The US Treasury imposed mandatory sanctions on Syria on June 17, targeting foreign persons and entities for economic activities that support the Syrian government’s ability to wage war. The Caesar Syria Civilian Protection Act targets beneficiaries of the Syrian conflict including Iran, and signals that the United States will not tolerate a Tehran-Damascus union unless Syria agrees to coexist peacefully with Israel and other Arab countries.
The Act will hit Iranian-Syrian businesses in the aviation, energy, telecommunications, tourism, agriculture, and construction sectors. This could disrupt the Iranian economy, which faces severe cash shortfalls and unprecedented hikes in foreign exchange rates. The Iranian currency, the rial, faced its biggest devaluation in recent history in June. Syria’s economy is also spiraling downward. The official foreign exchange rate for the dollar has nearly doubled since the Caesar Act came into force. The Syrian currency has eroded, and the country suffers from high inflation rates.
It is too early to assess how flexible the Iranian and Syrian economies are under pressure from the Act. Iran has decades of experience in circumventing tight US sanctions. Tehran has signed special banking and financial arrangements with Damascus to circumvent US sanctions. But in Sweida in southern Syria, anti-government protests erupted after Israeli strikes on the town on June 23, calling for an improvement in socio-economic conditions.
The Syrian foreign minister has said that the Act provides a window of opportunity for Syria to move towards self-sufficiency, as it has not imposed hurdles that are impossible to overcome. The Act is likely to impact the outcome of the Syrian presidential elections next year. Some hurdles can be overcome via black market profiteering, a big business in Syria and Iran, as well as in neighboring Lebanon and Iraq.
As a result of this possibility (i.e. the black market), more sanctions on Iran and Syria could push them closer and lead to further cooperation between the two countries. Before the Act came into force, Syria had options to trade with Arab countries, China, and Russia. But if these countries pull out, Iran is likely to take their place. More importantly, if Russia and China shy away from investing in Syria, Iran could become Assad’s preferred business partner, a standing which it has not had to date given foreign competition.
Not surprisingly, Iran is reacting to the Act by exploring all options. Iran’s ‘resistance economy’ policy to resist US ‘maximum pressure’ policies means that Tehran is likely to expand economic ties with Syria despite the Act. Iran’s official reaction to the Act was swift and clear, saying it will continue its economic cooperation with the Syrian government in spite of the sanctions.
If the Act pressures Syria to start talks with Washington, Tehran will have to bet and take actions to ensure that the Act is toothless. This will be made much easier for Iran if the Act is enforced without having major backers around the world. In this case, Syria might decide not to accept the option of starting talks with Washington, unless Iran agrees to it. Nor will the Act push Syria to break away from the so-called axis of resistance that Iran has built with its allies in the Levant region.
If the Act is toothless, it can alter the regional balance of power in Iran’s favor. This will give Tehran leverage to ask Ankara to work with it on Syria. In exchange, Iran and Syria can help Turkey contain the Syrian Kurdish threat on its northern borders. Additionally, Iran and Turkey will continue to work together as parties to the Astana Peace Talks on Syria’s future.
The third party to the talks is Russia, which together with Iran, is examining the ramifications of the Act for Russian investments in Syria. Iran’s Foreign Minister Mohammad Javad Zarif was in Moscow a day before the Act came into force to ensure that Russia remained committed to working with Tehran. Russian state and semi-state companies avoid taking risks on their investments abroad. But Syria remains strategically important to Russia. This gives Tehran hope that Moscow will not desert its interests in Syria despite the Act.
In general, Iran sees the Act as part of US efforts to alter Tehran’s current political calculations in the region. Iran’s ally, Hezbollah leader Hassan Nasrallah, has vowed that Syria’s allies would not allow the Act to defeat the Syrian government. But not everyone in Iran is optimistic that Syria can withstand the new sanctions, especially if Washington compels its allies to comply with the Act. If this does happen, Iranian-Syrian business dealings will come under tighter international scrutiny and face immense political pressures. Iran’s allies in Lebanon and Syria will suffer as a consequence too, which will impact their future dealings with Tehran.