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Decoding Syria’s War Economy

With tourism and investment at a standstill and unemployment on the rise, we look at the factors contributing to the Syrian economy’s collapse, and how big a factor Assad’s international allies have been in keeping his government afloat.

Written by Karen Leigh Published on Read time Approx. 4 minutes

Since the beginning of its conflict three years ago, Syria’s economy has been in a state of continual collapse. Violence in all major cities has obliterated a once-thriving tourism industry, oil fields that once netted the government 380,000 barrels of exportable crude per day now only produce 12,000, and as unemployment skyrockets, even those still earning government wages spend most of their income on basics whose prices have risen due to inflation.

In a new brief, Jihad Yazigi, visiting fellow at the European Council on Foreign Relations and the founder and editor of the Syria Report, explores the four stages of Syria’s economic collapse and the factors that led to a “war economy” he says has no chance of righting itself in the foreseeable future. Yazigi weighs in on what led to its fast decline, why the Iranian government is keeping Assad afloat, and whether or not the Syrian economy has fully collapsed.

Syria Deeply: How do you define a war economy?

Jihad Yazigi: War economy defines the situation of an economy at a time of war, at a time of violence, chaos and disruption of security, of competing legal, political systems, geographic and political fragmentation, of sanctions. A war economy is about the reallocation of resources from the normal economic cycle to these new cycles related to violence and war. It’s about the businessmen, traders, networks and means of production.

SD: Has the economy completely collapsed?

Yazigi: There is still an argument about whether the Syrian economy has collapsed at its root. My opinion is that it has. You have such a huge increase in unemployment and poverty. What is true is that the government, in the areas it controls, continues to pay salaries and supply basic commodities like bread and gasoline. Has the economy started to crumble in the time we thought? It’s a normal process in terms of time given the shift from peaceful to violent to nonviolent, and given that you have a war across the entire country, it’s not surprising that economy is collapsing.

The collapse was in several stages. One was the beginning of the uprising in itself. Very early on, when investors and consumers thought unrest was coming, there was a decline in investment and consumption. Hotel occupancy rates at leading properties in Damascus and Aleppo were 90 percent occupied in February 2011 and then 15 percent occupied in May 2011. Then [quickly] there were international sanctions, war destroying production capacity, poor government decisions.

SD: What was the watershed moment for Syria’s economy?

Yazigi: An important development was in spring 2013, when the northeastern region fell to the opposition. The government lost control of its oil fields and its entire wheat harvest. It’s the breadbasket of Syria, this region.

Oil exports represented 90 percent of the government’s foreign currency revenue. In 2010, 90 percent of the total the government received from exports came from oil. It has other sources of revenue from tourism and the like, but none of it was as important as oil. Estimates now say that 20,000 to 40,000 barrels of oil per day are being produced from the opposition areas. In government areas, it’s about 12,000 barrels of oil per day. That’s much lower than the numbers in 2011, when the government was producing 380,000 barrels per day. Obviously, the decline is huge.

SD: How do Russia and Iran factor in?

Yazigi: One important thing you have to know is that we don’t have access to data of the fiscal situation of the government: how much money it still has and what its foreign currency reserves are. The government is receiving significant international support from Iran and potentially from Russia, and you don’t see indicators that Syria is running short; there are no delays in payment.

So I think they’re still able to pay government workers on time, if not through their own reserves than through the Iranians, who are committed to the survival of the government. The Iranian government has provided a $3.6 billion credit line to Syria dedicated to the import of oil products. This month, Syria’s minister of oil admitted that all its oil imports were financed through this credit line. So it’s almost entirely reliant on Iranian help for its oil requirements. And this gives you an idea how much pull the Iranian government has.

SD: How much of a factor in the collapse was the violence in Aleppo and Damascus?

Yazigi: Everybody says Aleppo was the business capital of Syria, but Damascus has quite clearly taken over in the last few decades. Aleppo is an extremely important center – in terms of manufacturing it’s as important as Damascus – and it’s a center of trade and transit. They’re the two powerhouses.

Until 2012, Aleppo had managed to escape most of the consequences of the conflict, and what you saw there was one of the fault lines of Syrian society – the divide between rural and urban worlds. You have a very clear difference between the sophisticated city, a big trading hub since the Ottoman period, and then the rural areas, which are the most underdeveloped and conservative in Syria. The way the events unfolded in Aleppo were, to some extent, revenge against the capital by its rural counterpart. In the city, you had looting and the destruction of factories.

The large industrial area outside Aleppo was a source of income for rebel groups – you had looting and reselling of the equipment there, so it was targeted by the government. It’s a city that’s faced massive destruction. The source of overwhelming destruction is the government, but all sides contributed to it, and large economic and trade sectors were destroyed. Tourism and hotels were destroyed, especially in the Old City, which is not the case in Damascus.

SD: What’s your forecast for the economy?

Yazigi: I don’t see anything improving. People have realized that the conflict will last and they are making decisions accordingly. You have some small investments or business activity, but they’re low level. I don’t see significant improvement before the war ends. I don’t see investors investing before the war ends, and they know what the country’s long-term prospects are. Even those who are still wage earners don’t have disposable income left, except to buy food and basics. And the government is completely bankrupt.

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