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Syrian economy can survive Iraq war but needs reform

BEIRUT Syria’s command economy may be able to survive a war on Iraq, but analysts say only market reforms can cushion the loss of alleged cut-price contraband oil from next door and a captive market for cheap goods.

Iraq halted oil exports to Syria in the early days of the US-led war after supplying it with up to 200,000 barrels per day (bpd) outside the UN oil-for-food programme for the past two years, a Syrian industry source said this week.

That heavily discounted oil let Syria sell most of its own crude production on world markets at a handsome profit, making at least $500 million in revenues from illicit oil last year, according to one Syrian economist.

“They will be going from a windfall to significantly less,” one Western diplomat said. “There’s no monetary policy in Syria, so it is hard to say what they would do instead.”

Losing this major foreign currency-earner could plunge Syria’s economy into a downturn, diplomats and analysts say, and force Damascus to modernise state industries and speed development of its gas and oil sector.

Syria says it was only testing the Iraqi-Syrian pipeline, which was shut for nearly two decades when the former foes had cut ties, and that all dealings adhered to the sanctions regime.

A staunch opponent of war on Iraq, Damascus has come under growing pressure to distance itself from Baghdad since the fighting began more than two weeks ago.

“Syria stands to lose an enormous amount from this war (economically),” said Yahya Sadowski, a political science professor at the American University of Beirut.

Diplomats say a US-backed government in post-war Iraq would be unlikely to grant Syria, on the US-list of state sponsors of “terrorism”, favourable business terms.

While high oil prices could help Syria recoup part of its loss in the short run, economists say that boon might be reversed post-war, once Iraq’s vast supplies are brought on tap.

Syria may miss the extra cash from Iraq, but some economists say it has enough foreign exchange to cushion the fall for now, and its own oil production of about 500,000 bpd can meet immediate domestic needs.

“Iraqi oil was a boost for Syria’s economy, but is not essential,” said Syrian economist Nabil Sukkar. “Syria has been alright as far as foreign exchange is concerned since it discovered and started extracting its own oil.”

But Syria’s oil reserves are dwindling and economists and diplomats say it must find new oil or develop its gas sector fast if it is to continue seeing revenue from energy exports.

Syria produced 4-5 billion cubic metres of gas in 1999 and sees that doubling by 2005. It has given five foreign firms oil exploration rights and chose three to develop existing sites.

Syria has also taken a series of steps since 2000 to liberalise a financial system nationalised in the 1960s, streamline state firms and modernise the regulatory framework.

Diplomats and analysts welcome those steps but fear they might prove too little, too late.

“We are afraid that they will really have to make a big jump,” another Western diplomat said. “They are doing all the right things to reform, but the risk is it won’t be enough.”

Either way, Syria’s ties to Iraq do not stop at cheap oil.

Since 2000, the two countries have signed accords to boost a commercial relationship worth up to an estimated $2 billion a year, not including illicit oil.

While foreign trade comprises just a fraction of Syria’s income, partly insulating it from the shock of losing the Iraqi market, diplomats and analysts say that loss will still hurt.

Syrian firms that upped exports including food, electrical appliances and cleaners to Iraq in recent years and built factories to supply that market will likely be hard hit.

“After the war, Syrian companies will not have that captured market. They will have to compete with other companies from around the world for the Iraqi market,” one Western diplomat said. “Syria will be shut out of Iraq as they can’t compete.”

Economists say Syria is seeking new markets in the Arab world and eastern Europe, but that they would take time to foster. Others said Syria would do fine without Iraq.