The economic consequences of the conflict in Syria, By Ella Wind and Omar S. Dahi
ARTICLE IN BRIEF: The Syrian economy did well in several macroeconomic indices in the past decade, but suffered from growing corruption, social exclusion and the rise of a corrupt oligarchy. A lack of political liberalization and accountability contribute
The war in Syria constitutes a dramatic rupture in both the political and societal dynamics that preceded it. However the longest lasting and most profound impact may be on the economy of the country. The humanitarian crisis inside Syria and the refugee crisis in the neighboring countries are both now global catastrophes. The pace of the crisis so overwhelmed expectations that both the Syria Humanitarian Assistance Response (SHARP) and Regional Response Plans of 2013 -- dealing with humanitarian assistance inside and outside Syria, respectively -- had to be revised several times mid-year. Domestically, the economic changes brought about since the start of the Syrian uprising in March 2011 fall under two main categories. First, the war has resulted in the severe deterioration of the economy as a result of destruction of lives, physical infrastructure, capital flight and the imposition of sanctions. Secondly, Syria has seen the rise of a war economy and warlordism around the competition for natural domestic resources, foreign funding, and smuggled goods by warring militias and civilians inside the country.
GOVERNMENT RESPONSE TO UPRISING
When the protests in Syria first broke out, the previous economic team and government of Naji al-Otari was relieved of its duty and replaced by a new government that represented more career Ba’athists who were proponents of the public sector. The government announced it would increase salaries and subsidies as well as restore support for manufacturing and agriculture. However, these policies offered too little, too late. Rather than undertaking large-scale investment that would benefit Syrians across the board, the regime sought to target its presumed bases of loyalty among civil servants, workers in state-owned enterprises and the government bureaucracy at large. That half-measure, coupled with the regime’s unwillingness or inability to discipline the main objects of popular loathing, such as the president’s cousin Rami Makhlouf, indicated that the regime had gone immediately into survival mode rather than seriously addressing the underlying grievances of the uprising. Frustration mounted as the government stumbled back and forth between different policy directions, such as in 2011, when they imposed a ban on
all but a select few imports, 1 a policy that was quickly revoked just one week later. 2 Furthermore, the security crackdown, resulting in declining tourist and trade revenues, and eventually, the crippling oil embargo imposed by the EU, made these promises unsustainable.
The 2012 reshuffling of the government saw many top government posts given to Ba’athist loyalists and other figures more supportive of statist economic policies (like Deputy Prime Minister for Economic Affairs Qadri Jamil), although some of the top key posts remained the same. Overall, the regime has come to rescind on its previous tentative shifts towards some neo-liberal figures who were not necessarily active members of the Ba’athist party, retreating back into the statist policies in place from before President Bashar al-Assad came to power. 3
As unrest grew and the situation became more unmanageable, the government’s economic policies retreated further into survival mode, neglecting longterm investment in lieu of directing funding towards the fortification of the military. A June 2012 meeting of President Assad with the government of Wael al-Halqi definitively marked the beginning of a transitional period in which the government became fully committed to the pursuit of a war economy to the neglect of other government functions. In his speech to the new government, Assad declared: “We live, as I said in my speech to the parliament, in a true situation of warfare in all its aspects […] and when we are in a state of war, all our policies […] and all sectors must be oriented in order to win this war.”
Government spending up to the first quarter of 2013 saw a decline in public investment of 75 percent, while more than $4.85 billion was re-budgeted towards military expenditures. Furthermore, public spending on health, budgeted at $7.5 billion in 2010, was reduced to $5.2 billion in 2011, and by 2012 dwindled to $4.4 billion, even as the need for public health expenditures became more urgent. 4 Nevertheless, Syria’s $27 billion 2012 budget was the biggest in its history, motivated by a desire to fund state jobs and maintain subsidies on essentials. 5 Despite this, throughout 2012 in many areas around the country civilians or organized opposition groups began to undertake government functions in some areas, as trash piled up in the streets uncollected and government schools, hospitals, and other public service institutions were shut down. 6
However, in the face of the country’s near-total economic ruin, the government has maintained a rather impressive degree of resilience, which can be attributed to the financial support it continues to receive from its two biggest allies, Russian and Iran as well as the re-orientation of government expenditures toward basic goods provision and a cut in investment and import demand on foreign exchange. In 2012, Syria began to release banknotes printed in Russia into circulation to replace old currency, but also to ensure its ability to continue paying government salaries and other expenses. 7 According to Deputy Prime Minister Jamil, in an interview with the Financial Times in June 2013, $500 million in monthly aid was being sent to Syria from Iran, Russia and China in the form of oil and credit. 8 Just one month later, Syria and Iran signed a deal for a $3.6 billion credit facility that would allow the Syrian government to import oil products, this on top of a previous $1 billion credit line to Iran which allowed Syria to engage in some limited trade. 9 These deals open the way toward increasing Iranian investments in projects around the country, and assuming Assad stays in power, guarantees Iran and Russia top priority in reconstruction projects. 10
In 2013, it was reported that over 2 million government workers across the country are still receiving salaries. Some of these employees are even located in rebel-held areas in Aleppo, Deir Ezzor and elsewhere. 11 Salaries are arranged to be sent in cash by trucks, through meetings organized by communicating with rebel groups via fax and messenger. Mudar Barakat, a government employee, explained in an interview with The New York Times that government employees “come with the terrorists” to pick up their salaries.
For now, the government appears to have pinned its hopes on using these lines of credit to weather the storm, by taking a more active role in buying daily goods, tightening price controls, maintaining state employee wages and sealing off Syria’s economy from all but its most reliable allies. 12
FREEFALL IN THE ECONOMY
By the end of the second year of the conflict, Syria’s economy had already suffered devastating losses. GDP losses at the end of 2012 stood at 664 billion Syrian pounds (SYP) -- around $24.1 billion, or nearly half of Syria’s total GDP in 2010.13 Since then the rate of economic deterioration has in fact been growing at an alarming pace. A report from the Syrian Center for Policy Research (SCPR) and the United Nations Relief and Works Agency estimated that by the end of 2012, Syria’s human development indicators had fallen back 20 years since the beginning of the crisis. The same report went on to say that by the first quarter of 2013, Syria had fallen back 35 years on the Human Development Index, meaning the rate of destruction in just three months was almost comparable to that of the two previous years since the beginning of the uprising. Finally, more than half the population of Syria is now considered to live in poverty, as 6.7 million Syrian citizens fell below the poverty line as a result of the crisis, and 3.6 million fell below the line of extreme poverty. 14
Losses have been greatest in the sectors of transportation and communications, manufacturing, mining, and internal trade (both wholesale and retail). The tourism sector, previously comprising around 12 percent of the GDP, has unsurprisingly seen a complete collapse. 15 The higher losses in these sectors are indicative of the process of de-industrialization and large-scale capital divestment from the country. Declines in production have been relatively lower in construction (due to an illegal housing boom), government services and agricultural output. 16 Nevertheless, agricultural output has greatly declined, compounding the ill effects of the serious drought that has afflicted Syria since 2003.17 Wheat yields, long a major source of food security, have shrunk over the last several years by 30-50 percent, and the livestock and poultry sectors have suffered badly, according to a June 2012 UN Food and Agriculture Organization (FAO) report, fueling a rise in the prices of meat, milk, chicken and eggs by as much as 300 percent in some areas. The FAO concluded then that the “household-level food security of about 30 percent of the rural population,” was under severe threat. 18 It is clear that Syria will be paying the socio-economic costs of its civil war long after the any cease-fire may be achieved.
BY THE FIRST QUARTER OF 2013, SYRIA HAD FALLEN BACK 35 YEARS ON THE HUMAN DEVELOPMENT INDEX
One obvious cause of the degradation of the economy is the physical damage to infrastructure that has brought production in many places to a complete halt. Entire blocks of residential and commercial areas have collapsed under bombing, and shelling has gutted markets and streets. In June 2013, Local Administration Minister Omar al-Ibrahim declared that physical damage to public infrastructure amounted to $15 billion worth of damage, and some contested this figure as an underestimate. 19
The full extent of private damage is unknowable, but as an example, some estimate that up to 75 percent of the production facilities in Aleppo, Syria’s commercial capital, were no longer in operation in August 2013.20 Some factories were bombed, while others burned down or were taken over as rebel military centers. Many others were cut off from access due to the precarious security situation in surrounding neighborhoods.
Indeed, the mere fact of dividing the country into government-controlled and rebel-controlled areas (not to mention competition over territories within factions of the opposition) has been hugely deleterious to the economy, as the unified national economy is fragmented into small, incoherent local economies incapable of providing the range of goods and services needed for those living in these areas.
Accompanying this decline has been a concomitant process of capital flight. 21 Syrian expatriates were estimated to hold over $60 billion in assets that for the most part were not repatriated into the Syrian economy. Syria had already suffered from severe “brain drain” as many of the most educated and skilled citizenry were more attracted to migrate for opportunities to work and study elsewhere. 22
With the beginning of the conflict, the declining value of the SYP compelled many Syrians to withdraw their money and convert to dollars or other less-inflationary currency. The central bank attempted to alleviate the pressures on the SYP, but dwindling foreign currency reserves minimized any efforts in this area, and the value of the SYP has continued to decline gradually over the course of the past three years, losing about 70 percent in a span of two years according to official sources, with inflation at about 120 percent. 23 By 2013, data reported by Syria’s private banks painted a grim picture of the banking system and the extent of capital flight. According to data from six of Syria’s 14 private banks, profit losses amounted to between 40 to 95 percent, in contrast to what had been regular increases in both overall deposits and total profits in every year prior. But in the past six months, the government has managed to turn the tide of this trend through two
channels of action: coercion from its security apparatus, and aid from Iran and Russia. The latter two came through with several deals to boost the Syrian currency through an influx of dollars, as well as a flurry of credit and aid deals; while in June 2013, the government announced a crackdown on black-market money traders. For the first time two years, the SYP began to rise against the dollar, and black-market prices were reported to match the official rate set by the Syrian Central Bank. 25 While Syria’s allies appear to be absolutely committed to providing economic support, whether the government will be able to maintain this policy in the long term will depend in large part its ability to maintain an environment of fear for black-market traders, even as large parts of the country remain out of government control.
The longer the course of the war, the more we can anticipate that Syrian wealth will be put to use elsewhere and eventually entrenched in investments there. Similarly, Syria’s human capital -- its citizenry who are leaving the country at a rate of thousands of people per day -- will surely become increasingly tied to their places of relocation, and less likely to return to Syria following the end of the conflict.
As the regime proceeded with its brutal crackdown, there were calls for economic sanctions from the US and European governments, as well as the Arab League and activists inside Syria who were horrified by the violence inflicted upon the protest movement. 26 Though the precise impact of sanctions is hard to discern, it is clear that they have not achieved their goal of isolating the regime, but have certainly played a role in exacerbating the economic crisis. Although economic sanctions on Syria did not start with the 2011 uprising, the implementation of EU sanctions27 following the harsh measures taken against protesters struck a hard blow to the Syrian economy. According to the European Commission, Brussels has levied 17 sets of “restrictive measures” against Syrian nationals, government entities or private companies, including the suspension of Syrian government participation in the Euro-Med regional cooperation initiatives and the European Investment Bank’s loans to Damascus. The most onerous measures -- by amount of lost revenue -- are the import bans on crude oil and petroleum products. The EU has also halted investment in the oil industry and construction of electrical power plants in Syria, and stopped supplying the Syrian Central Bank with banknotes and coins, which had previously been minted in Austria. Since the imposition of sanctions, Syrian enterprises and regional partners have signed virtually no new export contracts. The only production and export that has occurred has been in fulfillment of existing export contracts exempt from the sanctions.
One impact of the sanctions has been an acceleration of the depletion of Syria’s foreign exchange reserves. The government has drawn heavily upon these stores of cash as oil revenue dried up. According to a report by the SCPR, the sanctions caused 28 percent (or roughly $6.8 billion) of the losses to GDP in 2011 and 2012.28 The report also concluded that the sanctions had the worst impact on the lower social classes, given the rise in prices of food staples such as bread and the higher cost of heating oil. The cost of sanctions on the regime itself in Syria has been mitigated somewhat by the government’s ability to maintain strong economic relations with other countries who have not imposed sanctions, as well as by an extensive degree of self-sufficiency in food production (a strategy launched under Bashar al-Assad’s father and predecessor, Hafez al-Assad).
BRUSSELS HAS LEVIED 17 SETS OF ‘RESTRICTIVE MEASURES’ AGAINST SYRIAN NATIONALS, GOVERNMENT ENTITIES OR PRIVATE COMPANIES
EMERGING WAR ECONOMY
As the war in Syria has dragged on, many areas of the country have seen the inevitable development of a “war economy” based on competition over smuggled goods and black markets, control over natural energy resources in the Northeast, and foreign funding flows, whether intended for humanitarian or militaristic purposes.
The roots of the smuggling economy -- especially along the Turkish and Lebanese borders -- can be traced back to before 2011 when smuggling of goods across
porous borders was a practice with a long history -- due to price differentials caused by heavily subsidized foodstuffs in Syria, shortages in Syria caused by government bans on imports of various products, or taxed products such as foreign cigarettes and beer. These illegal economic links were fortified by the rise of armed opposition militias and the fragmentation of the country into government- and rebel-controlled areas, which necessitated the rise of local, informal economies rather than a unified national economy.
However, this is not to say that only opposition groups participate in these informal economies. Reports indicate that the looting of homes and properties following government sieges on rebel-held areas has also encouraged the participation of security forces themselves in smuggling and informal economic activities. Furthermore, there is a great deal of illegal trade between rebel and government-backed groups in terms of looted and smuggled goods, as well as natural resources. While the political lines may seem to be completely impassable between the two sides, the economic lines are anything but. Beyond selling these goods on the black markets across the border, different groups barter with one another to obtain the necessities of daily life, along with weaponry and military equipment.
If trading looted goods has been a shared point between government and rebel groups, the issue of how to divide spoils from looting homes and businesses has often been a point of fierce contention between rebel brigades, especially in shared military operations between competing groups. 29
The Turkish border in particular has become a focal point of smuggling in recent years, attested to by numerous journalistic and academic accounts. The Orontes River, which runs between Syria and Turkey, is used by both smugglers and refugees as a point of transport and crossing. Many of the items smuggled out of Syria are essentials -- food, goods and machinery looted from homes and factories, gas for heating, and wood -- contributing to the escalating prices for these goods within the country, a trend which has been somewhat tempered by the government’s recent crackdown on food exports. 30 In the other direction, weapons to rebel groups are smuggled in with aspiring fighters and supporters of the rebels, along with humanitarian aid and medical supplies sent across the border from the numerous NGOs now operating in the south of Turkey, despite the official restrictions on these groups’ abilities to work inside Syria. 31 Similar dynamics are at work across the Lebanese and Iraqi borders. According to Ghaith Abdul-Ahad, a journalist who has been covering the black market economy in the country for the past two years, an AK-47 worth $150-200 in Iraq may be sold for over $1,500 in Syria. 32
OIL AND NATURAL RESOURCES
Control over oilfields in Syria’s northeast and natural gas plants throughout the country has been a focal point of fierce fighting between regime forces, Kurdish militias and Islamist militias. In November 2013, it was reported that a group of Syrian rebel brigades, including the al-Qaeda-linked Jabhat al-Nusra, had seized Syria’s largest oilfield from government forces. 33 Despite fierce competition over these valuable natural assets, production of the fields was reported to have fallen by more than 95 percent by July 2013, and the pipelines running out of the country have been shut down. 34 However, in the wake of rebel takeovers of oilfields, some displaced Syrians have been moving to the oilfields to work in operations on primitive refineries where they boil small quantities of diesel in vats over an open fire. One report indicated that a group or individual in control of an oilfield could expect to make around SYP 5 million per day (roughly $35,000). 35
Natural gas, an important source of electricity in Syria, continues to flow to the Syrian government. The regime’s adaptation to war economy in this regard is striking. 36 In a rebel-held gas plant in Jandar, south of Homs, gas still flows freely to the government in exchange for its continuing provision of salaries for some 400 technical and white-collar staff at the plant. Even fuel resources held by Jabhat al-Nusra are reported to be resold to the regime at close to cost, and the rest is resold on black markets in the rest of Syria at a substantial profit. 37
THE PROLIFERATION OF OUTSIDE FUNDING SOURCES ALL BUT GUARANTEES THE CONTINUING FRAGMENTATION OF THE ARMED OPPOSITION
In the past two years or so, some rebel brigades, rather than receiving funds channeled through the Free Syrian Army (FSA) affiliated Supreme Military Council (SMC), or depending on trade in looted goods, have become intensely concentrated on appealing directly to private outside donors. These private donors, most of the time either Syrian expatriates or wealthy individuals and clerics in neighboring countries, also prefer to fund their specific favored brigades directly. Funds outside of the distribution channels of the SMC were estimated to be at least in the tens of millions of dollars by the end of 2013.38 All this contributes to a continual forming and re-forming of fighting units and shifting alliances, based on outside interests in particular battalions. 39
Fundraising among rebel brigades has becoming a highly sophisticated, and often times surprisingly open process. Some fighters speak openly with journalists about the way in which groups with higher media profiles -- counted in YouTube hits, Facebook “likes,” and Twitter followers -- receive the largest share of the donations. “They taught us, hit, film it: I’ll support you,” says a fighter in an interview with TIME. 40 In some videos on YouTube, fighters thank their sponsors for their generosity, with a few brigades going so far as to name themselves after a Gulf sponsor: One rebel group in eastern Syria now calls itself the “Hajjaj al-Ajmi Brigade,” in a tribute to the Kuwaiti sheik of the same name. 41 Rebels with a strong social media following spread posts calling for donations, announcing drop-off points in neighboring countries. Similarly, prominent fundraisers, especially clerics with large followings further spread these videos and also produce their own videos showcasing the weaponry they provide to brigades in order to attract smaller funders to join in on their donations to their brigades of choice. The proliferation of outside funding sources and ability of funders to provide support to their preferred brigades directly all but guarantees the continuing fragmentation of the armed opposition, as fighters continually try to court their current myriad donors while keeping their eyes open for new and more lucrative sources of outside funding.
The war in Syria has set the country’s economy on a dramatically different course over the past three years. The economy has given way to a process of rapid deindustrialization and enormous losses in virtually every indicator of socio-economic development. The Syrian government has hunkered down into a budget prioritizing war efforts, slashing public goods and services but still managing to keep significant numbers of employees on the government payroll through financial support from some of its foreign allies. Physical destruction of infrastructure, widespread capital flight and strict international sanctions have all contributed to bringing the national economy into total collapse. But on the ruins of the failed national economy, a war economy is rapidly emerging. Illegal construction is booming. Warlordism, smuggling and black markets have become in many areas the main way to obtain goods and services, so much so that even the government takes part in the black market economy. Competition over funds from outside the country among rebel groups is rampant, while both the government and rebel groups fight over natural resources inside the country. The economic dynamics that have emerged are certain to echo for generations, and will influence the future outcomes for the country long after the conflict ends.
Civil war has had a huge impact on Syria’s economy.
Syria’s fragmentation has also given rise to warlordism and local economies based on theft and smuggling
Many areas of the country have seen the inevitable development of a ‘war economy’ based on competition over smuggled goods and black markets.