Wednesday, October 30, 2013

Financial conflict – Syria looks to Russia and Iran

Money Laundering Bulletin

Syria, mired in bloody civil war, is also fighting multilateral sanctions. Although notionally cut off from the international banking system, Damascus is evading the restrictions through use of Russian banks and receiving assistance from Iran, reports Paul Cochrane from Beirut. Neighbouring Lebanon is caught in the crossfire, despite not serving the Syrian regime as a major conduit for flight capital.

In 2011, as the Syrian government cracked down on protesters, the United States, followed by the European Union (EU), the United Nations and the Arab League imposed economic and financial sanctions on the regime of President Bashar al-Assad. Key members of the government, state-owned institutions, and connected businessmen and companies were also designated, including the Central Bank of Syria and the country’s largest deposit-taking institution, the state-owned Commercial Bank of Syria.

All transactions in US dollars were curbed, along with the use of the SWIFT system, and state banks’ accounts outside Syria were frozen. In December 2012, the EU Council of Ministers banned new correspondent banking relations between Syrian financial institutions and EU banks.

The sanctions, in addition to the loss of crucial oil export revenues with Europe, hit the Syrian government hard but did not deal a crippling blow. The Syrian economy had only been liberalising since the beginning of the century - private banks entered the country after 2004 - and the state was still a major economic player. When hostilities broke out, the private bank sector had some US$11 billion in deposits, and the whole banking sector USD29.8 billion, according to Syrian Central Bank (SCB) figures, a blip on the global level, and significantly lower than neighbouring Lebanon’s banks’ US$131 billion in deposits.

Nevertheless, March 2011 saw the start of significant account withdrawals - estimated at US$2.5 billion in the first year of the conflict, according to Bank Audi figures. As hostilities dragged on, more money was taken out with Lebanese media reporting Russia as the destination. But “the well-to-do already had accounts in Europe, it is the smaller guys who have cash and don’t have accounts,” according to Abdul Hafiz Mansour, secretary of the Special Investigation Commission, Lebanon’s financial intelligence unit (FIU). While Lebanon was flagged as a destination for Syrian flight capital, officials and bankers insist that the country – which was partly occupied by Syria for 30 years, until 2005 - is not a home for Syrian regime money. The data appears to support their case, with no abnormal rise in deposits at Lebanese banks since 2011. “The regulations and prudential supervision do not make it easy for money to be placed in the system in Lebanon. It could be easier to do so elsewhere,” said Mansour. Another Lebanon official noted that across the Levant and west Asia, “from Afghanistan to Turkey, it is a very porous region” for banking, adding that it can be straightforward to deposit funds in a Pakistani, Iraqi or Afghan institution, with few questions asked.

Yet, Syrian money is clearly entering Lebanon via refugees, migrant workers and businesses transferring cash. Refugee numbers reached 914,000 this year, according to the World Bank, and are forecast to rise to 1.6 million next year – a particular problem given Lebanon’s population is less than 5 million. The influx caused Beirut to advise the US Treasury that it would allow accounts to be opened by non-sanctioned Syrians and these would be monitored for abnormal activity.

When the [US] Executive Order was put in place the reality on the ground was different and you didn’t have [a] large number of refugees in Lebanon,” said Chahdan Jebeyli, general manager and head of legal and compliance at Bank Audi, who also chairs the compliance committee of the Association of Banks in Lebanon: “I personally expect more relaxation, not of the rules, but the way the rules are applied to those that have ceased activities in Syria and are engaged elsewhere, including Lebanon.”

Not all Lebanese banks are accepting Syrian deposits, however, with some unofficially but commonly recognised as anti-Syrian for political reasons. Indeed, Syrians know which to deal with and, if refused, Lebanese friends and relatives will often hold deposits on their behalf.

The Syrian Pound (SYP) can also be exchanged within Lebanon, albeit at fluctuating rates due to the currency’s depreciation; it stood at SYP46 to the US dollar in early 2011 but is over SYP200 today. Asked about the rate to the US dollar, a dealer in Beirut said: “Between SYP210 and SYP230, but it is changing by the second.”

Meanwhile, with blocks on SWIFT and transactions in dollars there has been rising use of ‘hawala’, despite a ban on the alternative remittance system in both Lebanon and Syria. A war economy and rapidly depreciating currency mean that, increasingly, trade deals and pricing are carried out in greenbacks, and to a lesser extent in Euros, Emirati Dirhams and Saudi Arabian Riyals. In response, the Syrian central bank banned both trading and pricing in US dollars in August. “The SCB also limited the ceiling of dollars sold to individuals, from US$1,000 to US$500 a month, and clamped down on the black market. This is how it has managed to keep the exchange rate at SYP200 for the past two months,” said Jihad Yazigi, editor of financial publication, The Syria Report.

With the government haemorrhaging money to pay for the conflict and keep subsidies as well as state-sector salaries going, foreign reserves have dwindled from US$18 billion (source: SCB) when the conflict started. To offset a looming cash-flow problem, Damascus approached its only ally in the Middle East, Iran, for financial assistance this year, opening credit lines of US$7.6 billion.

Syria may have just US$3-US$4billion left in the central bank and would rather not spend it, so they need the help from the Iranians. But there is really an absence of any data. The last time the SCB made any announcements about reserves was in May 2011,” Yazigi observed.

As to where the Syrian government funds and those of regime members have headed, fingers are pointing at Russia as a prime candidate. In September, four American senators called on the US Treasury to cut off three Russian banks from the US financial system as they were “undermining sanctions” by “aiding Assad”. The senators accused Vnesheconombank (VEB) of facilitating Syrian payments for Russian missile systems; Gazprombank for processing crude oil payments; and VTB (75%-stated owned) for hosting President Assad’s personal accounts.

VTB and VEB issued statements denying involvement with Syrian government accounts. “Historically, VEB acts on behalf of the government in terms of servicing the foreign debt of Russia, including settlements with Syria. Our bank does not have any other business with the Central Bank of Syria, its government, or government-controlled organisations. All the activities carried out by VEB are strictly in accordance with the sanctions adopted by the EU and the UN on the Syrian Republic,” VEB told state news agency RIA Novosti. Such protestations from Moscow contrast with comments from the Syrian government. At the end of 2011, the Central Bank of Syria governor Adib Mayaleh said that his institution had opened accounts at Russian banks. “There is around USD2 billion of Syrian foreign reserves in Russia. Mayaleh was open about that, that they had opened accounts,” said Yazigi.

In December 2012, Syrian state press reported that the bank had opened Euro and Rouble accounts with VTB, VEB, and Gazprombank, and issued guidelines to Syrian banks on how to deal with the Russian institutions. Earlier in the year, in June, the finance ministry stated that Syrian banknotes would be printed in Moscow, following the ban on currency printing in Europe, where, previously, it had used Austrian and Belgian printers. 

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