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Crisis takes toll on Syria economy

In the maze of alleyways that makes up the Old City of Damascus, traders finger worry beads and stare dejectedly from deserted shops that sell handicrafts, clothing and spices.

"This market is based on tourists," said Abu Adnan, who works in one of the many fabric emporiums.

But the tourists stopped coming when antigovernment protests erupted across Syria in March, prompting a violent crackdown. Now, even local homemakers no longer stop by to purchase bolts of imported cotton and silk.

"People are focused on getting food on the table, they aren't buying extras," said the store's owner, Abu Mohammed, who like his employee asked to be identified by a traditional nickname for fear of displeasing Syrian authorities.

In some parts of the capital, long lines form to buy scarce heating and cooking oil, with fights breaking out as people try to cut in front of others.

Months of unrest, increasing international sanctions and questionable fiscal policies — as Syria lurches toward outright civil warfare — are taking a heavy toll on the nation's economy. Yet it remains unclear what effect this will have on President Bashar Assad's grip on power.

Frustration is mounting among the business elite and the merchant class — key supporters of Assad since he took power in 2000 — particularly in Damascus and in Aleppo, the country's second city.

Some have begun quietly donating money to opposition groups for medicine, food and blankets in neighborhoods besieged by security forces — "playing for the future," as one Damascus businessman put it.

Western officials believe the financial pain could prove the undoing of a government that has ruled through fear for four decades under the leadership of Assad and before that, his father, Hafez. Embassies in Damascus have of late been fielding inquiries from individuals wanting to avoid asset freezes and travel bans, one Western official said.

Many Syrians, however, take a more jaundiced view of the future.

"I think the business community will do like anyone who has interests at stake: sit on the sidelines, wait and see who emerges and switch sides," said Jihad Yazigi, who edits the Syria Report, a business newsletter based in Damascus.

Others point to the example of neighboring Iraq, where the late Saddam Hussein and his ruling coterie continued to live luxuriously in the years before the 2003 U.S.-led invasion, despite the ravages of years of international economic sanctions and war with Iran.

"The [Assad] regime hasn't felt a thing from these sanctions," said Mohammed, a Damascus wholesaler who imports electronic goods from China. "It just steals from its people."

Assad's promise of a more open and modernized economy, with greater opportunities for private enterprise, has been a pillar of his support among middle-class Syrians even though the primary beneficiaries have been members of the country's close-knit leadership. In the last few years, tourism has boomed, foreign investment has poured in, and a consumer culture has developed, especially in the larger cities.

As recently as April, the International Monetary Fund was predicting that Syria's economy would grow by 3% in 2011.

By September, the fund was saying the economy would contract by 2%. With reliable figures hard to come by, local economists speculate that the actual loss in gross domestic product may have been up to 10 times higher.

Foreign investment is drying up, and the national currency has lost about a third of its value on the black market, where it is trading at about 70 pounds to the dollar. The official exchange rate has also fallen, from 47 pounds to 57.9 pounds.

As recently as October, Syrian officials were saying the country had $18 billion in foreign currency reserves, enough to secure imports for two years. But economists question the assertion, saying billions of dollars may have been spent trying to prop up the pound.

Mohammed, the importer, said he is forced to buy dollars at the black market rate because Syrians are hoarding hard currency and banks have been instructed to restrict sales. The weak currency and disruptions to supply lines are driving up prices for everything from eggs and cooking gas to refrigerators and television sets.

"Business is down between 25% and 50% overall because people are only buying the most basic necessities," he said.

The tourism industry, a major foreign currency earner that brought in as much as $8 billion in 2010, has been decimated. A stroll through old Damascus shows that boutique hotels and restaurants operating out of beautifully restored homes are almost empty on many nights, and that some have been forced to shut down.

Staff at a hotel in Aleppo that was once popular with European tour groups said they had slashed their rates by 40%. But only seven of the 40 rooms were booked for New Year's Eve, a night when the hotel would usually be full.

U.S. and European oil embargoes have cost Syria about $2 billion since September, Oil Minister Sufian Alao said last week.

Europe accounts for the vast majority of Syrian oil exports, and the government is struggling to find alternative buyers. Not many countries are in a position to refine the heavy crude produced in Syria, economists say. Although India and China have been suggested as potential markets, the shipping and insurance costs could prove prohibitive.

Financial sanctions are making it increasingly difficult for business owners to operate in a global economy. Credit cards are rejected and money transfers are blocked, they say.

Layoffs have become rampant, particularly in opposition strongholds, which have borne the brunt of the government's crackdown.

"I had 40 people working in my furniture factory. Now I have zero," said a manufacturer from the Damascus suburb of Saqba who also asked to be identified only as Mohammed. "Seven months ago, I was forced to close down my factory and the showroom where I displayed my furniture."

Security forces repeatedly stormed the area, he said, costing him an estimated $200,000 in lost business and property damage.

"I was forced to take part of my wife's gold jewelry and sell it," he said, "and I was a big merchant."

Because of fuel shortages, more people are using electricity to heat their homes, overburdening the supply. Daily power cuts last up to 16 hours in some areas.

Syrian officials have blamed the economic pain on the opposition at home and abroad. In a speech this month, Assad asked if being a revolutionary meant depriving people of "the cooking gas they need on a daily basis to avoid hunger, or the heating fuel they need to avoid catching their death from the cold?"

But analysts and Western officials say the government's own fiscal policies have contributed to the crisis.

Soon after the protests began, the government increased fuel subsidies by 25% and state salaries by up to 30% in a bid to quell public anger. Then, in September, the government unveiled a $26.5-billion budget, a 58% increase over the previous year.

Analysts questioned where the money would come from. Three months later, Prime Minister Adel Safar instructed public authorities to reduce overheads by 25% with the exception of salaries.

To protect foreign currency reserves, the government banned imports of many consumer products, causing immediate price hikes and shortages. But the outcry from the private sector was so great that the government reversed its decision in less than two weeks.

When Turkey, a major trading partner and longtime ally, followed the Arab League's lead and imposed a raft of sanctions late last year, Syria retaliated with a 30% tariff on all Turkish imports, a move that could drive some prices even higher, a Western official said.

Syrian officials say the country has withstood decades of sanctions and retains staunch allies, including Russia, China and Iran. They portray the latest international measures as an opportunity to stimulate domestic production.

But among those who frequent the capital's chic new cafes and shops, few relish the prospect of a return to the kind of isolationist economy built by Hafez Assad in the 1980s, a time when even tissue paper and diapers were in short supply.

Back in the Old City bazaar, Abu Mohammed peered hopefully from the door of his fabric store. "Today there is nice weather, so maybe we will get a customer or two," he said.

Asked how long he could keep going, he shrugged and laughed. "We are like camels in the desert," he said. "We can keep going for a long time."

alexandra.zavis@latimes.com

Times staff writer Zavis reported from Damascus and special correspondent Sandels from Beirut. Special correspondents Rima Marrouch in Damascus and Katie Paul in Beirut contributed to this report.

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