Russia and China may feel fine with making bad moral decisions when it comes to Syria, but even they don’t like to make bad economic decisions. Can preemptive sanctions turn up the heat on Assad?
Syria marked the first anniversary of its uprising -- and almost immediate crackdown -- last week. As the army expands its use of tanks and artillery against towns loyal to the rebellion, as many as 8,000 have been killed, and nearly a quarter-million have fled their homes. The United Nations remains incapable of agreeing to place water-tight sanctions on the country, however, thanks to opposition from Russia (still supplying arms to the regime) and China (still taking its oil).
The good news is that a new approach to sanctions is being proposed -- and one that does not require consensus at the Security Council. The approach -- declaring Syria's successor governments unbound to honor the Assad regime's contracts -- will provide additional pressure on a government that desperately needs outside financing to shore up its economy.
The West has already imposed a range of sanctions alongside those of the Arab League. European and U.S. sanctions include a ban on oil imports from or new investments in Syria, as well as a freeze on assets. And there is some evidence that they are having an impact. Before the uprising, Europe was the largest importer of Syria's major export, oil, and alternate markets are proving difficult for Syria to acquire. A number of Western energy firms are still operating in Syria, including Britain's Gulfsands Petroleum, Royal Dutch Shell, and France's Total, but they have suspended exploration and new investment. Foreign direct investment to Syria declined from around $1.4 billion to $500 million between 2010 and 2011. International Monetary Fund estimates suggested the Syrian economy would shrink by 2 percent in 2011.
Nonetheless, and despite widespread condemnation from many of Syria's Middle Eastern neighbors, Europe and America, the international community remains hamstrung on tougher measures, with Russia and China blocking any concerted action at the United Nations. And without international agreement, the long-run impact of traditional sanctions will be blunted. Asian refiners, among others, might be willing to pick up the slack when it comes to buying Syria's oil -- especially at a discount. Over the longer term, if Assad continues to hold out, even investment flows might pick up again. Perhaps the China National Petroleum Corporation -- already a minority shareholder in Shell's Syrian operations -- might invest in the country's oil sector on its own, for example.
But what if any contracts signed with the Assad regime from now on were considered illegitimate in the international financial system? Owen Barder and Kim Elliott, my colleagues at the Center for Global Development, are proposing that the Arab League, United States, and Europe unite to declare that any new contracts signed by the Assad regime need not be honored by a successor government. Call it preemptive contract sanctioning -- or declaring odious obligations, if you'd rather.
The aim of the declaration is to reduce the risks to a future legitimate Syrian government of defaulting on contracts signed while the Assad regime was shelling its own people. Traditionally, governments that have come to power in the wake of illegitimate regimes have nonetheless taken on those regime's obligations, driven by the concern to earn a reputation as a safe home for investment. The African National Congress kept up payments on $23 billion in debt accumulated by the apartheid regime in South Africa for fear of what a default would do to its ability to borrow going forward. In 1979, the Sandinistas in Nicaragua chose not to repudiate debt piled up as President Anastasio Somoza looted the country at gunpoint in the 1970s. They took advice -- offered by Fidel Castro, no less -- that the risk of alienating Western capitalists was too high.
But what if the countries whose laws are used to enforce most international contracts (Britain and the United States), along with the Arab League and others, declared that they would consider any contracts signed by the Assad regime unenforceable on successor governments? New investors would have little reason to consider Syria a bad prospect purely on the grounds that it renounced those same contracts. And firms that are thinking of signing deals with the Assad regime now (expecting them to be honored later on) would have considerable difficulty enforcing a contract declared illegitimate in major financial centers.
What is particularly attractive about preemptive contract sanctioning in the case of Syria is that, unlike the existing trade sanctions, they work even if many countries refuse to enforce them. Take Russia's recent insistence that it will continue selling weapons to Syria, for example. If the Assad regime wants to buy arms and Russia is the only country willing to sell, that merely strengthens Russian firms' ability to charge a high price for guns and ammo. But an odious regime designation -- even if Russia didn't take part -- would at the least make the arms companies demand payment up front (assuming they aren't already). And what if the Assad regime wants international investment to help build a power plant? If the world's major financial centers will only accept a new construction contract as valid if a legitimate successor regime subsequently chooses to endorse it, that adds immense risk to the deal -- wherever the investing firm is based.
Again, the new sanctions would stop allowing Western court systems to be used to uphold a competitive advantage to firms from countries that refuse to join the sanctions effort. Under the existing rules, U.S. and British courts would declare new contracts between U.S. and British firms and Syria unenforceable, but could be used to defend the contract rights of Russian or Chinese firms still dealing with the regime. Preemptive contract sanctioning would level the playing field by declaring all new contracts, whoever signed them, unenforceable.
While governments and firms in countries opposing sanctions on Syria may be happy with making bad moral decisions, even they don't like to make bad economic decisions. And for those worried about sullying the purity of contractual obligations, a note: While trade sanctions do force companies to renege on existing contracts, preemptive contract sanctioning just takes away enforcement rights from those signing new deals.
And one reason to believe the Syrian government might be particularly vulnerable to the declaration of odious regime status is that it had already come to the conclusion that ramping up foreign investment in areas like infrastructure was key to the country's economic future. Before the uprising, Syria was actively courting foreign investors to strengthen the economy outside of the oil sector, which is facing long-term decline. In 2009, the country set up a stock exchange and changed rules to allow foreigners to take majority stakes in Syria's banks. In 2010, the regime set the target of attracting $55 billion in foreign investment over five years -- about a fivefold increase over previous levels. It formed a sovereign wealth fund to oversee the creation of joint ventures between foreign and domestic companies. The country had started bidding on an independent power project south of Damascus -- firms from Germany, Britain, Finland, and Greece had been shortlisted. And five companies, including France Telecom, were in the running for a third mobile telecommunications license.
Preemptive contract sanctions have one additional attraction: They are technically straightforward to implement. In the United States, they could be enacted under existing law. That suggests there is no good reason to delay. Of course, any new Syrian regime might feel they needed to honor contracts with Chinese or Russian firms signed under the previous government because of diplomatic concerns. And the current regime may well be so desperate that no amount of international economic isolation will change its course. But President Obama has called on the international community to consider "every tool available" to stop the slaughter in Syria. So the Arab League, the United States, and Europe should call new deals with Assad's murderous regime what they are: odious.
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