Syria Cracks Open Its Frail Economy

[meowmeowmeow 1]

• SEPTEMBER 1, 2009

Syria Cracks Open Its Frail Economy

By JAY SOLOMON <h3 class="byline"> </h3>DAMASCUS -- Syria is accelerating its economic opening -- boosting U.S. hopes that its tight relationship with Iran might be weakened.

For decades, Syria has been defined by its rigid socialist economy and its military ties to Iran against Israel and the West. Trade sanctions have taken a heavy toll: More than half the 16 jets in Syria's state airline can't fly for lack of spare parts.

But President Bashar Assad -- heir to his family's political dynasty -- has started unshackling the economy by permitting private banks and insurers to open shop and by letting Syrians hold foreign currency without risk of being tossed in jail. In March, he opened Syria's first stock exchange. Nearby are a Ford showroom and a KFC restaurant.

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Reuters Syria's President Bashar Assad.

His four-year-old overhaul is now getting an unexpected lift from Washington. This fall the U.S. plans to name an ambassador to Damascus, its first in years. And in late July the State Department eased some sanctions set by President George W. Bush to punish Syria's support for militant groups Hezbollah and Hamas.

"Now we can begin to pursue new projects and improve our commercial ties to the U.S.," Syria's central-bank governor, Adib Mayaleh, said in his office, just hours after the sanctions rollback. His first step: Order some Oracle Corp. software to help run the central bank.

The Obama administration's policy shift on Syria is contentious. Just last year, U.S. special forces raided Syrian territory to disrupt alleged cross-border terrorist activities there. Iraq accuses Syria of helping orchestrate last month's massive suicide bombing in Baghdad that killed more than 100 people.

U.S. officials say their policy is aimed at weakening Syria's ties to Iran as part of a broader push for Arab-Israeli peace and a stable Iraq. In recent weeks, Pentagon officials reached agreement with Syria to more tightly police the Syria-Iraq border as U.S. troops withdraw.

President Assad's changes face pushback at home. Top members of Syria's ruling Baath Party say he is betraying the socialist agenda of his father, Hafez Assad, who served as president for three decades before his death in 2000. Liberal economists, meanwhile, say he isn't going far enough.

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Reuters Travelers inspect the goods in a handicraft shop in Syria, which is trying to reverse decades of underinvestment in the tourism business as part of its economic makeover.

Critics of the Assad regime claim the changes could simply be a tool for transferring state assets to members of the president's inner circle. Rami Makhlouf, an Assad cousin, has come to dominate the Syrian telecom and tourism trades amid the economy's opening. Last year, the U.S. Treasury barred American firms from doing business with his companies due to charges of corruption.

In an interview last year, Mr. Makhlouf denied the charges.

Mr. Assad's overhauls lifted economic growth to above 5%, on average, since 2004, according to the International Monetary Fund. But money is tight. In recent years, Syria swung to an oil importer from exporter. Twice in the past year, Damascus cut state subsidies on diesel and fertilizer, triggering inflation.

More recently, Syria's growth has been slowing again amid the global downturn. The economy will expand only 3% this year, according to IMF projections.

Perhaps the biggest challenge Mr. Assad faces is dismantling Syria's bureaucracy. The government is the largest single employer, involved in everything from energy to tourism.

At the same time, democracy activists are agitating for political reforms. Nearly 50 years ago, amid a flurry of coups, Syria declared a "state of emergency" -- which has never been lifted. To this day, Syrians can be detained and imprisoned without trial.

"How can our economy thrive, when we don't have functioning courts?" says Ammar Qurabi, a democracy activist who heads the National Organization for Human Rights in Syria.

Syrian leaders cite China as a role model: Economic opening married to strong social control. Without a tight social rein, they say, the risk is political destabilization. "We need to invest in political stability to promote economic stability," said Mr. Mayaleh, Syria's central-bank governor.

Mr. Assad, a 44-year-old ophthalmologist, assumed power in 2000, following his father's death, and immediately stirred hopes in the West that Syria would embrace serious change. His inaugural speech outlined a softening of his father's one-party state. He spoke of bringing Syria into the information age.

Julien Barnes-Dacey A billboard advertising Western wares outside a Damascus mall.

Washington's hopes faded. Mr. Assad's speech spawned cries for political freedom, a moment known as the "Damascus Spring," but then a government crackdown. The U.S.'s 2003 invasion of Iraq led to years of direct confrontation between Washington and Damascus.

U.S. officials charged Syria with helping usher al-Qaeda fighters into Iraq and with supporting anti-Israeli Hezbollah and Hamas militants. Israeli jets bombed a Syrian installation in late 2007 that the U.S. believes was a nascent nuclear reactor, a charge Damascus denies.

U.S. officials also believed Damascus ordered the 2005 assassination of Lebanon's former prime minister, Rafik Hariri.

"We always made it clear to the Syrians that we were open to changes in the relationship. But they were knocking people off in Lebanon and providing the main highway for jihadists going into Iraq," says Elliott Abrams, President George W. Bush's top Middle East adviser during both his terms.

Syria denies any hand in the murder. It acknowledges some senior Iraqi figures from the Saddam Hussein era live in Syria, but it denies supporting actual insurgents.

Damascus's conflict with the West aided Syria's economic opening in some ways, Syrian officials and businessmen say. Mr. Hariri's murder fueled mass protests in Beirut that sent thousands of Syrian entrepreneurs back home -- bringing with them financial expertise and money.

Entrepreneurs are returning from America, too. Among them is Louay Habbal. A former Citibank and Merrill Lynch executive, the financier returned to Damascus in 2006 after 28 years in the U.S. The 49-year-old has established a private bank and brokerage firm, Pioneers Securities, which managed one of Syria's first public stock offerings, a cement company.

Operating out of a one-floor office on Damascus's main thoroughfare, Mr. Habbal's 14-person staff includes just five stock brokers, a computer specialist, and financial comptroller. If trading is light, there is a good reason: The Damascus Securities Exchange lists just 13 companies. Most of the listed companies are banks.

The Boston University-educated Mr. Habbal believes Syria's nascent financial opening is already breeding a consumer mindset that will provide fresh opportunities for foreign investors.

"The train's already left the station," Mr. Habbal says. "It's going to be next to impossible to turn back this economy."

That nascent consumer culture in Damascus runs counter to the Baath Party's socialist mores. High-end boutiques and coffee houses dot the upscale Malki district. A new Four Seasons Hotel has opened across the street from Ottoman-era tombs. Teenagers cruise the Cham City Center mall chatting on cellphones and driving European and Asian cars made affordable by big reductions in import tariffs.

President Assad's moves to loosen Syria's system are apparent on the campus of the Arab International University, 45 minutes outside Damascus. The AIU is one of 15 private universities accredited since 2004. Students and faculty hail from across the Middle East and Europe. Courses are virtually all taught in English, a symbolic move away from Hafez Assad's fixation on forging Arab unity.

On a recent afternoon, construction crews labored to build new dormitories, classrooms and basketball courts in the Syrian desert. The school is preparing to enroll nearly 5,000 students, up from just a handful when it opened in 2004.

Traditionally, Syrian universities required students to memorize the works of Hafez Assad and the dictums of the Baath Party. At other Syrian schools, classrooms often hold 400 students, rather than the average of 40 at AIU.

"We're now the best university in Syria," says president Abdul Ghani Maa Bared. "Our methodology is different."

Syrian businessmen say new schools like AIU are crucial to providing human resources often not available inside their country. "People are no longer happy with their standard of living. They realize they need higher education," said Rateb Al Shallah, a former president of the Syrian Chamber of Commerce.

The stirrings of life in Syria's economy aren't benefiting everyone. In places like the Mohey al-Din souq, a traditional Arab market at the foot of Damascus's Mount Kassioun, vegetable vendors, bakers and butchers line narrow alleyways that feel far removed from the Benetton boutiques of up-market Damascus. An influx of more than one million Iraqi refugees into Syria since 2003 has helped drive up housing prices in the city by fourfold..

"Everything, from food to rent, has increased in price over the last five years," says Faruk Azzat, a 40-something vendor who runs a shop selling pirated DVDs. "Life is getting so much harder."

Nearby, taxi driver Jamal al-Hariri says the cost for meat has jumped in recent months to 700 Syrian pounds per kilo from 300 pounds, in part due to the slashing of government subsidies. "I can't afford it any longer," he says.

Any semblance of unrest is quickly tamped down. Dozens of Syrians campaigning for an end to the government's nearly 50-year-old "emergency law" -- which allows for detentions without trials -- have been arrested during Mr. Assad's tenure. And while most have been released, a sense of despondency has crept into Damascus's human-rights community.

On a recent afternoon, Mr. Qurabi, the democracy campaigner, nervously monitored his cellphone in a Damascus cafe as he drank coffee with fellow activists. The government had just launched a crackdown on his organization for operating without licenses. One member had been arrested. Mr. Qurabi worked the phones to see if others had been detained, or if he might be next.

"Now I'm nearly hopeless about political change here," the 40-year-old said, between drags on a cigarette. He said the Obama administration, by easing sanctions on Syria, seemed to signal that "other things than democracy are more important for the U.S."

Senior Obama administration officials acknowledge that human rights remain a major problem in Syria. But they argue that the Bush administration's attempts to isolate President Assad only made the regime more repressive. The White House, in returning a U.S. ambassador to Damascus, will be able to more directly press democracy issues, the officials said.

Underpinning U.S. policy toward Syria is a desire to isolate Iran. Syria's economic overhaul, and its appetite for Western technology and money, could push President Assad to shift his foreign policy, U.S. officials say.

Syria has a strong military alliance with Iran since that nation's 1979 Islamic revolution and the overthrow of the Shah, who had military ties to Israel and the U.S. Syria also backed Tehran during the 1980-88 Iran-Iraq war, breaking with other Arab states. And Damascus and Tehran have teamed up to arm and train Hezbollah, Hamas and other militants fighting Israel. Late last month, President Assad traveled to Tehran to endorse the scandal-plagued re-election of Iran's President Mahmoud Ahmadinejad.

Despite these ties, Iran is a relatively small player in Syria's economy compared to Arab and Turkish investors. One of Tehran's biggest investments: In 2007, Iran's state-owned auto maker opened factories outside Damascus and Homs to build a sedan, the Sham (the Arabic word for Damascus).

Members of Mr. Assad's government say that while they are determined to improve their relationship with the U.S., they are also keeping their options open when it comes to Iran.

"Syria's a friendly country toward Iran. That's not a secret," said Fayssal Mekdad, Syria's deputy foreign minister, in an interview last month. "We believe we can play a role in solving misunderstandings" between the U.S. and Iran.

—Julien Barnes-Dacey contributed to this report. Write to Jay Solomon at jay.solomon@wsj.com

Printed in The Wall Street Journal, page A1 Copyright 2009 DowJones

[S and S 12]

Wish there would have been a KFC when I was there, lol.

I would like to see relations between the US and Syria open up more. I just hope that life for the Syrians improves and that it doesn't come back to haunt the US later.

[meowmeowmeow 1]

Wish there would have been a KFC when I was there, lol.

I would like to see relations between the US and Syria open up more. I just hope that life for the Syrians improves and that it doesn't come back to haunt the US later.

kfc stinks...yeah i saw two i think when i was there...it was pretty nice

i saw signs of change, but it's going to take a while...hopefully things improve over the next few years.

[S and S 12]

It really wasn't a bad to place to visit, not like what they made it out to be according to the media. Of course its the politics between the US and Syria that are the real problem.

lol, about KFC, its not the best, but I think I would have just liked something familiar while I was there. Then again, I kind of liked that Syria was mostly untouched by the west compared to many other countries. It had such an old feeling to it.

[Donna A 4]

where were the KFC's. i didnt see anything american when i was there. the second time i went i did see someone selling pepsi products. my husband thought they were probably smuggled in or something cuz he never saw it there before.

[meowmeowmeow 1]

where were the KFC's. i didnt see anything american when i was there. the second time i went i did see someone selling pepsi products. my husband thought they were probably smuggled in or something cuz he never saw it there before.

i'm really bad with names, but it was near rook eldeen (if that's how you spell it??) going towards a nice area, 5 minutes from where the embassies are mainly congregated...

pepsi products...weird? i don't remember bebsi but there was coke and sprite and 7/11 and all that...

it's starting to change, slowly but surely...

there were areas that, if i had the money and leisure...i'd definitely go and retire in. just GORGEOUS...

i've only been to jordan to compare to another arab country but i definitely was surprised, i think syria has way more to offer and is more intriguing, cheap, etc etc...people are lovely...nice mix of everything.

ive been to jordan three times and detest it...it's too expensive (last year i spent nearly $3000 for a horrible hotel room, horrible food, etc), not much to see, people are ....unique let's say...etc. i think there's huge potential there, but the system is not allowing for it..and in essence this "system" exists in all of the middle east...no room for the middle man to grow.

i hope that the middle east will be more innovative in years to come...more openness, development, etc....it can be great if given the chance to really experiment with new ideas and what not.

[S and S 12]

Thats weird you guys didn't see the Pepsi. That is all my husband drinks and he bought it every day at a little store by his apartment building though I saw it in every shop we went to when we were out. This was in 2007 so not that recent.

Oh, and Syria makes its own pepsi in the country. I guess they work out some deal to get the recipe, but it tastes the same to me.

Edited September 11, 2009 by S and S

[Donna A 4]

i had a stomach ache and asked my husband to get me 7up and he came back with something called cheer up. said they didnt have anything called 7 up. it was similar though. he told me he couldnt find any american pops there.

[S and S 12]

I know I drank Pepsi while I was there, lol, not sure what else to say. I mentioned it to my husband and he laughed because he has always drank Pepsi whether he was in Iraq, Syria or Jordan. I don't remember seeing 7-up while I was there. I think I saw it in Jordan though.