Global Policy Forum

By Andrew J. Tabler*

On October 31, the United Nations Security Council unanimously adopted Resolution 1636, demanding Syria's full cooperation with the UN investigation into the assassination of former Lebanese Prime Minister Rafik Hariri, or else it would face "further action." The resolution was passed under Chapter VII of the UN Charter, which involves "use of force" in case of non-compliance. Pressure from Russia and China forced the resolution's three co-sponsors - the United States, the United Kingdom and France - to drop a direct threat of sanctions in the resolution's text.

Damascus should not rest on its diplomatic laurels. Chapter VII, specifically its Article 41, allowing for sanctions to enforce Security Council decisions, means the international case for economic retaliation against Syria can continue to build. Various reports indicate the U.S. and its allies are devising a regime of "smart sanctions" - tailor-made measures targeting Syria's leadership, not its people. While Damascus has promised to cooperate with the investigation, all sides must take a hard look at the possible sanctions looming and their implications.

Sanctions are not new to Syria, which has been on Washington's list of state sponsors of terrorism since 1979, and has faced a ban on "dual use" items and a general arms embargo. These restrictions were tightened in May 2004 with the implementation of measures banning all U.S. exports to Syria, other than food and medicine, and non-existent Syrian flights to the U.S.; investigating the Commercial Bank of Syria as a potential money laundering institution; and seizing the assets of certain Syrians in the U.S. So far, the measures have had limited impact because they are fairly easy to circumvent. American products can be substituted (or re-exported from elsewhere, including Lebanon and Dubai); Syria now has private banks, and Syrian officials probably do not keep their savings in U.S. institutions.

UN sanctions are an entirely different matter, however. One measure could include UN air and arms embargoes similar to those imposed on Libya in 1992 after the Lockerbie incident. This would likely include a travel ban or some restriction of movement on Syrian officials, as well as seizure of their assets abroad. This could be accompanied by a reduction in diplomatic representation in Damascus, as well as fewer visits by foreign dignitaries. Such restrictions would certainly make it difficult for the Syrian regime to communicate with the Arab world and beyond. Isolation would make negotiations with the international community, as well as internationally assisted reform efforts, harder.

Greater isolation by the UN would likely mean that the association agreement with the European Union remains unsigned, with deep implications for Syrian reform. Damascus' reform program is heavily assisted, if not sustained, by UN and EU projects. Increased multilateral pressure on the regime would politicize Syria's limited reform space and undermine reform goals, especially the association agreement's economic, political and cultural objectives. Thus far, for example, the economic chapter has been used by the regime to spur some reforms.

Another measure could include a ban on foreign involvement in Syrian energy - either in terms of providing vital components or through company operations. As pressure from Washington has increased and U.S. energy companies have departed, Damascus has relied on Croatian, Russian and Chinese companies in exploration and field development activities. At the same time, Shell and TotalElfFina have continued to help keep Syrian oil flowing. Currently, Syria's oil production is declining, with estimates that the country only has about 10 years of production remaining, with a considerable decline expected after five years.

Should the UN restrict foreign energy companies, Syrian energy activities would increasingly be in the hands of the state-owned Syrian Petroleum Company (SPC). While the SPC is involved in all energy projects, it would likely find it difficult on its own to deploy the technology necessary to make new discoveries and develop Syria's declining fields. Oil production would be hurt precisely when the regime needs to boost output the most. Development of Syria's sizeable natural gas fields - the regime's and the country's energy piggybank - would slow considerably.

This could then be followed by a ban on Syrian oil exports, which would go a long way toward bringing the regime down, at least as it operates today. Currently, Syria produces around 480,000 bpd, of which some 200,000 bpd are exported. Oil proceeds account for around 45 percent of the state budget, and high oil prices over the last few years have helped Syria build up foreign currency reserves approaching $18 billion. With a ban, the state's ability to fund its large public sector and development plans would be seriously curtailed, even if Damascus were to introduce austerity measures to survive what would be, in effect, a siege. Tax rates and enforcement would increase, with deep implications for the country's business community. Financing of imports, which in 2004 amounted to around $6.2 billion, would also become difficult. This would almost certainly restrict the availability of machinery and transport equipment, electrical power machinery, food and livestock, metals, chemicals, plastics, yarn and paper.

While all this seems to spell gloom, possible sanctions against the Commercial Bank of Syria (CBS), and its close relationship with the handling and holding of Syrian oil export proceeds, might actually force the bank to function as a commercial bank. Of Syria's $18 billion reserves, some $12 billion are held at the CBS. Crucially, the bank only holds an estimated $1 billion inside Syria, with the rest in short-term deposits abroad. Such deposits, while bringing only modest returns, also provide the regime with considerable flexibility in moving funds to avoid sanctions and the seizure of its assets.

The Syrian regime and the CBS could soon be forced to repatriate those funds, bringing much needed liquidity back into the Syrian market. For decades, the Syrian private sector has been starved of liquidity, financing most if not all of its activities through Lebanese institutions. Now, as sanctions become a real possibility, the regime and the CBS could be forced to invest in Syrian businesses and people. This would not only help the private sector, which accounts for 70 percent of all economic activity; it could also be a vital catalyst for spurring economic and political liberalization. While assessing investment risk remains a major obstacle in Syria, $12 billion, if invested wisely inside the country, could bring better returns, create the jobs Syria needs to absorb growing numbers entering the job market, and, most crucially for the regime, co-opt a large number of people for whatever political transition it may envisage.

Short of this, the growing role of Syria's private sector and its ability to finance imports from Lebanon and elsewhere could help keep the country running in the short to medium term. But it might not be that easy. Should the international community restrict Syrian trade financing through foreign (notably Lebanese) institutions, the private sector's ability to trade could be seriously harmed. This would not only affect Syria's public-sector banks, but also its budding private-sector financial institutions.

Since private-sector banks began operating in 2004, trade finance has become their bread and butter, as regulatory restrictions have limited their ability to make other profitable investments in Syria. This has worked out well, as imports are rising and Syrian exports are penetrating Arab and European markets more than at any time in the country's recent history. The ability of Syrians to finance trade is, therefore, instrumental in promoting overall economic growth. Possible restrictions on financial transactions would cut off a vital lifeline to private banking at a key moment in the sector's development, with negative implications for the country's general troubled reform process.

These are just a few of the many issues being considered. Hopefully, cooler heads will soon prevail, and the likely extension of the UN investigation may well delay talk of sanctions for the time being. However, with the Security Council demanding justice and Syria continuing to insist the investigation is all about politics, the day when sanctions will be imposed on Syria may be nearing dangerously.

*About the Author: Andrew Tabler is a fellow at the New Hampshire-based Institute of Current World Affairs. He is based in Damascus and Beirut and serves as consulting editor for Syria Today magazine.

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