The Nexus of Economy, Diplomacy, and Reform
Joshua Landis April, 2009
Arab Reform Bulletin – Carnegie Endowment for International Peace

The winds of change coming out of Washington have rekindled talk of liberalization and reform in Damascus. The Obama administration’s abandonment of a regime change approach to Syria has emboldened officials in Damascus to speak out about economic vulnerabilities—and the impact of U.S. sanctions—with refreshing candor. Long delayed economic reforms,  particularly the launching of Damascus’s stock exchange, have been pushed through. President Assad has also promised to put political liberalization back on his agenda because he no longer believes Western powers seek to destabilize Syria.

Deputy Prime Minister Abdullah Dardari, who coordinates economic planning in Syria, broke with the government’s party line on the economy in a recent interview with Reuters. Rather than repeating bromides about how Syria’s economy would not be affected by the world downturn, he warned Syrians that they would indeed face tough times. He explained that “Syria’s foreign trade makes up 70 per cent of GDP and this means that the country’s dependence on external factors is very large.” Mohammed al-Hussein, Syria’s finance minister, took Dardari’s warnings one step further, saying that 2009 would be a “difficult” year. The country’s banks were secure, but the industrial, transport and tourism sectors would suffer, he predicted.

Projections of an economic downturn are loaded with political significance in Syria. During the Bush administration, Syrian officials kept up a brave front in order to counter thinking in Washington that economic pressures would enable Israel and the United States to drive a better bargain on the Golan. U.S. sanctions were unimportant and ineffective, Syrian officials scoffed. Abdullah Dardari began to promise in 2005 that by 2010 he would have Syria’s economy purring along at 7 percent growth, the magic rate at which most economists believe Syria will begin to dry up its growing pool of unemployed laborers and youth. Damascus could afford to wait out Washington without abandoning its precious regional assets or “cards” that, if played wisely, it believed would win back the Golan and allow Syria to project its influence in the larger Middle Eastern arena.

So when Dardari admitted that Syria would fall far short of 7 percent growth, foreign analysts took note. More importantly, Dardari as much as confessed that U.S. sanctions were taking a toll on Syria. In a shot across the bow of Syria’s foreign ministry, he demanded that “the U.S. should lift its economic sanctions on Syria before relations improve between the two sides.” “The lifting of sanctions will likely have a positive effect on increased foreign investment,” he explained and would “remove a psychological barrier” to companies that now hesitate to put money in Syria. Only $700 million in foreign direct investment came to Syria last year; 2009 is likely to see even less.

According to Dardari, Syria’s infrastructure must undergo massive improvements on the order of $50 billion over the next ten years in order to grease the wheels of commerce and keep its main industries (textiles, cotton spinning, plastics, cement and canning) from being done in by cheap imports. Syria’s manufacturing sector has been battling on a number of fronts for the past few years, well before the current global crisis. For decades, it avoided competition from imports thanks to a program called “national protection.” High tariffs on imports gave local producers a false sense of security as they sold inferior products at high prices. But recent economic reforms have opened Syria’s doors to a wide array of new imports; tariffs between Arab states have been eradicated altogether, forcing Syrian manufacturers to compete with inexpensive imports for the first time.

Among notable recent developments was the launching of Syria’s stock exchange, which opened on March 10 after years of delays. Six companies were listed but only one traded a total of 15 shares on the first day. Volume was disappointing throughout the first weeks because fewer than 100 accounts have been registered with the five approved financial brokers. More importantly, cumbersome restrictions have been placed on the exchange to prevent “speculation” and promote “investment.” Securities cannot be sold on the same day of purchase and a 2 percent daily price movement limit has been imposed on stocks in an overzealous attempt to protect investors. These are some of the kinks that must be worked out, but Syrians were enthusiastic about having a working bourse after fifty years of socialism.

President Bashar al-Assad assured Syrians in March that the pace of reform would pick up now that Syria is “less affected by difficult international circumstances.” What is more, he suggested that reforms would not only be economic, but also political. When asked to elaborate, Assad responded: “For example by expanding political participation, creating another chamber in addition to the parliament, such as a freely elected senate with a legislative role to give more space to the opposition, by further liberalizing the political media and the Internet to promote dialogue, and finally by enacting a law regulating political parties. But all that will come about gradually, at our own pace.” Most Syrians may not hold their breath for political change, but they are gratified by the new climate of engagement with the United States, hoping that it will have important economic repercussions and perhaps bring some relaxation of the political atmosphere.

addendum: The following paragraph was cut from the original version for space, but I add it here because it may be of interest to SC readers.

Syria’s economic woes as explained by Abdullah Dardari were music to the ears of analysts at some think thanks. The Washington Institute for Near East Policy published an article entitled, “Global Economic Crisis Boosts Utility of U.S. Sanctions on Syria,” recommending that the US recalibrate sanctions to get the most out of their “powerful negative impact on the Syrian economy.” President Assad is unlikely to be swayed by bad economic times, however. In an interview published on March 9 he explained how he had learned not to “overreact to events” from his father. In particular he mentioned being impressed by how his father remained calm during the economic crisis of 1987, when “the economy was on the verge of collapse.” “Calmness and patience,” and “not being rushed in expecting results” are the “key to everything else,” he maintained.

Syria’s 100 richest businessmen via All4Sryia.info

Ambassador Imad Moustapha

U.S. alters course on Syria
Eli Lake in the Wash-Times, via Friday Lunch Club

“…The Obama administration has signaled a sea change in U.S. policy in its early talks with Syria, seeking Damascus’ help in bringing Hamas into negotiations with Israel as well as an agreement enlisting Syrian forces to help seal Iraq’s western border from al Qaeda, the Syrian ambassador to Washington said Monday.

In another change from the policies of the Bush administration, the Obama team has not insisted that Hamas leader Khalid Mashaal be expelled from Damascus, Ambassador Imad Moustapha told reporters and editors of The Washington Times….Mr. Moustapha said relations between the two countries have warmed enough that Syrian officials participated in a regional meeting Monday with Deputy Secretary of State Jim Steinberg

Mr. Moustapha said U.S. officials,…They “are telling us, ‘we will never ask you to kick Khalid Mashaal out from Syria,’ ” the ambassador said, referring to the political leader of Hamas who has been based in Damascus since Israel tried and failed to assassinate him in Jordan in 1997. …
Mr. Moustapha said U.S.-Syria talks are still in an “exploratory” phase but that the two sides are close to agreement on Iraq. Any such agreement, he added, must prohibit American forces from conducting raids inside Syrian territory.

“We will not allow the so-called hot pursuit into Syria,” Mr. Moustapha said.

In October, U.S. Special Forces raided the Syrian village of Sukkariyeh, just over the Iraqi border, in an effort to apprehend a senior al Qaeda financier named Abu-Ghadiya. The Syrian government said that the raid killed defenseless villagers, including 11 women and children.

“They killed them Rambo-style from their helicopters,” Mr. Moustapha said. He said there have been other U.S. incursions from Iraq. “Time and again, the Americans did infiltrate into Syria,” Mr. Moustapha said. …

The ambassador said he is confident that with the change in administrations, an agreement is close regarding Iraq. Syria is ready to make such a pact “operational,” he said.

“We will cooperate with the United States,” he said. “It is in our interest.”

……Another State Department official said, however, that the U.S. government, in talks with Syrian officials, also has explored ways in which Syria could moderate Hamas’ behavior…”

Obama Gradually Changes Course
By Rami Khouri,
Wednesday, April 08, 2009
Arab Media Watch and Daily Star: Analysis

President Barack Obama’s speech to the Turkish Parliament on Monday, April 6, was another milestone in what appears to be his continuing attempt to steer the American ship of foreign policy in new directions. He made some important new statements and changes in style, while repeating some silly old bad habits and simplistic insults. If he intended to address the Islamic world and signal a more humble, realistic policy towards majority-Islamic countries, he gets high marks for intent and execution, and medium marks for substance…..

O’S AMATEUR HOUR
By RALPH PETERS, Fox News’ strategic analyst and the author of “Looking for Trouble.”
April 8, 2009 —
New York Post

…Obama’s embrace of Turkish Prime Minister Recep Tayyip Erdogan (now orchestrating show trials of his opponents) was one step short of going to Tehran and smooching President Mahmoud Ahmadinejad. ….

Lebanon’s Mikati Will Only Accept Premiership With Consensus
By Massoud A. Derhally

April 8 (Bloomberg) — Former Lebanese Prime Minister Najib Mikati, a likely candidate for the premiership after elections in June, will only accept the position if there is consensus on his candidacy.

“If I am not nominated by the Sunni majority then I will not agree to be prime minister,” the Sunni Muslim Mikati said in a telephone interview from Beirut today. “I will not accept the candidacy unless there is consensus regarding my candidacy by all the Lebanese.”

Lebanon’s June 7 elections will determine whether the pro- Western March 14 coalition rules the country for the next four years or if the March 8 alliance that includes the Shiite Muslim Hezbollah and its allies takes over.

A poll of about 4,000 people by the Beirut Center for Research and Information gave Hezbollah and an allied Christian party led by Michel Aoun a victory of two or three seats in the 128-seat Majlis al Nuwab, or Assembly of Representatives. The poll was conducted between February and April.

Parliamentary seats are distributed equally between Christians and Muslims under an agreement negotiated in Taif, Saudi Arabia, which ended Lebanon’s 15-year civil war in 1990. Elections are held every four years. ….

Qifa Nabki has this to say about whether Mikati will be the next PM:

I recently spoke with a Hizbullah ex-minister and asked him whom he thought the opposition would nominate as premier if it won the election.

“Difficult to say,” he replied.”But it will have to be a consensus candidate.”

“What about Najib Miqati? He seems to be fairly neutral.”

(Indeed, Miqati is one of the most talk-about potential PM candidates these days).

The minister leaned back in his chair and was silent for a moment.

“I’ll give you my own personal opinion. This is not the official position of the Hizb. It’s just what I think.”

“Ok.”

Another pause. Then he leaned forward and said softly:

“If Hariri turns it down, Miqati will be the PM. If Hariri accepts it, Miqati won’t be the PM.”

Translation: if the opposition wins the election, they may try to use the offer of the premiership to prevent Hariri from staying out of the government. Then again, Hariri probably knows this, which may be why he is playing hard to get. Yes, it’s byzantine and highly cynical, but this is Lebanon.

syria: ‘Economy grew 6.5% in 2007-08’
08 April 2009

The Syrian economy grew 6.5 percent in 2007 and 2008, showing that the government’s policies were effective, newspapers quoted Prime Minister Mohammed Naji Otri as saying.

“Certain economic indicators reflect the correctness of our plans. GDP registered 6.5-percent growth in 2007 and 2008. These figures inspire optimism and show we are on the right track”, he reportedly told a meeting of engineers, without giving a breakdown of the figure.

Syria is suffering less than other countries from the global economic crisis, although it will lead to a fall in exports and in remittances home from expatriate workers, he said.

Otri said banks operating in Syria had assets of 700 billion dollars and the government was looking at ways of investing the money in major development projects.

“We are going to confront the global financial crisis by doing more construction”, he said.

The premier pledged to support the public sector and deal with its problems.

“No public sector worker will be dismissed”, Otri pledged, noting: “200,000 new workers join the labor market each year” and population growth was accelerating.

Major investment projects to be launched early next year included the creation of 180 hectares of farmland at Hassake in the Northeast and a project to transfer water from the Euphrates to Central Syria to enable the creation of petrochemical industries, he explained.

An Economy Ministry study published in February forecast that the credit crunch would cause a 30-percent drop in foreign investment in Syria this year and a fall in remittances from Syrians working abroad, worth 850 million dollars in 2008.

Syria has launched a major reform policy granting the private sector a bigger role in the economy including setting up a stock exchange, where dealing began last month.

Still Waiting for Change
Words Obaida Hamad & John Dagge, Photos Phil Sands
Syria Today

… Most seasoned Syria observers, however, remain highly cautious. Despite the apparent volte-face in US policy towards Damascus, they question what has fundamentally changed in the country’s long, complicated relationship with America.

“The Obama administration is not planning any revolutionary change in US policy toward the Middle East,” Joshua Landis, co-director of the University of Oklahoma’s Center for Middle East Studies, said. “Rather, it appears to have set its sights on preserving the status quo and seeking to attenuate radicalisation through engagement and the proffering of small carrots, such as repaired diplomatic relations with Syria and the incremental lifting of sanctions.”…

…Syrian analysts, both inside and outside the country, play down the likelihood of any major breakthroughs in the points of difference dividing Damascus and Washington.

Rime Allaf, an associate fellow at Chatham Ho
use in London, said the choice of President Obama’s last two envoys indicates “he is more willing to play by George W. Bush’s rules than to turn over a new page”….

“There are some files between the two sides that will not be easily solved, areas in which neither side wants to surrender its position,” Hamidi Abdullah, a Syrian political analyst based in Damascus, said. “America’s position regarding the national resistance of Hezbollah in Lebanon and Hamas in the Palestinian Territories will not change. America has been supportive of Israel since its creation and that is not going to change.”…

“It seems probable that the US is predicating the return of a US ambassador to Damascus on a favourable outcome to the June 7 elections in Lebanon,” Landis said….

arwan Kabalan, a Syrian political scientist who teaches media and international relations at Damascus University, said US attention on Syria is a means to an end; Obama’s real concern is Iran, rather than a better relationship with Syria in itself, or a settlement of the Arab-Israel dispute.

“The Americans have never been serious about peace,” Kabalan said. “They were always satisfied with conflict management. They have never wanted to think of it in terms of conflict resolution.”

Kabalan said US interests in the modern Middle East have moved away from the Levant and now are centred in the Gulf.

“The Arab-Israeli conflict has been going on for the past 60 years and it can go on for another 60 years,” he said. “US interests are no longer in this area of the Middle East, they have moved to the Gulf, to a nuclear Iran, to oil, Iraq and Pakistan.”….

The Syria Accountability Act (SAA) of May 2004 is the most comprehensive sanction. It prohibits the export of most goods containing more than 10 percent US-manufactured components to Syria. In order to remove this sanction, the president must certify before Congress that Syria has made significant progress:

* towards the peaceful development of stable relations with Lebanon
* towards a peace treaty with Israel
* to stop arming Hezbollah
* to stop providing sanctuary to Hamas
* to renounce weapons of mass destruction….

Syria and Lebanon – Thy neighbor’s trade
Executive Magazine (April 2008 No.117)
Cross-border commerce a product of history and geography
By Brooke Anderson

The economies of Syria and Lebanon have been closely intertwined since before they achieved independence from France in the 1940s. Now, with the two countries having recently opened embassies in one another’s capitals for the first time, an increasingly open and private-sector economy in Syria and a period of relative regional stability, there is now more potential than ever to take advantage of trade opportunities. These include not just goods, but services, expertise and labor – aHistorical economic tiesll of which illustrate Syria and Lebanon’s interdependent relationship.

Lebanon began its trade relationship with Syria in 1926 when it became an independent republic under French control. That same year, the Port of Beirut opened and Lebanon became Syria’s gateway to the world.
When Lebanon and Syria achieved independence from France in 1943 and 1946 respectively, the two countries continued a mutually beneficial economic relationship wherein Syria took advantage of Lebanon’s services, technical expertise and modern banking system, and Lebanon was able to make use of Syria’s labor force.

This complementary relationship was reinforced further in 1958. That year, Egypt and Syria merged to form the United Arab Republic, which led to the nationalization of Syria’s economy, leading many Syrian entrepreneurs to relocate to – or at least deposit their money in – Lebanon.

Lebanon’s civil war, from 1975 to 1990, marked the end of an era for the small eastern Mediterranean country’s reputation as the “Switzerland of the Middle East,” so-called because of its renowned top-quality banks in a stable climate. Still, during this time Syrians continued to use Lebanon’s banks because of their reliable services and secrecy policies.

Following the end of the war in 1990, Lebanon’s need for help with its reconstruction created a boom in need for Syrian labor. Throughout the 1980s and 1990s there were as many as a million Syrian laborers in Lebanon in any given period. At the same time, while wealthier Syrians waited for economic reform in their country, they used Lebanon’s renowned financial services and shopped at Beirut’s high-end retail stores to purchase items not available in Syria.

That all changed in February 2005 when Lebanon’s former Prime Minister Rafiq Hariri was assassinated. Syria was implicated in the assassination, but denies any involvement. Violent attacks on Syrian workers caused most of them to flee Lebanon, Syrians withdrew billions of dollars from Lebanese banks and Syrian shoppers abandoned their weekend trips to Beirut during a period of nationwide anti-Syrian sentiment.

The following years saw a thaw in Syrian-Lebanese political relations. Business has returned, but not at the same rate as before. Today, there are an estimated 300,000 Syrian workers in Lebanon, less than half of the pre-2005 level. Syrians who brought their business back home in 2005 have kept it there for the most part, mainly because luxury retailers and private banks in Syria have improved their quality and services to a level comparable to that of Lebanon.

With Syria’s ongoing economic opening and Lebanon beginning to warm-up politically to its next door neighbor, it appears that the two countries are in a good position to return to their traditionally mutually beneficial economic relationship.

“Even during the most difficult of times, trade relations slowed down, but then improved. This cannot stop. After… 2005, the only way left to go is up,” says Syrian political analyst Sami Moubayed.

Politics and geography of trade

When it comes to trade between the two countries, Syria is at a definite political and geographic advantage. With a 375 km border with Syria that constitutes the only route for overland trade — the 79 km border to the south has been closed since 1948, when Israel became a state — Lebanon is dependent on Syria for its trade with most of the world. Transit through Syria represents 60 percent of Lebanon’s trade.

“Syria has traditionally resorted to trade pressure, whenever relations were [tense] between the two countries, to affect the political flow between Syria and Lebanon,” says Moubayed. “There are no other outlets from Lebanon, except the sea, or Israel, for ground trade. When pressure of this sort is applied, it certainly affects political events, always in Syria’s favor, however.”

In 1950, for example, Prime Minister Khaled al-Azm would shut the border, to pressure Lebanon into changing political dialogue, or positions, knowing that if the borders with Syria were sealed, its trade with the outside world would suffer.

More recently, in 2005 and 2006, Syria shut its borders with Lebanon, again to put political pressure on its smaller neighbor. Still, goods usually reach their intended recipient somehow, regardless of political pressure.

“It’s a myth that the Syrian-Lebanese border is or can be closed to goods from the other side of the border,” says Samer Abboud, assistant professor in the department of political science at Susquehanna University in Pennsylvania. “The border is quite porous and will remain so even if there is full trade liberalization and improved transportation networks.”

Nevertheless, currently there is some hope that better political relations will open the door for joint development projects.

“While private investment continues to grow in Syria, what’s missing are bilateral projects,” says Jihad Yazigi, editor of the Damascus-based economic bulletin, the Syria Report. “It’s not enough to open the borders if you don’t have strong government commitments. At the government level, there’s little coordination. Even in the West, there’s government involvement in bilateral projects. For big projects, private business can’t do much.”

For example, Yazigi suggests, “With daily power outages in Lebanon and Syria, we need more power plants.” Or, “Maybe the two countries could find a way to share water better.” He believes, “The two countries need to debate publicly.”

“Despite the obstacles – transport, financing, long border crossings – inter-Arab trade represents almost 20 percent of total Arab trade, when oil is factored out,” noted Abboud. “This is a very high figure and speaks to the already existing trade between countries that need to be supported through infrastructural and institutional developments.”

Getting goods across the border

At any time of the day or night, cars and trucks can be seen lined up at the official Syrian-Lebanese overland border crossings and in the Bekaa Valley, flare lights signal communication between smugglers.
No matter how cumbersome the process of trade between Lebanon and Syria, the two countries continue to meet the demand for one another’s products – be it at one of the three official border crossings, using the unofficial crossings or catering to the niche markets on either side of the border.

For Lebanese consumers, that often means clothing, agriculture, oil and other products that are less expensive in Syria.

But in the past several weeks this has been changing, with oil and some agriculture prices in Syria surpassing those of

Volume of official Syrian-Lebanese bilateral trade

1997: $77 million

2000: $190 million

2003: $277 million

2006: $354 million

Source: World Bank.

Lebanon – a sign of the times for both countries.

“Some prices of goods in Syria are higher than in Lebanon. The situation is completely different after 2000. Usually, Lebanon is the free market and Syria is the closed market. Now that is changing,” says Syrian economist Samir Aita.

Syrians are buying Lebanese goods, including everything from Portland cement, Lebanon’s biggest export to Syria, to Western products that can’t be found in Syria. There is a thriving black market of American products that are illegal due to the United States’ sanctions imposed on Syria.

Most of these items tend to be electronics, such as computer parts, which can be “re-exported” from Lebanon at an extra fee. “We (the Lebanese) don’t do this for free,” says Beirut-based Hussein Zeaiter, assistant professor of business and economics at the Lebanese American University.

“Illegal trade is probably higher than official trade,” estimates Abboud. “Illegal trade patterns have always existed between the two countries. While there is a host of trade in illegal goods – drugs and weapons – most of the actual trade is in basic products that are just taken across the border on a daily basis in cars and taxis and goes unreported or under-reported by officials. Export receipts are also a huge problem on the border.”

He adds that, “there have been few attempts to regulate it because the illegal trade functions almost as its own economy with powerful networks controlling large swaths of trade, or, on the micro-level, border officials being bribed to look the other way.”

Swapping labor for expertise
Throughout their history, Lebanon and Syria have been able to use the other’s workforce to their mutual advantage. Lebanon has benefited from Syria’s cheap laborers, who have been willing to do jobs that most Lebanese refuse to do, which in turn eases Syria’s high unemployment rate. At the same time, Syria has benefited from Lebanon’s well-educated entrepreneurs and bankers who have helped Syrian private investors before and during the country’s economic opening.

“Lebanon has been an important place for services to Syrians,” notes Aita. “But in the last three to four years, Syria has been working to capacity.” As for Lebanon’s traditional role as Syria’s banker, he sees Syria beginning to hold its own in that sector.

“A lot of top management bankers have been coming from Lebanon to Syria,” Aita says. “But this is diminishing. Now, there is a lot of Syrians working at Lebanese banks.” Syria’s unprecedented growth rate last year of 6.5 percent and its own construction boom, combined with Lebanon’s continued anti-Syrian sentiment and a trend toward favoring Egyptian workers, has meant a continued steady decline in Syrian laborers in Lebanon.

“Mistakes on both sides meant that Syrians are no longer going to Beirut for shopping and services the way they did in the past,” Aita says. “And now there’s less need for Syrians to go to Lebanon.”

It does indeed seem that Syria is no longer closed economically. However slowly, the dynamic is changing. Aita concludes by saying, “Lebanon’s role as Syria’s banking hub will disappear in three to four years. Both countries will have to rethink their roles toward themselves and each other.”
[end]

US Treasury: Treasury Designates Iranian Proliferation Network 2009-04-07

Syria Unlikely to Resume Nuclear-Weapon Program, Expert Says
Tuesday, April 7, 2009, By Chris Schneidmiller, Global Security Newswire

The new most popular destination in Aleppo is the “Zmerud”, a restaurant with a karoake bar. It is extremely popular and financed by a San Francisco based Syrian expat who runs a hugely successful printing business, Lahlouh.