Syria: To Sanction or Not To Sanction?

This post was written by Keily Miller, Research Associate at the Baker Institute Energy Forum.

In response to the ongoing violence plaguing Syrian cities, the Obama administration is toying with a new plan to sanction Syria’s oil and gas industry. The plan rests on two assumptions: first, that sanctioning Syria’s energy industry sector will wreak havoc upon state finances, and second, that the ensuing havoc will debilitate every last shred of legitimacy that the Assad regime still holds. In the increasingly complex network of Middle Eastern interdependence, however, forces at play seem to render these two assumptions implausible.

First, one must question whether expanding sanctions to target Syria’s oil and gas industry would force drastic changes in the state’s spending patterns. Proponents of increased sanctions emphasize that the majority of Syria’s oil exports, which averaged last year at 250,000 b/d of heavy Souedie crude oil, are shipped to France, Italy, and Germany; since oil exports have come to occupy approximately a third of Syria’s national budget, sanctions likely to be supported by these countries would deal Syria a major financial blow. Nevertheless, Syria’s economy will likely prove resilient. A national policy of hoarding hard currency since the 1980s has transformed Syria’s foreign exchange regime into a “safe” model. Economists estimate that the Central Bank of Syria and the Commercial Bank of Syria together hold reserves valued at $18 billion in cash. While Syrian and Lebanese black market operators continue to finance currency needs of the private sector, national currency reserves could independently sustain Syria’s current import levels for three years.

Furthermore, in terms of international trade, Syria may prove as adept as Iran and Saddam-era Iraq at bypassing energy sanctions, whether through illicit export, third-country diversion, or the adoption of a barter system. Media sources report that Iran has already offered Syria assistance in the form of 290,000 b/d of free oil over the next month. Given the threat of sanctions, Syria appears to be preparing itself for a diminishing global market for its crude oil over the medium- to long-term. In 2010, Syria began to increase its oil refining capacity, with three projects in the pipeline comprising a total anticipated refining capacity of 380,000 b/d. Even as U.S., European, and Canadian developers withdraw from the country’s oilfields, the resulting contraction in oil production is not projected to take its toll for several years to come. The refining projects, though, are set to stream by 2014. With a proposed steady supply of oil from Iraq entering the country via a reconstructed Kirkuk-Banias pipeline, the addition of Syrian refining activities over the next few years could drastically increase the country’s supply of high-grade petroleum. If sanctions remain in place, the rise in domestic refining capability could ease the burden on cash reserves over the long-term by reducing the need to import refined oil.

Syria is developing the capacity to further offset any sanctions-related losses by increasing revenues derived from natural gas. Eager to remodel itself as a regional hub for the transit of natural gas, Syria recently signed three separate memoranda of understanding (MOU) with Iran, Azerbaijan, and Turkey respectively. These arrangements suggest that Syria’s gas trade could rise to approximately 48 million cu m/day by 2014, over 60% of which will likely be produced domestically.

In Syria’s worst-case scenario, sanctions will drive significant revenue losses for the regime in the short-term; however, it would take drastic economic near-collapse to break up the existing patronage networks that constitute Assad’s loyal civilian and military supporters. If public anger gets out of hand among those who still support the regime, there is always Iran’s $5.8 billion interest-free loan to fall back on. This funding could allow the regime to reinstate subsidies and additional public spending programs in order to rekindle internal support.