Will Damascus embrace a form
of economic Perestroika?

Not unusual in most countries, but in quasi-socialist Syria, foreign brand names and fast foods stores have long been heavily restricted as unwanted icons of Western influence. The last fast food chain to attempt to enter Syria was in 1997, when KFC opened an outlet in Damascus to great fanfare, only to have the authorities pass legislation banning American fast food companies.

Kuwait-based Americana, holder of the Middle East franchise rights for KFC, hastily renamed the outlet Kuwait Food Company, much to the chagrin of local consumers, who thought they were getting the real deal and tired of local spin-offs like “Pizza Hat” or “Kabooky Fried Chicken”. 

So is it symbolic that in 2003 the first signs to greet travellers entering Syria from Lebanon are those of an American donut store and international brand name alcohol and cigarettes?

Breaking isolation

It has been three years since Bashar al-Assad, the son of the late president, Hafiz al-Assad, came to power on the promise to turn around Syria’s failing economy. After more than 30 years of almost total economic isolation and state ownership, Syria’s economy is in dire need of reform.

Its GDP is roughly the same size of its nearest neighbour, Lebanon, despite having almost five times its population and vastly greater territory, while per capita income, at approximately $1100, is the lowest in the region bar Yemen, and war-torn Iraq, Sudan, and the Palestinian territories. And with a population that has grown slightly over 3 per cent on average for the last twenty years, one of the highest in the world, Syria has a surging unemployment problem, which is estimated at not less than 20 percent of the workforce. 

So from being suspicious of foreign investment, Syria’s leaders are now openly wooing it in the hope that this will generate much faster economic growth. “Syria provides limitless opportunities for Arab and foreign capital investment,” says the Syrian Prime Minister, Mohamed Mustapha Miro.

And there has been some success. Two foreign firms, Lebanon’s Investcom and Egypt’s Orascom Telecom (OT) made multi-million dollar investments in setting up Syria’s first mobile telecommunications network. 

After a long lead-up, three foreign banks, two Lebanese and one Jordanian, were given licenses to operate in Syria in May this year in competition with the moribund state-owned financial sector. The hotel sector is seeing significant investment as well: Saudi billionaire Prince Al-Walid Bin Talal is constructing a 342-room Four Seasons Hotel in Damascus and the Hilton Hotel Group has also submitted a proposal.

But questions are being asked in Damascus whether these new investments are examples of an economy that is genuinely beginning to open up, or one that is hedging its bets. “Many are in favour of reform,” says Syria’s Minister for Economy and Trade, Ghassan el-Rifai, “including the majority of those in the political process today.  It is how much reform and what kind of reform that is being discussed.”

Reform tentative 

Three years have passed since
Bashar al-Assad came to power

To date, economic reform has been relatively timid. The government is uninterested in the privatisation of its public enterprises, while the current batch of regulatory reforms – implemented to encourage private sector investment – ironically insist on the role of national ownership and the public sector.

New laws permit privately owned banks, for example, only if they are majority owned by Syrian interests. Also, public/private banks can only be set up if the government owns a minimum 25 percent stake.

“What is missing,” says Nabil Sukkar, a former senior economist with the World Bank and Managing Director of the Syrian Consulting Bureau for Development and Investment,  “is a major commitment [by the government] to the market economy. Without this commitment on an official level, reform will remain slow and investments won’t come.”

Efforts to tackle Syria’s vast network of vested interests have also been half-hearted. After working for more than 30 years as a department manager in a government bureaucracy, Samir Kanaan came to work in July last year to find he no longer had a job.

“I was told to leave the same day,” he says, due to the presidential decree that no government employee could be over 60 years of age. But the decree, a neat attempt by President Assad to clear away decades of entrenched interests amongst elite government officials, was watered down. While overnight thousands of middle level employees lost their jobs, the real powerbrokers, such as 71 year old Defence Minister, Mustapha Atlas, kept theirs thanks a to a presidential dispensation. 

“I believe the president is sincere in his attempts to modernise,” says Lebanese analyst Michael Young, “but this is different from reform and requires opening up what is a very inflexible system. This is much more complex and could lead to the Gorbachev paradigm – cutting off the branch on which you are sitting. Obviously, he is not willing to go that far.”

Business concerns

Emblematic of the piecemeal approach to reform has been the litigation saga of Syria’s highest profile foreign investor outside the oil and gas sector. OT, the largest GSM operator in the Middle East, is the foreign company behind Syriatel, one of two GSM operators established under contracts offered by the government in 2001.

Five times the population of its
neighbour Lebanon, Syria hasn't
felt the same economic progress

According an OT statement of last year, it initiated litigation against its Syrian partner, Ramak Group, for attempting to sign off on bank accounts held jointly by the partners in attempts to “assume management control of Syriatel” at the expense of OT.

The resulting legal battle has been almost too complicated to figure out: OT sued Ramak’s Virgin Islands-registered Drex Technologies, winning an injunction that froze Drex’s assets of up to $57 million. But in Syria, a Damascus court ruled in favour of Ramak, ordering OT to forfeit its equity in Syriatel and pay $20 million in compensation to Ramak.  It now appears that OT has lost its investment.

Neither firm is keen to talk about the case, although OT’s chief executive, Mr Nagiub Sarwiris, made an oblique reference in a recent interview, suggesting that one of his biggest mistakes was “having local partners, who were not businessmen, but politicians.” 

This is an allusion to Ramak, which is actually short for the owner’s name, Rami Makhlouf, the young nephew of President Assad’s mother. Ramak is now a highly profitable firm that not only is the majority owner of Syriatel, but of Syria’s duty free outlets and the Dunkin’ Donuts franchise.

Political interference

Few people in Syria feel the legal decision from the Damascus court was free of political influence. “This litigation has really brought to light how dysfunctional the Syrian judiciary is,” says Jihad Yigazi, editor of the France-based Syria Report.  

The subservience of the judicial system to interests of the regime highlights just how hard it is for foreign companies to make a case for coming to Syria.  But despite all this, Syrians are still hopeful that real change is coming.

And for some it has. In an ironic twist, Samir Kanaan’s family, which was hurt by the imperfect reform process, is now benefiting.

His only son, Khaled, freshly graduated and working in a dead-end job selling women’s lingerie for $50 a month, answered an ad in a local newspaper for a position with Syriatel. Without any political connections, he was interviewed and got the job at a salary of $400 a month. Now there for over two years, he is due for a raise to $600. “It’s strange,” says Khaled. “The changes in the past few years took my father’s job, but gave me a new one. Now I support the family.”