Syria Faces Economic Endgame Amid Chaos as Sanctions Bite

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Photographer: Muzaffar Salman/Bloomberg Markets

A square in the old city of Damascus, shown before fighting between pro-Assad troops and rebels flared up in the city.

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Photographer: Muzaffar Salman/Bloomberg Markets

A square in the old city of Damascus, shown before fighting between pro-Assad troops and rebels flared up in the city. Close

A square in the old city of Damascus, shown before fighting between pro-Assad troops and rebels flared up in the city.

Photographer: Muzaffar Salman/Bloomberg Markets

At the Damascus Securities Exchange, prices have plummeted more than 50 percent since the turmoil began. Close

At the Damascus Securities Exchange, prices have plummeted more than 50 percent since the turmoil began.

Photographer: Louai Beshara/AFP/Getty Images

A fountain flows outside a complex built by the Dubai's Emaar Properties PJSC, 15 miles west of Damascus on Nov. 8, 2010. Close

A fountain flows outside a complex built by the Dubai's Emaar Properties PJSC, 15 miles west of Damascus on Nov. 8, 2010.

Photographer: Louai Beshara/AFP/Getty Images

A worker stands on the balcony of housing blocks constructed by the Dubai's Emaar Properties PJSC, 15 miles west of Damascus on Nov. 8, 2010. Close

A worker stands on the balcony of housing blocks constructed by the Dubai's Emaar Properties PJSC, 15 miles west of... Read More

The city pulsed to a beat it hadn’t felt for decades as it welcomed its new president. Intellectuals met at private political salons for open, lively discussions of topics they had only dared to mention in whispers before: demands for greater democracy, the suspension of emergency law, an end to the ruling party’s domination.

The young president and his elegant wife, Asma -- a Briton of Syrian origin -- delighted their people by popping into a grocery store or eating dinner at a trendy restaurant, their youth a source of hope for those who wanted to believe that change was possible in what had once been a dour Soviet client state, Bloomberg Markets reports in its September issue.

That was Damascus 12 years ago, in the early months of Bashar al-Assad’s presidency -- a period that became known as the Damascus Spring and that included promises of economic liberalization.

By September 2001, Assad had clamped down, throwing pro- democracy activists into jail.

It was a bloodless preview of the steps the Assad regime would take to crush any hint of a threat to its existence. At the time, when the world was preoccupied with the terrorist attacks in the U.S., the moves drew little international notice.

“Had the Damascus Spring been allowed to flourish, a soft landing could’ve been reached both for the nation and the regime 10 years down the road,” says Sami Moubayyed, a Syrian historian.

‘An Autumn’

Instead, says Haitham al-Maleh, an 81-year-old lawyer and activist, “It was an autumn, not a spring.”

Assad has staged a relentless crackdown on opponents of his regime since March 2011. More than 19,000 people have died, according to the Syrian Observatory for Human Rights. They say the number includes almost 5,000 government troops.

Most of the civilians died from shelling, torture and massacres allegedly committed by government troops and pro- regime militiamen, Maleh says. Human Rights Watch says Syria’s intelligence agencies are running an “archipelago of torture centers” across the country.

At the same time, the economy is slowly being suffocated. The European Union began imposing sanctions in May 2011 on top of U.S. restrictions that date to 2004.

Tighten Vice

“Syria’s currency and foreign reserves have collapsed,” U.S. Secretary of State Hillary Clinton said in July, urging a further tightening of the financial vice. “Sanctions on oil alone have deprived Assad of billions of dollars in lost revenues, and his ability to finance his war grows more difficult by the day.”

The revolt began as a peaceful movement inspired by the demonstrations that toppled longtime leaders in the Arab world. Tunisian President Zine El Abidine Ben Ali fled to Saudi Arabia in January 2011. Egyptian President Hosni Mubarak was forced out a month later and has been sentenced to life in jail, while Libya’s Muammar Qaddafi was killed in October and Yemen’s Ali Abdullah Saleh was replaced through a negotiated settlement in February.

The Assad regime remains, though its fate appears more precarious with the spread of the uprising to Damascus and Aleppo, Syria’s largest cities, in mid-July and after a blast killed four security chiefs.

Opponents say Assad has survived this long because of the regime’s brutality. Assad says it’s because he still enjoys public support, according to an interview he gave German broadcaster ARD in July. He ruled out stepping down.

‘A Challenge’

“The president shouldn’t run away from a challenge,” he told ARD.

Regional and international efforts to end the crisis have failed. United Nations envoy Kofi Annan brokered a cease-fire deal in April that failed to take hold; the UN mission overseeing it was suspended in June amid increasing violence.

Divisions between the majority Sunni Muslims and Assad’s Alawite leadership have spilled across the country’s borders, with clashes between different religious groups in Lebanon during the past few months. The makeup of religious groups in Syria is similar to that in Iraq and Lebanon, says Edward Djerejian, a former U.S. ambassador to Syria who’s the founding director of the James A. Baker III Institute for Public Policy at Rice University in Houston. He says the violence could spread through the region.

Authoritarian Rule

The authoritarian Assad of today contrasts starkly with the 34-year-old ophthalmologist who took power in July 2000 after the death of his father, Hafez al-Assad. Many were willing to give the political novice a chance partly because the image he projected -- so different from his father’s remote and austere approach -- suggested he could move Syria into the 21st century.

“Bashar’s charm, his choice of a wife, his youth, his inexperience” made people give him the benefit of the doubt, says Joshua Landis, director of the Middle East Studies program at the University of Oklahoma in Norman, who once lived in Syria.

“He was shy, a little bit bumbling. He didn’t have bodyguards. He played the simple guy who goes amongst the people, and people were so relieved.”

In his inaugural speech on July 17, 2000, Assad pledged to follow his father’s path and refuse to bargain with Israel over the return of the Golan Heights while also promising to revitalize the economy and be open to constructive criticism. In the early days of his rule, Syria appeared younger and livelier, with the spread of mobile phones, satellite television, Internet cafes and even shopping malls.

Speaking Out

More imports were allowed, making a distant memory of the days when salt, toilet paper and sugar were sold from under the counter and people stood in long lines for bread. No longer did restaurants have to rely on an intermittent supply of goods smuggled from Lebanon; usually every item on the menu was available.

Intellectuals began speaking out, gathering in private salons to discuss politics and the economy, and openly calling for greater civil liberties and democratic political reform. In less than a year, the government had cracked down on the salons and snuffed out the movement, throwing 10 of its leaders in jail on charges ranging from attempting to change the constitution to inciting sectarian conflicts, Maleh says.

Landis says Assad was trapped by the system his father had created, one that relied on personal loyalty rather than competence and was antithetical to openness.

‘OK, Criticize’

“He says: ‘OK, criticize. I want to modernize Syria,’” Landis says. “And within two weeks, all of the political salons are calling for an end to dictatorship.”

Assad continued to make economic changes. In 2005, Syria announced a shift from a socialist economy based on the Soviet model toward more-market-oriented policies. Private banks and insurance companies opened, and firms from countries such as France, the Persian Gulf states, Iran and Turkey began to invest. “Positive things happened in response to the liberalization policies,” says Nabil Sukkar, a former World Bank economist and managing director of the Syrian Consulting Bureau for Development and Investment in Damascus.

Sukkar says the private sector grew to about 67 percent of gross domestic product by early 2011 from about 40 percent two decades earlier, creating new job opportunities.

“The private sector became the largest employer, absorbing 70 percent of total employment,” he says.

Fried Chicken

A few foreign fast-food chains moved in, introducing Damascenes to caffe lattes, American fried chicken and sticky cinnamon rolls. Modern Japanese and Korean cars replaced aging models. And amid the soot-covered, dun-colored, Soviet-style apartment blocks that dominate Damascus, new building began.

One showcase project, still under construction, is Eighth Gate -- the name refers to the seven gates that circled the city in ancient times -- featuring rows of sleek apartment buildings just off the highway linking Syria and Lebanon. A joint venture between Dubai’s Emaar Properties PJSC, the biggest real estate developer in the United Arab Emirates, and Dubai-based Invest Group Overseas, the project will include office space, a five- star hotel, residences, space for 255 retail outlets, cinemas and the new headquarters of the Damascus Securities Exchange. It was scheduled to be completed in 2014.

Since the unrest began in March 2011, trade, bank lending and tourism have been drying up.

Slowing Growth

“This crisis is going to retard our growth and development as well as our efforts to catch up with the rest of the countries in the region,” Sukkar says.

Businesses are seeking alternative markets in allied nations such as Iran and Iraq.

As of July 29, the Syrian pound had lost more than a third of its value against the dollar since March 2011, slashing the purchasing power of Syrians on fixed incomes. Syria’s inflation rate was about 33 percent in May, the most recent data available from the Central Bureau of Statistics. Deposits fell by an average of 35 percent in 2011 at Bank Audi Syria SA, Bank of Syria and Overseas SA and Banque Bemo Saudi Fransi SA, according to April filings with the securities exchange. Lending plunged 22 percent.

The EU’s decision to stop importing Syrian crude oil had cost the country $3 billion in export revenue, Sufian Alao, who was oil minister at the time, told the official Syrian Arab News Agency on April 30. Syria exported 150,000 barrels of the 380,000 barrels a day it produced before the sanctions were imposed last September. Its other main exports are textiles, kitchenware and canned food.

‘Killing Us’

“The sanctions have strangled us; they’re killing us,” says Sonia Khandji Cachecho, a businesswoman who’s also a board member of the Damascus Chamber of Commerce.

As of July, 65 percent of small industrial enterprises and half of service companies in Damascus and its suburbs had closed, says Cachecho, a perfectly coifed blonde who runs a maker of hair-care and health-care products. Cachecho, the Syrian agent for Wella hair products, says her supplier stopped doing business with her in October because of the EU sanctions.

“What kind of genius sanctions are these that affect the poor and those with fixed income?” she says. “They’re punishing the people, not the regime, and creating unemployment and poverty.”

Business is down 80 percent at Anat, a handicrafts store on Straight Street, which was mentioned in the New Testament of the Bible. The shop once provided part-time employment for 1,000 women across the country and helped preserve Syria’s traditional textile work. Arab and Western tourists, who made up the bulk of Anat’s clientele, are avoiding travel to the country, and Syrians are skimping on nonessential items.

The shop and warehouse, constructed from two converted old Damascene houses with a marble fountain between them, are packed with embroidered shawls, stitched tableaux of traditional homes and silver jewelry studded with turquoise to ward off the evil eye.

‘Considerable Hardship’

The store’s owner, German Heike Weber, 61, who moved to Damascus 30 years ago with her Syrian husband, says any orders have to be shipped via third countries to the U.S. and Europe. And since the clashes have blocked roads to the villages where her wares are made, future supply is uncertain.

“The economy can manage, but with considerable hardship for both the people and the government finances,” Sukkar says.

Until fighting moved to the capital in mid-July, the streets of Damascus had a veneer of normalcy: Workers painted a renovated building on a side road. Kids slammed a ball against the glass wall of an electronics shop, making its owner wince. At a patisserie, a couple flirted as they waited for an assistant to put their cakes in a box.

Stock Market

At the Damascus Securities Exchange, up a steep flight of marble steps, government officials attended a refresher course on how markets work. Lecturer Osama Hassan stood in front of a whiteboard covered with terms: stocks, bonds, Treasury bills. Across the hall, brokers traded stocks, whose prices have fallen by more than 50 percent since the unrest began.

Harsh reality was inescapable, even then. Down a winding road near the exchange, Syrians stood in a long line at a gas station, empty cylinders in hand, to get a ration of cooking fuel--a casualty of sanctions.

As fighting draws closer to Assad’s seat of power in Damascus, his reign is drawing to an end, says Patrick Ventrell, a U.S. State Department spokesman. “We don’t have a crystal ball to know if it’s going to be today or tomorrow or next week or when,” Ventrell says. “But it’s clear that the opposition is going to be unyielding in its demands for democracy and that the people of Syria want to see a new regime.”

To contact the reporter on this story: Donna Abu-Nasr in Beirut at dabunasr@bloomberg.net

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net.

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