Syria: Binding economic ties

19 October 2007
Strong links between Lebanon and Syria persist despite Damascus' withdrawal of troops and ongoing political tensions.

The snaking line of trucks crossing the mountainous border between Lebanon and Syria affirms a healthy flow of goods and services in both directions. But this is only the visible part. Few would guess the two countries' governments are in a state of barely-contained war. Movement of arms, ammunition, contraband and other illicit goods represent another side to the sometimes tortured relationship between Syria and Lebanon.

As Lebanon's main overland trans-shipment route, Syria remains a key trade partner. For its part, Lebanon has always positioned itself as the 'lung' for the shackled Syrian economy to breathe through. Not that it had much choice. For nearly 30 years, Damascus was the dominant political force in Lebanon, its influence extending into every part of Lebanese life.

Unravelling relationship

Until the unravelling of that relationship in the aftermath of the assassination of prime minister Rafiq Hariri in February 2005, Syria bound Lebanon in a close security and military embrace. Syrian mukhabrat were ever present. Syrian roadblocks rammed home to the Lebanese who was really in charge.

Even into the late 1990s, visitors to Beirut International airport would be greeted by portraits of Syrian president Hafez al-Assad and his favoured son, Bassil, rather than the Lebanese president or prime minister.

From its promontory in the Bekaa valley town of Aanjar, Syria ensured it dominated the business world. Senior Syrian figures secured protection commissions from the Lebanese post-war construction boom, and were prominent in a range of key business deals, such as the first GSM phone contract awards to Celis and Libancell in the mid-1990s. At Beirut port, they allowed importers to circumvent Lebanese customs duties by paying lower fees to them instead. Through intricate patronage networks, Damascus obtained the loyalty of numerous Lebanese clients who could be relied upon to serve Syrian interests.

Such links went to the very top of the Syrian hierarchy. 'This was a strong state controlling a weak state, so Syria got all kinds of benefits,' says one Beirut banker. 'But it was not a very acceptable business relationship to begin with.'

A hint of the nature of such links was provided in a lawsuit filed by Lebanon's Al-Madina Bank this year against Syrian General Rustom Ghazaleh and three brothers, accusing them of spiriting away $72 million from the bank between 2000 and 2003.

Syria's Baathist regime traditionally left economic policy to Lebanese governments, concentrating on the security and military domain. This division served both sides. In 1992, a run on the Lebanese pound provoked a serious economic crisis, with rioters taking to the streets. Damascus quickly realised that to keep Lebanon stable, it needed a strong economy. This is where the billionaire Hariri came in. The prime minister, with strong Saudi connections, was the man the Syrians believed could deliver economic prosperity. Hariri was cut enough slack to revive the economy, overseeing a£Leb 27 trillion reconstruction drive.

Reconstruction programme

Despite racking up massive debts in the process, Hariri largely oversaw a successful reconstruction programme, returning macroeconomic stability. Gulf investors piled into Lebanese real estate. But by the late 1990s, strains were becoming evident. The continued Syrian presence, underlined by its close ally President Emile Lahoud in Baabda palace, undermined any feel-good factor. Syria's role as a trans-shipment point for arms from Iran sustained a close relationship with Hezbollah, Lebanon's Shia political movement, which has drawn a heavy toll in Israeli attacks. Hariri's increased conflict with Lahoud, which gained traction in 2004 with the controversial three-year extension of Lahoud's presidential mandate, tore into the heart of Lebanese-Syrian relations. The Syrian leaders with whom Hariri did business long-serving vice-president Abdel-Helim Khaddam, army chief Hikmat Shehabi and military intelligence chief Ghazi Kenaan were soon sidelined in Damascus.

The equation was changed by the virulent local reaction to Hariri's assassination. President Bashar al-Assad's speedy withdrawal of Syria's remaining troops in April 2005 appeared to offer a new beginning in the relationship. Now the pro-Western government of Fouad Siniora is barely on speaking terms with Damascus, yet the two countries remain inextricably linked albeit uncomfortably in many ways.

Syria still exerts influence as a major trading partner and through a series of business networks involving many Lebanese individuals and companies. Both economies have large informal sectors, with significant scope to weave intricate cross-border ties.

Lebanon still needs Syria. 'If you look at the labour relationship, there are still hundreds of thousands of Syrian workers in low-skilled jobs in Lebanon,' says Nassib Ghobril, head of research at Byblos Bank. 'Syria is the exit point for Lebanese exports.'

Some of the trade is formalised in trade agreements. Lebanon and Syria have four bilateral co-operation agreements in the fields of economy, transport, agriculture and health. Free passage is guaranteed to Syrian exports on all but 17 agricultural products. About one-third of Lebanese depend on the overland Syrian border route.

Growing international pressure on Syria has had a surprising short-term impact in intensifying trade relations. With the US tightening the sanctions net on Damascus, Syrians have resorted increasingly to Lebanese re-exports.

Even so, trade volumes are not particularly high. Lebanese exports for the first five months of 2007 reveal Syria in third place with $80 million 7.4 per cent of the total. Lebanon, meanwhile, accounted for less than 10 per cent of Syrian exports in 2006. Iraq and Turkey represent far bigger trading markets for Syria.

Overcoming politics

Necessity overrides political considerations, a trait ingrained in Levantine commercial culture for generations. 'Relations are so intimate that most political situations can be overcome,' says Joshua Landis, an expert in Syrian politics at the University of Oklahoma.

The Syrian economy depends on the remittances of up to one million Syrian labourers in Lebanon, estimated at about $4,000 million. No Lebanese construction project would ever get off the ground without a ready supply of competitive Syrian labour to draw on.

Yet politics does occasionally intrude on commercial ties. At the height of the difficulties between the countries in 2005, Syria closed its border with Lebanon for six weeks, dealing a severe blow to goods trans-shipments. Beirut accused the Al-Assad regime of manipulating the flow of cross-border traffic to exert pressure on Lebanon's economy.

The Syrian government has, in the past year, imposed a£Syr 500 ($9.80) a day charge on nationals crossing the border to Lebanon, which has curbed visitors heading to Lebanon to shop.

The architecture of business relations is changing. Where wealthy Syrians used to 'offshore' their banking and business transactions to Lebanon, attracted by robust Lebanese bank secrecy laws concentrated in the Bekaa town of Chtaura observers say the political climate has made them more hesitant about doing deals on the other side of the border.

Syrians now sense that the old black-market trade through Chtaura is coming to an end. Despite a residual reluctance to repatriate their savings to Syria's new private banks, change is in the air.

The Hariri assassination had an unexpected impact on Syrian-Lebanese relations. Initial expectations that a sanctions-wracked Syrian economy, stripped of its Lebanese territory, would quickly unravel proved unfounded. In fact, it is the Lebanese economy that has struggled though many Lebanese accuse Syria of being the prime culprit behind its present state of fragility. 'The withdrawal from Lebanon is a driving force for reform in Syria,' says a Western diplomat in Damascus. 'Before 2005, everyone went to Chtaura to bank. If they wanted to import, they went through Jounieh port [north of Beirut]. Now they don't want to bank in Lebanon, and this is helping them to remove the domestic blockages to reform.'

Syria's economy is undergoing a mini-boom. Private investment has strengthened, the government has tweaked the investment climate and GDP growth exceeded 5 per cent in 2006.

The expedient capitalisation on Lebanon's difficulties in August 2006 suggests the Lebanese should not think Syrians will always be their poor relations. 'Many predicted Syria's economy would crash and that the [Al-Assad] regime would totter, given that the Syrian economy had been sucking blood out of the economy,' says Landis.

'But we are seeing something different: Syria is proving it could live without Lebanon, if not today, then at least in the future.'

Though the past two years have proved that relations can ride out tough political problems, the full benefit of the two countries' economic interdependence is only likely to be realised if ties are brought onto an even keel.

In the near term, political rapprochement looks a distant prospect. The passage of UN Security Council resolution 1757 on 30 May, endorsing a special tribunal on the assassination of Hariri, has stoked Damascus' ire. The Siniora government sees the tribunal as a touchstone issue reasserting the sovereignty of Lebanon. But Syria still views Lebanon as a strategically vital interest. The Syrian involvement alleged by many to be behind the assassinations of several Lebanese politicians suggests an all-too-close interest in its neighbour's affairs.

The Al-Assad regime is riled at the actions of the March 14 camp in Lebanon. Druze leader Walid Jumblatt's meetings with exiled former Syrian vice-president Abdul Halim Khaddam in Paris proved inflammatory. Al-Assad views Jumblatt as a 'water carrier' for the now--alienated Khaddam in Washington.

Foreign troops

The Syrians are refusing to accept the deployment of foreign troops along the border, as envisaged under UN Security Council resolution 1701, ending hostilities between Israel and Hezbollah in 2006. If Beirut gives the green light for UN troops to be deployed along the border, Damascus has hinted it will impose a more stringent trade blockade on Lebanon.

Many Lebanese believe Syria will never be happy until it is back in charge. But others detect a long-term shift in attitudes to its smaller neighbour. 'Syrians have no interest in going back to Lebanon and they are glad they have got that headache out of the system,' says the Damascus-based Western diplomat.

That does not mean Damascus will not seek to play Lebanese politics to its advantage, but there is at least the prospect of a better relationship. 'Assad has indicated his willingness to draw a final border once the political issues are resolved,' says the diplomat. 'He is dangling this proposition in front of the Lebanese: if you help us get the Golan Heights back, we won't need Hezbollah. And promise us you won't be used as a beachhead to destabilise Syria.'

The topography of the relationship may have been transformed by two turbulent years, but many Lebanese recognise that Syria may never be completely sidelined for good or bad.

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