The Syrian Stock Exchange: Success Hinges on the United States

After three years of repeated delays, Syria is scheduled this week to launch trading on the Damascus stock exchange. Had the authorities advanced the gala opening slightly and had investors been able to raise capital from foreign investors starting a few weeks ago, presumably their shares would have registered nice gains in light of Senator John Kerry’s visit to Damascus. Even though the Syrian regime has argued stubbornly for the last four years that the economic war waged by the Bush administration against Syria is not causing the state any serious damage, signs of a possible thaw in relations between Washington and Damascus are some of the best news that investors considering potential opportunities in Syria could have hoped for.

In recent years Syrian economic policymakers have earned much praise from International Monetary (IMF) economists, who noted in their reports that the government is spearheading – albeit slowly – crucial steps toward liberalization that will enable Syria to deal with the consistent decline in oil reserves. The rate of oil production in Syria, which only ten years ago stood at over 600,000 barrels a day, shrank dozens of percent and currently does not exceed 380,000 barrels per day. Income from the sale of oil still constitutes over 20 percent of the state’s income, but if the payments to foreign oil companies are factored in, it can be argued that already starting in 2007 Syria in effect had become a net importer of oil. The planned opening of the stock exchange is another key pillar of Syria’s efforts to develop a financial system that will make it possible to finance the development and enhancement of various export sectors that will compensate for the rapid erosion of income from oil export. Nevertheless, the performance of the stock indexes on the Damascus exchange, as well as the success of most of the economic measures the Syrian government promised to undertake are not dependent solely on Syria’s willingness to enact liberalization and develop its economy at a moderate pace. Rather, they also hinge on the diplomatic ties that evolve between Damascus and the Obama administration.

The direct American sanctions ordered by President Bush in May 2004 did not damage the Syrian economy seriously, but the mere fact that the US declared and led an economic war against Syria significantly lessened its attractiveness to foreign investors and companies. The fact that the Damascus exchange is opening only now, even though President Asad ordered its opening as far back as 2006, is one indicator that clearly illustrates this claim: from reports published in recent years in the world financial press it appears that concern over the US’s possible reaction prevented several international companies from supplying Syria with technical support services and helping it set up an electronic trading system. Similarly, there is a list of telecommunications companies, financial corporations, and most important of all, energy companies whose appetite for investing in Syria was suppressed following the exertion of direct pressure on them by US Treasury officials.

The improved business environment resulting from the economic reforms did indeed enable Syria to increase the flow of direct foreign investments over the last three years by dozens of percent. But a breakdown of the sources of the investments indicates that most of them came from Turkey, Iran, and other Gulf states, where the existing number of companies cannot provide Syria with all of its needs to rebuild the energy industry and develop other sectors. It is likely that Gulf states’ activities in Syria will decline in the near future due to the sharp fall in oil prices that is curtailing their scale of operations in foreign markets. Even Syrian exports, which in recent years enjoyed increased demand in the Gulf region given the economic upswing, are likely to be affected due to the decline in oil prices and the global recession. The recession is likewise expected to affect the state’s income from tourism as well as the amount of foreign currency sent by Syrian citizens working in the Gulf states.

One of the factors likely to compensate to a certain extent for the expected decline in demand for Syrian exports is the recent warming of Syria’s ties with the European Union (EU). In 2004, the parties initialed a trade agreement, but its implementation was frozen after the assassination of Rafiq al-Hariri in February 2005. The thawing of ties with France paved the way to renewed acceleration of the economic negotiations between the parties, and on December 14, 2008 the parties initialed an updated version of the agreement. The removal of European quotas for a number of Syrian agricultural products – whose yields were hurt by the drought afflicting the country – may help slightly to ease the pressure incurred from the economic crisis and the decline in oil production.

Syria can increase the competitiveness of its products in other potential markets as well if it succeeds in becoming a member of the World Trade Organization (WTO). In 2001, Syria's request to become a member of the WTO was rejected, in part due to the US’s vigorous efforts to block acceptance. The lifting of American objections to Syria’s becoming a member of the WTO is just one carrot among many that the US can extend to Syria’s economy.

In February official Syrian representatives reported that the US Treasury Department approved the transfer to Syria of $500,000 in charity raised by Syrians residing in the US. In addition, the Syrian authorities reported that the US Department of Commerce approved the sale of spare parts for two Syrian Boeing planes. The media attention received by these two reports and the enthusiasm of official representatives who noted that these steps signal a possible lifting of the American sanctions further attest to the effectiveness of the American pressure and Syria’s hopes for its removal.

The most effective component of the financial war the US has waged against Syria is its ability to persuade foreign companies to refrain from doing business with Syria. This is the main reason why the indications of a possible thawing in the relations between the countries may ease the economic situation in Syria, without it having to provide anything in return. Reduced concern that economic investments in Syria may not be well received in Washington will affect the effectiveness of the sanctions, even if the US does not in the end announce that their rescinding. In order to prevent this, the US must make it unequivocally clear that it will not cease to exert direct and indirect economic pressure on Syria so long as it does not clearly commit to launch steps that will demonstrate a willingness to disengage from the strategic alliance with Iran and refrain from providing arms to Hizbollah.

The world economic crisis limits the US’s economic-political maneuvering room in many arenas, but the Syrian arena is not one of them: commercial ties between the two countries are negligible, and Syria cannot influence the value of the dollar, the yields from American bonds, or the price of oil. While the world economic crisis itself is not a factor that is likely to disturb the US in its continuing efforts to isolate Syria economically, it certainly does increase the Syrian economy’s sensitivity to American pressure. Syria’s economic vulnerability enhances the carrots the American can extend, and therefore it would be a mistake to grant them specifically at this point without getting something in return.