SYRIA CONTINUES ECONOMIC PRESSURE ON LEBANON

C O N F I D E N T I A L SECTION 01 OF 03 DAMASCUS 000425 SIPDIS SIPDIS NEA/ELA TREASURY FOR GLASER/SZUBIN/LEBENSON NSC FOR ABRAMS/DORAN/SINGH EB/ESC/TFS FOR SALOOM E.O. 12958: DECL: 02/02/2016 TAGS: ECON EFIN ETRD EINV SY LE SUBJECT: SYRIA CONTINUES ECONOMIC PRESSURE ON LEBANON REF: A. DMS 03988 ¶B. DMS 04149 ¶C. DMS 04447 ¶D. DMS 04347 ¶E. DMS 04675 ¶F. DMS 04985 Classified By: Charge d'Affaires Stephen Seche, reasons 1.4 b/d. 1.(C) Summary: Economic ties between Lebanon and Syria have declined in step with the deterioration in their political relationship. Contacts contend that the SARG is pursuing a two-pronged economic policy toward its neighbor designed to (1) reduce its economic dependence on Lebanon; and (2) squeeze Lebanon economically, particularly in the Beka'a Valley, in order to maintain a lever over the political process in Beirut. While readily admitting the linked nature of the two economies, Syrians appear largely dismissive of Lebanon's importance and deny that the SARG's policy could have negative economic consequences for Syria. End summary. -------------- A Chronology of Punitive Measures -------------- 2.(C) Contacts have described the traditional economic relationship between Syria and Lebanon as one large "pool," in which labor, commodities, and money flowed unimpeded between them in response to changes in market conditions on either side of the border. Since Syrian forces withdrew from Lebanon in April 2005, however, Syria has taken a number of steps to separate its economy from Lebanon and diminish the extent of economic relations. In July, security services rounded up and deported hundreds of Lebanese working in Syria's telecommunications and financial sectors (ref A). In August, the SARG choked off Lebanon's overland trading routes by closing the border to truck traffic (ref B). Then, Syrian customs began aggressively searching personal vehicles entering Syria from Lebanon and confiscating goods that were purchased abroad (ref C). 3.(C) Syria continued to take additional steps throughout the year. In the fall, the SARG raised the exit fee for Syrians traveling to Lebanon from 200 SYP to 800 SYP, and decreed that Lebanese tourists had to pay their hotel bills in foreign currency at foreign tourist rates (ref D). In perhaps its strongest measure, the SARG periodically stopped the flow of electricity into the Beka'a Valley and northern Lebanon (ref E). Contacts have been very straightforward lately in saying that these steps prove that Syria maintains powerful economic levers against its smaller neighbor, and that it has the ability to punish the Lebanese economy without hurting its own economic interests. -------------- Freezing Labor Relations -------------- 4.(C) Labor relations have been hit particularly hard due to SARG policies. Sources suggest that as many as a third of all Lebanese white collar workers in Syria's telecommunication and banking sectors have left Syria permanently since August. Contacts among the Lebanese who remain in Syria state that they continue to face a higher level of scrutiny and harassment than other foreign workers, despite SARG claims that it is enforcing its labor laws uniformly (ref E). Danny Choueiry, a Lebanese upper-level manager for Siemens in Damascus, stated that he and his Lebanese colleagues throughout the telecom sector are required to visit branches of the security services for an interview and fill out a questionnaire that asks for details about family members, previous employment and political affiliations. Choueiry stated that he knows of instances in which the security services have conducted background investigations in Lebanon in order to confirm the information that other workers have provided. He laughed that the Syrians are &filling their files8 on all the Lebanese in Syria, and that the SARG has begun to look upon white-collar Lebanese workers as political threats instead of economic assets. DAMASCUS 00000425 002 OF 003 5.(C) Choueiry added that he has been informed by Syrian colleagues that the SARG is undertaking a policy of quickly trying to secure its strategic industries, and that removing Lebanese workers from companies that are developing Syria's telecommunication infrastructure is a critical first step. He stated that the SARG so far has denied 30-40 work permits for Lebanese upper managers at Spacetel Areeba 94, one of Syria's two private cellular network providers. Choueiry explained that previously 90% of the company's upper management was Lebanese, a percentage significantly higher than Areeba's main telecom competitor, Syriatel, which employs 30 Lebanese at all levels out of a total workforce of more than 1,000. Contacts further report that Syria's labor law, which was amended just two weeks ago, sets up incentives and imposes requirements on employers to fill management positions in key sectors with Syrians. The law requires that employers who hire a foreign worker pay a fee of $2,000, hire a Syrian to a position with parallel responsibilities, and then train him or her to take over the foreign worker's job. 6.(C) While Syria has been taking measures to push Lebanese workers out of its key sectors, contacts report that hundreds of thousands of low-skilled Syrian workers remain in Lebanon. Although reports immediately after the Syrian military withdraw suggested that half of the 400,000 to 600,000 Syrians who worked in Lebanon had returned home to avoid anti-Syrian violence, contacts estimate that perhaps 70% of those since have gone back. Vaskan Yacoubian, General Manager of a major Damascene construction firm, stated that his company witnessed a small but temporary increase in the number of Syrians looking for work in 2005, but that most of them indicated their intention to return to Lebanon, where they could earn double the Syrian wage and get paid in hard currency. Although Syrian expatriate workers in Lebanon's labor market have provided Syria with an estimated $1-2 billion annually in remittances, a critical source of revenue for Syria's $22 billion economy, contacts downplay even this aspect of Lebanon-Syria economic interaction. Several opined that Syria's informal and agricultural sectors easily could absorb all of the workers in Lebanon if they were to return, but that their continued presence in Lebanon despite the countries' poor political relationship indicates how dependent Lebanon is on Syria. -------------- Interrupting Cross-Border Commerce -------------- 7.(C) The punitive measures restricting the flow of goods and people have resulted in a sharp drop in cross-border commerce. The border crossing of J'deideh that used to be crowded on weekends with travelers in both directions is now regularly deserted. Contacts associated with Rami Makhlouf's Ramak Duty Free store, located just outside Syrian passport control on the Beirut-Damascus road, state that Ramak's large grocery store likely will close in 2006 due to a lack of business if the trend does not reverse. Most Syrians with whom Post spoke say that they simply have stopped traveling to Lebanon, although shopping in Beirut and entertainment in the Beka'a used to be routine for them. Haitham Joud, the general manager of a large import/export company with headquarters in Damascus and Lattakia, stated that he and his family- like many other Syrians- used to spend thousands of dollars per week in the Beka'a Valley's restaurants, hotels and casinos. Now he stays home, or spends his disposable income in the Gulf and Europe. 8.(C) Contacts further state that overall trade relations have chilled, even though Syria has removed the blockages to trucking. Some textile manufacturers in Aleppo report a 40-50% drop in trade with Lebanon, which they attribute wholly to SARG policies, although some Damascus retailers say that part of the decline is due to the weak Lebanese economy. Joud said that new regulations and heightened scrutiny from Syrian customs caused his business with Lebanese partners to drop 20% in 2005. Marwan al-Kadri, exclusive agent for Kickers brand clothing in Syria and a textile manufacturer, reported a similar decline, and stated that shipping goods to Lebanon now takes a minimum of a month and a half, while his products used to arrive in Lebanese stores in a matter of days. In addition to official trade, contacts state that the DAMASCUS 00000425 003 OF 003 rate and volume of smuggling from Lebanon- which previously had been estimated to be at least ten times the value of official trade- has dropped dramatically. Travelers between Syria and Lebanon used to bring carloads of commodities into Syria for personal use and resale. Since the SARG stepped up its enforcement at the border, prices for goods such as prescription drugs, cheese and luncheon meats that traditionally were smuggled through Lebanon have jumped. 9.(C) Most contacts expressed their confidence, however, that Syria is better positioned to handle the new, diminished level of cross-border commerce than Lebanon. While contacts contend that residents of the Beka'a relied on the weekly influx of Syrians to keep their businesses open, wealthy Syrians, like Joud, can spend their disposable income anywhere. In addition, contacts contend that Syria's January 1, 2005 entrance into the Greater Arab Free Trade Agreement (GAFTA) has provided the market with substitutes for the goods and services that Lebanon previously provided. Syria's largest mall on the road to Jordan is full of cheap consumer items from China, which contacts say enter the Syrian market duty free under GAFTA after being assembled in the UAE and receiving the mandatory minimum Arab value-added. 10.(C) Further, contacts in the tourism business say that although Syria witnessed a 25% decline in Lebanese visitors in 2005, the overall number of tourists visiting Syria last year rose by 12% due primarily to an increase in visitors from other Arab nations. The newly opened Four Seasons Hotel in Damascus currently is running at 90% occupancy with most of its guests from the Gulf states. These contacts further state that Syrian tourism has benefited at Lebanon's expense, as Arab travelers are choosing Damascus over Beirut due to fears of violence in the Lebanese capital. -------------- Shutting Off the Power -------------- 11.(C) Contacts contend that Lebanon's need for electrical energy and gas provides Syria with its most powerful economic lever. Throughout 2005, the SARG periodically shut off electricity transmissions to the Beka'a Valley and northern Lebanon, and refused to begin gas shipments to power Lebanon's electric plants, despite previous agreements that called for gas to flow through the recently completed Syria-Lebanon gas pipleline in mid-2005. Syria, which for years had provided Lebanon with electricity below cost, shut off the flow of electricity for several months after Hariri's assassination citing Lebanon's debt of $30 million that it had yet to pay for prior electricity transmissions. Syria agreed to restart the flow of electricity only after Lebanese Minister of Energy and Hydraulic Resources, Hizballah's Mohammed Fneish, visited Damascus in August to negotiate the debt payment. Despite the agreement, Syria used the same issue to shut off the flow of electricity again for more than three weeks in late October and November. 12.(C) Comment: Contacts display a perhaps unwarranted confidence that Syria holds all of the economic cards in its relationship with Lebanon, and that it can afford to punish its neighbor with impunity. Syria's ability to make life tough for the residents of the Beka'a and seriously affect Lebanon's power supply does give it very potent economic tools, which most contacts suggest the SARG will continue to employ. Still, Syrians are likely underestimating the potential costs of the new economic relationship to their own economy. Syria's nascent private banking sector will remain reliant on Lebanon for the foreseeable future considering that four of the six parent companies are Lebanese. In addition, Syria relies on Lebanon to stabilize its currency, since expatriate workers in both countries play a critical role in bolstering Syria's all-important black market. SECHE