The Economic Ruin of Syria?

At what point will the business elite leave Assad?

Earlier I mentioned the economic troubles that could be a fatal weakness for the Assad regime in a post about the swinging momentum in the Syrian protests. With pro-Assad demonstrations across the country and a splintering opposition, it seemed as though the protests were not as strong as many had previously thought. My economic point of the article was that the protests had greatly disturbed the Syrian economy and further rupture could lead the Sunni business elite – who are the main regime backers – to ditch Assad. While the Economist still believes that Assad is going to fall, several Syrians have commented that separating the business elite from the regime will be impossible to do.

A piece entitled “The Squeeze on Assad” is currently up on the Economist highlighting how the economic problems of Syria could kill off the remaining regime support [my emphasis]:

The immediate threat comes from the economy. Business activity is down by about half, according to entrepreneurs and analysts. A company selling car-engine oil has seen sales drop by 80%. “And this is not a luxury product,” says one of the owners. Most firms have sacked employees or cut pay or both. According to rough estimates, unemployment has doubled this year from about 10%. Officials worry that grain supplies are low and food shortages could come soon. Trade is down between 30% and 70%, depending on where you are, and that was before a new round of sanctions imposed by the European Union, Syria’s biggest trading partner. Foreign investment, on which Syrian growth has been built in recent years, has dried up. In a recent speech, Mr Assad talked about the threat of “economic collapse”.

Public finances are in deep trouble. The president has raised government salaries and various subsidies to appease the populace. He cannot afford to do this. The government will probably print the money to meet its promises, so runaway inflation is likely, further fuelling popular anger as cash deposits become worthless.

Capital flight is rampant. Drivers on the roads into Lebanon talk of clients going from their bank in Damascus straight to one in Beirut, carrying large bags. According to one estimate, $20 billion has left the country since March, putting pressure on the Syrian pound. To slow capital flight, the government has raised interest rates. A phone company controlled by the Assad family sent out messages urging people to put money back into their accounts.

But a run on the banks cannot be ruled out. Over the past few years, about 60% of lending in Syria has been for people to buy their own cars. Many can no longer keep up with payments. A leading financier says, “If one of the smaller banks defaults, we all go down.” Some branches are even displaying millions of dollars—in bundles of notes piled head high—to reassure worried customers. Some keep enough cash in the vaults to repay almost half their depositors on the spot.

“We are heading for a brick wall,” says a man responsible for several percentage points of GDP. With the regime bust, the elite is likely to be asked to bail it out. Rami Makhlouf, Syria’s richest man and the president’s cousin, said as much during a recent press conference. Having pledged to give up part of his wealth, he added: “I call upon Syrian business leaders to follow this example because our nation is in need of support. The time has come for giving rather than taking.”

But Syria’s captains of industry are asking whether they must “go down with the ship”, as one puts it. Some are taking their children out of private schools in Damascus to send them abroad. One prominent businessman who long flaunted his closeness to the president has given a Western ambassador a list of his supposed disagreements with the regime. “For my file,” he says. Another has been donating blood to support the protesters. In Homs, the country’s third city, businesses have started paying protesters’ expenses.

The central compact of the Assad regime is breaking down. The president’s family is from a minority Muslim sect, the Alawites, who are rank outsiders in Syria, accounting for around 10% of the population. His father seized power in 1970 and struck a bargain with the richest merchants, who are mostly from the Sunni majority, who make up 75%. In return for political support, the regime pledged to protect their wealth. The merchants got rich but few warmed to the Assads or their Alawite cronies, who have behaved like mafiosi, demanding a slice of every pie. Now a growing number of merchants believes the regime has become bad for business. They think that rather than ensuring stability, it is the main cause of instability, deliberately stoking sectarian tensions to scare people off the street.

If this is the case, those pushing for an end to the Assad era should be supporting defections from the business community. Syrian commentators on SyriaComment are skeptical, though, that the business elite can be separated from the political elite, that the two are – despite belonging to different sects (Sunni vs Alawite, generally) – are part of the same inescapable establishment [again, my emphasis]:

  • The business elite is the regime today. If you are not in the regime, you are not in the elite. The converse is also true. The military elite, married to the business elite, buying the pieces of the art elite, living in the homes purchased from the builder elite, consuming the food of the hospitality elite, driving cars from the auto elite, and it’s elite this and elite that. Change the regime and a slice of this elite class will be replaced by another. Who are we kidding?
  • Presumably the country’s high net worth individuals make up its so-called business elite. If you happened to belong to this group, the last thing that you want to do is rock the boat. The wealthier you are the closer you are to the higher echelons of the political leadership. Those who have remained in the country have come to expect to be rewarded for their loyalty. Rather than move their capital overseas, they decided to invest in the country and for that they must receive certain privileges, advantages and access. Over time, this turned into a self fulfilling prophecy. By staying in the country, you were loyal and because you were loyal you gained access and certain privileges which made you more money which you reinvested more of and so on… Will any of those abandon the regime? I think that the answer is extremely unlikely. This is because most are trapped in the system. They are trapped in highly illiquid assets that are difficult to sell nowadays. Even if they were sold, transferring such funds to one’s Swiss account is most likely not going to be looked at too kindly by the security and political leadership. For the above reasons, the business elite will stick with the regime and pray that everything returns  to the status quo that prevailed before March of this year.
  • Any targeting of the Syrian economy will be considered by the business community to be an attack on them personally and on Syria. This will more likely stir an already high nationalistic sentiment in Syria today to new heights.

So who are we to believe? Are the Sunni business elite in Aleppo and Damascus sending their children abroad and moving their wealth to more stable investments outside of Syria? Or are these elite inextricable from the Assad regime? Personally, I assume that these contradictory claims stem from the vague definition of elite. Certainly some of the more connected businesspeople in Syria have benefitted so greatly from Assad’s rule that they are indistinguishable from the regime itself; however, undoubtedly, there are many other – perhaps less wealthy and connected – elite who are siding with the protesters. Fully breaking down the business class into pro-regime and anti-regime is and will be impossible as many are straddling the fence without true loyalty to either side.

If protests continue to gain support and if the Syrian economy continues to tank, certain members of the business class who are able to divest from the regime may switch sides, in a gamble to come down on the winning side; others may wish to jump ship, but will be simply too connected to the state to completely drop the president; and more will be stuck somewhere in the middle. It will continue to be important to watch how the Sunni elite act – particularly in Damascus and Aleppo. Should the Assad ship seem to be irreversibly on the path to destruction, we will see many last ditch efforts by the elite to him to get out (though many truly connected to Assad will go down with him). Yet it is still uncertain whether that ship can be steered towards ruin without the desertion of the elite.

A catch 22, in other words: many of the business elite will leave a falling regime, but the regime may not fall if the elite are still on board.

Photo from the Guardian

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