The Hellish Cycle Continues for Syria: The Economic Impacts of Russia’s Invasion of Ukraine
Introduction
Regarding its worldwide consequences, Russia’s invasion of Ukraine in late February 2022 is probably the most significant historical event since the US- and British-led invasion and occupation of Iraq in 2003. In addition to its catastrophic humanitarian impact in eastern Europe, the war in Ukraine is already having a wide impact on the global economy, especially in commodity markets with the prices of oil and gas escalating rapidly. Russia and Ukraine provide almost a third of the world’s wheat exports and over 70% of all sunflower oil exports and 20% of corn, 26.6% of barely and 11% of oil, while Russia is one of the world’s most significant suppliers of fertiliser and related raw materials such as sulphur. Since the invasion, ports on the Black Sea have nearly ceased all forms of commercial activity, resulting in a historic rise in wheat prices surpassing levels witnessed during the global food crisis in 2007-08. Both countries have temporarily banned wheat exports. According to a study published by the OECD in March 2022, “the moves in commodity prices and financial markets seen since the outbreak of the war could, if sustained, reduce global GDP growth by over 1% in the first year, with a deep recession in Russia, and push up global consumer price inflation by approximately 2.5%.”
Syria is not isolated from these global dynamics and the economic weakening of Russia. Although Russia has not acted as a financial backer of Damascus, the economic dependence of the Syrian regime on Russia increased following Russia’s military intervention in Syria in 2015.
Russia-Syria Economic and Trade Relations
Trade relations between Moscow and Damascus declined following the eruption of the Syrian uprising in 2011, from USD 1.1 billion in 2010 to USD 198 million in 2020, representing only 3.7% of total Syrian imports. This decline was the result of a quasi-total suspension of Russian oil exports to Syria after western sanctions were imposed on its oil sector and a decrease in Russian weapon exports (or at least those recorded officially). However, Russia became the leading supplier of wheat to Syria after the massive decrease in the country’s local production as a result of conflict. The quantity of Russian wheat supplied to Syria annually rose from 650,000 tonnes in 2015 to between 1 and 1.5 million tonnes a year since then. In 2021, Syria imported 1.2 million tonnes of wheat with a value of USD 310 million. The country’s annual need is estimated at around 4.5 million tonnes (of which 3.5 million tonnes are for food use). While Syria needs about 2 million tonnes of wheat a year, its wheat production in 2021 has been estimated at approximately 1.05 million tonnes. This quantity was down from 2.8 million in 2020, of which only around 0.8 million tonnes were produced in government-controlled areas.
Syria is also heavily dependent on both Russia and Ukraine for fodder, especially yellow maize, barley and soybeans. According to the manager of the Syrian General Organisation for Fodder (GOF), Abdul Kareem Shoubat, the institution imports fodder from Russia, while private traders import from Ukraine and other countries. For instance, Damascus imported maize valuing USD 8 million in 2019 and 2020 from Ukraine, out of a total value of USD 117 million of maize imported to Syria, according to the UN Comtrade database.
Deals have also been signed between Damascus and Moscow on energy and construction. After 2015, Russian companies expanded their presence in Syria, mainly in the energy sector. The main Russian contractor, the Stroytransgaz Logistic Company (STG), which started operating in Syria in 2005 and had already been sanctioned by the US in April 2014 over Russia’s role in Ukraine, has since then diversified its investments and in 2018 and 2019 signed three main contracts which allow it to oversee the entire phosphate production, transport and export chain from the mines in Homs to the port of Tartous. Other Russian companies have also capitalised on Moscow’s influence in the country, although not at the same level as STG.
However, Moscow’s economic role and investments in Syria remain limited and will probably remain so with Russia’s additional political and economic challenges resulting from the sanctions imposed on it and the effects of the war in Ukraine. It was already a very fragile and weak economy. The recent announcement of the conclusion of a contract in mid-March 2022 between a Russian energy company, Ros EnergoStroy Levant (RESL), and Russian and Syrian-Russian investors on one side and Damascus on the other to build a gas turbine power plant with a capacity of 25 megawatts (MW) in the Sheikh Najjar Industrial City in Aleppo should not be seen as demonstrating a capacity of Moscow to maintain or further its investments in the country. Several agreements and contracts for construction and restoration of power plants and turbines have been awarded by Damascus to the Russian government and Russian investors since 2011, but none have yet been implemented because of the Syrian government’s lack of funding.
Finally, the sanctions imposed on Russia’s financial system will have some impacts on Syria, and particularly on networks of businessmen connected to the presidential palace. Since 2011, Russian banking institutions have welcomed the Central Bank of Syria holding foreign deposits after sanctions were imposed by western countries on Syria’s banking sector. This served as a financial refuge and alternative for Syrian businessmen and members of the ruling family. The amount of Syrian funds deposited in Russian private financial institutions is unknown, but use of the country’s banking system for connections with the outside world has been vital for the Syrian government and some regime cronies, especially as sanctions have severed Syria’s ties with much of the world’s banking system. The suspension of Russian banks from the SWIFT international transactions system will now severely complicate the ability of Russian banks to conduct international activities, and therefore that of its Syrian users too.
Short- and Long-Term Impacts on Syria’s Economy
The economic effects of the war in Ukraine can already be seen at different levels all over Syria while others can also be expected in the near and medium future. Various types of goods related to the production of wheat and flour have already seen rapid surges in prices in markets such as vegetable oil, vegetable ghee, yellow corn and soybean meal (Table 1) and also other commodities. For example, the price of fuel oil has once again reached SYP 5,000 (equivalent to USD 2 at the official exchange rate of 2,512 SYP/USD) for a litre on the black market in various areas of the country instead of an average of SYP 3,500 (equivalent to USD 1.4), as has happened in previous periods with high levels of shortages in the country. This represents an increase of 43%.
The Syrian Trade Establishment (STE) has also increased the prices of some subsidised products because of the rise in feed prices internationally as a result of the Ukrainian crisis.
Table 1: Differences between market prices of goods on 24 February and 17 March in regime-held areas
Source: The author
Likewise in the north-west, which mostly imports these resources from Ukraine and Russia, the prices of flour and oil imported from Turkey in addition to several other products including sugar, vegetable oils, ghee and grains have also risen since the outbreak of the war in Ukraine. Ankara has also recently banned the purchase of these products in local Turkish markets and stopped exporting grains, oilseeds, cooking oil and other agricultural commodities, which are being held in bonded warehouses at Turkish seaports. The north-east is also suffering similar dynamics with rising prices of essential items and threats of shortages, as the vast majority of its goods are imported.
This general rise in expenses is connected to various factors, in addition to the general instability in international markets. It is first the result of the increase in the oil price to over USD 100 a barrel for the first time since 2014. Although Damascus imports most of its oil from Teheran, the rise in oil prices impacts shipping costs for imported goods, including higher expenses for transport, and insurance has also increased in this sector. Shipping fees actually started to increase in the past year, for instance the cost of transporting a container from China to Syria was estimated at around USD 3,000 a year ago, compared to over USD 10,000 today. Alongside this, the Syrian pound underwent a new devaluation in the weeks after the eruption of the war in Ukraine, decreasing from SYP 3,680 to the US Dollar on 24 February to SYP 4,000 on 17 March. The Turkish lira has also continued to lose value against the USD, which has impacted north-western Syria. All these elements contribute to a rise in the cost of production, especially in manufacturing and agriculture, and therefore in the cost of living.
Moreover, this new surge in prices comes after a year of continual increases in the cost of basic food products. There is a potential drop in local production as a result of freezing temperatures in these past few weeks. The national average price of the World Food Programme’s standard reference food basket increased from January 2022 to February by 2%, reaching SYP 231,004 (equivalent to USD 92.4). The national average food basket price increase was 34% since August 2021 and 71% since February 2021. The reference food basket price in February 2022 represented the highest ever recorded monthly average since monitoring started in 2013. In this general framework of surging prices, the pro-regime newspaper Al-Watan has revealed that according to different sources there are studies on raising the price of bread as a result of the increase in flour prices: by about SYP 400 per kilogram, passing from SYP 2 million a ton to SYP 2.4 million (respectively 796 USD and 955 USD).
Inflationary dynamics exist all over the world and they reached a record level in February 2022 in the World Food Price Index produced by the Food and Agricultural Organisation (FAO) with an average of 140.7 points, up 3.9% from January and as much as 20.7% above the level a year ago. Internationally, the price of various types of feed has notably dramatically risen in the past two years. For instance, a ton of corn increased from USD 180 in 2020 to currently around USD 340. This international context has not prevented criticisms appearing in pro-regime newspapers condemning large traders for instrumentalising the crisis in Ukraine and with their monopolies on the import of particular goods increasing prices or stocking goods to limit quantities on the market to sell them at higher prices later on. Similar reports have emerged in the north-west on Hayat Tahrir al-Sham (HTS) affiliated authorities and traders connected to them.
In addition to all this, the Russian war on Ukraine and its consequences in Europe can also potentially lead to further prioritisation by European governments, which are the most important donors, away from Syria, as around 3.5 million people have already fled Ukraine, and the number is likely to increase further. Humanitarian financial assistance provided to Syria has decreased in the past few years and in 2021 it reached USD 3.6 billion, its lowest point since 2015. This covered only a little more than a third of the total funding requirements (estimated at USD 10.052 billion). This is all while the Syrian population’s need for humanitarian assistance is continuing to deepen, with an estimated 12 million food insecure people (55.3% of the population) and 14.6 million people (67.3% of the population) in need of humanitarian assistance in February 2022.
In this context, the rising cost of goods and commodities, including wheat and oil, will contribute even more to difficulties in purchasing such items and potentially lead to shortages, while contributing to the increase in the cost of production. For instance, the agricultural sector will be impacted negatively as a result of the disruption to global fertiliser production, among other factors. Alongside these effects, the Syrian government and other authorities are also most likely to use this situation to introduce further austerity measures and increase the prices of particular subsidised commodities and goods, such as bread, fuel oil and gas, using the pretext of the higher prices in international markets and a lack of funding.
What Options for Local Authorities?
A few hours after the beginning of the Russian invasion, an emergency meeting of the Syrian government was held on 24 February in order to prepare a plan to alleviate the repercussions of the war and international developments in the internal economic situation. In this framework, Damascus has since then enacted several measures such as forbidding producers from exporting particular items[1] in order to guarantee the country’s food security and secure the needs of the local market in the current period, including in the holy month of Ramadan, and agricultural and industrial production. The government has also announced it will rationalise distribution to the population of key products such as wheat and diesel oil for the next two months, while it will strengthen its supervision of the foreign exchange market to try to stabilise it. On 7 March the Central Bank of Syria also made the decision to increase the list of imports that can be funded with foreign currency purchased from foreign exchange companies, which will further expand demand for the USD. On the same day, the GOF announced a new tender to purchase 40,000 tonnes of maize, 40,000 tonnes of barley and 20,000 tonnes of soybeans as a result of the war in Ukraine and to satisfy local needs.
Moreover, Syrian officials have already been seeking alternatives to Russian wheat. The Director of the Grain Corporation, Abdul Latif Al-Amin, announced in mid-March 2022 that the institution was in the process of purchasing 200,000 tons of wheat from India. He added that the cost of importing a ton of wheat had increased from USD 317 to USD 400 because of a rise in insurances prices. Syrian officials have stated on several occasions that the country has enough wheat to last until around the end of 2022.
Alongside this situation of general lack of wheat in the country and surging prices, further competition between various authorities to purchase the wheat production of Syrian peasants and farmers will most probably increase. In the past two years, the Autonomous Administration of North and East Syria (AANES) and the Syrian Interim Government (SIG) have been able to purchase significant quantities of wheat from local farmers by offering higher prices than the Syrian regime. For example, the SIG has been provided support by the Turkish government through the Turkish Grain Board (TMO) to buy wheat and even import some portion of it from Turkey.
The authorities in the north-west and north-east have not yet issued any programme to deal with the increases in prices and potential shortages of various goods and commodities. They say they have sufficient stocks of wheat to last until September and have requested the population to be patient regarding the high commodity prices in their areas. Salman Barudo, co-chair of the Economy and Agriculture Board of the AANES, declared on 19 March that “the production of the vegetable oil factory does not cover the market’s needs” and therefore they would monitor the markets in northeast Syria and control prices in order to try to preserve market stability. A few days beforehand, local authorities had issued decisions allowing bakery owners to mix wheat flour with corn flour given the acute shortage of wheat and flour in the region. Finally, the Syrian Salvation Government affiliated with HTS in the north-western province of Idlib on 5 March reduced the weight of a loaf of bread by 100 grams in the bakeries and grain department it manages down to 650 grams. Eight loaves of bread are priced at 5 Turkish lira (USD 0.34).
In this situation, some regional states, including Iran, Turkey and the UAE, could potentially exploit Russia’s further political and economic isolation on the international scene and difficulties as an opportunity to increase their influence and economic investments in Syria. Iranian officials are, for instance, anxious to finalise a nuclear agreement with the world’s powers, which if concluded rapidly could possibly allow Teheran to exploit Russia’s weakened position to strengthen its presence in Syria, including in the economic field. In addition, the Syrian regime’s normalisation process is continuing following Bashar al-Assad’s visit to the UAE. During this first visit to an Arab country since 2011, both sides called for more economic exchanges and investment in Syria. Significant deterrents remain, however, against further investments in the country, including Western sanctions, and in particular among them the Caesar Act, the scarcity of funding of the Syrian government and the lack of stability in the country, both political and economic.
Conclusion
The war in Ukraine and its global effects are expected to harm a Syrian population that is already suffocating because of the catastrophic socio-economic situation and the high cost of living. The vast majority are unable to deal with this without different forms of assistance and coping mechanisms, including remittances and multiple jobs. Decisions by the Syrian government and by de-facto authorities in north-western and north-eastern Syria to try to mitigate the impacts will not be enough to limit the rise in the prices of basic commodities and goods and prevent future shortages.
* Joseph Daher is a part-time affiliate professor at the European University Institute, Florence (Italy). He works under the aegis of the ‘Wartime and Post-Conflict in Syria’ research project in the Middle East Directions Programme at the EUI. He completed a doctorate in Development Studies at SOAS, University of London (2015), and a doctorate in Political Science at Lausanne University, Switzerland (2018).
For an overview of all our publications, visit our website: https://middleeastdirections.eu/wpcs-project/
[1] The items included are garlic, onions, potatoes, vegetable margarine, animal margarine, animal butter, vegetable oils, eggs, olive oil, all types of legumes, wheat and its products, and chicken.
* This publication was produced with the financial support of the European Union. Its contents are the sole responsibility of the author and do not necessarily reflect the views of the European Union.