The Syrian Stock Exchange: Success Hinges on the United States INSS Insight No.

97, March 9, 2009

Feldman, Nizan

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.