SYRIAN STOCK EXCHANGE OPENS...WITH THREE TRADES

C O N F I D E N T I A L DAMASCUS 000189 TREASURY FOR HAJJAR/CURTIN; COMMERCE FOR BIS/TCHRISTINO; LONDON FOR TSOU; PARIS FOR WALLER; NSC FOR SHAPIRO/MCDERMOTT E.O. 12958: DECL: 03/10/2019 TAGS: ECON EFIN EINV SY SUBJECT: SYRIAN STOCK EXCHANGE OPENS...WITH THREE TRADES Classified By: Charge d'Affaires Maura Connelly for reasons 1.4 (b,d). 1.(C) SUMMARY: The Damascus Stock Exchange (DSE) opened its doors on March 10 with a grand total of three transactions recorded during the two-hour trading session. The bulk of the six companies presently listed are majority Syrian-owned private banks. A total of nine companies are expected to be listed in the medium term, and the DSE chairman predicts that number will increase to 15 by the end of 2009. A rigid framework governs all trades, with the DSE reserving the right to suspend trading of stocks on a number of grounds -- a structure that officials deem necessary to "preserve transparency" in the market. The DSE has been successful in securing trading software and infrastructure from Slovenia, after its first-choice Oracle software proved impossible to procure under USG sanctions. The bulk of the DSE's employees have been trained on other Arab bourses, including Abu Dhabi, Cairo and Amman. Despite an inauspicious start, there may be money to be made down the line. Specially Designated National Rami Makhlouf seems poised to get in on the action, with his Cham Capital company recently licensed as a brokerage firm. In fact, in the near term, the number of licensed brokerages (nine) will outnumber companies listed on the DSE. END SUMMARY. -------------- It's A Bull Market -------------- 2.(SBU) In a curious branding decision, DSE officials have adopted a Merrill Lynch-like bull as their logo for the launch of the long-awaited bourse. Indeed, two-and-a-half years after Syrian President Bashar Asad granted approval for establishment of the DSE, trading of the stocks of six Syrian companies began in earnest on March. The number of listed companies should increase to nine in the medium term. Most are majority Syrian-owned private banks with significant outside capital, including Bank BEMO Saudi-French, Bank Audi Syria, and the Arab Bank of Syria. DSE Chair (and former Damascus Chamber of Commerce Chair) Rateb Shallah envisions a total of 15 Syrian companies to be listed by the end of 2009, and optimistically projects that the bourse's total capital will reach SYP 28.5 billion ($608 million) over the same period. 3.(SBU) The DSE has a long way to go to meet these projections. Only three transactions were recorded on the first day of trading, all on Bank BEMO stocks. These trades were conducted within the constraints imposed on the market by the Syrian government (SARG): A stock or security cannot be bought and then sold in the same day; if stock prices rise or fall by more than 2 percent, trading of that stock will be suspended until the following day; trading is also suspended when "information is announced" that could affect the value of a stock; and foreign investors are not permitted to resell stocks ("transfer capital") for six months after initial investment. Going forward, trading will be held on Mondays and Thursdays from 11 a.m. to 1 p.m., preceded by a coordinated meeting of brokerage firm representatives at 10:30 a.m. On trading days, DSE representatives will be available to answer questions from the public and from investors. -------------- Restrictions to Aid Transparency -------------- 4.(SBU) These tight controls are justified, according to Shallah, in the name of "transparency and full disclosure." In remarks made to a Syrian conference on investment and capital markets on March 1, Shallah claimed that "business bad practices of world financial institutions have turned into a global economic crisis," and noted that "billions injected into the markets" had not aided recovery. While Syria has been affected by the crisis "to a lesser degree," Shallah said, prospective Syrian investors are nevertheless wary and the DSE must work to win their trust. Meanwhile, the newly-appointed executive manager of the DSE, Mohammed Al-Jlelati, was recently quoted in Syrian media as saying that the bourse should "function as an investment market rather than a speculation market," and aim to "attract long-term investment that will contribute to the growth of the economy." He said that the strict regulations around DSE trades would help to limit speculation. -------------- Infrastructure and Administration -------------- 5.(C) The DSE encountered lengthy delays in 2008 while attempting to secure operating software. DSE planners, including Shallah, initially selected a proposal by the Swedish-Finnish company OMX to provide IBM hardware and Oracle software. After NASDAQ acquired OMX in February 2008, however, NASDAQ's corporate counsel decided against executing the OMX proposal due to the additional scrutiny NASDAQ would face because of U.S. sanctions. 6.(SBU) In late 2008, DSE finally purchased two trading software programs, "Quick Trade" and "Quick Clear," from the Slovenian company Market Evolution. According to Mazen Murtada, a DSE IT specialist, Market Evolution company also supplied related telecoms, network security, and physical security (cameras and fingerprint access control) infrastructures. The trading screen, meanwhile, was supplied by a Pakistani company and modeled after one in Dubai. A recently concluded one-month trial of simulated trading turned up no great technical difficulties. The majority of DSE employees -- 33 technical staff and 15 administrative and clerical staff at present -- were trained in Abu Dhabi, Cairo and Amman. -------------- The First Nine -------------- 7.(C) Nine local stock brokerage firms have been licensed since late 2008, four of whom participated in simulated trading prior to the actual DSE launch. Interestingly, the most recently licensed brokerage is Cham Capital, which is a joint venture between Specially Designated National Rami Makhlouf's RAMAK Investment Group (45%) and Makhlouf front-man Mohammed Al Dandashi (25% through Dandashi's Al-Ramz securities and 30% through Dandashi directly). -------------- Comment -------------- 8.(C) Some SARG officials and private sector leaders are hyping the opening of the DSE as an important step toward a free-market economy in Syria. Observers at the well-attended initial trading session were overwhelmed by the sense of openness on the floor, and with DSE officials' and employees' willingness to answer questions from both the media and the general public. Under the surface, however, the tightly-controlled "market" is evidence of a Syrian regime unwilling to adopt new paradigms in support of real economic reform. Though DSE Chair Shallah is American educated, having earned his PhD from a California university in the mid-sixties, his 40-plus years of experience working in and under the Soviet-influenced Syrian administration is evident in his approach to regulation of the DSE. The same holds true for second-in-command Jlelati, who earned his PhD in economics and accounting from the Soviet Union in 1975. A fully-functioning bourse, subject to true market forces, is a long way off without more fundamental change to Syria's tightly controlled -- and structured -- economy. For now, the Syrian public has bought what the SARG is selling: They are proud of the establishment of the DSE and the "economic progress" that the SARG tells them it represents, they are reveling in the "transparency" of the process, and they seem reassured by the "protections" that the new, less-than-free-market offers investors. Though trading may have gotten off to an inauspicious start, the fact that Rami Makhlouf has entered the brokerage business signals that there may well be money to be made down the road -- at least for those with the right connections. CONNELLY