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The Iran-Syria Alliance: The Economic Dimension

Nimrod Raphaeli and Bianca Gersten - 7/29/2008

An examination of Syrian-Iranian economic relations reveals that, beyond their propaganda value, these relations are of small benefit to Syria and of negligible benefit to Iran. The alliance between the two countries is driven first and foremost by political and strategic interests rather than by economic considerations. As neither Iran nor Syria is considered a reliable source of data, it is difficult to draw a clear picture on the nature and depth of these economic relations. Often distorted anecdotal figures create a misleading reality in order to serve political objectives. At times it seems the two countries are engaged in mutual deception to create a myth of economic collaboration that exists on paper only. To the extent there is depth to the relationship, it is political and strategic but not economic.

OVERVIEW

The burgeoning relationship between Syria and Iran dates back to 1979, when Imam Ruhallah Khomeini returned triumphantly to Tehran from his exile in France to launch the first full-fledged Islamic revolution in modern history. The date marks the beginning of a new brand of Islamic theocracy based on the principle of wilayat-e-faqih, or the rule of the jurist, who in this case was Khomeini himself. No sooner had the revolution established itself and routed its domestic opponents than a new strategy was put in motion--the export of the tenets of the Iranian Islamic Revolution to the rest of the Middle East. Alarmed by the perceived threat of an onslaught by a Shi'a branch of Islam on predominantly Sunni regimes in the region, Iraqi leader Saddam Hussein, perhaps encouraged by other like-minded Sunni leaders, initiated a bloody conflict with Iran that lasted for eight years--from 1980 to 1988--inflicting terrible losses on their respective populations and bringing destruction to the infrastructure and economic assets of both countries.

With the breakout of the war between Iraq and Iran, secular Syria sided with Iran not for love of its Shi'a revolutionary theocracy, but because of the expectation that the war would end with the demise of Syria's Ba'thist nemesis in Baghdad. It was hatred for Saddam Hussein above all else that shaped Syrian strategy with regard to the conflict. Furthermore, hatred of Saddam was also behind then Syrian President Hafiz al-Asad's joining the United States-led multinational military coalition in 1991 that expelled the Iraqi army from Kuwait, which had been invaded by Iraq the year before.

The Islamic Republic of Iran readily welcomed Syria as an ally against Iraq as a way of breaking the wall of hostility that was erected by the Sunni Arab countries--primarily Egypt and Saudi Arabia--to shield them from Iran's revolutionary fervor. Two decades later, Iran's foreign minister, Manuchehr Mottaki, declared in Damascus: "Actually, the strategic relations between the two important countries in the region [meaning Iran and Syria] are a trust placed in our hands by our late leaders Imam Khomeini, may Allah have him rest in peace, and Hafiz al-Asad."^[1] Mottaki denied Asad similar a blessing.

Hafiz al-Asad was shrewd, calculating, and an Arab nationalist at heart. He kept his cards close to his chest and his foreign policy at bay from the Islamic Republic. It was his way of preserving Syria's independence in the Arab arena while at the same time benefiting from Iranian economic aid and political support. In the words of Syrian journalist and writer Hussein al-Awdat, "Syria gained economically without losing on the Arab front while keeping its independent decision[making capacity]."^[2]

Although Asad and Saddam Hussein were politically estranged, this did not prevent Saddam from using the Kirkuk-Banias oil pipeline to smuggle oil to Syria in contravention of the UN sanctions and the Oil-for-Food Program, nor did it prevent Syria from accepting Iraqi oil at a heavily discounted price. When challenged about accepting the smuggled Iraqi oil, Syria's response was that it was merely testing the pipeline.

If there was a fundamental trait that characterized the policies of Hafiz al-Asad, it was caution, reinforced by ability to balance conflicting interests. Both Syria and Iran were isolated in the region, and both sought each other for political support. The sanctions by the United States on both countries--and in the case of Iran, sanctions by the United Nations Security Council as well--forced them to seek strength by mitigating the consequences of isolation. Asad the son, inexperienced and adventurous, may have found a soul mate and source of comfort from his increasingly isolated position in the flamboyant and populist president of Iran since 2005, Mahmud Ahmadinejad. Bashar al-Asad could not overlook a statement such as the one made by Iran's minister of defense that "the security of Damascus is more important than the security of Tehran."^[3] It would have been out of character for Arab nationalist al-Asad to declare that the security of Tehran was more important than that of Damascus.

Syria's isolation was amply demonstrated at the Arab Summit meeting held in Damascus on March 29-30, 2008. It suffices to point out that among the nine heads of state absent from the summit, six were heads of state from the seven original founding members of the Arab League: Egypt, Saudi Arabia, Yemen, Lebanon, Jordan, and Iraq. Syria was the seventh founding member and the only one represented by its president at the summit.

For Iran, the growing relationship with Syria was important but far from exclusive. Not willing to put all its eggs in the Syrian basket, Iran moved vigorously to erect surrogate satellites, including Hizballah in Lebanon, the Shi'a militias in Iraq, and Islamic Jihad and the Hamas Islamic Movement in the Gaza Strip. In all these endeavors, Syria was counted upon to play the role of more of a secondary collaborator than a full-fledged and equal partner. In fact, the rise of Hizballah in Lebanon may constrain Syrian aspirations to ever reestablish its hegemony over Lebanon.

Apart from a potentially long-term conflict over Lebanon, the two countries have little in common: Arab versus Persian identities, secular versus theocratic regimes, a Sunni majority in Syria versus Shi'a predominance in Iran. The issue of Arab identity versus Persian identity, in particular, is a fundamental element of Syrian cultural history. The Bashar al-Asad regime, built on the support of a small minority of Alawites (an offshoot of Shi'ism), must be particularly concerned about the rise of the Salafi movement among its majority Sunni population--which, similar to the Saudi population, considers Muslims who adhere to the Shi'a branch of Islam, which is dominant in Iran, as apostates. In this regard, Syria must also be concerned about 1.5 million Iraqi refugees, mostly Sunnis, who did not escape sectarianism in Iraq, falling under Iranian Shi'a domination.

Syria should also be concerned about an Iran-dominated Iraq, which could run contrary to its Arab nationalist conviction that favors a unified Arab nation at some future time. Damascus sees itself as the intellectual heart of the Arab nation and though Iran is a friend and an ally, a neighboring Iraq dominated by Iran would be an anathema to Syria's Arabist outlook and aspirations. Indeed, Iran is better kept physically separated from Syria by the entire width of Arab Iraq.

In his inaugural speech on the celebration of "Damascus the Capital of Arab Culture 2008," President Bashar al-Asad called Damascus "the capital of Arab dignity, not simply a city or a capital." "Damascus," he said, "carried a big and total meaning in the Arab consciousness, as the source of spiritual wealth and a fountainhead of creativity." He concluded his long celebratory speech with cultural overtones: "Our message is one of solidarity with the Arab nation, with the language of our great ancestors, with the great universal values bestowed to us from God."^[4] Among the many dignitaries present at the event and recognized by Asad were the emir of Qatar, the president of Turkey, and the former president of Lebanon. Asad made no mention of an Iranian presence.

The true Arab nature of Syrian politics was avidly demonstrated in the Arab League's summit meeting referred to earlier, in which Syria sided with the United Arab Emirates (UAE) and against Iran. A few days later, the Iranian daily Jomhuri-ye Eslami criticized Syria for supporting the final communiqu?, which established the sovereignty of the UAE over three islands occupied by Iran. The daily wrote that despite its good relations with Iran, Syria had acted unfairly towards its friend.^[5] By siding with the UAE over the three disputed islands, Syria opted to stay on the Arab side, motivated in part by the expectation of an increased flow of oil money into its stagnant economy.

MARCOECONOMIC FEATURES OF THE TWO ECONOMIES

Iran's economy is state-dominated. A large number of state enterprises and quasi-state institutions (bonyads) are engaged in economic activities in virtually all sectors.^[6] Purely private firms are currently found mostly in agricultural, domestic, and foreign trade; small-scale manufacturing; and mining. Establishing private enterprises remains difficult (see the "Doing Business" Annex).

The IMF has identified the challenges faced by Iran in providing employment for its fast-growing labor force while lowering inflation. Every year approximately 750,000 Iranians enter the labor market for the first time, putting enormous pressure on the ability of the economy to create jobs. Attempts to support economic activity and job creation through fiscal and monetary stimuli have resulted in persistent double-digit inflation (estimated in February 2008 at 20-22 percent), which has undermined the objective of achieving high sustainable growth rates over the medium term.^[7] Ali Daryani, the owner of a retail food store in Tehran, told Reuters: "Sometimes, we are forced to change the price sticker three times a day because of inflation."^[8] In fact, the dual issue of inflation and high unemployment has become the subject of Friday sermons by Iranian preachers in mosques calling urgently on the government to address it.^[9]

As the fourth-largest exporter of crude oil, Iran earned $70 billion in 2007. However, according to estimates by Muhammad Husayn Adli, the former governor of the Central Bank of Iran who resigned over disagreement with Ahmadinejad on economic policy, the direct and indirect cost of energy support had reached $45 billion a year. Iran imports gasoline worth $5 billion a year because of a lack of refining capacity, which it cannot expand due to the reluctance of international companies to construct new refineries in Iran for fear of retaliation by the United States. The imported gasoline is sold at a heavily subsidized price, which encourages waste and smuggling. Smugglers, connected with key political and religious figures, smuggled the gasoline to Iraq, where it fetched a much higher price than at the official rate in Iran. In May 2007, Iran introduced a rationing system to reduce the cost of imported gasoline,^[10] but in March 2008 announced that it would allow drivers to buy additional amounts of gasoline at five times the price of subsidized gasoline.^[11]

Syria was categorized by the World Bank as a lower middle-income country with a per capita income of about US $1,200. In 2006, the population stood at about 19 million, registering an annual growth of about 2.5 percent and a median age of 20.7 years--a demographic structure that places high pressure on the labor market, which expands at about four percent annually.

Like that of Iran, Syria's economy is predominantly state-controlled, characterized by the International Monetary Fund as "a stable but stagnant economy."^[12] This characterization reflects, on the one hand, political stability maintained through the use of force and intimidation and, on the other hand, the failure of the narrowly based political establishment to implement extensive economic reforms to move the country in the direction of the global market. The Center of Economic Research of the Federal Technical Institute at the University of Zurich ranked the UAE and Saudi Arabia as thirty-fifth and thirty-sixth, respectively, among the 122 countries that are the most integrated in the global economy. Syria was ranked 106 globally but last in the Middle East.^[13] Under 50 years of Ba'th Party rule, the Syrian economy has remained an old-fashioned, inefficient, and heavily regulated socialist command economy--presided over by a quasi-totalitarian regime characterized by political repression and by large-scale corruption at the highest levels of government.

The draft budget for 2008, submitted to parliament in November 2007, sends a strong signal that the fall of oil production and revenue is beginning to take its toll on various aspects of the Syrian economy. Budget revenue was projected to fall by 19 percent, with oil revenue dropping by 59.2 percent from its 2007 level, and there was a negative oil balance, despite record oil prices. The budget forecasts a big spike in deficits of 128 percent over 2007, which the government is to cover by tapping into its $20 billion foreign exchange reserves.

Syrian oil production reached its peak in the 1990s with 600,000 b/d but has since declined to about 370,000 b/d. With Syria becoming a net oil importer, the rising cost of oil imports is projected to push the budget deficit to an unprecedented level of close to ten percent of GDP in 2008, compared with six percent in 2007. The Syrian government has begun a five-year program to lower fuel subsidies gradually; it has indeed raised the gasoline price to $0.60 per liter (about $2.40 per gallon), but it has kept the price of diesel unchanged at $0.14 per litter ($0.56 per gallon).^[14]

Oil subsidies in Syria, which account for about 15 percent of GDP, have, as in Iran, enriched smugglers who sell the subsidized fuel in Lebanon, Turkey, and Iraq. Smuggling between Syria and its neighbors is highly organized, and it is estimated that it costs the Syrian treasury about $800 million a year. In June 2006, a UN mission investigating security on the Lebanese-Syrian border reported that it had noticed "permanent installations [pipes] for the smuggling of fuel across the border on the slopes of the mounts towards the lowlands [biq'a] in Lebanon."^[15] While Syria was occupying Lebanon through 2006, Syrian army officers were known to lead the smuggling operations from narcotics to cosmetics. It is hard to believe that large trucks carrying smuggled gasoline across Syrian borders could do so without some sort of military connivance.

THE NEED FOR REFORM

Abdallah al-Dardari, the Syrian deputy prime minister for economic affairs, conceded in an interview with the London daily al-Hayat that his country's economy was subject to much negative news, but he chose to focus on "four specific challenges." The first challenge was the introduction of "deep structural economic reform and freeing the various sectors of the economy from their shackles." While Syria has taken measures toward economic reform, al-Dardari said that the road ahead is long. The second challenge is improving the competitiveness of the Syrian economy and reducing unemployment. He acknowledged that the measurement by the International Labor Organization (ILO) of the rate of unemployment, which stood at about 12-13 percent, could be misleading since the ILO does not consider unemployed a person who may have worked at least one hour the week before the survey of employment was conducted. Al-Dardari conceded that unemployment among the 16-24 age group remains at 18.4 percent. A third challenge is energy. The demand for power supply in Syria is growing at ten to 11 percent annually while the economy is growing at a rate of five to six percent. The country will need 1,000 megawatts annually at a cost of 1.5 billion euros. This means the country needs vast investment to meet the rising demand for power, which Syria will have difficulty meeting, given its considerable budget deficit. The fourth challenge is food prices. The recent spike in the price of agricultural commodities is putting Syrian food security in jeopardy. Al-Dardari concluded his interview by drawing attention to the social gaps in society that are getting wider, indicating that the Middle East is being, in his words, "eaten up." Poverty, he said, is "a serious and profound phenomenon," although he was careful to say that the government was trying to provide a "social safety net." ^[16]

As for Iran, there is currently an "open war" being waged in the government over economics. Daoud Danish Ja'fari, the ousted economic minister, revealed that his dismissal by President Ahmadinejad on April 9, 2008, was triggered by disagreements in the cabinet over economic and financial issues. Critics maintain that allocating money for the construction of small infrastructure projects in villages and supporting the practice of interest-free loans have directly contributed to Iran's high inflation. Yet the president insists that government banks should make interest-free loans and maintains that both public and private banks should reduce their interest rates considerably below the rate of inflation. Despite this, the governor of the central bank declared on national TV that interest rates would be raised to the level of inflation as an "absolute measure" to control rising prices.^[17] Abd al-Moneim Said, director of the al-Ahram Center for Political and Strategic Studies, stated that the Iranian regime "ridicules the views of economists."^[18] It is clear that as long as Mahmud Ahmadinejad is in power, calls for specific reforms--even those that come from within his administration--are unlikely to be heeded and moreover will continue to be discounted as mere mafia-led disruptions.

ADDITIONAL OBSERVATIONS ON THE TWO ECONOMIES

There are two fundamental economic differences between the two countries: Iran is an oil-based economy and Syria is an agriculture-based economy. The other difference is the size of the two economies, with the Iranian economy having the upper hand in terms of size and magnitude. For a quick comparison of key economic indicators of the two countries, Table 1 below shows the juxtapositions on a number of basic economic variables.

Table 1: Iranian and Syrian Economic Data in Juxtaposition

All data compiled from The CIA World Fact Book, https://www.cia.gov/library/publications/the-world-factbook/index.html(accessed January 25, 2008).

THE REALITY OF ECONOMIC COLLABORATION

As one examines the economic relations between the two countries it quickly becomes evident that beyond their propaganda value, the benefits of the relations are small for Syria and negligible for Iran. The alliance is driven first and foremost by political and strategic interests rather than by economic considerations. While Syria has benefited from Iranian economic support, this support is constrained by Iran's own limited resources and the growing public clamor within Iran to have the government address stressful economic conditions such as burgeoning inflation, the shortage of housing, and a high rate of unemployment, particularly among the youth. What Iran can spare in terms of economic aid can hardly meet Syria's needs in boosting its economy, nor can it generate employment for an equally high rate of unemployment, particularly among its youth. In reality, Syria needs massive investment in its promising tourism sector, and for this it needs the injection of oil money from Gulf countries. It will also need investment in its infrastructure and housing, which Iran cannot supply. Arab investment is very important: Kuwait alone has invested $3 billion--primarily in tourism projects and real estate--and Qatar has announced an investment program of $4 billion, while total Iranian investment is estimated at $1 billion, including a commitment of more than $600 million for a joint refinery project with Iran and Venezuela that remains on the drawing board.

SANCTIONS AS A UNIFYING FORCE

The American sanctions on Syria for facilitating the transport ofjihadists into Iraq and Syria's support of Palestinian rejectionist organizations (meaning those political entities that reject peace with Israel on principle), as well as the sanctions on Iran because of its nuclear program in addition to its support of international terrorism, have brought the two countries closer together. In other words, the alliance between the two countries was not founded on a compelling economic rationale (like France and Germany after the end of WWII) but rather to mitigate the undesirable consequences of sanctions.

The sanctions have already exacted a heavy toll on both Iran and Syria. In the case of Iran, foreign direct investment in its oil and gas fields has been hard to come by. Many producing oil fields have passed maturity, and new fields are not being developed for lack of investment or equipment. A report leaked by Iran's central bank in January 2008 claimed that not a single dollar of foreign investment reached Iran in 2007. President Ahmadinejad was quick to blame his critics for distorting the facts and claiming that foreign investments were "pouring on the country like rain."^[19]

In the case of Syria, the sanctions have meant that the partnership agreement with the European Union negotiated in Brussels in 2005 was frozen, as was Syria's application in 2001 to join the World Trade Organization (WTO). It is not likely that either the agreement or the application for WTO membership will be put in motion any time soon. The sanctions have also limited Syria's ability to procure new aircrafts for its aging airline, Western pharmaceutical products, and badly needed Western investment.^[20] Of course, the same applies to Iran. The Syrian minister of finance told the London daily al-Sharq al-Awsat that the economic pressures [that is, sanctions] have affected the country's ability to secure much of the material and technological requirements needed for economic health.^[21]

PROLIFERATION OF IRANIAN-SYRIAN AGREEMENTS

It is almost impossible to keep track of all the bilateral agreements signed in recent years as the two countries moved closer to one another on every conceivable subject, including agreements on tourism, education, land transport, power, scientific research, health, environment, agriculture, weights and measurements, industry, tariffs, banking, and more. By the counting of the government daily al-Thawra, by March 2007, the two countries had signed "bilateral agreements, memoranda of understanding, and protocols whose number exceeded 30."

In addition, there is also the important tripartite agreement, together with Venezuela, for the construction of a refinery in Syria.^[22] Most of these agreements remain on paper for years before additional agreements on implementation are signed. For example, the Tourism Cooperation Agreement was signed in Tehran in July 1984, but the execution was delayed until an implementation agreement was signed in Damascus in mid-1999. The education agreement was also signed in 1984, but the implementation program was signed only at the end of 2002. Furthermore, the agreement on land transport of passengers was signed in 1986 but an implementation program was not signed in Damascus until February 2006.^[23]

Following the March 2008 meeting of the high-level Syrian-Iranian Committee on Cooperation, no less than ten agreements and memoranda of understanding were concluded, including the most uncommon agreement for cooperation between the two state-owned and state controlled news agencies, the Iranian News Agency (IRNA) and the Syrian News Agency (SANA). ^[24] At the same meeting, it was announced that Iranian investments in Syria had reached $1.5 billion, including $950 million in the industrial sector, focusing on a car production--in reality, an assembly line and a cement factory. Neither party has ever published a breakdown of these alleged investments. During Ahmadinejad's state visit to Syria in July 2007, the Syrian press referred to an investment figure of $3 billion within three years.^[25]

There were, nevertheless, grandiose ideas whose chance of implementation is difficult to determine. For example, in the meeting between the Syrian Minister of Electricity Dr. Ahmad Khalid al-Ali and his Iranian counterpart, Fattah Parvez, the two officials discussed interconnecting their electric networks. (It is not clear how this would be possible without a common border or the agreement of a third party.) The Iranian minister also met with the Syrian minister of irrigation, Nadir al-Bunni, and discussed the building of pumping stations connected to a 6.3 meter diameter canal that will draw Tigris River water to irrigate 150,000 hectares at a cost of $2 billion.^[26] However, when Syria needed technical assistance to establish its own stock exchange, it sought help not from Iran but from the Nordic OMX, which was acquired by Dubai in 2007.^[27]

TRADE AGREEMENT

Trade relations between Syria and the Islamic Republic of Iran are governed by a trade agreement that was signed by the two countries in March 1996 but went into effect only in April 2004,^[28] a little over eight years from the time the agreement was initially signed. In the interim, there was a presidential decree issued by the president of Syria in November 1997 that ratified the trade agreement. One would suspect that it took that much time for a trade agreement to go into effect for the simple reason that there was little trade between the two countries to hasten the urgency for its enactment.

The agreement was meant to raise the trade level while offering mutually preferential status to both countries' products. The agreement was to have annexes listing the goods to be traded, paying particular attention to the issue of "country of origin." Damascus is the headquarters of the Arab boycott of Israel, and the issue of "country of origin" is of concern to the bureaucrats, mainly Syrian, who run the boycott office.

The trade volume between the two countries reached $200 million in 2007, but it is almost entirely one-sided in that it covers $180 million of Iranian export to Syria against $20 million of imports from Syria, or a ratio of nine to one in favor of Iran. Syrian exports to Iran include cotton, textile, olive and olive oil, fruits, and chemicals. The most important Iranian exports to Syria are industrial equipment, technical and engineering services, spare parts of industrial supplies, chemicals, train compartments, tractor engines, electricity cable supplies, and nuts.^[29]

The numbers suggest that the trade relationship between the two countries is not significant and, by Tehran's own admission, it is certainly not in Syria's favor.^[30] In fact, it is negligible compared to Syrian trade with Turkey, which was recorded at $1.6 billion in 2007.^[31] It is even insignificant by comparison with the Syrian trade with the United States.

Table 2: U.S.-Syrian Trade 2001-2006 (Millions of USD)

Source: U.S. Department of Commerce, Office of Trade and Industry Information

The above table shows an average annual total export by the United States to Syria of $217.3 million over the six years from 2001 to 2006 against an average annual total export by Syria to the United States of $228.5 million. This is a far superior trade record for Syria than the one it maintains with Iran.

The drive to strengthen the economic cooperation between Syria and Iran has often been clouded by a considerable amount of verbiage and very little action. During his visit to Damascus in October 2005, Iranian Foreign Minister Manuchehr Muteki characterized the relations between the two countries as "solid and positive." He said his government "recognizes the big opportunities for cooperation between the two countries" and called for detailed discussion on new strategies designed to expand the opportunities for cooperation. Interestingly enough, two years earlier Syrian Prime Minister Muhammad Naji Otri declared on the eve of the 2006 meeting of the joint Iran-Syrian Economic Commission that "Iran is currently involved in several economic development projects in Syria, whose value exceed 1.8 billion dollars."^[32] One cannot escape the conclusion that many of these investment figures are concocted for propaganda purposes and that they are far less significant in reality.

A news item that appeared on the Syrian official internet site Champress (Arabic) illustrates how it is nearly impossible to separate the wheat from the chaff:

Dr. Amir Husni Lutfi, minister of economy and trade, discussed in Tehran yesterday with the Iranian vice president, Parvez Davudi, and the Iranian minister of trade, Mir Kazemi, the means of strengthening the economic relations and raising the trade level between Syria and Iran. During the meeting, emphasis was placed on the importance of the Iranian companies implementing their projects in Syria according to the required quality and time limit and on the serious effort to advance the economic, commercial, and investment relations between the two countries. On the other hand, Dr. Lutfi and Muhammad Sa'idi Kia, the Iranian minister of housing and construction of new towns, signed the protocol of the fourth meeting of the committee for the follow-up and development of Syrian-Iranian activities. The committee has focused its work throughout its discussions on the follow-up of the subject of Iranian companies operating in Syria and the subject of future cooperation between the two countries, in addition to the exchange of views about following the preparations for the next round of meetings of the joint high-level commission. Dr. Lutfi said that the objective of convening the follow-up committee is to deliver on all pending issues, particularly the implementation of what has already been agreed upon at the last meeting of the high-level commission, which met in Tehran last year. He added that the second objective of convening [the follow-up] committee is to deliver the annexes relating to the preferential trade agreement between the two countries and consulting and debating [the issues] relating to the preparation of the joint high-level commission in Syria at the end of February or early March [of 2008.] The minister of economy and trade clarified that the committee is studying all the various subjects at all levels, not just at economic and commercial levels but also all other sectors, especially the cultural and scientific as well technical and technological aspects.^[33]

KEY PROJECTS

Iran's investments in Syria have focused on the energy, construction, services, automotive, and tourism sectors. Below is a list of projects that have been under implementation or consideration. It is not clear from available data how many of these projects have been completed, how many are in the design and preparation stage, and how many are being financed by the Iranian government or by Iranian private investors.

In its discussions with Iran, Syria has demanded that goods manufactured in Syria, regardless of the source of the key components, be presented as Syrian products. As such, they would have the support and backing of the Damascus government.^[34]Aside from national pride, Syrian demand must be seen in the context of the Arab Customs Union, which exempts manufactured goods sold within the union from tariffs.

Oil Refinery

Like Iran, Syria lacks sufficient refining capacity to meet the demand for gasoline and heating oil, and it has become a net importer of such products.

In October 2007, the national energy companies of Syria, Venezuela, and Iran, along with a Malaysian company, signed a joint venture agreement to build a 140,000 b/d refinery in the Furqlus area, near the city of Homs. A memorandum of understanding for the project was first signed by the Syrian, Iranian, and Venezuelan governments a year earlier but did not include the Malaysian partner. According to the agreement, the founders would set up a shareholding company to implement the project within six months from the latest agreement.

The ownership of the proposed refinery was to be shared by the Syrian Ministry of Petroleum and Minerals (15 percent), the Venezuelan Ministry of Energy and Petroleum (33 percent), the National Iranian Oil company (26 percent), and the al-Bukhari Group of Malaysia (26 percent). Crude oil would be supplied by Syria (70,000 b/d), Venezuela (42,000 b/d), and Iran (28,000 b/d); the latter would guarantee the supply of crude oil for at least 25 years, under an agreement to be signed with the refinery company. According to an initial feasibility study, the refinery would cost $2.6 billion, 30 percent of which is to be funded by the four founders and 70 percent by commercial loans. Given the international sanctions on Iranian and many Syrian banks, it is not clear how the founders would attain a commercial loan to get the implementation of the refinery under way. One is also left pondering the reason for the bigger supply of crude oil by far away Venezuela than by the Iranian allies.

Commenting on the project, the Syrian Deputy Prime Minister for Economic Affairs Abdallah al-Dardari, who has often exaggerated the economic achievements of his country, said the strategic objective of the refinery was to minimize the dependence on foreign sources for petroleum product imports, which have become a financial and logistical burden for the government, especially as the oil balance in Syria is almost negligible.^[35] The Syrian press has not reported on any construction activity of the proposed refinery, and there is no available information on its status.

Automobile Assembly Plant

This is a joint venture between the Iranian company Khudro-Iran and Syrian investors to assemble an Iranian designed car, known as Samend in Iran and Sham (Sham refers to Syria in classical Arabic) in Syria, with Iranian drive train at a cost of $60 million.^[36] The plant was designed to assemble 10,000 cars a year beginning in 2007, with a capacity for 30,000 cars a year. Recent figures indicate that the company assembled 3,000 cars through the end of 2007, and it was in control of 30 percent of the Syrian market. The company is planning to introduce a new version of the car with automatic transmission, which could increase sales.

The identity of the investors was not revealed. Wali Nasr, a professor at the Fletcher School of Law and Diplomacy at Tufts University, told the daily al-Sharq al-Awsat that state and privately owned Iranian companies often have connections to political figures such as Ali Akbar Hashemi Rafsanjani, chairman of the Expediency Council and former president of Iran. This causes some Syrians to be concerned. A senior Syrian official, who spoke to the same daily on condition of anonymity, said it was not by coincidence that Iran was investing in strategic industries such as cement and power generation. These vital industries, he stressed, "can give Iranians considerable influence."^[37]

The Syrian government has announced that it would remove the sales tax on the car as an incentive to local buyers and to make the Sham competitive with imported vehicles. As of early 2008, there was no data about the number of cars being assembled, car price, or the number of units being offered to the domestic market.

As part of its automotive cooperation with Iran, Syria announced in mid-October 2007 that it had placed an order for 5,000 Iranian-made buses to relieve the traffic pressures in its major cities. The first shipment of 1,200 buses was due to be delivered in 2008. There is no record whether any of these buses have been delivered. In fact, in March 2008, the official Syrian press showed photographs of new Chinese buses that were introduced into service in Damascus, with promises of more to come. No further reference to Iranian buses has been made.

Joint Hamah Cement Plant

One of the significant projects is the Hamah cement plant, designed to produce one million tons of cement annually. The cost of the plant was estimated at $198 million. The plant was scheduled to open in the second half of 2007, but there is no record of it having opened.

Boiler for Banias Refinery

This is an $8 million project to build a boiler for the Banias refinery. The official announcement stated that the project was implemented by the Syrian Ministry of Energy and the Adhrab Company in Banias.

Gas Agreement

In January 2008, Syria and Iran signed a framework gas sales agreement under which Syria would import Iranian gas, via Turkey, from the end of 2009. The two countries have agreed to build two sections of pipeline to allow for the gas imports. Syria will build a 62-kilometer (38 miles) pipeline from Aleppo to the Syrian-Turkish border at Kilis, while Turkey will construct a 94-kilometer (59 miles) pipeline from Kilis to Turkoglu in Turkey, which will link up the Turkish gas network. Syrian Minister of Petroleum Sufian Alaw declared that Iranian gas deliveries were expected to begin at the end of 2009 at the rate of 3 mn cmd (cubic meter/day), rising to 9 mn cmd three years after the date the agreement comes into effect. The sales agreement will have a term of 25 years, renewable for a further five years.^[38]

In the meantime, Syria is in the process of completing the construction of its section of the Arab Gas Pipeline from the Jordanian border to Homs in Syria, which would allow the latter to import Egyptian gas. Demand for gas for power generation and industrial usage is estimated at 25 mn cmd and is expected to rise to 40-50 mn cmd in 2020.

Iran has enormous natural gas reserves to meet both its domestic needs and its international obligations. The issue is whether Iran has the capacity, given its current status as a country under sanctions, to extract enough gas to meet these obligations. In winter 2008, Iran cut exports to Turkey and reduced injection volumes (into oil fields to help the process of oil lifting) to meet other domestic needs. However, in many cities, particularly in northern Iran, the gas supply was woefully inadequate and people experienced a supply failure in the one of the coldest winters on record. The gas shortage was attributed by the Iranian press to the disconnect between upstream and downstream activities in Iran. Each of the streams is controlled by a separate government company, with each pursuing its own planning and operation.^[39] There was also a sudden interruption of supply by Turkmenistan due to "maintenance activities"--which, in fact, had to do with disagreement with Tehran over the price of natural gas.^[40]

Joint Fund for Industrial Projects

In January 2008, Iran and Syria agreed to establish a joint fund with a capital of $200 million to finance the construction of industrial projects in Syria.^[41] There was no follow up that could be verified.

CONCLUSION

When examining the economic relationship between Syria and Iran one runs into a profound practical difficulty-- neither government is known for its meticulous or reliable data. For this reason, it is difficult to draw a clear picture of the nature and depth of the economic relations between the two countries. All that exist are anecdotal figures, often twisted beyond recognition to create a misleading reality to serve political objectives. At times, one may get the impression that the two countries are engaged in a mutual conspiracy to create a myth of economic collaboration that exists on paper only. To be less charitable, it is a case of two countries involved in mutual deception at a grand scale.

Fundamentally, the cooperation is asymmetrical. What Iran needs is technology that Syria cannot provide; what Syria needs is massive foreign direct investment that Iran cannot afford. What is left for the two parties to do is spend time on meetings and official visits, which at best result in a series of memoranda of understanding and, at worse, amount to nothing. Iran and Syria often talk about hundreds of millions of dollars of Iranian investment in Syria that invariably do not add up.

There is also a deliberate vagueness about the source of investment--whether it is Iranian government money or originates from a private source. Yet even private sourcing could be misleading because the money may originate from the various revolutionary poniards, mafia-type organizations associated with senior clergy figures or the Revolutionary Guards, who also run a vast business enterprise financed by questionable sources.

The main conclusion is that Iran's pure economic benefits from its relations with Syria are marginal at best; Syria's economic benefits from Iran are not significant. To the extent there is depth to the relationship it is political and strategic but not economic.

ANNEX

Three indexes have been selected to provide further juxtapositions of Iran and Syria. The three indexes are: (a) the Doing Business 2008 Rankings; (b) the Index of Economic Freedom; and (c) the Corruption Perception Index. A close examination shows that either country would be hard-pressed to use the other as an economic model.

1. Doing Business 2008 Rankings

   Every year, the World Bank together with its private business arm, the International Finance Corporation, conducts cross-country and cross-regional research into economic reforms that promote business growth. Such reforms include strengthening property rights, simplifying regulations, increasing credit access, reducing tax burdens, and easing the difficulty with which firms attempt to import and export goods.^[42] As the following index illustrates, Iran and Syria score considerably low on all ten indicators used to measure the overall ease of doing business. The two countries have an equal score on two indicators, while Iran scores lower on four indicators and Syria scores lower on the two remaining indicators. However, when measured against the first indicator of "Overall Doing Business" both countries receive a low score.

   

   Overall Doing Business Rank: Determined by scores on the ten main indicators, from Starting a Business to Closing a Business.

   Starting a Business: Determined by number of procedures necessary, duration of days needed, cost as a percentage of gross national income per capita and paid-in minimal capital.

   Dealing with Licenses: Based on what is involved in building a warehouse (used as a benchmark for all countries) and includes obtaining necessary licenses, permits and utility connections, and completing required notifications and inspections. Determined by number of procedures necessary, duration of days needed, and cost as a percentage of income per capita.

   Employing Workers: Determined by the difficulty in hiring and firing workers, the rigidity of hours, nonwage labor cost as a percentage of salary, and firing costs in terms of weeks of wages.

   Registering Property: Determined by the number of procedures necessary, duration of days needed, and cost as a percentage of property value.

   Getting Credit: Determined by rankings on the Legal Rights Index, which shows whether laws are suitable for expanding access to credit, and the Credit Information Index, which evaluates the quality and quantity of credit information available through public registries and private bureaus. Also based on public registry and private bureau coverage as a percentage of adults.

   Protecting Investors: Determined by the transparency of transactions, liability for self-dealing, shareholders' ability to sue officers and directors for misconduct, and the strength of investor protection.

   Paying Taxes: Based on the tax(es) that a medium-sized company would have to pay or withhold in a given year, including the number of payments; the time in hours needed to prepare, file, and pay; and the total tax rate as a percentage of profit.

   Trading Across Borders: Based on the costs and procedures involved in importing and exporting a standardized shipment of goods, the number of documents necessary for export, the time needed for export, the cost of exporting in USD per container, the number of documents needed for import, the time necessary for import, and the cost in USD per container imported.

   Enforcing Contracts: Based on the evolution of a payment dispute from the moment a plaintiff files a lawsuit to actual payment. Determined by the number of procedures necessary, the duration of days needed, and the cost as a percentage of the claim.

   Closing a Business: Based on what is required to resolve bankruptcy. Determined by the time necessary in years, the cost as a percentage of estate, and the recovery rate (what claimants recover from the insolvent firm) in terms of cents on the dollar.

2. Index of Economic Freedom^[43]

   The 2008 Index of Economic Freedom covers 162 countries using ten specific freedom indicators, such as trade freedom, business freedom, and property rights. Data is generally recent, having been attained within the previous year and a half, and countries are graded on a score range of one to 100, with 100 marking a society that is most conducive to economic freedom. The Heritage Foundation, which publishes the index jointly with the Wall Street Journal, considers an economically free state to be one in which individuals are free to work, produce, consume, and invest in a manner of their pleasing, and where that liberty is both protected and unconstrained by the state.

   

   Labor Freedom: Based on employment regulations and costs of employment. In Iran, regulations are restrictive, which hinders productivity growth; the non-salary cost of employing someone is high, and it is difficult to lay off a worker, which creates a risk aversion for companies that might otherwise hire a larger amount of workers. In Syria, regulations are also rigid, and companies face the same risk aversion that they do in Iran with regard to hiring and firing workers.

   Freedom from Corruption: In Iran, the anti-corruption agency has less than 1,000 inspectors to monitor the 2.3 million full-time civil servants and government contractors. In Syria, regime members are reportedly alarmed at the level of corruption in the legislative, judicial, and executive branches of government. In both countries, corruption is perceived as being widespread.

   Property Rights: Based on the ability to resolve disputes in court, enforce contracts, intellectual property, copyrights, and trademarks. In Iran, going to court is usually counterproductive, and legal protection of intellectual property, trademarks, and copyrights is weak. In Syria, property rights protection is weak and court decisions are determined by political connections and bribery; there is basically no legislation on intellectual property.

   Financial Freedom: Determined by banking restrictions, the ability to acquire credit and insurance, and the state of the stock market. In Iran, all banks and insurance companies are nationalized and function under Islamic law; state banks account for 98 percent of banking assets; credit is supplied in bazaars, which encourages investment in cash-based businesses; and the stock exchange is small. In Syria, interest rates are fixed by the government; while the banking sector was opened to foreign ownership mid-2006, the insurance sector is almost entirely government-controlled, and there is no stock market.

   Investment Freedom: Determined by restrictions of foreign investment, government-imposed restrictions on shares of state-owned companies, and resistance toward privatization. In Iran, there are restrictions on foreign investment in banking and telecommunications, and it is altogether banned in defense, oil, and gas; President Ahmadinejad has fired several public and private figures for supporting privatization; parliament can also veto projects in which foreign investors have a majority stake. In Syria, foreigners may own 100 percent of a company, and new laws guarantee against expropriation, which has led to modest renewed interest on behalf of the European Union; a weak and arbitrary legal environment and political uncertainty are major disincentives; all foreign exchange and trade transactions require government approval.

   Monetary Freedom: Based on inflation, price stability, and government price controls. In Iran, inflation is high, averaging 14 percent between 2004 and 2008; prices are relatively unstable, with the government controlling petroleum product, electricity, water, and wheat prices; the government also influences prices through the regulation of its many state-owned enterprises.

   Freedom from Government: Based on the amount of state-owned enterprises and total government expenditures. In Iran, government expenditures, including consumption and transfer payments, are moderate at 22.7 percent of GDP; more than 500 companies are state-owned, and around 1,000 are semi-public. In Syria, total government expenditure is moderate at 36.4 percent of GDP. The presence of the state in public enterprises is considerable.

   Fiscal Freedom: Based on tax rates and the overall tax revenue as a percentage of GDP. In Iran, the top corporate tax was 25 percent, and taxes include a tax on check transaction and a tax of property transfers; most recently tax revenue was six percent of GDP. Syria has a low income tax rate and a moderate corporate tax, and taxes include a tax on insurance and property transfer; most recently, tax revenue was 14 percent of GDP.

   Trade Freedom: Evaluated based on weighted average tariff rate, prevalence of import bans and restrictions, export licensing requirements, customs procedures, government control of imports, and enforcement of intellectual property rights, among others. Iran has high tariffs and import taxes, burdensome customs procedures, frequently changing tariff and tax schedules, and weak enforcement of intellectual property rights. Syria suffers from similar problems, corruption, and a non-convertible currency.

   Business Freedom: Evaluated based on overall freedom to start, operate, and close businesses. Iran has a difficult regulatory environment. Starting a business takes four days longer than the world average of 43 days, and obtaining a business license takes 670 days, compared to the world average of 234 days. Syria is restrained by its regulatory environment, as starting a business takes roughly the world average of 43 days and closing a business can be a long and burdensome process.

3. Corruption Perception Index

   Transparency International (TI) released its 2006 Corruption Perception Index, which ranks 163 countries on the degree to which corruption is perceived to exist among public officials and politicians. It is a composite index, which makes use of 12 different surveys from nine independent institutions. All data was compiled between 2005 and 2006. Each country in the Middle East and North Africa region is presented with its overall rank in parentheses.

   The range of the CPI Index is from one to ten, with ten representing ultimate transparency. The Confidence Range expresses the numerical area in which the exact score could vary, given that the number of sources for each country can vary. Usually, there is a 90 percent chance that the exact score would fall within the Confidence Range, with a five percent chance of it falling above or below.

   In its Global Corruption Report 2007, TI asserts the generally "strong empirical finding that corruption adversely affects growth in the medium to long run," and points to studies that "have shown that a 1 standard-deviation increase in corruption lowers investment rates by 3 percentage points and lowers average annual growth by about 1 percentage point."^[44]

   In order to place the corruption index of the two countries in perspective, a broader index that included both Arab and Muslim countries was constructed. Again, the two countries--but more so Iran than Syria--score poorly but not as poorly as neighboring Iraq, which ranks among the bottom five countries overall.