North Africa, West Asia

Syria's war economy

The economy is the bedrock that any future Syria will be built on. This excerpt from the concluding sections of ECFR's policy brief explores what is left of that bedrock, how it has been transformed, and what European states can do in the light of the current state of Syria's economy.

Jihad Yazigi
21 May 2014
Primitive oil refining in Deir Ezzour, Syria. Photo courtesy of the Syrian Observatory for Human Rights

Primitive oil refining in Deir Ezzour, Syria. Photo courtesy of the Syrian Observatory for Human Rights

The fragmentation of the Syrian economy

Alongside the development of new forms of business based on the conflict, a fragmentation of the Syrian economy is also taking place. The parts of Syria under the control of the government – almost all the main cities in addition to the coast and the Suweida governorate in the south – are often no longer connected with each other; Kurdish armed groups are partly in charge in the northeast and other pockets around Aleppo; the rest of the country is controlled by dozens of different opposition brigades. In the rebel-held north, much of the needs of the population – cars, oil products, some food items – are imported from Turkey. Oil extracted by rebel groups and farming products are also sold through Turkey.

In regions outside of government control, new institutions have been created to take charge of daily life. In the Ghouta suburbs of Damascus local councils manage the life of the inhabitants and ensure supplies of products and services. In the city of Manbij, a police force and a workers union have been established. In January 2014, de-facto Kurdish decentralisation was formalised with the creation by the Kurdish Democratic Union Party (PYD), the most powerful party on the ground, of local administrations to govern daily life in the three main areas under its control, around the city of Qamishli in the northeast and in two pockets north of Aleppo. In March 2014, the creation of the Higher Council for Local Administration (HCLA), a grouping of local administration groups was announced. While this grouping was only one of several similar groupings announced over the last two years, it confirmed the entrenchment of the decentralisation experience. In the statement announcing its creation, the HCLA said that it would work to move Syria “from a centralised dictatorship to decentralised freedom”.

The loss of the northeast to the opposition in the spring of 2013 was particularly sensitive for the government, given that the region contains all of the country’s oil wealth and a large part of the grain and water resources. In response to its losses, the regime has sought to redirect economic resources to more secure areas of the country. The government has publicised new projects in the more stable coastal area and encouraged investors to relocate there. These projects have included a civilian airport in Tartous (despite there already being an airport in nearby Lattakia), several university faculties, a solid waste treatment plant and a tobacco-processing centre.33 A free trade zone in Lattakia has also been enlarged to accommodate new investors. In January 2013, the government received a loan from Tehran to build a 650MW power plant in the coastal area. If these projects materialise, which is by no means certain, they will increase the attractiveness of the coastal area and provide the regime with the beginning of an alternative economic base to make up for losses elsewhere.

Coupled with these developments fostering growing decentralisation, opposition forces have also received important external backing aimed at strengthening their independence and hold over territories seized from the regime. This support has largely come in two forms: humanitarian aid aimed at alleviating the suffering of the population, provided by regional states, international organisations, Syrian expatriates, and private donors from across the Gulf region; and military aid, mainly provided by Gulf states, in particular Qatar and Saudi Arabia, as well as rich private funders from Kuwait and Saudi Arabia. As with all data on the opposition areas, measuring the size and allocation of these funds is challenging.

The importance of donations from private charities in the Gulf, channelled through informal networks, complicates the task. Contrary to the government side, where private donations have remained limited, large Gulf-based networks have poured hundreds of millions of dollars into opposition groups. In Kuwait alone, the aid has reached the hundreds of millions of dollars, although these amounts may not necessarily all be originating from the country. Relatively lax terror-financing regulations have encouraged many donors from other Gulf countries to channel their funds through the country. Beyond financing the armed struggle, this money has been used to fund a wide selection of projects in opposition areas, such as hospitals, water wells, or bakeries.

Even as fragmentation deepens and the central government’s hold over the country grows ever weaker, some economic interaction between the areas controlled by the regime and the rebels has continued. In Aleppo, after the Sharia Authority, which manages civilian life in opposition areas, threatened to cut water supplies to government-held areas if electricity outages were not discontinued, a “water-for- electricity” deal was agreed by the two sides. In Idlib, rebel groups owning wheat stocks reportedly struck a deal with local government officials who controlled a flour milling plant. In April 2013, reports emerged that Jabhat Al- Nusra had struck a deal with the government to supply it with oil after it took over several oil fields in Deir-ez-Zor. These economic linkages may represent one of the very few tangible means of exerting mutual compromises out of the warring parties.

Even so, the relative autonomy gained by local stakeholders is clearly creating strong interests and localised power centres that are likely to clash with any future central government should it want to reassert the level of control exerted by Damascus prior to the war. Control of natural resources, such as oil and water, or over access to border posts and ports, will likely be a major source of ongoing competition. More broadly, the relationship between the different regions and the capital, the respective dependency of the one towards the other, the level of autonomy granted to local powers and the future of the institutions created during the war will all be sources of ongoing friction given that newly empowered groups and regions are unlikely to willingly cede what they have gained.

Towards a solution

Three years after the Syrian uprising began there is no end to the conflict in sight. An uprising that began as a call for a fairer, freer, and more dignified life has been transformed into a prolonged civil war. As it has developed, both regime and rebel sides have taken advantage of the shifting dynamics to ensure their ongoing ability to mobilise resources behind their fight. A growing number of individuals and groups on both sides of the divide are now reaping significant material benefit from the ongoing conflict, which gives them a powerful incentive to prolong the fight from which they are profiting. Many rebel brigades are now believed to focus entirely on their business operations, and have effectively given up the fight against the regime. For these, and many other individuals and groups on both sides of the divide, the ongoing war is now cementing lucrative new money-making opportunities.

At the same time, the control of the central state has been fatally weakened and new forces and actors have seized control across the country. These new power centres have been particularly empowered by access to and control over key economic resources, such as oil in the northeast or border crossings along the Turkish border, which have provided economic independence, helping to cement local holds on power.

Europe’s most important tool over the course of this conflict has been the imposition of sanctions. Although it has a significant financial impact on the regime’s revenue streams, it has not produced the desired political impact. The sanctions, which were initially supposed to coerce the regime into accepting the demands of its population, have broadly failed in their political goals. Meanwhile, they have contributed in their own way to the war economy by strengthening new supply networks to bypass them. The sanctions have also given the Assad regime a scapegoat for the public cost of the conflict; had a humanitarian impact by limiting supplies and increasing the cost of imported foods, medicines, and other products such as equipment for waste treatment plants; and have served to tighten the regime’s dependence on external actors, particularly Iran.

In partial recognition of some of these effects, the EU decided in the spring of 2013 to partially lift its ban on Syria’s oil exports to allow for the export of crude from regions under the control of the opposition. This relaxation of sanctions was intended to generate new sources of revenues – and local sustainability – in opposition-controlled areas. In practice, however, the measure had little impact because one of the conditions for lifting the ban was that the proceeds would go to the National Coalition, the opposition grouping recognised by western countries, but which has little meaningful leverage with the fighting groups that control the fields.

Europe now needs to more carefully consider the implication of sanctions. While the measures imposed have already had an impact that is irreversible, European states must resist falling back on the default measure of imposing new sanctions for lack of other alternatives, when it wants to make a further stand against the Assad regime and its supporters. Given the urgently deteriorating humanitarian catastrophe, Europeans should also constantly reassess the impact of sanctions. While there are obvious risks that regime cronies may benefit from loopholes, this should not impede a “liberal” application of the sanctions regime on humanitarian grounds. In particular, a reduction in procedures with regards to trade and banking transactions to speed up supplies of medicines and food should be considered.

Meanwhile, although the civil war is fundamentally a struggle for political power, Europeans need to take into account the emergence of powerful economic interests when it comes to thinking about what it will take to draw the fighting to an end. In particular, the fragmentation of the Syrian economy makes it increasingly difficult to envisage the reconstitution of the pre-uprising central Syrian state. The new forces created by the emergent war economy are almost certain to powerfully resist attempts to rebuild central control over Syria and will likely only support a settlement based on a large degree of local political and economic autonomy. Although many Europeans would prefer to re-establish a strong central state, they should consider a transition premised on a decentralised state.

Given the growing strength of localised actors, European policymakers need to do more therefore to empower the capacity of local councils across the country. These efforts are already starting to take place, and should be actively pursued. Efforts should not be geared only towards humanitarian aid but focus rather on providing the means for the self-sustainability of these regions for as long as a broader new political dispensation remains elusive. A more decentralised political system could even be part of the solution to the Syrian conflict, providing a means of working towards a new national consensus from the bottom up.

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This is an excerpt from the European Centre on Foreign Relation's policy brief on 'Syria's war economy' released on 7/4/2014 and republished with the permission of the Middle East and North Africa programme. For the full report click here.

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