Oil sanctions which the European Union is expected to impose on Damascus for repressing protests would be a significant blow to Syria’s economy but it may take more than that to hasten the end of President Bashar Assad’s rule.
Five months of protest and government reprisals have undoubtedly inflicted economic damage. Even before the likely EU embargo on Syrian crude exports, tourism, trade, manufacturing and foreign investment have all collapsed, reversing a decade of steady growth, starting to drain the country’s financial reserves and forcing many Syrians out of work. One industrialist said some were losing patience with the worsening economic outlook.
Yet the wealthy business classes in Damascus and Aleppo have so far remained loyal to Assad and months of high global prices for Syria’s oil exports mean his government still has substantial foreign exchange reserves to fall back on. EU diplomats confirmed Friday plans to sanction imports of Syrian oil, saying the embargo could be imposed this week. The loss of European oil sales will interrupt a crucial flow of foreign currency and force Syria to offer its oil more cheaply to new customers further afield.
Syria produces around 385,000 barrels per day of oil, exporting around 150,000 bpd, most of which goes to Europe. “Syria will have to sell oil at a more discounted price,” said Eurasia Group analyst Ayham Kamel. “It’s important, though it’s not going to bankrupt the regime.” Oil market consultant Olivier Jakob from Petromatrix said it would take time to identify new customers – probably in Asia – for the sour and heavy Souedie crude that makes up most of Syria’s exports. “If you’re going to try to target a new refinery, usually you’re talking more in terms of months than days,” Jakob said.
Assessing the broader impact of Syria’s unrest on the economy is difficult because of a lack of data – the most recent published Central Bank figures cover April, just a few weeks after the unrest broke out in mid-March. They show bank deposits fell 29 percent to 241.7 billion Syrian pounds ($5.1 billion) between February and April. The Central Bank says much of that money has returned after it hiked interest rates on deposits in early May, but moves to limit sales of dollars two weeks ago suggest that it is struggling to support the local currency.
The Syrian pound officially trades at 47.7 to the dollar, but changes hands at more than 50 pounds at private exchange dealers. Shares on the Damascus stock exchange have fallen 46 percent since a peak in late January. In a forecast calculated before the prospect of EU oil sanctions, economist Lahcen Achy of the Carnegie Middle East Center said the economy, predicted by the IMF to grow 3 percent at the start of the year, will instead shrink 5 percent. “Syria has not experienced such a fall over the last decade. Even the international financial crisis did not affect the economy because it was such a closed and small economy,” he said.
A businessman in Syria, who imports European hydraulic equipment, said German firms had told him they were freezing future orders until Syria’s political crisis stabilizes. “Things are getting worse,” he said. “I have stopped imports as a result of the fear about the internal situation. You are selling on credit and if there is a security deterioration there will be chaos and it will be difficult to get your money back.”
A Damascene industrialist who exports dairy products to Middle East markets said businessmen felt the security crackdown, in which 2,200 people have been killed, was hurting their interests. “They are seeing the boat sinking and are starting to prepare to jump ship,” he said.
Bankers say decisions by U.S. credit card companies to suspend activities in Syria following the latest round of U.S. sanctions on Damascus, which included sanctions on Syria’s biggest commercial bank, had prompted a transfer of funds from foreign-based banks in Syria to accounts in Jordan and Lebanon.
Achy said trade with Syria’s neighbors had fallen off, probably around 30 to 40 percent. The collapse in investment and tourism meant that oil and remittances from Syrians working abroad were the only sources of income holding up so far. Indications were that the government had already halted investment spending in infrastructure, schools and hospitals to focus on more immediate needs, he said. Any interruption to its $2.5 billion a year oil exports “will have an immediate impact on current spending as well … this means probably the government will not be able to pay civil servants.” “Thirty percent of the labor force is in the public sector and this means the economy will feel the effect because these people also consume, pay rent, buy food and clothes,” he said.
That kind of disruption would be likely to fuel more dissent against Assad, and Achy said the financial cost of unrest could ultimately bring down his rule. But Kamel of Eurasia Group said it was unlikely the immediate impact would be so severe, and that only a broader EU trade embargo would really squeeze Syria. “[EU oil sanctions] are not going to be a significant impediment in terms of financial constraints on the regime in terms of hard currency,” he said.
One lifeline for Syria is that it entered this current crisis with foreign reserves thought to be between $16 billion and $18 billion along with a low debt burden of around a quarter of GDP, half of which was external debt.
That is likely to rise as the combination of falling revenues and higher expenditure are set against a shrinking economy, pushing the likely budget deficit above 8 percent of GDP this year, Achy said.