Identifier
Created
Classification
Origin
06DAMASCUS2063
2006-05-04 09:26:00
CONFIDENTIAL
Embassy Damascus
Cable title:  

CBS CONTINUING TO WEAKEN UNDER SECTION 311

Tags:  ECON EINV EFIN SY 
pdf how-to read a cable
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O 040926Z MAY 06
FM AMEMBASSY DAMASCUS
TO RUEHC/SECSTATE WASHDC IMMEDIATE 8749
INFO RUEHEE/ARAB LEAGUE COLLECTIVE IMMEDIATE
RUCNMEM/EU MEMBER STATES COLLECTIVE IMMEDIATE
RUEHTV/AMEMBASSY TEL AVIV IMMEDIATE 0947
RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE
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C O N F I D E N T I A L SECTION 01 OF 02 DAMASCUS 002063 

SIPDIS

SIPDIS

NEA/ELA
TREASURY FOR GLASER/SZUBIN/LEBENSON
NSC FOR ABRAMS/DORAN/SINGH
EB/ESC/TFS FOR SALOOM

E.O. 12958: DECL: 05/03/2016
TAGS: ECON EINV EFIN SY
SUBJECT: CBS CONTINUING TO WEAKEN UNDER SECTION 311

REF: 06 DMS 01217

Classified By: Charge d'Affaires Stephen Seche, reasons 1.4 b/d

C O N F I D E N T I A L SECTION 01 OF 02 DAMASCUS 002063

SIPDIS

SIPDIS

NEA/ELA
TREASURY FOR GLASER/SZUBIN/LEBENSON
NSC FOR ABRAMS/DORAN/SINGH
EB/ESC/TFS FOR SALOOM

E.O. 12958: DECL: 05/03/2016
TAGS: ECON EINV EFIN SY
SUBJECT: CBS CONTINUING TO WEAKEN UNDER SECTION 311

REF: 06 DMS 01217

Classified By: Charge d'Affaires Stephen Seche, reasons 1.4 b/d


1. (C) Summary: Financial sanctions under USAPATRIOT Act
Section 311 are beginning to weaken the Commercial Bank of
Syria (CBS) as more financial institutions in Europe and the
Gulf cease their business with the bank. The seriousness
with which CBS management views the imposition of Section 311
was highlighted during a recent meeting it held for European
missions to justify its own management procedures and attack
US sanctions on the grounds of extraterritoriality. In
addition, the pressure of sanctions is exposing faultlines in
the CBS's financial position that were not fully anticipated,
further eroding its dominance. While the Central Bank is
attempting to take more responsibility for financial affairs,
it remains a weak institution incapable of fulfilling the
CBS's central role. End summary.

INCREASING ISOLATION


2. (C) Contacts contend that the Commercial Bank of Syria
(CBS) is becoming increasingly cut off from the international
financial system as more third-country banks are terminating
their correspondent relationships with the CBS, continuing a
trend of disengagement from the bank that has accelerated
since the imposition of USAPATRIOT Act Section 311 sanctions
(reftel). George Sayegh, General Manager of Bank of Syria
and Overseas, reported that German Commerz Bank has informed
him of its decision to halt all business with the CBS in any
currency. The Dutch bank ING allegedly has canceled its
confirmation of a letter of credit (LC) that the CBS opened
in 2005 for diesel imports, which, if true, would add to the
obstacles hindering the SARG's ability to meet burgeoning
demand for the commodity. Nabil Hchaime, General Manager of
Bank BEMO, stated his own belief that banks in Saudi Arabia
now are disengaging from the Syrian market. Hchaime
explained that a major Saudi bank recently refused to
transfer funds to an account in Bank BEMO Syria to finance a
tourism project in Lattakia, in which the Syrian governorate

has a quarter share, because of the potential risk of
interacting with the CBS. The Saudi bank finally agreed to
send the funds to BEMO Lebanon for onward transfer to Syria.

WEAKENING POSITION


3. (C) The CBS's inability to maintain dollar assets abroad
is putting pressure on the bank's internal vulnerabilities
and inept management. Hasham Akkad, member of Parliament and
intimate of regime insiders, reported that sanctions have
exposed a major vulnerability and money-losing policy in
which the CBS historically increased its dollar assets by
converting accounts denominated in Syrian Pounds (SYP) into
dollars. The CBS then deposited the dollars in correspondent
accounts abroad, on which it earned less in interest than it
paid to its Syrian customers. Those dollars are now a
liability, and as more foreign banks request that the CBS
remove its dollars and close correspondent accounts, the CBS
will witness a larger loss in profits. While its bottom line
is protected by exclusive control of all public sector
contracts, contacts say that the loss of overseas accounts is
exacerbating other weaknesses. They specifically point to an
estiamted 400 billion SYP ($8 billion) worth of deposits held
at the CBS in local currency that are earning no interest
while the CBS pays depositors six percent, and a default rate
on loans to the private sector that may be as high as 80
percent.


4. (C) Contacts further contend that the CBS is losing
customers, particularly private importers who have to pay for
goods in dollars. Although many Syrian businessmen claim
that they use foreign banks or Syria's informal sector to
finance imports, businessmen who have been financing trade
through the CBS increasingly are moving their accounts to
Syria,s private banks or banks abroad since major European
institutions reportedly are refusing to confirm letters of
credit (LCs) opened by the CBS. Syria's private banks also
claim that they are being much more cautious about their
dealings with the CBS, going as far as closing their
correspondent accounts that they have held there. Sayegh
stated that his parent bank, the Lebanese bank BLOM, has
instructed him to avoid interactions with the CBS that could

DAMASCUS 00002063 002 OF 002


negatively impact BLOM's worldwide network.


CENTRAL BANK VYING FOR AUTHORITY


5. (C) The pressure of sanctions is beginning to erode the
CBS's dominant role in Syria's financial system, contacts
report, while the Central Bank may be vying to assume greater
authority. Contacts contend that Central Bank Governor Adeeb
Meyala is frantically trying to prepare the Central Bank to
assume some of the functions that the CBS has performed over
the past forty years. With the CBS unable to move its dollar
assets, Sayegh expects that the SARG will choose to shift
dollars from the CBS to the Central Bank, with the Central
Bank taking over more responsibility for managing Syria's
foreign accounts. Observers state, however, that while
Meyala aspires to model his bank after the central banks in
Beirut and Amman, Syria's Central Bank still lacks the human
and institutional capacity to carry out the same role as the
other central banks in the region. Despite the lack of
capacity, contacts in the private banking sector are uniform
in saying that the Central Bank has increased its efforts to
monitor their activities, requiring monthly reports on the
banks, financial position, how much of their deposits are in
foreign currency, and the volume of international
transactions. The private bankers complain that the
reporting requirements are a burden and more of a paper
exercise than an indication that the Central Bank is
conducting proper oversight.

CBS FUTURE STRATEGIES


6. (C) In the face of these threats to its position, Dureid
Durgham, President of the CBS, is actively seeking to keep
his bank connected to the international system. Contacts say
that he is considering switching all of his dollars into
euros to avoid the US financial system, even though he would
lose considerable value in the exchange. In addition,
Durgham is reaching out to European governments, most of
whose diplomatic missions still maintain accounts at the CBS,
to enlist their support against unilateral US action. During
an April 24 meeting with economic counselors from EU member
countries, Durgham presented himself as a reformer unfairly
targeted by US sanctions. According to a number of European
colleagues who were present at the meeting, Durgham
questioned the legality of US sanctions on the grounds of
extraterritoriality, complaining that the Section 311
sanctions unfairly regulate the activities of third-country
financial institutions doing business with Syria. Fabrice
Ferandes, an economist with the EC mission in Damascus,
commented that his EU colleagues intend to follow up on the
issue with European banks.


7. (C) Comment: It appears obvious at this point that Section
311 sanctions have caused the Commercial Bank of Syria (CBS)
greater distress than originally anticipated, and impeding
its ability to play its central role in Syria's financial
sector. However, given the Central Bank's lack of
institutional capacity and monetary tools, there still is no
immediate, viable alternative to the CBS. The imposition of
sanctions against the CBS has added new urgency to the
pre-existing trend of Syrians moving their business to the
private banks, but the sector still is rudimentary and unable
to keep up with demand. As a result, Section 311 seems to be
having a larger secondary effect, potentially weakening
Syria's entire financial sector in the short-term.
SECHE