresponding banks for foreign trade operations and to deal with public foreign procurement as well as INGOs.
Most of the foreign financial transactions were moved out of the Syrian banking system toward the informal hawala system and similar informal money transfer means. This applied to the UN and INGOs operations as well.
Thus, the unilateral measures left the Syrian economy dependent on informal financial transactions, through mainly neighboring countries (particularly Lebanon and Turkey), with little means available for the Central Bank of Syria to intervene on the exchange rate.
This was the main driver of the severe impact of the Lebanese financial crisis on the Syrian economy. The assets of the Syrian middle class and businesses, including most SMEs, had been blocked (and probably lost) due to the Lebanese financial crisis. The Syrian SMEs can no longer use these assets to even import non-designated products. The threat of the Caesar Act on both Syria and Lebanon added to the effects of the Lebanese crisis, leading to the depreciation of the Syrian pound to unprecedented levels and to hyperinflation, blocking the functioning of the Syrian economy, with dramatic consequences.
The unilateral measures, as well as the financing of the conflict, also gradually led to the dollarization of the Syrian economy. The result was inflation and depreciation of the currency compared to the U.S. dollar. This inflation led to the deprivation of a large segment of the population. Yet, with the current Lebanese crisis and the pressures of the Caesar Act, hyperinflation could have more dramatic consequences on the population.
The Role of Neighboring Countries
The unilateral measures led Syria to be extremely dependent on neighboring countries: Turkey, Lebanon, Iraq and Jordan; and, in turn, to be influenced by these countries’ own economic difficulties. This is particularly true in the case of the Lebanese crisis, which emerged in October 2019 and has proved to have dramatic consequences on the Syrian economy and livelihood of its population.
The Unilateral Measures and the COVID-19 Crisis
The World Health Organization (WHO) warned that, in the context of the Lebanese financial crisis, the collapse of the currency, growing inflation, and the unilateral measures, Syria was left very vulnerable to the uncontrollable spread of COVID-19 infections. The lack of basic means to address the pandemic (testing, protection, hospital equipment, medicine, etc.) is extremely problematic. However, the economic impact and the risk of famine surpass the health risks.
The Expected Impact of the Caesar Act
The Caesar Act does not technically add substantial tools to the already existing U.S. unilateral measures. However, its “secondary” dimension puts pressure not only on neighboring Arab and Asian countries in their remaining trade with Syria, but also on the EU, in case it intends to slow down its own unilateral measures.
The Caesar Act has detrimental effects because of its timing; it disrupts any chance of real recovery for the Syrian economy and adds a major psychological dimension on the already severe consequences of the Lebanese financial crisis and COVID-19 emergency in Syria.
Conclusions and Policy Recommendations
It would have made more sense to limit the unilateral measures to individuals with proven responsibilities for human rights violations and those who have committed crimes against humanity. Moreover, it would have been advisable to accompany these measures with mechanisms that could tackle the direct and indirect consequences of broadly applied de-risking practices. Such mechanisms should not be similar to the “food for oil” program adopted by the UN in the case of Iraq in the 1990s, not only because Syria has little oil to export, but mainly because these mechanisms negatively impact the population as a whole.
The mechanism urged must be under UN control and must prioritize increasing agricultural production and food security, the activities of the MSMEs, and allow for the banking sector’s strong involvement in the financial sector, instead of the current hawala and other informal systems.
The urgent implementation of such processes is vital today considering the expected extended duration of the Lebanese financial crisis and the dire consequences of COVID-19.
Read the full report