Current Bulletin Issue - Volume 18, Bulletin 1, March 2005

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RUSSIA TIES SYRIA TO ITS ECONOMY

Russia's Finance Minister Alexei Kudrin and Syria's Finance Minister Mohammad al-Hussein signed an agreement settling the outstanding debts between Syria and Russia. Russia agreed to write off 737/8% of Syria's US$14.5 billion debt. Syria would pay only $170 million to Russia in 2005, the remaining $3.618 billion would be paid in two tranches: $2.118 billion to be transferred to Russia's special account of at the Central Bank of Syria in Syrian Pounds at a rate of $1=11.20 Syrian Pounds. Russia can use this account to buy Syrian commodities or to finance Russian investments in Syria. The remaining $1.5 billion is to be paid over the next ten years, at the rate of $150 million per annum.

Russian analysts say this extraordinary generosity aims to secure the help of Syrian President Bashar al-Assad to regain Russia's strong position in the Middle East and a captive market for its military equipment. As part of the Russian-Syrian military and technical program for 2004-2008, Russia plans to revamp Syria's anti-air missile system by building a 'missile umbrella.' The sides also signed six agreements on economic cooperation, including one in the sphere of oil and gas between oil company Soyuzneftegaz and Syria's Ministry of Oil and Natural Resources. Agreements on international motorways and bilateral investment promotion and protection have also been signed. Talks between Assad and President Putin centered on measures to deepen ties between the two countries.

Though Syria will now be tied hand and foot to Russia (Assad even visited the Governor of Moscow, Yuri Luzkov, and discussed the possibility of using the working procedures of the Moscow Governorate in Syria), Putin cannot afford to give Damascus a blank check. He must have taken into account that bankrupt Syria will no more be able to pay for imports from Russia than it was able to pay for imports from the Soviet Union - and decided that the political advantages of writing off non-collectible debts were too big to ignore. But tying Soviet industries to a client who cannot pay is an economic risk and the Arab propensity to exploit foreign goodwill without giving anything in return increases this risk enormously. Syria has been greatly strengthened. Russia will only be strengthened if it does not put too many eggs in the Syrian basket.