No ‘overnight boom’ for Syria's economy despite lifting of sanctions

Investments will not flow until security and legislative framework improve, analysts say

A seller in central Damascus. Syria's micro, small and medium-sized enterprises have shown remarkable resilience amid the country's economic turmoil. EPA

The lifting of US sanctions bodes well for Syria but improved security and legislative changes will be key to revive the war-torn country's battered economy, analysts say.

US President Donald Trump, in the middle of a Middle East tour this week, announced the lifting of sanctions before his high-profile meeting with Syrian leader Ahmad Al Shara in Riyadh.

That led to celebrations in Damascus, with citizens cheering under a familiar theme: “Make Syria Great Again”.

The first effect would be a breath of economic relief after years of suffocation, as sanctions had hindered trade, investment and the Syrian lira. But the success of the economic redevelopment would hinge on a streamlined government programme.

The lifting of sanctions, “if followed by concrete steps that bring tangible benefits to the Syrian population, could contribute to jump-starting reconstruction and attracting new investment”, Rim Turkmani, director of the Syria Conflict Research Programme at the London School of Economics and Political Science, told The National.

“However, this alone is insufficient. The establishment of rule of law and significant improvements in security remain prerequisites. Without these conditions, we are likely to see only limited reconstruction efforts, primarily funded by Gulf countries.”

Huge bills yet to be paid

The civil war in Syria began after the suppression of a peaceful protest movement calling for the removal of then-president Bashar Al Assad in 2011 and subsequent fighting against opportunistic extremist groups such as ISIS – resulting in the devastation of infrastructure, displacement of skilled labour and the draining of domestic industry.

The national economy, which was maintaining a brisk pace of growth before the protests, has struggled since: gross domestic product plunged 6.4 per cent in 2016 before gradually recovering, government data shows.

The Syrian economy has been devastated by the civil war, with the UN's Development Programme estimating cumulative losses – including physical damage and economic deprivation – at more $923 billion at the end of last year.

The estimated cost of reconstruction, meanwhile, has varied from $250 billion and $500 billion.

Despite the staggering costs, the economic opportunity in Syria would be on the radar of overseas players, said Osama Al Saifi, managing director for the Middle East and North Africa at Dubai-based financial services firm Traze.

“The removal of US sanctions is a critical signal for global finance, likely encouraging capital from Arab nations, Turkey and potentially US and Chinese firms,” he told The National.

Global financial institutions such as the International Monetary Fund and the World Bank are also expected to support the recovery, but sustained investment “hinges on stability and governance reforms”, he added.

Those have been high on Damascus's agenda: in March, Syrian President Ahmad Al Shara announced new members in his government, appointing 23 ministers in a broadened cabinet, a move seen as an important milestone in the transition from decades of Al Assad family rule and the improvement of ties with the west.

That addresses a “profound lack of inclusivity”, said PeaceRep, an international research consortium led by the Edinburgh Law School.

But while government efforts and the hope brought by the lifting of sanctions are both positives, it will not be “an overnight boom”, as the economy is still “structurally fragile”, said Ahmad Assiri, a research strategist at broker Pepperstone.

“Lifting [sanctions] eases restrictions on imports, offers some support to the currency and helps dial down inflation that’s been out of control,” he told The National. “For consumers, this could mean better availability of goods, especially essentials like food and fuel.

“But how fast this materialises will depend on logistical factors like whether ports and airports can actually handle the anticipated surge in demand.”

Multilateral institutions such as the IMF, the World Bank, the International Finance Corporation, and the European Bank for Reconstruction and Development are expected to engage more in Syria to rebuild its economy, said Nassib Ghobril, chief economist at Beirut's Byblos Bank.

“I suppose the IMF will start discussions with the authorities and will eventually try to reach a staff level agreement on a reforms plan, while the World Bank will start looking into the rehabilitation of sectors and of infrastructure, and into social needs.”

Syrian currency

The Syrian lira appreciated sharply against the US dollar following the announcement, with an exchange rate of 11,000 lira to $1 on Tuesday, compared to 12,000 lira the day before, according to the Syrian News Agency report. The currency, however, fell to 13,000 lira against the dollar as of Thursday.

Under the former regime, the Syrian currency collapsed, reaching 15,000 lira to the dollar on the eve of Mr Al Assad’s downfall on December 8, compared with 50 lira to the dollar on the eve of the revolt against his rule in March 2011.

Challenges ahead for banking

While the banking sector is expected to benefit from the lifting of sanctions, challenges remain.

A major concern is that some of the leaders in Syria today continue to be designated terrorists, Ms Turkmani said. “This has direct implications for the banking sector. International banks are likely to remain hesitant to engage with Syrian banks due to the high compliance risks involved.”

Syria is also placed on the grey list of the Financial Action Task Force (FATF) against money-laundering and terrorism financing that restricts financial flows into the country.

“Unless the FATF updates its recommendations on counter-terrorism financing – which currently underpin much of this financial isolation – banks will likely continue to avoid dealing with Syrian institutions,” she said.

The lifting of sanctions under the Caesar Act, which requires a vote by the US Congress, will also be vital for smooth functioning of financial institutions and attract more investment into the country.

The Caesar Act, named after a Syrian photographer who documented war crimes against the population, places a ban on people and companies dealing with the former Syrian regime and its associates across entire economic sectors.

Aviation sector takes off

Vital areas such as aviation stand to benefit, with the planned lifting of sanctions having the potential to be a “watershed moment” for the long-neglected industry, said Linus Bauer, founder and managing director of UAE-based consultancy BAA & Partners.

But again, the practical effect will depend heavily on the scope and sequencing of the relief, in combination with government and investor efforts, to “open a critical window for reintegration into global aviation networks”, he told The National.

“After more than a decade of isolation, this could set the stage for a multiphase recovery and modernisation, provided that political conditions and investor confidence improve in tandem,” he added.

Syrians optimistic after Trump lifts sanctions

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Syrian airlines – especially state-owned Syrian Air and private operator Cham Wings – have long operated with an ageing fleet under a severe shortage of parts, often relying on black-market channels or cannibalising grounded aircraft.

“Sanctions relief would, for the first time in years, allow these carriers to legally source OEM [Original Equipment Manufacturer]-certified parts from Airbus, Boeing and their tier-one suppliers. This could significantly improve safety standards and reliability,” Mr Bauer said.

In the medium to long term, sanctions relief could re-enable commercial aircraft orders with major OEMs, which were previously blocked due to US components being embedded in virtually all commercial jets.

“This opens the door to fleet renewal strategies, potentially starting with wet leases or second-hand aircraft to bridge short-term capacity needs,” Mr Bauer said.

Damascus International Airport could see a “gradual return” of global carriers and increased regional connectivity, improving passenger and cargo volumes, said Dean Mikkelsen, independent aviation analyst.

“While direct flights to the US are unlikely in the near term due to [regulatory] and ongoing security concerns, the removal of sanctions could pave the way for Syrian carriers to operate more freely in Europe, the Middle East and parts of Asia,” he said. Codeshare agreements with global carrier may also become viable, he added.

Lifting US sanctions could also revive interest from foreign investors, particularly from the UAE, Russia and potentially China, who have expressed interest in infrastructure and logistics development in Syria, said Mr Mikkelsen.

“I would expect that Gulf investors from the UAE and Saudi Arabia would be interested in investing in Syria through the whole logistics and transportation chains.”

Syrian investors and diaspora-based businesses may be encouraged to post capital to the sector, especially if reforms to protect capital inflows are implemented, he said.

However, meaningful recovery will require parallel improvements in banking access, insurance underwriting, regulatory oversight, and civil aviation safety, the analyst said.

Tech reboots

The technology sector is also set to gain from sanctions lifting, especially with the reopening of access to US majors such as Google, which are among the services affected by the sanctions.

Restricting access to software and services are limiting people and businesses from using tools like Google Analytics, Google Ads and other essential digital business services, which would companies can use to their advantage, according to the research arm of Syrian Future Movement, a national civil political entity.

“Syrian companies, along with collaborative efforts from multinationals operating in these sectors, could potentially find significant opportunities as the country rebuilds itself,” Arun John, chief market analyst of Dubai-based Century Financial, told The National.

Back on the investment radar

Lifting sanctions puts Syria back in the investable space, especially those drawn to high-risk and long-horizon opportunities, and early moves could be seen in construction, telecoms and core services where demand “is sticky and touches daily life”, Mr Assiri of Pepperstone said.

However, institutional capital such as global banks, multinationals and major funds are areas “still clouded with question marks”, and players “will likely wait it out [as] they’ll want clarity on legal frameworks, transparency and security”, he noted.

“Selective inflows” – as Mr Assiri calls them – particularly from regional players or allies including Turkey, Saudi Arabia and the UAE, would be crucial for Syria's economic revival.

Last month, Mr Al Shara visited the Emirates for the first time since taking office and President Sheikh Mohamed pledged the UAE would “spare no effort in providing all possible support to Syria” to help the country rebuild.

Shortly after that, the UAE General Civil Aviation Authority announced flights between the two countries would resume.

President Sheikh Mohamed says UAE committed to helping Syria rebuild

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Also last month, Saudi Arabia and Qatar agreed to settle Syria's outstanding debts of about $15 million to the World Bank, as part of their efforts to “support and accelerate the recovery of the Syrian Arab Republic’s economy”.

The further Syria's economy is supported and opens up, the more opportunities there will be, especially for domestic firms such as importers, distributors and contractors – but they should act fast.

“Foreign firms, especially from the US, Turkey and Gulf states, are anticipated to enter sectors like construction, energy, agriculture and manufacturing,” Mr Al Saifi said.

Equally important is the recovery of Syria’s productive sectors, particularly agriculture and manufacturing, which were severely weakened by the conflict and compounded by sanctions.

“Micro, small and medium-sized enterprises have shown remarkable resilience,” Ms Turkmani noted. “A rapid influx of large-scale investments, if not carefully managed, could undermine these local businesses.”

For these embattled companies, eased restrictions could offer a lifeline, restocking inventory, expanding operations – and maybe even reviving partnerships with overseas suppliers, Mr Assiri added. “Many have been operating at a survival mode … for them it’s a real opportunity.”