I. COMMERCIAL OVERVIEW Syria is an economy in slow transition to a market system. Since 1990, Syria has experienced real economic growth. Foreign exchange constraints have eased due to a renewal of external foreign exchange flows, both official and private, and the government has taken liberalization measures to open up the economy. Until recently, the government pursued policies aimed at expanding the public sector, with tight controls imposed on private sector activity. All large industry, including the banking and insurance sectors, was nationalized in the 1960's and continued to grow with the help of Arab aid in the 1970's. During the 1980's, the country suffered from severe foreign exchange shortages, aggravated by a fall in remittances and aid flows from the Gulf. With a liberalization of trade and foreign exchange controls, a greater proportion of economic activity is now within legal channels, but the parallel economy, particularly smuggling from Lebanon, remains a key element of the economy. Until recently, the overriding barrier to U.S. exports to Syria has been the aforementioned shortage of foreign exchange, although various USG foreign policy-related sanctions imposed against Syria pose additional constraints. Syria's participation in the Gulf war coalition ended years of isolation from the Arab Gulf states, gaining the government access to substantial financial aid resources to undertake a wide range of projects to rehabilitate the country's deteriorating infrastructure and public sector enterprises. Since 1991, Syrian government agencies have issued a record number of tenders. In 1994, the government's general budget was about USD 3.4 billion, up 17 percent from 1993 and 55 percent from 1992, with most increases reflected in the "capital" or project component of expenditures. Improved economic performance has also contributed to Syria's prospects as a market for U.S. exports. During 1990-1993, after years of stagnation, the economy registered average annual growth rates of 7-8 percent. Growth was led by both the agricultural sector, which recovered from neglect and drought in the 1980's, and an expanding oil sector, where production nearly quadrupled from 150,000 barrels per day (bpd) in the mid-1980's to a current plateau of 580,000 bpd, which may yet grow modestly and be sustainable for the next few years. Since 1991, private sector investment also has picked up noticeably, as businessmen have taken advantage of incentives offered under a new investment law. Liberalization measures implemented in recent years now permit private exporters to retain foreign exchange from exports, 75 percent for industrial products and 100 percent for agricultural commodities, and to finance permitted imports for inputs and a number of basic commodities using foreign exchange gained from exports. Although retaining a monopoly on wheat and flour imports, the government widened the list of imports permitted to the private sector, including items formerly reserved for public sector trading companies, such as rice, sugar, and tea. In 1990, the government established an official parallel rate, known as the "Neighboring Country Rate," to provide further incentives for remittances and trade through official channels. The use of this rate and others more closely reflecting the real value of the Syrian pound continues to expand, a trend which should eventually lead to unification of the multiple rates now used for different purposes. Private investment will continue to be oriented to the new investment law, especially in food processing and textiles, and other light, consumer-oriented industries. In 1994, supported by the government's buoyant public investment program, GDP growth is expected to continue to be positive. Good winter rains should boost both crop production and GNP in the agro-based economy. Oil production is likely to continue at, or modestly above, its current levels. However, reductions in consumer demand during the first and second quarters of 1994, resulted from a financial scandal that has sharply reduced liquidity in the economy and from price increases stemming from reductions in government subsidies and wage increases to government employees. In addition, the government will continue to face a number of serious economic challenges, including rising unemployment, maintaining the momentum of reform, and securing financing for the public investment program. Two decades of heavy military and public sector investment expenditures have left Syria with a heavy debt burden and a poor credit rating. Russia holds the great preponderance of this debt, about 11 billion dollars of mainly military debt--most of which will never be repaid. Other debt, officially estimated at three billion dollars but perhaps ranging as high as six to eight billion dollars, including unpaid supplier credits and arrearages, is held by East and West European trading partners, Arab and international development institutions, including the World Bank, and bilateral donors, including USAID. Government policy on management of official debt appears to be based on deferment. A Middle East peace settlement could encourage Syrian debt payment, but only if policy-makers were convinced that such a decision would result in greater foreign trade and aid flows. U.S. exporters are well advised to conduct all business transactions with the public sector on a cash or secured letter-of-credit basis. OVERVIEW OF IMPORT MARKET During the late 1980's, the bulk of Syrian imports was raw materials essential for industry and agriculture, advanced oil field equipment, and heavy machinery used in the construction of infrastructure projects. Based on U.S. trade data, U.S. exports to Syria in 1993, were about USD 185 million, an eight percent increase over 1992. Syrian data indicate that U.S. exports had captured a 6 percent share of the total Syrian import market during 1993. Despite the negative impact of USG sanctions, in 1993, the U.S. was Syria's fifth major supplier. Table 1-1 --------------------- Syria's Imports 1990-1993/2 (In thousand U.S. dollars) --------------------------- 1990 1991 1992 1993 ---- ---- ---- ---- Total imports 2,405 2,775 3,498 4.149 Total non-oil imports 2,333 2,709 3,413 n/a Imports from U.S. 258,286 259,628 214,028 267,232 U.S. Share of total imports 8 pct 11 pct 6 pct 6 pct Table 2 ----------------------------------- Syria's total imports from U.S. by value and percentage of total imports and rank among foreign suppliers (in thousand U.S. Dollars) ------------------------------------ Percent of Rank among foreign Year Value Total imports Suppliers ----- ----- ------------- ------------------- 1990 258,286 11 pct 2 1991 259,628 9 pct 2 1992 214,028 6 pct 4 1993 267,232 6 pct 5 Table 3 ----------------------------- Syria's 1993 imports from its largest suppliers by value and As a percent of total imports (in thousand U.S. Dollars) ------------------------------ Country Value Percent ------- ----- ------- (1) Germany 422,321 10.2 Pct (2) Italy 340,893 8.2 Pct (3) Japan 339,107 8.2 Pct (4) France 293,839 7.1 Pct (5) U.S.A. 267,232 6.4 Pct /1 Exchange rate: 11.20 Sp/USD /2 Syrian official statistics COMMERCIAL ENVIRONMENT Traditionally, best prospects for exports to Syria have been agricultural products, and goods and services related to the development of Syria's oil fields. This will continue to be the case, but the departure of U.S. exploration firms will force service and equipment companies to focus their marketing efforts on Syrian and foreign oil companies. The recent entry into the market of much less expensive Egyptian service and product companies will also affect U.S. market share. Capital goods to rehabilitate public utilities and state enterprises, light industrial and transportation equipment, and computers will offer additional opportunities for U.S. firms able to capitalize on the excellent reputation of U.S. products and the competitiveness of the U.S. dollar. Primarily as a result of Syria's participation in the coalition to liberate Kuwait and in the Middle East peace process, the Syrian government earlier obtained access to a significant amount of Arab Gulf and other donor financing to invest in public sector projects. However, because the level of financing is not currently sufficient to fund all tenders, the government often issues tender offers before solid financing is secured. Contracts awarded through the official tendering system abide by very complex language contained in decrees number 195, dated 1974, and number 349, dated 1980. These decrees set forth the regulations governing contracts and tenders for public establishments, companies, and enterprises. Announcing tenders with deadlines of less than 45 days is not an uncommon practice. This is read by many U.S. companies as a signal that the contest is already "fixed." Public sector procurement procedures pose special problems for companies competing in public tenders. The Commercial Bank of Syria requires that all bonds be issued according to the "Syrian official text." Once these bonds are submitted, obtaining their release sometimes can be a very lengthy process. Although Prime Ministry note number 43/b/1637/15, dated 1987, emphasized the necessity of releasing bonds immediately after their expiry dates, the Commercial Bank of Syria still remains cautious about implementing this directive. SYRIAN BUSINESS ATTITUDE TOWARD THE U.S. Despite these difficulties, several U.S. companies have been able to compete successfully in public tenders and conclude large contracts. They attribute their successes to tenacity and patience in dealing with government officials, a clear understanding of the nature of the regulations and evaluation process, and most importantly, a capable "agent" or "middle man." Under Syrian government regulations, public establishments and companies do not accept offers presented through non-registered agents. On the other hand, many Syrian businessmen often try to avoid having their agency agreements registered to evade income taxes. Therefore, Syrian agents often request that the agency agreements not be disclosed to the government. If at any stage during the execution period of the contract, the government discovers the existence of such an agreement, the commission will be deducted from the contract value and be given to the agent at the unfavorable "official" rate of 11.2 SP/USD. (Note: Agencies are only recognized after a formal copy of the agency agreement, with a fixed commission clearly stated, is presented and registered at the Ministry of Economy.) For U.S. companies interested in selling to the private sector, the Ministry of Economy and Foreign Trade is the import licensing authority. Although in principle, any commodity not produced locally can be imported, actual licensing is governed by a number of considerations. Raw material and equipment that promote industrial and agricultural development tend to receive favorable consideration, whereas "luxury" consumer items are discouraged, although the list of permitted goods continues to expand. Under investment law "number 10," U.S. companies may also establish independent businesses in Syria, or participate in joint-venture agreements with Syrian partners. All applications for investment under the law must be vetted through the Higher Council for Investment. Thanks to the increased availability of foreign exchange and incentives resulting from the law, the private sector will offer a market for increased exports of agricultural inputs, such as seeds, corn and soybean meal, as well as capital goods for industrial projects, especially in food processing and textiles. There is also considerable interest in the licensed production of U.S. goods. MAJOR BUSINESS OPPORTUNITIES 1. Oil: Construction of two oil pipelines and storage facilities - Ministry of Petroleum 2. Telecommunications: Installation of GSM Cellular phone system - Syrian Telecommunications Establishment (STE) Procurement of cables, conducting and hanging material for overhead communications cables (STE) 3. Transportation: Procurement of railroad locomotives - Directorate General of Syrian Railways/Ministry of Transport Installation of civilian air traffic control radar - General Directorate of Civil Aviation 4. Food Processing: Procurement of a fresh onion drying line - General Organization for Food Industries Turn-key plant for the production of cheese and powdered milk - Ministry of Defense Turn-key project for producing dry soup - private businessman Other key areas of opportunity include electrical power generation and distribution, computerization of public and private sector institutions, and supply of light industrial capital equipment, as well as grain storage silos. (See sectoral descriptions and analyses in section II and Appendix B.) MAJOR ROADBLOCKS TO DOING BUSINESS While individual Syrians are estimated to hold billions of dollars outside the country, their concerns over long-term political stability and government economic policy prevent a more rapid return of a larger portion of that capital. In recent years, thanks to a slow series of economic reform steps, some capital has returned and has been placed into newly established businesses and industries. However, the same concerns that make Syrian capital hesitant more strongly affect the business calculations of foreigners. American firms looking at business or investment opportunities must also consider, however, a range of U.S. export controls and a lack of guaranteed trade financing stemming from Syria's presence on the list of state sponsors of terrorism. Arab Boycott: The Arab Boycott of Israel prohibits trade with Israel, with those who engage in certain kinds of trade with Israel, and with blacklisted firms. The boycotting countries maintain a blacklist of firms they believe have violated boycott regulations. The so-called blacklist is their principal enforcement mechanism. Syria's continued adherence to the Arab boycott of Israel conflicts with U.S. Anti-boycott legislation, complicating the conclusion of sales to the government in particular. Various entities in Syria continue to make boycott requests in commercial documents which place U.S. firms in the position of having to act affirmatively to stay within the requirement of U.S. law. On a selective basis, Syrian entities have deleted boycott terms from commercial documents to enable business to be contracted, but they will often request information on a U.S. firm's business relations with Israel and with firms on the blacklist. Under the antiboycott law it is prohibited for U.S. firms to furnish this type of information. Advice on boycott and antiboycott related matters is available from the U.S. Embassy in Damascus or from the Office of Antiboycott Compliance in Washington at (202) 482-2381. Given the widespread use of commercial agents in Syria and the widespread corruption, it is also important to be aware of the impact of the Foreign Corrupt Practices Act. NATURE OF COMPETITION None of the major competitors in this market faces the formidable range of obstacles outlined above. American companies compete effectively on the basis of superior quality and a reputation for technological advancement. Products uniquely made in the U.S., particularly high technology or specialized industrial equipment, or those for which U.S. firms enjoy a clear technical edge are likely to be most competitive in this market.