RE-ENGAGING SYRIA: A FIRST LOOK AT SANCTIONS

C O N F I D E N T I A L DAMASCUS 000120

SIPDIS

STATE FOR NEA/ELA, EEB/TFS; NSC FOR SHAPIRO/MCDERMOTT;
COMMERCE FOR BIS/CHRISTINO

E.O. 12958: DECL: 02/03/2018
TAGS: ECON EFIN EPET ETRD ETTC PGOV PTER SY
SUBJECT: RE-ENGAGING SYRIA: A FIRST LOOK AT SANCTIONS

REF: A. DAMASCUS 108

B. DAMASCUS 94

C. 08 DAMASCUS 661

D. 08 DAMASCUS 559

E. 08 DAMASCUS 199

F. 08 DAMASCUS 735

G. 08 DAMASCUS 742

H. 07 DAMASCUS 950

Classified By: Charge d'Affaires Maura Connelly for reasons 1.4(b,d)

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Summary
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1. (C) Top-level SARG officials are increasingly identifying
U.S. trade sanctions as a key issue in any diplomatic
re-engagement. The Presidential waiver authority codified in
the Syrian Accountability Act and operationalized by the
Commerce Department's General Order No. 2 authorizes the
export and re-export (with a license) of items relating to
aviation safety, telecommunications, and humanitarian need.
As our bilateral relations with Syria progressively
deteriorated from 2004-2008, the previous administration's
guidance for interpreting General Order No. 2 became
increasingly narrow. By relaxing the interpretation of
General Order No. 2 to be commensurate with the "spirit of
the law," the speed and volume of export licenses for items
that maintain aviation safety, promote the exchange of
information, and improve humanitarian conditions could be
increased, should the USG so choose. Positive reciprocal
steps would provide the administration with justification for
considering greater economic engagement. Even if the SARG
dismisses these initial steps as merely symbolic, the primary
economic benefactors of a potential relaxation would be
hard-hit U.S. companies and sectors of Syrian society that
are in our national interest to strengthen -- NGOs and the
private sector. End summary.

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Trade Sanctions Are a Hot-Button Issue
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2. (C) In our conversations with Syrian officials and private
businessmen since President Obama's inauguration, we hear a
steady clamor for the lifting of U.S. economic sanctions --
particularly trade sanctions under the Syria Accountability
Act (SAA). President Bashar al-Asad complained to a visiting
delegation from the U.S. Institute of Peace that his doctor
friends could not equip their hospitals with the latest
medical technology due to U.S. sanctions. In a recent
meeting with CODEL Smith (ref A),FM Muallim implied that
trade sanctions prevented the SARG from considering any USG
request to re-open the Damascus Community School (DCS) or to
construct a new embassy compound (NEC). Deputy PM for
Economic Affairs Dardari told Reuters on February 4 that the
lifting of sanctions was essential to having "normal
relations between Syria and the U.S." and would be "a very
important part of any dialogue between Syria and the United
States."


3. (C) We leave to a separate cable a comprehensive review of
our sanctions policy, but in this cable we suggest some
avenues for economic engagement that are immediately
available under existing U.S. law as a low-cost, first step
to signal our desire for a better relationship, should a
policy decision be made to do so.

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Presidential Waiver Authority
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4. (U) On May 11, 2004, President Bush implemented the SAA by
issuing Executive Order 13338. In his message to Congress,
President Bush exercised his statutory authority to waive the
application of subsections 5(a)(1) and 5(a)(2)(A) of the SAA
to permit the export and re-export of, among other things,
medicines on the Commerce Control List (CCL) and medical
devices; aircraft parts and components for purposes of flight
safety; information and informational materials, as well as
telecommunications equipment and associated items to promote
the free flow of information; and certain software and
technology. The former President justified this waiver as in
the interest of U.S. national security to help maintain
aviation safety, to promote the exchange of information, and
for humanitarian purposes.


5. (U) On May 14, 2004, the U.S. Commerce Department (DOC)
issued General Order No.2 to operationalize licensing policy
consistent with E.O. 13338. General Order No. 2 stipulated
that a license is required for export or re-export to Syria
of all items subject to the Export Administration Regulations
(EAR),except food and medicine classified as EAR99. It
further authorized the Commerce Department's Bureau of
Industry and Security (BIS) to consider license applications
on a case-by-case basis for six categories of goods. Three
of the six categories related directly to the U.S. national
security interests defined by President Bush: (1) medicine
and medical devices (humanitarian); (2) parts and components
intended to ensure the safety of civil aviation and the safe
operation of commercial passenger aircraft (maintaining
aviation safety); (3) telecommunications equipment and
associated computers, software and technology (promoting the
exchange of information).

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Interpretation of General Order No. 2
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6. (C) As our bilateral relations with Syria progressively
deteriorated from 2004-2008, the previous administration's
guidance for interpreting General Order No. 2 became
increasingly narrow, with the following consequences for our
stated national interests:

-- Maintaining Aviation Safety: Although some licenses for
spare parts were approved, the lengthy interagency
adjudication process (over a year in some cases) effectively
prevented Syrian Arab Airlines (Syrian Air) from having a
sufficiently reliable flow of spare parts to maintain its
fleet. Consequently, Syrian Air today is operating just five
Airbus A320s from a fleet of 16 known aircraft (6-Airbus
A320, 6-Boeing 727, 2-Boeing 747-SP, 2-Tupolev 134). The
Damascus International Airport operates the American Oshkosh
brand emergency firefighting and medical vehicles, which are
also in need of replacement parts that have heretofore not
been approved for export.

-- Promoting Exchange of Information: To our knowledge, the
only entities that have received licenses for
telecommunications equipment and associated computers,
software and technology are the national phone company (Syria
Telecommunications Establishment) and the two GSM providers
(SyriaTel and MTN). Two key sectors of Syrian civil society
-- NGOs and private businesses -- have been unsuccessful in
legally obtaining the basic IT essentials to operate
internationally, such as Oracle accounting software, Norton
Anti-Virus software, and licensed MS Office upgrades. Out of
necessity, international NGOs administering Iraqi refugee
assistance programs and domestic NGOs strengthening civil
society have resorted to using pirated or illegally
trans-shipped software and hardware. The Aleppo-based
International Center for Agricultural in Dry Areas (ICARDA)
(which trains Iraqi agricultural engineers, among other
programs, and is primarily, albeit indirectly, funded by
USAID) cannot obtain a license to upgrade its Oracle
software. The EU, working through UNDP, could not complete a
project to strengthen Syrian border controls because they
could not obtain export licenses for computer equipment to be
installed in Customs Directorate offices at border terminals.
USG interpretation of General Order No. 2 also affects
legitimate Syrian businessmen who represent an increasingly
influential sector of society and are generally predisposed
to a better relationship with the United States.

-- Humanitarian Purposes: Export licenses for medical
equipment have been more forthcoming than for either aviation
spare parts or telecommunications equipment. The stigma of
doing business in Syria, however, coupled with the
requirement to license all spare parts for medical equipment
-- even consumable rubber gaskets worth USD 0.05 -- has
convinced many U.S. manufacturers that the Syrian market is
simply too small to be worth the trouble. From a public
relations as well as a humanitarian perspective, the
consequences are abysmal. For example:

- The Syrian Ministry of Health paid USD 800,000 for a
GE MRI machine that was delivered to a hospital treating the
poorest segment of the Syrian population and Iraqi refugees.
After delivering the machine in 2005, GE decided to suspend
its Syrian operations due to sanctions concerns before it
sent a licensed technician to install the MRI. The MRI
machine subsequently remained inoperable in a basement
storage room for two years until GE's regional office in
Dubai sent a tech to complete the installation.

- The U.S. firm Cardinal Healthcare recently acquired a
smaller U.S. medical company (Viasys) that held several
pre-existing equipment contracts with Syrian hospitals.
After the acquisition, Cardinal informed the Syrian agent for
Viasys that it intends to cease supplying spare parts and
machines to Syria. The local agent, who received a clean
"bill of health" during the Commerce Department's July 2007
Post-Shipment Verification (PSV) visit to Syria, is now
facing hundreds of thousands of dollars in financial
penalties and possibly prison time for not being able to
fulfill the long-term maintenance requirements of the
multi-million dollar contract.

- Chicago-based Abbott Laboratories may lose a USD 1
million bid and performance bond (and a USD 16 million
contract over the next three years) if it cannot obtain a
license to export new blood analysis machines and reagents to
the General Establishment for Blood and Medical Industries
(GEBMI) -- the Syrian national blood bank -- by February 28,

2009. As the sole blood testing facility and supplier to all
Syrian hospitals, GEBMI is considered a strategic asset and
is nominally administered by the Syrian Ministry of Defense.
Emboff recently paid a no-notice visit to GEBMI with the
local Abbott representative, and heard from GEBMI's civilian
director that the organization operates as an
independently-financed non-profit. The director made a
convincing argument that the Syrian military accounted for
less than ten percent of the blood bank's total donors and
recipients, and the only uniformed personnel Emboff observed
in the center were conscripts performing janitorial work.
Under the current guidance for interpreting General Order No.
2, however, it is unlikely that Abbott would receive the
necessary export license. Not only will the American company
be liable for the bid and performance bond, but GEBMI is
likely to award the contract to a Swiss vendor.

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Support for Pro-Reform Businessmen
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7. (C) As we argued in mid-2008 (ref E),Syria's new status
as a net importer of refined oil by-products has dramatically
increased Syria's budget deficit, decreased revenues, and
highlighted its increasing dependence on international trade.
At the same time Syria's oil is running out, entrenched
government interests and many Syrian industrialists who
benefit from subsidies remain opposed to any corrective
economic policies. Absent an accommodation between Israel
and Syria, which would be likely to increase pressure for
lifting the state of emergency, short-term internal change in
Syria is not going to come from the political opposition.
The Western-oriented business elites are the principal hope
for change. While such a process will be slow, any U.S.
pressure that benefits legitimate businessmen at the expense
of known corrupt figures establishes ties to this group that
will be useful as a basis for any future U.S. economic
relationship with Syria.


8. (C) Syrian business elites are always on the lookout for
the possibility of increased economic engagement with the
U.S. We believe they will be more likely to pressure the
regime if they see a willingness by the USG to be more
flexible in facilitating unsanctioned areas of private sector
trade between the two countries. There are authentic Syrian
businessmen who deal with regional and global markets. Many
of these businessmen are Sunni, but Christian Arabs and
Armenians are also well-represented because of the secular
minority (Alawi) regime's favorable treatment of other
minorities. Particularly eager for business opportunities in
the current global financial crisis, this community cares
about opportunities in major financial centers, such as the
U.S., Europe, the Gulf, Turkey, India, and China.


9. (C) Moreover, President Bashar al-Asad has awakened hopes
among businessmen that he will implement real economic reform
and will allow Syria to take its "rightful place" in the
regional and international market. The limited economic
reforms that Bashar has implemented over the past six years
have resulted in opening Syria's economy to a greater private
sector presence. These reforms have enticed some Syrian
expatriates with much-needed white-collar skills to return,
and have renewed business hopes for Syria's potential as an
emerging market.


10. (C) It is worth repeating that there is widespread
skepticism within the business community about the value of
Iranian interest in Syria. The Sunni business community
harbors deep suspicions about Iranian/Shia business
involvement in Syria (some of which is related to antipathy
towards the Shia). The Iranian government is actively trying
to establish an economic relationship with Syria that is as
strong as its political relationship, although Iran has
little to offer Syria. (refs F, G)

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Start With What the Sanctions Allow
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12. (C) Should the USG decide to alter our approach to
implementing sanctions against Syria, there is a low-cost
economic avenue immediately available -- the Presidential
waiver authority built into the SAA and operationalized by
General Order No.2 -- to signal our seriousness to the
Syrians. By relaxing the interpretation of General Order No.
2 to be commensurate with the "spirit of the law," Washington
could increase the speed and volume of export licenses for
items that maintain aviation safety, promote the exchange of
information, and improve humanitarian conditions for the
average Syrian. We could then use such licenses to gauge
Syrian willingness to reciprocate with concrete actions
towards our issues of concern. Positive reciprocal steps
would provide the Administration with justification for
considering greater economic engagement. Even if the SARG
dismisses these initial steps as symbolic rather than as
indicators of our interest in improving relations, the
primary economic benefactors of a potential relaxation would
be hard-hit U.S. companies, pro-reform Syrian businessmen and
NGOs.

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Useful Test Case: Boeing 747-SP Licenses
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13. (C) In a rather fortuitous test-case of this suggestion,
Syrian Minister of Transportation Yarub Badr described the
recent issuance of export licenses to Boeing as a "positive
indication" that the new Administration is seeking a better
relationship with Damascus. The licenses authorize Boeing to
conduct airframe overhauls (D-checks) on Syrian Air's two
747-SP aircraft, which have been grounded since March and
October 2008, respectively. It is our understanding that the
interagency recommended approval for the two licenses some
three months ago -- after a year-long internal review -- but
that other offices within the Executive Branch delayed their
issuance. After the licenses were finally issued to Boeing
on January 24, 2009, Post notified the Ministry of Foreign
Affairs on February 5 and the SARG Transportation Minister
informed Syrian media on February 9. While the SARG may
publicly herald these licenses as indicative that all
sanctions will soon be lifted, the licenses offer Washington
policymakers an intermediate step to gauge Syrian
responsiveness.
CONNELLY