Nearly six years of conflict have dramatically altered Syria’s economy. To better understand these changes, SyriaSource interviewed Rashad al-Kattan, a researcher on Syria, about the state of Syria’s economy. His responses give insight into how, even as the Syrian regime is winning on the military front, the long-term economic challenges paint a more complex picture about whether it can stabilize the country, and the difficulties the international community will face when considering reconstruction.

How much control does the Syrian regime have on the financial sector? 

It would not be an exaggeration to say that the financial system (including private banks) has been largely captured by the regime. The Central Bank of Syria, which was until recently governed by Adib Mayyaleh, who is now the Minister of Economy and Foreign Trade for more than ten years, has lacked any semblance of independence required to adequately manage monetary policy and oversee financial institutions. The new central bank governor is Dureid Durgham, who has been the general manager of the largest bank in the country, the Commercial Bank of Syria, which is under US and EU sanctions. His institutional background and strong links with regime officials, means the independence of this important institution will continue to erode for the service of the regime’s narrow-minded policy to ensure its economic survival.

How did the Syrian regime consolidate its control over the banking sector during the war?

One way the banking sector and private banks came under immense pressure was to suspend their operations and close their branches in non-regime held areas. This meant that people in those areas have been excluded from the formal financial system for years now, converting to a cash-based economy, which will pose a tremendous challenge during reconstruction and rebuilding the financial system. Several conditions were also introduced for those seeking to use banking services, especially loans and credit, such as obtaining security clearances from security agencies and having collateral property or land in “safe areas”—a euphemism for regime-held areas.

What effect has this had on Syrian banks?

As the national landscape shrank for the banking sector, with non-performing loans and defaults soaring, banks re-oriented their operations from a conventional lender, to both institutional and retail clients, to loan recovery entities. Private banks—are subsidiaries from neighbouring Arab countries such as Lebanon, Jordan, Qatar, UAE, Kuwait and Bahrain with a total of 14—have become more risk averse during the conflict.

The banking sector has remained largely afloat, and we have not seen any collapse of banks in the country. While banks, especially private banks, appear profitable on the surface, they have engaged in aggressive financial engineering practices by re-evaluating their foreign denominated accounts to local currency. The steadily depreciating Syrian Pound meant that their “unrealized” income was always growing every year, something that was recently acknowledged in the Syrian cabinet but without the political will to address this irregularity.

Has this affected other banks in the region?

In recent years, Lebanese banks have especially come under international pressure, particularly from the US government, over Hezbollah’s financial activity in the country. US officials from the Department of Treasury have been visiting Beirut regularly, and meeting with banks’ executives and officials to enlist their support for combating Hezbollah’s global network of money laundering activities that spans the Middle East, Africa, and all the way to South America. This pressure has increased following the introduction of the Hezbollah Financing Prevention Act by the US government in December 2015, which has made the militia group more nervous about the impact it might have on its ability to continue to hide its activities inside the financial system. This nervousness saw a small bomb planted outside Blom bank in Beirut as a likely warning by Hezbollah against any attempt by the Lebanese central bank to target its financial infrastructure.

This also likely triggered fear among some Lebanese banks that they might come under fire for continuing to do business with Hezbollah or people close to it, and operating in Syria. The first indication of this pressure appeared in October 2016 when Bank Audi announced it had written-off its investment in Syria and that its representatives on the bank’s board of directors had resigned. This came three months after Bank Audi had changed its name in Syria, to Ahli Trust Bank (ATB). Despite close commercial links between Lebanon and Syria, Bank Audi’s decision might prompt other private banks in the country to follow suit in order to avoid exposing themselves to US or EU sanctions by continuing operations in Syria. Four months later another Lebanese bank, Byblos, in which Rami Makhluf has held shares and is still unclear if Makluf has divested from the bank, followed in Audi’s footsteps by writing off its investment and discontinuing its operations in the country.

Given what you’ve just described, can Damascus re-establish financial stability?

Despite the extreme fragmentation across the country many still view the country, especially its economy, through the centralized lens of Damascus. This is a fantasy that serves only those who think the regime will roll back the influence of non-state actors as well as the emerging regional spheres of influence in different parts of the country.

Territorial fragmentation became conducive to expanding the war economy. Physical divisions and emerging asymmetry, most visible between regime and rebel held areas, exacerbated the war economy and warlordism footprint. This fragmentation translated into the substantially higher cost of internal trade, and restricted the movement of people and capital. In the last few years, it was cheaper for the regime to import wheat than transport it from the north-eastern region known as al-Jazira.

The concept of a national economy has lost relevance, as the regime’s control and influence does not extend over more than half of its territory. Aside from Lebanon, the regime also lost control over most land border crossings.

Areas that have been under rebel control witnessed the highest levels of destruction, thanks to the disproportionate regime response, and are the areas where most refugees and internally displaced persons (IDPs) have fled. As many cities and regions have seen unimaginable destruction, the number of returnees after “local truces and reconciliation” has been minimal. Examples abound of local residents either not willing or restricted from going back to their areas in Homs, Hama, Damascus, and of others that were instead “transferred” to Idlib and other rebel-held areas. 

If reconstruction does happen, what is likely to happen to Syria?

In an overly optimistic scenario in which some external funds make their way into the country, donors and foreign investors, and even Syrian businessmen who might be repatriating some of their capital, will face the same reality as before 2011—but in a more entrenched manner—of high levels of corruption across all levels of bureaucracy. As the war raged on in many cities and regions, an economic war was taking place simultaneously against consumers who found themselves at the mercy of sellers. Corruption and collusion have allowed private businesses and suppliers to levy exorbitant prices on basic consumer goods with little serious and genuine government oversight. One instance stands out, with the oil minister admitting in late 2015 that “the experience of allowing private sector to import petroleum products to supply industrial facilities was not successful… imported petroleum products were being sold on the black market.” Also quite an unusual criticism from the rubber-stamp parliament, an MP described “a new kind of corruption” in which he pointed out that “officials responsible for diesel distribution to households have been registering fictitious names to sell it on the black market.” However, pleas from him and others to hold accountable those responsible unsurprisingly fell on deaf ears.

If reconstruction takes place under the current distribution of control it will likely mirror the regime’s agenda of pumping cash and kick-starting projects in its areas. This will create a loop of dependency as most critical sectors and revenue-generating economic activities are still located outside regime control (either under control of rebels, Kurds, or the Islamic State). For instance, wheat fields are largely based in Hasaka, Raqqa, and Idlib. Also, major oil and gas fields sit outside regime control, and the energy sector has been largely decimated by US-led coalition airstrikes and mismanaged by locals. Those non-state actors have established parallel and alternative procurement and supply chain networks that currently compete with the regime. 

Rashad al-Kattan is a political and security risk analyst, and a fellow with the Centre for Syrian Studies (CSS) at the University of St. Andrews.

Image: Photo: A blood stained Syrian banknote is pictured at a site hit by missiles fired by government forces towards a busy marketplace in the Douma neighborhood of Damascus, Syria October 30, 2015. At least 40 people were killed and about 100 wounded after Syrian government forces fired missiles into the market place in a town near Damascus, a conflict monitor and a local rescue group said on Friday. REUTERS/Bassam Khabieh