Syria: The Son And The Father’s Old Allies
Stratfor.Com: In an effort to kickstart Syria’s stagnant economy, Damascus will allow foreign banks into the country to operate in free zones. Bashar al-Assad, son and heir to late president Hafez al-Assad, is expected to take over for his father and is spearheading Syria’s economic and financial reform. By allowing foreign banks to operate freely, Bashar appears intent on creating a parallel banking system that will circumvent Syria’s current banking system – controlled by his father’s Baath party loyalists – without directly challenging their entrenched interests. But the son’s plan may ultimately result in his loss of the critical loyalty of his father’s old allies.
Syria has begun to open up its financial sector and allow foreign banks to operate in free economic zones, the official Ath-Thawra newspaper reported on June 26. According to the report, “authorities in the free trade zones began this week to accept requests from investors who want to open banks.” Economic and financial reform is a key priority of the recently reshuffled Syrian government and new Prime Minister Mustafa Miro – former governor of Aleppo province and a Bashar loyalist.
Bashar al-Assad, western educated and oriented, appears to be spearheading the reform movement. As the apparent successor to his late father, longtime President Havez Assad, Bashar is attempting to create a parallel banking system independent of Syria’s current nationalized system in order to circumvent political problems with his father’s old loyalists. But the son’s efforts may fail.

Ibrahim Wardeh, director of investment for Syria’s free zones, told Ath-Thawra that “first rank” banks with a minimum capitalization of $11 million in foreign exchange will be able to transfer and receive foreign currency without restriction and will not have to pay taxes. In 1972, Syria set up free zones for industry, trade and transit of goods in five cities: Damascus, Adra, Aleppo, Lattakia and Tartus. Allowing foreign banks to operate in these zones will allow international investors free control over their capital and make it easier for them to carry out international transactions.

Syria’s current banking system is in urgent need of reform. Current law places strict controls on foreign exchange and limits the transfer of money abroad. Nationalized in 1963 in the wake of the Baath party taking power, the country’s banking system comprises the Central Bank of Syria, the Commercial Bank of Syria, and various specialist outlets including the Agriculture Cooperative Bank, Industrial Bank and Real Estate Bank. The country’s archaic system has blocked the modernization of its atrophied financial institutions; the Commercial Bank has just $22 million in foreign currency reserves, according to government figures.

Instead, financial institutions are a balkanized landscape divided up to reward the late president’s political allies. More concerned with loyalty than economics, Hafez Assad adopted a policy of appointing close Baath party members and advisers to run the banks. In 1995, for example, Assad appointed Bashar Kabbara – previously a presidential adviser – as the new governor of the central bank. Kabbara is also closely linked to Economy and Trade Minister Mohamed al-Imadi, who supervises the functions of the central bank. According to Syrian bankers quoted in Middle East Economic Digest, Kabbara has no banking experience and is not considered a proponent of reform.

In contrast, the western-educated Bashar is attempting to set up a parallel banking system for international investors that will operate virtually independent of Syria’s archaic system. The plan will allow Bashar to avoid alienating his father’s loyalists while at the same time attracting foreign investment and pursuing his policy of economic and financial reform. Maintaining his grip on power and appeasing factions both inside and outside the Baath party will be one of Bashar’s greatest challenges in his new leadership role.

On its face, Bashar’s plan should work nicely; however it is likely that some unintended consequences will occur. The new leader’s plan may lead local and international banks to compete over the investment that Bashar hopes will find its way into Syria. According to the Ath-Thawra report, free zone authorities have already begun receiving applications to set up banks. Syrian Prime Minister Miro has even called on banks with part-Syrian ownership to set up and operate in the free zones. Successfully operating in a free zone will require a level of reform and fiscal transparency that most Syrian banks will be reluctant to meet. However, if they don’t want to lose business, they will in essence be forced to reform.

The result: the late president’s loyalists may withdraw or refuse to give their support for Bashar – even going so far as to challenge his leadership in order to preserve the status quo. Bashar’s greatest challenge will come not from peace negotiations with Israel or exercising authority in Lebanon; rather will come from the domestic front. Bashar ultimately runs the risk of losing his father’s allies