The sanctions imposed on Syria by the United States, the European Union, the League of Arab States, and a host of other countries are aggravating the already-negative domestic economic conditions that the political crisis in Syria has generated. So far, the regime has managed to avoid economic collapse and weather the pressure by increasingly relying on Russia, Iraq, and Iran to both absorb Syrian exports and provide financing for projects affected by the sanctions. Yet, though that external lifeline is providing some stability, the Syrian economy will not be saved from its downward spiral of contraction and volatility.

The Central Bank of Syria has responded by marshaling large portions of its reserves to stabilize the economy and address problems such as price increases, inflation, supply shortages, and exchange rate volatility. But the long-term viability of its measures are called into question as the sanctions hamper the regime’s ability to generate further revenues, not least by blocking oil exports. Here again, the role of friendly states has been crucial in helping to keep the country afloat. 

The Sanctions Regime

The sanctions that impact Syria the most are those imposed by the League of Arab States and the European Union. Their sanctions mainly target sources of government revenue by prohibiting transactions with individuals, companies, and state-owned institutions tied to the regime. For example, the Arab League has maintained the economic boycott it decreed on November 27, 2011, which includes the freezing of Syrian government (and some individuals’) assets in Arab countries, the cessation of transactions with the central bank, a travel ban on a number of Syrian officials, and the termination of all investments supported by Arab governments. The member states of the Gulf Cooperation Council have also banned civil aviation from flying to or from Syria.

The EU sanctions mirror those of the League, but include banning imports of Syrian oil, a measure unnecessary under the Arab League sanctions since Syria exports all of its oil to Turkey and European countries. U.S. sanctions are equally restrictive but have had a much less negative impact because of the already-limited economic relations between the United States and Syria.

Oil and Public Revenues

The Syrian oil sector has been hardest hit by the sanctions. Prior to the uprising, more than 90 percent of Syrian oil exports were to EU countries, with the remaining going to Turkey. Oil (and gas) revenues constituted around 20 percent of total gross domestic product and 25 percent of total government revenue. The banning of Syrian oil imports has forced Syrtol, the state oil company, to find new markets. This has proven difficult, as Indian refineries that expressed interest in importing Syrian crude could not secure private or public insurance for shipments.

To date, Syrtol has not been able to find markets for Syrian crude sufficient to compensate for the loss of exports to the EU. Sanctions on Syrian oil are estimated to have cost the government $4 billion in lost revenues, leading to a severe foreign currency crisis that has hampered the ability of the central bank to intervene in the economy.

The termination of official Arab investment in Syria—Qatar alone is estimated to have halted $6 billion in commercial investments—has forced the Syrian central bank to tap into its reserves to ensure the continuation of infrastructure and other important projects, such as those related to water and energy use. On their own, these reserves are insufficient to continue such large projects.

In light of this, various government ministries were recently tasked with identifying priority infrastructure projects that have been affected by sanctions and need external funding to continue. The result was the February 2012 negotiation of a comprehensive loan program with Russia, under which Moscow will provide Syria with up to $3 billion to help complete key projects.  

Increases in import tariffs have been imposed to help offset some of the decline in oil revenues, but this has had a negligible impact: few people can afford non-necessity imported items under these economic conditions. Revenue from tourism has, predictably, dropped dramatically. For example, hotel occupancy rates have fallen from 90 percent before the crisis began to less than 15 percent in May 2012, reflecting the rapid decrease in incoming tourists. Because of this, around 40 percent of all employees in the tourism sector have lost their jobs since the beginning of the crisis. Some enterprises that were entirely dependent on tourism—whether large hotels or roadside businesses—have been forced to close because their source of income is drying up.

In the absence of revenues generated from oil, tourism, and trade, the Syrian economy will continue to contract. The regime has little hope of finding alternative revenue sources, whether domestic or external, and looks set to continue to rely on loans, grants, and trade support from allied states. In addition to Russian support, Iraqi leaders, for example, have publically dismissed the Arab League sanctions, and trade and gas pipeline deals between the two countries have even been signed. Iran, among other things, has taken measures to provide incentives for their importers to purchase Syrian products. Still, the economy struggles.  

Currency Volatility and Its Impacts

The devaluation of the Syrian pound (SYP) has been consistent. The exchange rate was around 50 SYP to the U.S. dollar at the beginning of the uprising, but by February 2012, the value was cut in half, with the exchange rate reaching 74 SYP to the dollar. Since then, it has been as high as 85 to 90 SYP to the dollar on the black market. Currency exchangers have begun to hoard dollars, driving the exchange rate even higher.

The Syrian central bank is left with few options except to restrict withdrawals of foreign currency and to try and maintain a tolerable exchange rate that does not spiral into irreversible currency devaluation. While it has been denied by the central bank, there are rumors that the bank has begun to sell its precious metals assets, such as gold, to further shore up its foreign currency reserves to avoid collapse of the Syrian pound.

The devaluation has actually worked to the advantage of some exporters as the cost of Syrian products has decreased, thus making them more affordable for regional customers. This partly explains why the central bank has tolerated the devaluation, which, otherwise, has been extremely negative. In particular, the fluctuations have dramatically reduced the already-low purchasing power of average Syrians. An average public sector employee, for example, made around 12,500 SYP a month, or around $250, prior to the crisis. That same salary is now worth as little as $140, making basic household products increasingly unaffordable.

Average consumers suffer on two fronts: Reduced wages make increasingly higher-priced products inaccessible. Moreover, inflation is around 30 percent as of June 2012 and will likely continue to rise. Recently, the Syrian government released new banknotes into circulation to help finance the budget and to pay public sector salaries. Over the long term, this will only aggravate inflationary pressures and drive the cost of products even higher.

The Syrian central bank is caught in a dilemma: between the need to protect reserves and to marshal them toward stabilizing the economy. For example, in anticipation of the EU sanctions, the central bank withdrew most of its assets from European banks and either repatriated them or deposited them in euro or ruble accounts with the Russian Commercial Bank. However, although the central bank was able to shield most of its assets, it, along with other public banks, has acted to restrict loans and credit in an attempt to hoard reserves. This has ground activity in many areas of the economy to a halt, as reserves are being funneled into essential and major projects in infrastructure and energy at the expense of commercial or manufacturing projects. 

The government has also taken measures to limit import spending exclusively to necessity items, such as food. These spending restrictions have caused severe supply problems in the industrial sectors of the economy that have especially hurt small- and medium-size enterprises. These enterprises often relied on public sector financing of supply imports, and with financing restricted to essential items, they have been forced to seek out personal or private loans. Predictably, these import issues, coupled with a trade embargo, have caused many businesses to experience major supply problems and have contributed to the rapid increase in the prices of basic products.

Energy Shortages

To a large degree, the rise in prices has been aggravated by energy shortage problems. The fiscal impact of the sanctions may be reduced public sector financing of imports, and thus a reduction in the number of goods entering the country and increases in the prices of ones that do. But energy shortages leading to increased energy costs are raising the price of producing and transporting domestic goods as well.

Syria has an acute problem with fuel access, as EU-based suppliers, in compliance with sanctions, have ceased all exports to the Syrian market. Since Syria does not have refinery capacities, it has to reimport its fuel from other countries. Prior to sanctions, it was heavily reliant on a Greek company, Naftomar, for domestic- and commercial-use fuel but has since had to look to allied countries to satisfy these energy demands.

Shortages of fuel and energy are common, and this has ripple effects throughout the economy. In agricultural areas, for example, shortages have prevented farmers from utilizing their tractors and other machinery, such as water pumps. Iran, Russia, and Venezuela have been providing Syria with fuel in recent months, but insufficiently to meet domestic demand. One reflection of this has been constant power cuts, even during the early period of the crisis. In response, the government has imposed a countrywide electricity-rationing program, cutting supply by at least three and a half hours per day throughout the country.

The energy shortages and increased energy costs are aggravated by price fluctuations in other areas of the economy. Price liberalization measures passed over the last decade mean that around 85 percent of all consumer products are subject to market pricing, with the remaining products subject to government-set price ceilings. However, these do not include all foods, and, as such, some essential products are being subject to speculation and price manipulations by merchants. For example, in April 2012, the government had to distribute sugar on the domestic market because merchants were selling it at more than four times its estimated value.

Such large price increases have become common in Syria. Inflation is rampant and reached an official year-on-year level of 11 percent in December 2011. But aside from the interventions described above, the government has been largely ineffectual in preventing such price fluctuations. Its role has been relegated to regularly issuing official price lists of key commodities. But, in the context of political crisis, sanctions, and currency volatility, these are largely ignored. 

Help From Syria’s Allies

Russia and China have blocked attempts to impose sanctions through the United Nations, so the Syrian economy is not completely isolated. But it is increasingly dependent on a few countries to absorb its exports.

Between March 2011 and March 2012, Iraq, largely ignoring the Arab League sanctions, increased its imports from Syria by 40 percent, and Iran increased its imports by 100 percent. Russia has provided Syria materials and supplies for the production cycle, including steady shipments of diesel fuel that is used for everything from farm tractors to civilian transport trucks. And despite tensions with neighbors such as Turkey and Jordan, a considerable amount of informal cross-border trade and smuggling continues. Indeed, official trade with Jordan has actually increased since the imposition of the Arab embargo. All of this suggests some resiliency in the face of sanctions.

Decline but Not Collapse

The Syrian economy will continue to deteriorate for the foreseeable future under the impact of sanctions. Sanctions targeting individuals or official institutions have had the least impact, since the regime was able to protect its assets by repatriating them or moving them into Russian banks. But the stress on public revenues and the ensuing problems of dwindling foreign currency reserves and exchange rate fluctuation pose a more serious challenge.

In May 2012, there were serious supply problems with the delivery of Russian and Iranian fuel to Syria. Should the external lifeline wither or be disrupted, for example if the United Nations can agree on imposing international sanctions, then Syria’s economic isolation will increase sharply.

However, isolation does not mean that the collapse of the economy is imminent. In the short term, the regime can continue to weather the sanctions currently in place through reliance on its external allies. All major signs of collapse—a rapid devaluation of the currency, extremely high inflation, and acute supply shortages—have been avoided through the external injection of money and subsidized supplies into the Syrian economy.

But these are merely stopgap measures. They are insufficient to reverse deepening unemployment, the stagnation of economic activity, and food and supply shortages in the market. Nor can they prevent the progressive devaluation of the currency or the continuous erosion of the purchasing power of average Syrians. The external lifeline is critical in preventing economic collapse, but not enough to stop the economy’s slow, gradual decline.

Samer N. Abboud is an assistant professor of international studies at Arcadia University.