In the opening weeks of August, Syria’s Arab neighbours finally lost patience with the brutal tactics of President Bashar al-Assad. The mounting death toll among anti-regime protesters prompted Saudi Arabia, Kuwait and Bahrain to withdraw their ambassadors. The Cairo-based Arab League and the GCC called for an immediate end to the violence. Saudi Arabia’s King Abdullah bin Abdulaziz al-Saud gave a speech saying “What is happening in Syria is unacceptable … The future of Syria is between only two options: either it chooses wisdom willingly, or drifts into the depths of chaos and loss.”

What is important now is for all of us to work in order to restore confidence in the Syrian economy

Syria’s President Bashar al-Assad

Outside powers have only a limited amount of influence on events in Syria, but the statements add to the political and economic pressure on Al-Assad. The GCC states are important foreign investors in a country that badly needs the finance they can offer. International investments are largely on hold while the violence continues and the various statements serve as a warning that they may not quickly resume, even if Al-Assad’s forces do manage to get the situation under control.

Tough economic position for Syria

The president has himself publically acknowledged the tough economic position Syria is facing. In a speech at Damascus University on 21 June, he warned of the economic consequences of the civil unrest, which began in March. “We need to look for a new economic model,” he said. “What is important now is for all of us to work in order to restore confidence in the Syrian economy. The most dangerous thing we will face is the weakness or the collapse of the Syrian economy.”

If the economy dives [Al-Assad] will have lost anyway, because he’s creating the elements for a new uprising

Volker Perthes, German Institute for International & Security Affairs

Critics might respond that a new political model rather than an economic model would be far more useful for Syria today. And despite the hopes of some of Al-Assad’s opponents, there is still little evidence to suggest that the country’s economic problems are severe enough to bring about regime change.

“This has been the preferred scenario for the opposition,” says Joshua Landis, director of the Center for Middle East Studies at the University of Oklahoma in the US. “That at some point you hit a tipping point and all hell breaks loose; you begin to get the collapse of the economy, you get cascading bankruptcies and everything comes undone very rapidly. That’s possible, although we’ve never seen that in a Middle East economy.”

Syria’s economy is certainly under pressure. The nascent Damascus Securities Exchange lost more than 40 per cent of its value over the first seven months of the year and large amounts of money are thought to have moved out of the country. According to the Central Bank of Syria, the value of deposits at local banks fell from £Syr1.42 trillion ($29.8bn) at the end of January to £Syr1.29 trillion at the end of April – a drop of some $2.6bn.

Much of that is thought to have ended up across the border in Beirut. Bankers in the Lebanese capital talk of $2bn or more arriving in local banks from Syria this year, although there are no official statistics to back that up. Nonetheless, given the close financial ties between the two countries, Lebanon would be the obvious place to turn for many Syrians.

“The interest in banking with a Lebanese bank has probably increased as people try to get some money outside Syria,” says Nadim Haidar, a senior private banker at FFA Private Bank in Beirut. “Wealthy families and business people may move assets to Lebanon, the way they did in the early 1960s, which created a boom in the Lebanese economy.”

Stringent sanctions from EU

But moving money and other assets is not always straightforward, particularly in light of the increasingly stringent sanctions being imposed by the EU, Syria’s most important trading partner, and the even longer history of trade embargoes by the US. In June, the EU placed travel bans on seven individuals closely linked to the suppression of protests. The brutality of the assault on Hama on the eve of Ramadan prompted Brussels to impose further restrictions on five Syrian individuals, including asset freezes, and more are likely to follow if the unrest continues.

On 18 August, Washington added to its existing sanctions on Al-Assad’s government, freezing assets in the US and banning the trade in Syrian petroleum products. Even for those individuals not on the banned list, there can be difficulties.

“People talk about the industrial and commercial Sunni elites abandoning the regime, but that’s not going to happen soon or happen easily because they have nowhere to go,” says Landis, who runs the Syria Comment blog. “The most likely scenario for people who find the instability overwhelming is they leave the country and the wealthier you are the more likely you are to have dual citizenship or an escape route. So people will leave, but that won’t necessarily bring down the regime.

“Many of the commercial elites are not competitive outside the country. They cannot sell their investments easily. It’s likely that many people will just hold tight, baton down the hatches and try to hang in there.” That suggests a continued period of weak economic activity for Syria, something that will also cause difficulties for its neighbour Lebanon due to the ties between the two economies. Direct trade between Lebanon and Syria is at a relatively low level, although with a clear trade gap in Syria’s favour. In 2010, Lebanon bought $339m worth of imports from Syria, making Damascus only its 15th biggest source of imports, according to figures from Lebanese Customs. Exports from Lebanon to Syria were worth just $221m.

Transit route for Lebanese goods

But the economic links between the two countries are far more important than those raw statistics might suggest. For one, the black market trade between the two is believed to be substantial, if unquantifiable. Anecdotal evidence suggests that there is far more grey and black market activity in Syria now than before the unrest began.

What is clear is the impact that the unrest is having on the role of Syria as a vital transit route for Lebanon. This allows Beirut to export its goods to Iraq, Jordan, Saudi Arabia and the rest of the Arab hinterland. The overland route is also favoured by many tourists coming from those countries to visit Lebanon.

“Syria is not the biggest export market for Lebanon or the biggest source of imports for Lebanon, but it is the only exit route for Lebanese goods into the Arab world, so it is an important transit route,” says Nassib Ghobril, chief economist at Lebanon’s Byblos Bank.

The outbreak of unrest in Daraa, in the south of Syria in March, and its subsequent spread across the country, has seen much of that traffic dry up. In particular, tourists have failed to turn up this year in Lebanon in anything like the usual numbers.

Lebanon’s economy has not been helped by its own domestic political squabbles, which left the country without a government from mid January when Saad Hariri’s national unity administration collapsed until mid June when a new government was eventually pieced together under Prime Minister Najib Mikati.

Such problems have contributed to a far weaker Lebanese economy this year. It is expected to grow by around 2.5 per cent over the course of 2011, according to the Washington-headquartered IMF, less than half the rate of recent years. The domestic political difficulties have also meant that Lebanon has not been able to take full advantage of its potential as a safe haven this year, notwithstanding the flow of money from Syria in recent months.

“If the politicians would just keep their mouths shut we could benefit and the money could come here and not go to Dubai or places like that, but they all want to take sides,” says Khaleel, a restaurant manager in the Hamra district of Beirut. “This time last year, we must have had three times as many tourists.”

Lebanese banks also play a powerful role in the Syrian economy, accounting for around 60 per cent of all private banks in the country. Among the big three Lebanese banks for example, Byblos Bank has 11 branches in Syria, while Blom Bank has 25 and Bank Audi has 22 branches. To date they have reported that business has remained healthy and, although there have been some temporary branch closures, the disruption was nothing like as bad as in Egypt earlier in the year, when all banks were forced to repeatedly close their doors.

The Lebanese banks entered the market as part of the gradual economic liberalisation that Syria has undergone in recent years. Those reforms have been piecemeal and stuttering, and do not come close to the hopes that many had for the country. Nonetheless, according to some observers, the reforms that have been made could help the country to cope with the current disruption.

Reforms to help Syrian economy

“The reforms over the previous few years, the liberalisation of some sectors, the providing of incentives for foreign direct investment, reducing some bureaucratic hurdles and so on; that will help the Syrian economy overcome the current turmoil,” says Ghobril. Prior to the unrest, the IMF had been predicting GDP growth of 4.8 per cent in Syria this year. That was revised down to 3 per cent in April, but now looks set to be far lower, if there is any growth at all. Before any recovery can happen, there needs to be political stability, and that appears as far as way as ever.

According to Volker Perthes, director of the German Institute for International & Security Affairs, the continued use of force by Al-Assad’s regime is likely to store up even more economic problems for the future. “If he crushes the rebellion he can probably hang on, but he will be isolated,” says Perthes. He has already lost legitimacy in his own country and the neighbourhood.

“There will be no international investment and there will be no tourists. If the economy dives further he will have lost anyway because he’s creating the elements for a new uprising. Syria cannot survive in isolation.”