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Investing in Syria's Future

7 MINS READFeb 6, 2017 | 09:32 GMT
Investing in Syria's Future
(SAMEER AL-DOUMY/AFP/Getty Images)
More and more, Syria's central government has been unable to provide basic services to much of its population, weakening its authority. In rebel-held territories, competing opposition factions furnish necessities such as food, water and electricity.
Forecast Highlights

  • The crippled state of Syria's economy risks weakening the remaining loyalist support for the government in Damascus.
  • The international involvement in the country's civil war will leave Damascus with few partners that it can trust to help with its reconstruction efforts. 
  • Iran's investments in Syria will not yield immediate financial gains but will afford Tehran greater influence in the country. 

Six years of conflict in Syria have left its economy in tatters. Since 2010, the country's gross domestic product has shrunk by more than half. The war has devastated Syria's population, killing more than 440,000 people and driving some 6 million more out of the country, a loss that will cripple the country long after the fighting inevitably stops. An estimated 60 percent of Syria's population — what's left of it — is unemployed, and it's hard to say how many more Syrians are underemployed.

Though the government entered the new year at an advantage over its opposition, having just retaken the city of Aleppo, its financial decline has undermined its ability to exert control over the country. When the time finally comes to begin picking up the pieces, the government in Damascus will not be able to embark on the daunting task of reconstruction alone. Several countries have already begun extending their support to help rebuild the battered nation, some more strategically than others.

An Inauspicious Start

When the country descended into civil war in 2011, it was already facing economic troubles. Drought conditions hurt the country's agricultural sector, all the more so as rural Syrians moved in droves to urban areas. Syria's economy, moreover, had only just emerged from a period of economic liberalization that President Bashar al Assad kicked off when he took office in 2000. Although reforms in the banking industry had encouraged economic growth, their progress was reversed within a year of the war's start when foreign governments slapped sanctions on Syria's central bank and financial sector. The country's economic output had shrunk by more than 40 percent by 2013. As its cash flow dwindled, Damascus was forced to progressively cut food, fuel, water and electricity subsidies. By 2015, Syria's reserves had reportedly fallen to just $1 billion, enough money to cover roughly a month's worth of imports.

The past year was even worse for Syria's economy. The cost of natural gas and water rose in 2016, particularly in the capital, though other cost-of-living indicators such as rent and taxes stayed more or less constant. The cost of food, meanwhile, rose by 99 percent compared with the previous year. On top of that, shelling and airstrikes have destroyed infrastructure across the country, causing shortages of water and electricity. This bodes ill for al Assad: The country's precipitous economic decline could start to undermine trust in the government, even among its most loyal supporters. And since the government has lost the ability to provide basic services to its people, Syrians have taken matters into their own hands to furnish necessities. In rebel-held territories such as Idlib, competing factions have taken over supplying food, water and electricity to the local populace. As a result, Damascus' authority over the country has weakened, even in the territories it still technically controls.

Hollow Victories

In late 2016, the Syrian government claimed its greatest triumph in the civil war so far when it pried the city of Aleppo from rebel control. But it was a hollow victory, like so many of Damascus' successes in reclaiming territory. The war has devastated vast portions of Aleppo, once Syria's most populous city, as well as an economic capital. The damage to the city is estimated between $100 billion and $200 billion, and the province surrounding it is still an active war zone with multiple fronts. Even now, the Syrian government is working to repair water and electricity infrastructure that its forces had a hand in destroying, a process that will take months if not years to complete. In the meantime, industry in Aleppo will stay at a standstill.

Furthermore, the government's gains against the rebels have done little to ameliorate the country's food shortages. The Islamic State is still present in eastern Syria, formerly the country's breadbasket. In addition, the government can no longer rely on the abundant agricultural production in the country's northeastern corner because Syrian Kurds have taken control of the region, which they hope to establish as a semi-autonomous zone. Even though the Kurdish territory is still nominally under the central government's control, Damascus is steadily losing its influence there.

The country is on the verge of a wheat crisis, too. The government could apparently afford only one-third of the wheat it had planned to purchase for the month of January. In fact, Damascus' cash crunch kept it from finalizing a deal for a much-needed wheat shipment of 1 million metric tons from Russia at a 20 percent discount. Moscow's markdown wasn't terribly generous, considering that Russia is still trying to offload the fruits of last year's record wheat harvest (on a saturated market, no less). Still, the offer is a sign of Russia's interest in helping the Syrian government get back on its feet — one that Damascus lacked the funds to take advantage of.

Iran: An Ally for Richer or for Poorer

But Russia is not the only foreign power trying to lend a helping hand to Syria. For richer or for poorer, Damascus has a devoted ally in Iran. The two countries recently signed deals over phosphates, telecommunications, oil and natural gas, and agriculture that were all designed to kick-start Syria's stagnant economy — and secure potential kickbacks for Iranian companies down the road. Tehran has also extended an estimated $6 billion to $10 billion in credit over the course of the conflict, enabling Damascus to continue paying government salaries, funding its war effort and keeping essential services running.

Iran's financial assistance is an investment, not an act of charity. Tehran views the money it is funneling into Syria as a long-term insurance policy for its continued influence with Damascus, regardless of who is in charge. These economic ties will ensure that Iran has even greater leverage over Syria than it does over Iraq. Unlike Damascus, which many countries have isolated over the course of the civil war, Baghdad entered its reconstruction phase after Operation Iraqi Freedom with several coalition partners, including the United States, the United Kingdom and the European Union. The al Assad government lacks support even among most of the powerful countries in the Middle East, leaving it few foreign partners with which to rebuild and giving Iran considerable sway. 

Of course, Iran also stands to benefit economically from its deals. Tehran intends to offer the services of its state-owned companies for Syria's reconstruction. When the time comes, Iran will be Syria's preferred partner for efforts to restore the country, notwithstanding the deeper economic ties Damascus had forged with other nations such as Turkey, Qatar and Saudi Arabia prior to the conflict. The contracts Iranian companies win in Syria will help their country stay on top as the leading iron producer and second-biggest steel producer in the Middle East. Funding Syria's reconstruction will be tricky, however, because Syria will not have the cash reserves to pay for the work.

Lining Up Behind Iran

By sinking hundreds of billions of dollars into Syria from the start of the civil war, Iran has demonstrated the value it places in the country as a strategic ally and a conduit to its prized militant proxy, Hezbollah. Tehran's focus on investment deals also indicates that it believes the war will end soon. Until then, Iran will invest in Syria as needed to stabilize the country and protect its interests. And as its own economy slowly improves thanks to steady oil prices and eased economic sanctions, it may redouble its support.

At the same time, other countries are lining up to cash in on Syria's eventual reconstruction. Egypt signed a deal to increase its investment there, and Lebanon hopes to become a transit hub for funds and construction materials en route to Syria. But Iran has made sure that it will be at the top of Damascus' list of partners when the Syrian government starts putting its country back together.

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