Fallout on Syria from Lebanon’s crisis is not just economic

The result has thrown the shadowy relationship between Syria and the opaque Lebanese banking sector into sharp relief.
Sunday 08/12/2019
A Syrian refugee waits in Beirut to board a bus to Syria, December 3. (AP)
Neighbourly connections. A Syrian refugee waits in Beirut to board a bus to Syria, December 3. (AP)

TUNIS - The Syrian pound hit a record low while protests in neighbouring Lebanon pressured Beirut’s banking system and choked one of Syria’s few financial gateways to the world.

Lebanon’s open-market economy and banking system have long served as vital financial conduits between Syria and the world. However, since protests erupted across Lebanon in mid-October, controls have been imposed on Lebanon’s historically robust banking sector, limiting currency withdrawals and restricting financial transfers abroad.

The fallout is bound not to be just economic. Few dispute that Syria’s and Lebanon’s fates are tightly bound. Thousands of Syria’s refugees are in makeshift camps along the Lebanese-Syrian border, reliant on international aid, much of it dispersed through the Lebanese government.

That makes the protests of acute political interest to policymakers in Damascus, who are trying to re-establish stable governance after years of civil war. However, further to the political ties between the two countries are economic ones, which  predate Syria’s civil war, that decimated Syria’s economy. As such, businesses, wealthy families and Syria’s diaspora have relied on Lebanon’s banking sector and its high rates for financial security or to transfer money from abroad to relatives in Syria.

As unrest has overtaken Lebanon, dollar transfers to Syria have dwindled to next to nothing, Reuters reported. “These deposits are now trapped. You can imagine the aftershocks from this which is beginning to surface in the Syrian economy,” a senior Lebanese banker who handles accounts of wealthy Syrians told Reuters on condition of anonymity.

As the supply of dollars has shrunk, Syria’s pound, pegged at 47 to the dollar prior to 2011, was trading at a record low of 1,000.

One middle-aged Syrian in Damascus told VOA News he couldn’t understand what was happening. “The supermarket, the vegetable man and the taxi drivers tell us that prices are rising because the dollar is rising. It makes no sense, though, he says, because we’re in Syria and we’re paid in Syrian pounds. Who cares what the dollar is worth?” he asked.

Lebanon’s banking sector and its role in ensuring the supply of hard currency to Syria is becoming apparent.

“Lebanon’s banking sector is one of the few remaining viable ways for Syrians to get access to dollars and to trade with the wider world,” said Ryan Bohl, Middle East and North Africa analyst with risk consultancy Stratfor.

“Although the Jordanian border has reopened and Syria now controls some Iraqi border posts again, trade between those countries hasn’t rebounded back to pre-war levels and they don’t have major financial sectors either. So this is a key financial route for Damascus to maintain access to capital.”

Given the opaque nature of Lebanon’s banking sector, no one can be certain about precisely who in Syria may be benefiting from its loose controls.

“Nobody really knows if Syria’s government or its top leaders have money in Lebanon,” Bohl said. “They probably do, at least on a personal level, in part because it’s a safe place to park their money but in the sense of Syria’s Central Bank and its very small reserves (which are propped up by Iranian credit lines and Russian aid), there’s less direct exposure to Lebanon’s financial sector.”

While the extent of Damascus’s financial commitments in Lebanon’s banking sector is unclear, there is a network of Syrian businesspeople who rely on the sector to import goods to Lebanon, which can be transported or smuggled to Syria.

“Syrian businesspersons are also using this sector to avoid sanctions impact and to be more flexible in trading with Western companies,” said Zaki Mehchy, a fellow with Chatham House, a think-tank in London.

“It is worth mentioning that many Syrian businesspersons have made fortunes from violence and conflict-related activities such as smuggling, kidnapping, arms dealing and human trafficking and, unfortunately, they are using the Lebanese banking sector to clear their money through projects inside Lebanon or transactions with foreign companies.”

After more than a month of unrest, the future of Lebanon’s declining economic fortunes, which sparked the current protests, is uncertain.

Dramatic slashes to the central bank’s interest rates, a factor that had made the sector so attractive to Syrian investors in the first place, has been like “bringing a bucket to a wildfire,” Farouk Soussa, an economist at Goldman Sachs, told the Financial Times. “It’s helping but at the margins.”