Syria’s currency crisis means big trouble for Bashar al-Assad’s war efforts

Future of Finance
Future of Finance

Late this spring, in between eulogies for fallen militants and diatribes on heated issues in Salafi-jihadist politics, Abdullah al-Muhaysini, a Saudi cleric who now wields influence in Syria, took some time to weigh in on a subject far outside his wheelhouse: currency.

Muhaysini’s Twitter tangent (link in Arabic) might appear out of place, given his occupation as a celebrity recruiter and cleric for jihadist militant factions in Syria. This is a man who used Twitter to call for the blanket “extermination” of all Alawite men (the ruling Shiite minority in Syria) in 2015.

In the context of the Syrian conflict, however, the diatribe came as no surprise. Economic conditions have steadily deteriorated as the war drags on, leaving the Syrian regime and its opponents hard-pressed to carry on the fight. More and more, it appears that economic collapse—including the continued plummeting of the Syrian pound’s (SYP) exchange rate—may poses an important challenge to the Syrian government’s recovery than the back-and-forth, daily grind of the conflict.

 Syria’s currency crisis has weakened its military might and made foreign support a necessity. Syria’s currency crisis has weakened its military might and made foreign support a necessity. If Syrian president Bashar al-Assad cannot rein in the slide of the SYP and gain control of his economy, he also cannot retake control of Syria, which he reiterated his pledge to do earlier this month.

Russia’s intervention on al-Assad’s behalf in 2015 has greatly benefited the Syrian president. Over the past year, the Syrian government has made strategic advances, including around Aleppo, Syria’s largest city and the site of the country’s most devastating violence. But over the same period, the SYP, which was valued at 47 SYP to the US dollar before the conflict began in 2011, has lost more than half of its value, falling from 310 SYP to the dollar in September 2015 to around 520 SYP to the dollar today. In July, the Damascus Chamber of Commerce, an economic group loyal to the Syrian government, published a review of the economy’s trends over the past year. Its conclusion? If 2015 was a bad year for the SYP, the first half of 2016 was catastrophic (link in Arabic).

The SYP likely fell off the cliff this year because the regime ran out of the nearly $17 billion in foreign currency reserves it had amassed before the conflict. The reserves, along with Russian aid and about $5 billion in Iranian financial support (that we know of), had been used to finance Syria’s imports and keep its exchange rate stable. And the regime did all this while still maintaining the high levels of government expenditure necessary to execute its war.

By the end of 2015, though, the International Monetary Fund estimated that the regime’s foreign exchange reserves had fallen to $1 billion, enough for just one month of imports. With foreign reserves now vanishingly low, that foreign support has become indispensable to survival.

As a stopgap measure, the government has attempted some internal reforms, lifting subsidies on a range of goods and sharply limiting imports of non-essential goods. In October 2015, to protect the SYP, Syria’s cabinet was forced to bar any individual unlicensed by the Central Bank from dealing in foreign currency, at a penalty of up to (link in Arabic) 15 years in prison.

 If 2015 was a bad year for the Syrian pound, the first half of 2016 was catastrophic  In June 2016, Syria’s Central Bank did temporarily rein in the SYP’s slide, announcing (link in Arabic) that it had used a series of conventional and unconventional policies to bring the exchange rate back under 500 SYP/USD, from a high of near 600 SYP/USD control. Along the way, the Central Bank has gained an unusually active fan base. A pro-regime Facebook page, “The Global Campaign to Support the Syrian Pound,” lauds the bank’s intervention, juxtaposing (link in Arabic) currency moves with fawning images of al-Assad.

But even these measures will do little to safeguard the pound’s long-term viability. In May, Muhaysini, the aforementioned recruiter and cleric of an umbrella organization of hardline Islamist groups in Syria’s northwest, became arguably the most prominent Syrian leader to propose switching the unit of exchange in rebel-held areas away from the SYP and toward the Turkish lira (TL). Railing against the regime’s overprinting of currency to pay for mercenary fighters from Iran and Russia, Muhaysini argued that if armed groups introduced the TL as the exchange base in northern Syria, it would accelerate the depreciation of the SYP and contribute to the regime’s economic collapse.

This is not to say that Muhaysini will succeed—at least not in the near future. Too many state employees living in rebel-held areas still receive their government salaries and pension in SYP. Meanwhile, the newly minted monetary economists among the opposition’s ideologues and nationalist revolutionaries fear that abandoning the SYP could weaken their claim to the Syrian state.

Nevertheless, the SYP’s increasing inability to hold value has made the TL and the US dollar de facto currencies for many, particularly in northern Syria. In August, there was a major outcry in Idlib, the largest rebel-held city, when it emerged that landlords were requiring (link in Arabic) the internally displaced to pay their rent in US dollars. The USD and Turkish lira lining the pockets of Syrians employed by humanitarian aid organizations in these opposition-held areas may eventually make their way into Syria’s Central Bank. In this way they have both become an unlikely source of foreign reserves for the regime, and fueled the SYP’s depreciation.

 The pound’s inability to hold value has made the lira and the US dollar de facto currencies for many, particularly in northern Syria.  Even ISIL, which at one point announced it would use gold, silver, and copper coins as its unit of exchange as part of its project to set conditions for the arrival of judgment day, seems to prefer US dollars. US-led coalition airstrikes on IS warehouses sent clouds of US dollars floating into clouds of smoke. The terrorist group appears to be prioritizing solvency over its ideals, at least in this instance.

These economic decisions reduce the demand for the pound, weakening the Syrian government’s ability to sustain itself as it has for decades.

Historically, al-Assad has guaranteed loyalty by employing his supporters and providing them privileged access in the economy. Since the conflict began, al-Assad has allowed these loyalists to administer restive cities through largely self-funded, semi-official militias. These groups have subsequently crafted alternative revenue sources, including from an illicit siege economy that profits on the near-starvation of besieged civilians, and a prisoner-exchange system that literally barters over the release of the bodies of detainees. Outside of his formal command structure, these militias often also appear outside of al-Assad’s control.

With his formal military weak, al-Assad is also farming out the basic execution of the conflict to a slew of foreign militias and militaries that lead air campaigns ahead of any major advance and man the front lines. With this support, al-Assad will remain in his capital of Damascus.

Meanwhile the Syrian economy and currency steadily deteriorate. Regardless of the war’s ebb and flow, this economic reality bars the al-Assad regime from its oft-stated pipe dream: reestablishing sovereignty over all of Syria.

Follow Elizabeth on Twitter @BiffPM. We welcome your comments at ideas@qz.com.

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