Perfect storm

One of the first line one encounters in Syrian geography textbooks is the assertion that Syria “enjoys” a strategic location. For decades, Syrian dark humour has poked fun at that choice of verb. Strategic, certainly; but enjoyable is another matter. Since independence in 1946 Syria’s location has more often exposed it to the ambitions and anxieties of others than delivered consistent economic advantage.

That paradox is once again coming into sharp relief. The fallout from a war involving Iran should be understood through this geographic lens. Its consequences for Syria will not be confined to the familiar macroeconomic pressures – rising prices, renewed inflationary strain and the chilling of already tentative investment flows. These are real and painful, but they are only the surface symptoms of a deeper structural vulnerability.

2025 imports are estimated to have been at least eight times larger than exports, At the same time, the government’s recovery approach relies heavily on externally financed investment. So far, Gulf countries have been the main source of MoUs and contracts, with notable agreements including USD 7 billion for the electricity sector and USD 4 billion for the development of Damascus airport. This dual dependency – on external markets for goods and external partners for investment – makes Syria highly vulnerable to external shocks.

It is estimated that the Iran war could result in a 30 percent rise in import costs, reflecting higher oil prices, freight costs and insurance costs. Based on evidence from other countries that each 10 percent increase in import prices raises consumer price index (CPI) by about 3 percent, this would add roughly 9 percent to inflation, with the strongest impact on food, energy and basic consumption goods.

In parallel, investment is expected to slow. Gulf countries are likely to prioritise domestic stability and reduce exposure to high-risk environments. A one-year delay within a five-year investment cycle would translate into an approximate 20 percent reduction in expected FDI inflows into Syria. This year alone, the combined impact of rising import costs, higher inflation and declining investment could reduce Syria’s GDP growth by around 5 percent, assuming other factors remained constant.

The fiscal position is also set to deteriorate. Lower consumption and reduced investment will directly weaken tax and fee collection. Evidence from the World Bank and IMF suggests that a 10 percent decline in consumption leads to a 2 - 3 percent drop in tax revenues. Under these combined pressures, Syria could see real public revenues fall by 5 - 10 percent, even as its expenditure needs increase.

What will define whether Syria can survive the severe impacts of the conflict is not only the scale of the shock itself, but who remains willing to rescue the country. Can Syria still secure the substantial investments promised by GCC countries? If so, can it actually channel them in ways that benefit economic stability and the welfare of its people? If not, are there alternative sources of investment? And if Iran were to emerge from the war open for business, would Syria still be relevant for investors, even frontier investors who look for high risk, high return markets? Or will they send their money to Iran instead?

Such questions are far from rhetorical. Beyond undervalued state assets, major concessions and extractive opportunities, it is not clear what Syria currently offers to investors. This is not only because of sanctions, politics, or insecurity, but the lack of progress by the government in restoring the productive industrial base and strengthening the rule of law.

Similar questions apply to trade. Will Syria import inflation from Turkey, its largest source of imports, at a time when Turkey itself is expected to be hit hard economically and is already struggling to stabilise the lira amid rising inflation and higher oil prices?

Lebanon presents a similar concern. Syria and Lebanon have many problems and their economies are deeply entangled. A striking illustration of their inter-dependence has been the Lebanese economic and financial crisis that started in 2019 which contributed to the collapse of the Syrian pound and has had catastrophic wider impacts on the Syrian economy. 

Iraq, one of Syria’s most important export destinations, is no less exposed. Security tensions between Baghdad and Tehran are escalating rapidly, carrying the risk of broader disruption.

According to Syria’s Central Bureau of Statistics, Lebanon, Iraq, and Saudi Arabia were the largest destinations for Syrian exports in 2023, at USD 237.2 million, USD 232.7 million, and USD 183.1 million respectively, together accounting for more than 35 percent of total exports. Syria’s export map is heavily concentrated, leaving the country highly exposed to regional disorder.

Major geopolitical changes have not affected Syria in uniform ways. At times, they have created severe pressure; at others, they have opened space. In the aftermath of the first Gulf War (1990-91), GCC countries provided significant financial support at a time when Syria was under extreme stress as a result of its involvement in Lebanon’s civil war and international sanctions. The collapse of the Soviet Union, then Syria’s main trade partner, was far more disruptive, dealing a heavy blow to parts of Syria’s industry. In the late 1990s and early 2000s, however, the opening of alternative markets in Europe and, to a lesser extent, the US created new opportunities. The beneficiaries included opposition politician Riad Seif, who produced “made in Syria” Adidas sportswear for European markets.

The problem today is that Syria enters this regional crisis without having rebuilt enough of its productive base to benefit from any new openings. Syria needs stronger domestic production to reduce import dependency and narrow the trade deficit, more diversified sources of foreign investment and stronger domestic value chains. More robust local production could reduce inflation. Building strategic reserves of essential goods such as food and fuel could also help mitigate the impact of future external shocks.

Without all that, a perfect storm is brewing.

This analysis was provided exclusively by Syrian Ventures Alliance, an investment and economic advisory platform.