2009 Investment Climate Statement - Syria
Designated by the U.S. government as a state sponsor of terrorism, Syria has been listed on the U.S. Department of Commerce Control List (CCL) and has been subject to Export Administration Regulations (EAR) for nearly thirty years. All dual-use goods and advanced technology items have been controlled and/or restricted from the Syrian market since 1979. These restrictions were enhanced through the implementation of economic sanctions under the Syria Accountability Act (SAA) of May 11, 2004. As currently implemented, the SAA does not ban U.S. investments. However, the current ban on the export of almost all products of the United States has made investments by U.S. businesses more difficult to carry out, and the President has the authority to extend implementation of the SAA to ban all U.S. business and investment activity in Syria at any time.
SAA sanctions are in addition to restrictions under the Grassley Amendment that prevents U.S. corporations from taking advantage of foreign tax credits for taxes paid in Syria. Furthermore, the President has designated more sanctions under the International Emergency Economic Powers Act (IEEPA) and Section 311 of the USAPATRIOT Act regarding financial transactions with the Commercial Bank of Syria. As a result, the transfer of U.S. dollars to and from Syria has become difficult, making investments that much more challenging to execute. Therefore, since the end of 2006, a number of U.S. corporations, notably in the oil and gas sector, made the decision to divest and cease their activities in Syria.
Syrian officials and ministers routinely stress publicly the need for economic reform in order to attract foreign direct investment and thus stimulate economic growth and increase employment. Announced liberalizations are often, however, rescinded or contradicted by other government officials, sometimes at the expense of private companies that have made business decisions based on government commitments subsequently annulled. Although a bloated bureaucracy, rampant corruption, and the lack of an independent judiciary are still significant impediments to business, in 2008 the Syrian Arab Republic Government (SARG) did issue new laws in the fields of investment, intellectual property rights (IPR), finance, real estate and trade that continue its slow and halting effort to reform the country’s economy. Continued political instability in Syria's neighboring countries, however, as well as the international financial crisis, discouraged significant foreign investment.
Investment Law No. 10 (1991) and its amending Decree No. 7 (2000) were the SARG's initial attempts to stimulate foreign direct investment in Syria; unfortunately, the Higher Council for Investment's (HCI) lack of definitive criteria for adjudicating foreign applications left the process open to political pressures, lobbying and corruption. This first attempt at reform brought long delays and was seriously lacking in many areas. Consequently, due to poor implementation, Investment Law No. 10 fell short of its goal of making Syria a more attractive investment venue.
To address the shortcomings of Investment Law No. 10, the SARG announced Decrees Nos. 8 and 9 on January 27, 2007, which resulted in a dramatic increase in the number of HCI-approved projects in 2007 and 2008 compared to previous years. Decree 8 allows preexisting investment licenses (under Law 10 and Decree 7) to continue unchanged.
Decree No. 8 is designed to enable investors, whether Syrians, Arabs or foreigners, to own or lease the land required for their projects, and provides for free repatriation of profits, dividends and invested capital, on condition that all tax liabilities have been met. If a foreign investor encounters obstacles in setting up a project, and decides to withdraw within six months of receiving a license, all capital invested up to that point may be freely repatriated. Foreign staff will be entitled to repatriate up to 50 percent of their net income and 100 percent of any end-of-service benefits.
Additionally, Decree 8 exempts investors from paying customs duties on equipment imported to set up their projects, but they are liable to standard corporation taxes, which fall under the jurisdiction of the 2006 Tax Law. However, if investors chose to establish their projects in remote areas or in one of Syria’s industrial zones, they are eligible for tax deductions. Decree No. 8 offers additional tax deductions for projects that create a high number of new jobs, as well as projects with many shareholders.
Most sectors are open for private investment under Decree 8, except for cotton ginning, water bottling, and cigarette production. Tourism and real estate investments are covered by separate legal and tax frameworks and governed by the Ministry of Tourism. Oil and gas projects and salt mining must be coordinated directly through the Ministry of Petroleum, while the Ministry of Finance governs the establishment of all banks and insurance companies.
As a corollary to Decree 8, the SARG also passed Decree 9 of 2007 stipulating the formation of the Damascus-based Syrian Investment Commission (SIC). The Higher Council for Investment (HCI) will meet only twice per year to review general investment policies, but will delegate operational decision-making to the SIC. The SIC, under the auspices of the Prime Minister's office, has the overall responsibility for supervising national investment policies, developing and enhancing the investment environment in Syria, providing data and statistics to investors, approving projects and annulling licenses for those projects not implemented within the required timeframe.
Decree 9 also charged SIC with providing one-stop-shopping service to potential investors in order to speed the processing of investment applications and help reduce bureaucratic hurdles. SIC officially inaugurated its one-stop investment center in early December 2008. As part of its menu of services, the one-stop center offers an "Investment Map" of Syria that was produced with the assistance of the United Nations Development Program (UNDP). The map reportedly provides detailed information pertaining to laws and regulations governing investment in Syria, as well as a list of established investment projects and continuing investment opportunities.
The SIC is supposed to meet at least bi-weekly to reduce the review process time to two weeks from application to decision. The SIC board members are appointed by the Prime Minister and include a Chairman, Director General, Deputy Director General, Deputy Ministers of Finance, Local Administration and Environment, Economy and Trade, Agriculture, Transport, Industry, Tourism, Social Affairs and Labor, Housing and Construction, and State Planning Commission as well as a representative from each of the Federation of the Syrian Chambers of Industry, the Federation of the Syrian Chambers of Commerce, the Federation of the Syrian Chambers of Agriculture, and the Federation of the Syrian Chamber of Maritime, Director of Legal Affairs at SIC, Director of the One-Stop-Shop, and the Director of Marketing.
According to Decree 9, HCI members will include the Prime Minister; Deputy Prime Minister for Economic Affairs; Ministers of Finance, Local Administration and Environment, Tourism, Agriculture, Social Affairs and Labor, Economy and Trade, Housing and Construction, Transport, and Industry, the Head of the State Planning Commission, as well as the Chairman of the SIC and its Director General.
Despite the government's recognition of the need to change Syria's investment climate, both foreign and local business leaders continue to cite three main obstacles to growth in investment. First, the banking sector is inadequate to meet the financing needs of not only multinational corporations, but also local enterprises. Second, the lack of rule of law makes contractual obligations inherently uncertain and potentially impossible to enforce. Finally, the lack of regulatory transparency and specificity, particularly when dealing with government-affiliated entities, leads to a climate of bureaucracy, confusion, intimidation, and corruption.
Foreign investors often are hampered by a lack of awareness throughout the tendering process and complain that winning bids are often based more on contacts and relationships than the actual merits of a proposal. Certain ministers in the government have acknowledged this problem within the last few years and have tried unsuccessfully to address it. Similarly, in the judicial system, judgments are subject to external pressures that make it difficult for businesses to ensure that contracts are binding.
Although government officials had previously stated that no privatization of state enterprises will take place during the current Five-Year Plan, which runs through 2010, in 2008 the SARG awarded a contract to privatize the operation of its largest container port in Lattakia. The tendering process was typically opaque and the winning French company may have benefited from having an influential Syrian partner and an improving political relationship between Syria and France. Also in 2008, the SARG awarded a license to a private holding company headed by the Syrian President's cousin to construct the first privately-owned power generation plant in Syria.
Despite recent legislative attempts at reform, the economy remains centrally planned, and uncompetitive public sector companies continue to drain government finances. While government officials publicly reject the notion of privatizing state enterprises on ideological grounds, such positions likely reflect their unstated pragmatic fears of a dramatic increase in unemployment.
In addition to the challenges mentioned above, business contacts highlight the following specific difficulties of doing business in Syria:
- The SARG requires import licenses for every item imported, except for raw materials and items imported from Turkey and the GAFTA (Greater Arab Free Trade Agreement) countries. Likewise, foreign companies must acquire permits for each item of equipment intended for temporary use and subsequent re-export (i.e. drilling rigs) to avoid paying import duties. The validity of these permits can be difficult to extend if the company’s service contract expires and the company wishes to keep the equipment in the country for stand-by usage. Delays in the re-export of equipment after a temporary permit expires have resulted in heavy fines.
- Syrian corporate, income, and wage tax liabilities for foreign contractors have been unclear for quite some time, and they continue to complicate the operations of many companies.
- The awarding of contracts is often delayed by the lobbying efforts of influential local business interests and groups. Even in cases devoid of external influence, bureaucrats fear accusations of corruption and abuse, and therefore often require additional reviews of investment proposals that are not mandated by law and that inordinately delay projects. The SARG has reiterated its commitment to increasing the degree of transparency in the process, but foreign and Syrian firms continue to cite problems.
- Public sector employees may demand bribes for required routine services. The average public sector employee earns wages estimated at USD 215 per month. Public sector wages have not kept up with rising inflation, so many public employees have turned to petty corruption to make ends meet. In addition, labor laws are complex and significantly limit an employer's flexibility to hire and fire employees.
- Syrian property law – at least since the Ba’athists took power in the early 1960s - has been tenant-friendly, which made it difficult for landlords to lease residential properties, negotiate rent rates and evict problem tenants. In addition, at the end of 2004, the government implemented an 18 percent tax on any real estate leased for use by foreign persons or entities. In 2005, however, the SARG began implementing a residential rent law passed in 2000 that affords landlords greater rights and protections.
In 2006, the SARG issued a law permitting commercial real estate owners to lease their properties according to contract terms. The law allows the real estate owners to reclaim their properties after the contract’s term of validity has expired. In addition, foreign investors in real estate and the tourism sector have been able to take advantage of decisions of the Higher Council of Tourism that provide foreign landlords with exemptions from labor and tenant laws.
In June 2008, the SARG issued Law 11 regulating property ownership by non-Syrians. The law's objective is to facilitate foreign ownership of residential property as a means of stimulating greater overall foreign investment. Law 11 was followed quickly by Law 15 in July 2008, which established a Real Estate Development and Investment Authority which is specifically empowered to encourage investment in the real estate sector. Despite these steps, foreign individuals and companies are allowed to rent offices and residences for a maximum period of 15 years, which is not renewable.
- Enforcement of the Arab League Boycott of Israel (dating from 1967) may lead to difficulties in the importation of needed products or in registering trademarks because the government requires additional paperwork certifying compliance with the boycott. U.S. law prohibits companies from providing this paperwork. Anecdotal reports indicate the SARG has occasionally waived its requirement for boycott compliance certification in order to facilitate business with large U.S. companies.
Conversion And Transfer Policies
Under the guidelines of the USAPATRIOT Act, the President has designated the Commercial Bank of Syria (CBS) as an institution of primary money-laundering concern. Consequently, the Secretary of the Treasury issued a decision on March 9, 2006 banning correspondent relations between the Commercial Bank and U.S. financial institutions. Although the U.S. Treasury sanction only targets CBS, many U.S. and European banks subsequently cut off correspondent banking relationships with all Syria-based financial institutions.
In March 2001, the SARG passed Law No. 28, which authorized the establishment of private and joint-venture banks. The law made general provisions for the operation of private banks and set a minimum Syrian ownership requirement of 51 percent. At the same time, a banking secrecy law was also issued that authorizes numbered accounts and restricts asset seizures. To date, eight private traditional banks are operating in the country and are generally able to carry out the same banking operations that are permissible to the Commercial Bank of Syria. In May 2005, a Presidential decree allowed the establishment of Islamic banks in the country with a minimum of 51 percent Syrian ownership. At present, two Islamic banks are operating in the country while the third, al-Baraka Islamic Bank, is scheduled to begin operations in early 2009.
Upon the advice of the IMF, the SARG is deliberating an amendment to Law No. 28 that would increase allowable foreign ownership of private banks from 49 to 60 percent.
Under current Syrian laws, investors are permitted to open foreign exchange accounts with CBS and the ten existing private banks, and may retain 100 percent of their export revenues. Decree 8 allows the repatriation of foreign currency profits generated from the import of capital into the country through Syrian banks only.
Newly opened private banks can provide the same level of banking services as CBS, including opening saving/checking accounts and issuing Letters of Credit (L/Cs), provided the money originates from outside the country. In some limited instances, private banks are allowed to issue U.S.-dollar-denominated L/Cs backed by Syrian pounds.
In 2006, the government allowed private investors to have access to foreign currency through CBS to finance the import of raw materials. In 2007, the SARG authorized foreign investors to receive loans and other credit instruments from foreign banks, and to repay them as well as any accrued interest from the proceeds of their projects using local banks. In February 2008, the SARG permitted investors to receive loans in foreign currencies from local private banks provided that the loans are used to finance capital investment, particularly the import of machinery and production equipment. Debtors are free to repay their loans from their foreign currency accounts in Syria or abroad or by purchasing foreign currency from the lending bank.
Aside from the loosening of controls under the previous Investment Law No. 10 and Decree No. 7, strict foreign exchange restrictions were enforced until mid-2003. Even though relatively recent legal changes permit the possession of foreign currency, overseas borrowing and the export of capital still require the approval of the Central Bank. These restrictions, however, are often disregarded. Foreign companies operating outside the parameters of the investment law and its amendment may transfer capital inside Syria only in accordance with special agreements, usually in the form of a Presidential decree. The SARG passed Law 24 in April 2006 which permits the operation of private money exchange companies, provided such operations are licensed. To date, ten private moneychangers have received licenses to operate, although many more continue to operate illegally on Syria's vast black market.
Outward capital and profit transfers are permitted to companies licensed under Decree 8. Otherwise, they are prohibited unless approved by the Prime Minister or arranged separately, as in the case of production-sharing agreements with oil exploration companies. Decree 8 allows free repatriation of profits, dividends and invested capital, on condition that all tax liabilities have been met. In addition, if a foreign investor encounters obstacles in setting up a project, and decides to withdraw within six months of receiving a license, all capital invested up to that point is to be freely repatriated. Foreign staff will be entitled to repatriate up to 50 percent of their net income, and 100 percent of any end-of-service benefits. In the case of foreign oil companies, "cost recovery" of exploration and development expenditure is governed by formulas specifically negotiated in the applicable production sharing agreement. Foreign oil partners in production-sharing joint ventures with the state oil company report delays in the recognition of "cost recovery" claims, although payments are eventually approved.
In February 2007, the President issued Decree 15 permitting the establishment of financial, banking and social institutions that provide micro-financing and insurance to small investment projects. These institutions target clients in the suburbs and the rural areas, and are expected to provide loans as small as $100. Anyone with the required minimum capital of $5 million may open such an institution, though foreigners must first obtain approval from the Prime Minister. The First Microfinance Bank (FMB), as the bank is named, started operations in November 2008.
Expropriation And Compensation
The main period of the expropriation of private property occurred from 1964 to 1966, after the Ba’ath Party seized power on March 8, 1963. During this period, as well as in the late 1950s after Syria’s brief union with Egypt, the government nationalized many private farms and factories without paying any compensation. To the best of the Embassy’s knowledge, no one has been compensated for the material losses that occurred as a result of nationalization, although we have heard anecdotal accounts that there were some offers of derisory sums for compensation that landowners rejected out of hand. Between 1967 and 1986, there were fewer cases of expropriation because the government had already seized the most valuable properties, and thus, they spent more time scrutinizing any remaining properties for nationalization. The Embassy does not have any knowledge of private property nationalized after 1986.
Investment laws enacted in 1985-86 for specific sectors, i.e. tourism and agriculture, included clauses that protected against expropriation and nationalization. Decree 7 of 2000 explicitly stated that projects could not be nationalized or expropriated. Likewise, Decree 8 of 2007 explicitly states that projects could not be nationalized or expropriated. Decree 8 opened many sectors to private investment including petroleum refining, electricity generation, cement production, sugar refining, infrastructure, air transportation, environment, and services. Projects in the fields of oil and gas production, banking and insurance, and tourism and real estate continue to be regulated under separate, specific laws. In late 2008, the SARG authorized the private sector to invest in salt extraction and mining projects subject to licensing by the Ministry of Petroleum and Mineral Resources.
Despite these protections, the rule of law is weak in Syria and the SARG does occasionally seize the property and business interests of political opponents and officials who have fallen out of favor. In early 2006, alleging corrupt practices, the SARG confiscated all residential, commercial and business assets of former Vice President Abdul Halim Khaddam, his wife and all other members of his family, including his children, their spouses and their children. In early 2008, the Ministry of Finance seized the assets of the board members of al-Nama' Company due to corruption and misleading information.
On June 8, 2005, Syria signed the Washington International Convention on Investment Dispute Settlement. In addition, as a party to the New York Convention on Arbitration, the SARG accepts binding international arbitration of disputes between foreign investors and the state in cases where the investment agreement or contract includes such a clause. Otherwise, local courts have jurisdiction. Arbitration cases involving the public sector must be tried by the State Council, which attempts to ensure the integrity of the process; however, they have no authority to enforce their decisions.
In March 2008, the SARG issued the country’s first Arbitration Law No. 4. Law 4 authorizes the establishment of an official arbitration center in Syria, which will be registered with the Ministry of Justice and include a registry of accredited arbitrators. According to the law, public sector entities are permitted to resolve disputes through arbitration.
A number of U.S. suppliers and companies have asserted claims against state enterprises for non-payment of goods and services delivered. The government has made an effort after 1995 to settle some of these debts on a case-by-case basis and one American supplier finally received payment in 2002 for goods delivered in 1982. Long delays are common in settling disputes through negotiation and arbitration. In the past several years, fewer investment disputes have been filed or brought to the Embassy’s attention as U.S. business activity in Syria has decreased steadily over the period.
While property and contractual rights are protected on paper, the government regularly interferes in the judicial process. Judgments by foreign courts are generally accepted only if the verdict favors the Syrian government. Although an official bankruptcy law exists, it is not applied fairly because a creditor's ability to salvage any investment is contingent on the amount of influence he can exert and not on the letter of the law. Monetary judgments, if granted, are made in local currency and cannot be converted to hard currency.
Performance Requirements And Incentives
Investment Law No. 10 and its amendment, Decree No. 7, did not stipulate formal performance requirements as a condition for establishing, maintaining, or expanding an investment or for determining eligibility for tax and other incentives. Decree No. 8, however, raised the minimum investment capital from USD 200,000 to USD 1,000,000 if the investment projects are located in greater Damascus, Aleppo, Homs, Lattakia, Tartous and Hama and to USD 600,000 if the projects are located in the rural areas of Dayr al Zur, Hasakeh, Dar'a, Quneitra, Idleb, and Sweida. Furthermore, Decree 8 offered tax deductions if investors chose to locate their projects in remote areas or in one of Syria’s industrial zones. Finally, Decree No. 8 offered additional tax deductions for high job-creation projects as well as for share-holding projects.
All three investment decrees do mandate that investors must begin implementing the project within a period of three years or risk losing their investment license. According to official sources, 40 percent of all licensed investment projects are never completed due to financing and other technical problems. More than 60 licenses were revoked in 2008 for projects that were either not executed during the required timeframe or because the investors had requested revocation. Since 2004, the HCI began to annually review the status of licenses granted and automatically annul those which were not implemented. The new SIC now assumes this license review function.
While investors are not required to hire a fixed number of local employees, the SARG looks more favorably on proposals that include a large element of local labor, that use local raw materials, and that are designed for undeveloped rural areas. As a result, informal guidelines on labor and materials are usually negotiated on a case-by-case basis during the approval and licensing process. Syria’s labor laws generally are considered an impediment to foreign investment, although some recent investments in the tourism sector have been able to win exemptions from the SARG. Foreign investors are not required to partner with a Syrian citizen. However, successful foreign investments usually involve a well-connected local partner who can overcome bureaucratic hurdles, frequently by bribing the appropriate official.
For all public tenders, the SARG requires a bid bond, which is usually five percent of the value of the tender. If selected, a performance bond is required, which is usually ten percent of the value of the contract. Even though these monies are held in CBS on behalf of the foreign investor, most companies now incorporate the amounts into their overall bid because the monies are rarely, if ever, returned after completion of the contract. In addition to these bonds, the government may also require disclosure of proprietary information before approving a project.
While the Ministry of Economy and Trade has the authority to set prices and/or profit margins on products imported for the local market, they have not usually done so for products brought in through foreign investments. Similar types of incentives, which are outlined in various pieces of legislation, include increased flexibility on hard currency, reduced income taxes for share-holding companies, and incentives to promote investments in underdeveloped regions and sectors.
Right To Private Ownership And Establishment
Foreign and domestic private entities have the right to establish and own business enterprises and engage in all forms of remunerative activity after completing sometimes extensive licensing requirements. Moreover, private entities have the right to freely acquire and dispose of interests in business enterprises.
All private investment projects must be licensed. Over the past few years, the SARG has opened most sectors formerly reserved for government monopolies to private sector investment. Key sectors opened since 1994 include flour milling, sugar refining, cotton ginning and spinning (if the project is completely integrated to include manufacturing and finishing), banking, insurance, electricity generation, petroleum refining, aviation, cement production and salt mining. Nevertheless, state enterprises have a comparative advantage in winning bids due to their connections in the HCI and the new SIC. Several projects that have been approved have not reached implementation because investors have failed to produce the necessary resources and/or found the final conditions of the project unsuitable. The HCI and now the SIC revoke licenses if the project is not implemented within three years of receiving a license.
The standard of competitive equality is not applied to private enterprises competing with state enterprises in a number of important areas. For example, although a number of state banks such as the Real Estate Bank and the Industrial Bank are authorized to loan local currency to help finance private sector projects, state enterprises continue to have privileged access to local credit and exclusive access to official loans from the Commercial Bank of Syria. In previous years, private companies could sometimes access offshore financing, and if they were located in Syria's "free zones," could have been able to access financing from the few local branches of private foreign banks operating in the free zones. However, in December 2007, the Central Bank of Syria gave the six Lebanese banks operating in "free zones" the option of either ceasing operations within six months or becoming branches of onshore banks. This action aimed to ensure that all banks in Syria operate under uniform regulations monitored by the Central Bank.
Protection Of Property Rights
Violations of intellectual property rights (IPR) are rampant in Syria. Patent, trademark, and copyright laws are all inadequate. As a result, Syria provides minimal protection for local producers and almost no protection for foreign producers.
In July 2002, Syria officially joined the 1967 Stockholm Convention on Intellectual Property Rights. Subsequently, the authorities began to enforce the protection of IPR through raids and confiscations of pirated goods from a number of local vendors and producers. However, direct government action to punish IPR violators ceased by the end of 2003 and the senior official at the Ministry of Culture who was spearheading this effort resigned. In May 2004, Syria became a member of the World Intellectual Property Organization (WIPO), but has not made improvements in IPR enforcement to date. In March 2007, the SARG passed Law No. 8 regulating trademarks, geographical indications, and industrial models and designs. Syria officially joined the Geneva Act of the Hague Agreement pertaining to the protection of international designs in May of 2008.
In late 2005, the Syrian Association for Intellectual Property (SIPA), an NGO, was established with a USD 50,000 grant from the UNDP. In November 2006, the NGO became an observer in the WIPO. SIPA's main objectives include increasing public awareness about IPR issues and supporting the execution of IPR laws and regulations. Among their activities are a quarterly newsletter; issuance of a geographical indicator list to protect national industries (e.g. Ifrin oils, Aleppo soap); evaluating protection rights in public and private companies (with Ministry of Industry assistance); issuing certificates regarding compliance with non-pirating/counterfeiting laws; and maintaining their website at www.sipa-sy.org.
The Syrian regulatory system is not sufficient to provide the necessary legal framework to actively protect and enforce IPR. The Ministry of Economy and Trade traditionally processes the registration of patents and trademarks, while the Ministry of Culture is responsible for copyrights. Books in English are frequently translated into Arabic and published without any royalties paid to the copyright holder. In addition, music, software, and video CDs, CD-ROMs and DVDs are copied and sold ubiquitously. Film industry contacts estimate that the home video market alone is 80 percent pirated, although the amount of revenue lost to U.S. IPR holders is unknown and very difficult to measure.
While IPR protection is almost non-existent, the protection of real property rights is much more developed, and therefore legally and socially accepted. Since bank financing and mortgage lending does not exist, real estate is bought through cash payments in full or through installments. Property ownership is not transferred until it is paid in full.
Transparency Of The Regulatory System
The Syrian regulatory system is not transparent on any level. As described by local private business leaders, corruption is endemic at nearly all levels of government. Decisions are made without consulting consumers, producers, or suppliers. Government regulations do not promote competition, either among private firms or between private firms and state enterprises.
In April 2008, the SARG issued Law 7, the first Syrian legislation addressing Competition and Anti-Trust. The law establishes a Competition Authority to be managed by a Competition Council that will statutorily be empowered to ban or permit mergers and to impose fines. Law 7 states that prices will be defined by free competition, that cartels are prohibited, and that economic entities will be prevented from abusing their dominant positions in the market. It is not clear how the Competition Council will enforce Law 7, as enforcement would be financially detrimental to many senior regime officials and prominent business elites.
To foster competition, the government has informed public sector enterprises that they will no longer be permitted to operate as a monopoly, particularly if private capital, foreign or domestic, can be obtained to finance projects. However, there are no regulatory processes managed by non-governmental organizations or private sector institutions to provide a system of checks and balances on government directives. As a result, legal, regulatory, and accounting systems are incompatible with international standards. Local businesses do not comply with what are perceived to be arbitrary regulations. They also avoid paying taxes because they consider payment as a means of official confiscation of their profits.
Efficient Capital Markets And Portfolio Investment
Syrian government policy does not facilitate the free flow of financial resources. The lack of a fully convertible currency exchange and the absence of a capital market continue to impede both domestic and foreign investment. However, to attract investment and to ease access to credit, the SARG issued Decree 4 in 2007 allowing investors to receive loans and other credit instruments from foreign banks, and to repay the loans and any accrued interests through local banks using project proceeds. Furthermore, in February 2008, the SARG allowed investors to receive loans in foreign currencies from local private banks to finance capital investment and in particular the import of machinery and production needs. Debtors are free to repay their loans from their foreign currency accounts in Syria or abroad or through the purchasing of foreign currency from the lending bank.
In October 2006, President Asad issued Decree 55 formally establishing the Damascus Stock Exchange (DSE), and has since named a governing board. However, technical and regulatory difficulties caused the delay in the opening of DSE, now scheduled to start on March 8, 2009.
The government continues to impose strict foreign exchange controls on currency outflows for private sector operations that are not under the legal umbrella of Investment Law No. 10, Decree No. 7 and Decree No. 8. Foreign capital can be brought into the country and can be exchanged for commercial purposes at the daily rate established by the Central Bank of Syria. One-way, non-commercial foreign exchange transactions are currently available at branches of CBS at a set rate, which is close to the real or market rate.
Syria is an autocratic police state that severely restricts political dissension. Protests are rare and usually dispersed quickly. Syrian security services routinely jail protestors and outspoken political opponents for indefinite periods of time. In February 2008, a senior Hizballah operative was assassinated by a car bomb in a residential neighborhood of Damascus. In August 2008, a Syrian military officer was assassinated by a sniper in the coastal city of Tartous.
Anti-American sentiment has risen as a result of the war in Iraq, the Israeli-Hizballah war of 2006, and on-going Israeli military operations in Gaza. In September 2006, the U.S. Embassy was attacked without warning by a small group of terrorists using automatic gunfire and grenades. They attempted, unsuccessfully, to detonate a vehicle-borne improvised explosive device at the embassy's rear gate. One local guard was seriously injured. A Syrian bystander, one Syrian security officer, and all four attackers were killed in the ensuing gunfight. Government-orchestrated demonstrations involving thousands of Syrians damaged Embassy property in December 1998 and in October 2000.
Syria was ranked 147 out of 180 countries in the London-based Transparency International’s 2008 corruption perception index. This poor placing is getting steadily worse, falling from 93rd in 2006 to 138th in 2007. Of the Arab countries, only Sudan and Iraq had lower rankings in 2008.
Corruption cuts across most sectors of Syrian society and affects the legal system as well. Bureaucratic procedures for receiving required documents and for obtaining licenses can cause protracted delays and often involve official approval from many levels within the government. Under-the-table payments are commonplace, as corruption is endemic in nearly all levels of government.
After 1998, state-run newspapers began publishing articles about the misappropriation of public funds and the lack of probity among public officials. As a result, a number of officials were jailed for corruption after an investigation into their abuse of power. Even with these public cases, however, corruption is prevalent, and the SARG often uses its anti-corruption campaigns to target its critics or those who have fallen out of favor. Wages and benefits in the public sector are insufficient to meet the cost of living, thus fringe benefits and excessive "agency" fees are widely tolerated as a means of supplementing income, especially during the procurement, investment licensing, import licensing, and customs clearing processes.
In an effort to reduce public graft, the President issued Decree 22 in April 2008 subjugating any embezzlement or corruption to the Economic Punishment Law and increasing the penalty from five to ten years of imprisonment.
In February 2008, President Bush issued Executive Order 13460, which authorizes the U.S. Treasury Department to sanction individuals or entities found to be engaging in, facilitating, or profiting from official corruption with the government of Syria. Subsequently, the Treasury Department used this E.O. to designate Rami Makhlouf, Syria's most prominent businessman and President Asad's first cousin. The designation prohibited American individuals and companies from transacting business with Makhlouf. In July 2008, the Treasury Department listed two companies owned by Makhlouf, SyriaTel and RAMAK, as "blocked properties." SyriaTel is the largest mobile phone provider in Syria and RAMAK is a chain of duty free shops present at Syria's land border terminals and airports.
Bilateral Investment Agreements
On August 9, 1976, Syria signed an investment guarantee agreement with the United States that protects investments from nationalization and confiscation. Similar agreements are also in force with Germany, France, Switzerland, Pakistan, China, Indonesia, Russia, Belarus, Iran, Italy, Bulgaria, Ukraine, Romania, Kuwait, the U.A.E, Morocco, Sudan, Yemen, Egypt, Lebanon, Jordan, Tunisia, Algeria, Bahrain, Turkey, Cyprus, Greece, Senegal, Ukraine, Tajikistan, India, Nigeria, Korea, Serbia and Libya. In addition, a number of bi-national committees have been established with Arab, Asian, and European countries to explore private and mixed joint ventures, and improve bilateral trade.
The U.S does not have a bilateral taxation treaty with Syria.
OPIC And Other Investment Insurance Programs
U.S. businesses are not allowed to utilize OPIC or other U.S. government investment insurance programs because Syria is on the State Department's List of State Sponsors of Terrorism. In addition, the Export-Import Bank, the Small Business Administration, the Commodity Credit Corporation, and the Trade Development Agency cannot extend financing for U.S. business activities. USAID terminated its assistance to Syria in 1983; subsequently, all funds appropriated through the annual foreign operations legislation are banned. While the recently implemented Syria Accountability Act does not currently prohibit investments, the President can decide to ban U.S. investments at any future date. As a result, the U.S. embassy does not actively promote U.S. investment in Syria.
The SARG reported an unemployment rate of 8.1 percent in 2007. However, more accurate independent sources estimated unemployment as high as 25 percent. It is worth noting that most public sector entities suffer from over-employment, thus rendering a high cost of production and low rate of efficiency. Close to half of the population lives on less than USD 150 per month per household. In May 2005, the UNDP announced that around 20 percent of the Syrian population lives below the poverty line. The average public sector salary is USD 215 per month, and public sector employees constitute over one quarter of the total labor force. Many public sector employees resort to accepting bribes or taking a second job in order to afford basic commodities.
Compared to the public sector, the private sector offers higher wages and better benefits and usually has been able to recruit and hire more skilled labor. However, recent developments in information technology have outpaced the level of competency among Syrian engineers. Syrian universities continue to teach many technical courses in Arabic and use Soviet-era curriculum that is outdated. In recent years, a few private universities have opened and provide competition for the public institutions. As a result of the deficiencies inherent in the Syrian education system, both private and public sector firms are looking abroad to find qualified technicians for their IT needs. While the public sector is not competitive, the private sector is struggling to compete in the international marketplace for qualified engineers. Syria is continuing to lose a large number of highly-skilled workers who are leaving the country for higher wages abroad.
Government officials acknowledge that the economy is not growing at a pace sufficient to create enough new jobs annually to match population growth. According to official Syrian statistics, the economy grew at about six percent in 2008, although others estimated real GDP growth below three percent. However, during the same year population grew at 2.45 percent. Since 2001, the SARG has tried a number of initiatives to promote job growth without much success, including job fairs and loans for small and medium sized investment projects.
Independent labor unions do not exist in Syria. The General Federation of Trade Unions (GFTU) is government-controlled and oversees all aspects of union activity.
Foreign Trade Zones / Free Ports
There are eight existing duty-free zones throughout Syria. Through 2008, the total investment in Syria’s free zones reached USD 677 million, with 73 foreign investment companies operating there.
The General Organization of Free Zones (GOFZ) has plans to establish four additional public free zones in Homs, Dayr al Zur, Idleb, and the port of Tartus. Moreover, GOFZ has licensed the first privately owned and managed free trade zone in the Damascus suburbs for use by the textile industry to produce exports for Europe and the U.S. In May 2000, a free trade zone was inaugurated near the Syrian-Jordanian border as a joint venture between the two countries. The government is preparing international tenders to establish similar zones with Lebanon and Turkey. Both major ports in Lattakia and Tartus have free trade areas; however, there are no free ports in Syria.
Both China and Iran announced plans to build free zones in Syria; Iran later dropped this idea in favor of pursuing a regular Free Trade Agreement with Syria, though an Iranian FTA has yet to be concluded. "China Town," designed to house roughly 200 Chinese companies and act as a gateway to Syria for Chinese goods, was officially inaugurated in the Adra free zone in July 2008. Recently, a Syrian investor, in cooperation with Persian Gulf partners, obtained preliminary approval for the establishment of a private free zone in al-Tanf border area in Dayr al Zur to promote trade with Iraq.
Foreign Direct Investment Statistics
Official foreign investment statistics by country are not available in Syria. 2008 witnessed the licensing of 211 local and foreign investment projects at an estimated total capital of USD 11.3 billion. Of those 211 projects, 41 account for foreign investment amounting to some USD 8.36 billion. Spending on equipment imported for these projects, which are expected to create more than 22,752 new job opportunities, is estimated at USD 58 million. To accommodate these investments, eight new industrial zones have been approved with investment costs exceeding USD 40 million. The HCI and SIC have adopted a policy of reviewing the status of projects on a yearly basis and annulling licenses of those projects which are not implemented within the required period of three years. Accordingly, more than 60 licenses were revoked in 2008 for projects licensed but not executed.
In 2008, the Ministry of Tourism licensed several new tourism and real estate projects. Led by Gulf companies, including Emaar and Bunyan of Dubai, al-Khurafi of Kuwait, and al-Ta'ef and Balkis of Saudi Arabia, over USD 1.3 billion were pledged to be invested in the establishment of hotels, tourism resorts, and shopping malls. Among the major tourism projects launched in 2008 are two resorts in Lattakia. The Qatari al-Diyar company's investment is estimated at USD 350 million, while the Russian Intourist Sinara's is valued at USD 40 million. In Damascus, the Swiss Movenpick hotelier and American Holiday Inn are exploring USD 28 million and USD 35 million ventures, respectively, although ground has yet to be broken on either project.
According to government statistics, 222 foreign investment projects valued at USD 7.12 billion were licensed from 1991-2006, excluding joint ventures in the petroleum and tourism sectors. Major foreign investors include companies from Turkey, Germany, Russia, Iran, Switzerland, the U.K., the U.S., France, Cyprus, Spain, China, Canada, South Korea, Belgium, Pakistan, Brazil, Venezuela, the Netherlands, Malaysia, Italy, Austria, Sweden, India, Saudi Arabia, Kuwait, Jordan, Lebanon, Iraq, Egypt, the UAE, Algeria, Bahrain, Qatar, Libya, and Morocco.
The largest foreign investors are in the petroleum sector and include Shell (UK/Dutch), Total (France), INA Nafta (Croatia), Dublin (Canada), Dove Energy Ltd. (U.K.), PetroCanada, Stroytransgas (Russia), and Gulfsands Petroleum (U.K.). The government began to actively court international energy companies in the late 1980s. By 1990 twelve foreign firms had production or exploration operations in Syria; however, most departed as a result of dry wells, rising costs, and major disagreements with the government over contractual terms and tax liabilities.
The government redoubled efforts to attract foreign energy companies by opening five blocs in 2001 and eleven blocs in 2002 for international tenders. In an effort to reverse the downward trend in production, the government opened additional blocs for international bids in January 2003. As a result, Dublin, IPR (U.S.), Devon Energy / Gulfsands Petroleum (U.K.), INA Nafta, Tanganyika Oil Company (Canada), the Chinese National Petroleum Corporation, and Zarubezhneft (Russia) have all been awarded exploration and/or production sharing contracts. In November 2005, nine additional blocs were opened for exploration resulting in signed contracts and/or production sharing agreements with Shell (UK/Dutch), Maurel & Prom (France), Hunt Middle East (U.S.), Loon (India), Unkranadra Oil (Ukraine) and Soyuznaft (Russia). In 2007, GroundStar (Australia) was awarded exploration rights to two additional blocks in southern Syria.
After the implementation of U.S. economic sanctions in May 2004, a number of major U.S. corporations made the decision to divest and pull out of Syria. These companies include ExxonMobil, Devon Energy, 3M (for household products), Conoco Philips, Marathon, and Veritas. In April 2008, the American oil field services firm Weatherford also ceased all of its Syrian operations.