ANALYSIS - Syria's neighbours may soften sanctions blow

BEIRUT/AMMAN Mon Nov 28, 2011 9:22am IST

A Syrian protester is silhouetted behind a Syrian flag during a demonstration against President Bashar Al-Assad in front of the Syrian embassy in Amman May 22, 2011. REUTERS/Majed Jaber/Files

A Syrian protester is silhouetted behind a Syrian flag during a demonstration against President Bashar Al-Assad in front of the Syrian embassy in Amman May 22, 2011.

Credit: Reuters/Majed Jaber/Files

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BEIRUT/AMMAN (Reuters) - Arab states have landed a hefty blow on Syria's crisis-hit economy by stopping deals with its central bank and halting investment, but unease among Syria's neighbours about the impact of sanctions on their own economies may weaken the impact.

At their meeting in Cairo on Sunday, Arab League foreign ministers also agreed to freeze assets related to President Bashar al-Assad's government and impose a travel ban on top Syrian officials in response to Assad's crackdown on eight months of protests.

Syria's economy is already expected to contract up to 6 percent this year. The unrest has halted tourism -- a major source of foreign revenue -- hit foreign investment and trade and started eating into the country's foreign reserves.

European Union sanctions on Syrian crude oil, announced in September, have all but wiped out exports worth up to $400 million a month, at least until Syria finds other customers for its oil.

Sunday's announcement by the Arab League fell short of a full trade embargo on Syria, and ministers have made clear they sought to avoid measures which would hurt ordinary Syrians.

"But boycotting the Central Bank of Syria, which used to offer credit notes (for trade), would make imports and exports very difficult for Syrian traders," said Chris Phillips of the Economic Intelligence Unit.

However he added it was difficult to see Lebanon or Iraq implementing sanctions.

Lebanon, which has close political and business ties with Syria, voted against them, as did Iraq. Baghdad had said before the meeting that it would not impose sanctions.

"Iraq has reservations about this decision. For us, this decision ... will harm the interests of our country and our people as we have a large community in Syria," Iraqi Deputy Foreign Minister Labeed Abbawi said.

Lebanon has sent mixed messages about whether it would participate in sanctions. Foreign Minister Adnan Mansour said last week Beirut would not take steps against Syria, but Prime Minister Najib Mikati said on Thursday his government would implement Arab League decisions, whatever its misgivings.

Bankers in Jordan and Lebanon said it would take time to assess the impact of Sunday's decision, as details were sketchy and states might implement the measures differently.

"The picture is not clear but it could really make doing business with Syria very difficult," said one Jordanian banker.

A leading Lebanese banker declined to comment on Sunday until he had discussed the implications with other banks.

Several Lebanese banks have units in Syria, set up in recent years after Assad lifted restrictions on private banking operations. Most of the larger Syrian private banks have already been hit by sharp falls in customer deposits.

SAUDI BANK PULLS OUT

In a sign of the tumbling regional confidence over Syria, a Saudi bank said on Saturday it planned to sell its stakes in two Syrian and Lebanese banks because financial risks no longer allowed it to continue as a partner there.

Banque Saudi Fransi said it will sell its 27 percent stake in Bemo Saudi Fransi Syria and its 10 percent share in Bemo Lebanon.

While the bank said its decision was a financial one, Gulf states have taken the lead in acting against Assad, in contrast to some of Syria's Arab neighbours.

Phillips said 25 percent of Syria's exports go to Iraq, while RBS economist Raza Agha said 30 percent of Lebanon's exports head for Syria -- the only country with which Lebanon has an open land border -- illustrating how intertwined their economic fates are.

"Lebanon is very hostile to closing down that avenue (to Syria)," Phillips said. "Iraq certainly benefits from the relationship and they aren't keen to implement anything."

A banker in Jordan whose bank also operates in Syria also suggested some countries might drag their feet.

"If every country starts saying it has special considerations then I expect the move will be more symbolic than practical. Countries will try to find a way out of it," he said.

"It will be a step by step approach, but will no doubt have a negative impact on both the Syrian and Jordanian economies."

Jordan's King Abdullah is the only Arab leader so far to have called for Assad to step down and a Jordanian official said economic losses were a price the had to be paid for increasing the pressure on Assad.

"Of course there will be economic pain in the sort term and some Jordanian importers and exporters will suffer because of the cut of ties with Syria," he said. "But political considerations outweigh the economic losses."

Turkey, which is Syria's largest trading partner with bilateral trade worth $2.5 billion last year, also attended Sunday's Arab League meeting, and Foreign Minister Ahmed Davutoglu said Ankara would act in unison with Arabs.

Ankara has said it is weighing new transport routes to other Middle East markets that would bypass Syria. But an official said last week it had decided against cutting electricity supplies to Syria because of the impact it would have on ordinary Syrians.

(Writing by Dominic Evans; editing by Philippa Fletcher)

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