As spotlight stays on Makhlouf, Syrian telecoms industry undergoes significant changes

AMMAN — The recent spate of videos published by Syria’s richest businessman and Bashar al-Assad’s cousin, Rami Makhlouf, have come as a surprise to many, prompting some to speculate about the future of the Syrian regime.

While highly personal in nature, the dispute between the Presidency and Makhlouf began as a struggle over Makhlouf’s crown jewel, Syriatel. Having accrued a net profit of 59 billion Syrian pounds (SYP) in 2019, the telecommunications giant and mobile phone operator is said to be the biggest private company in Syria.

In his first video, published on April 30, Makhlouf alleged that the government had targeted his company, ordering him to pay billions of Syrian pounds in unpaid taxes. In subsequent videos, Makhlouf’s tone grew defiant, protesting the government’s decision to raid Syriatel’s offices and arrest a number of his employees.

Less widely publicized, however, is that Syriatel has not been the only company targeted. The other mobile phone operator, MTN-Syria, has also been asked to pay unpaid taxes to the government, forming a combined penalty of SYP 233.8 billion between the two companies. Although Makhlouf has been targeted primarily, the fact that the entire sector is being targeted suggests that the issue may be larger than a personal dispute between Makhlouf and Assad.

“Politics and economics are always interlinked in Syria. Obviously, the government needs to accumulate capital and therefore reach into this sector for profit, but it’s also about taking control over political networks as well,” Joseph Daher, a scholar of political economy at Lausanne University, told Syria Direct.

Establishing one of Syria’s most profitable ventures

Syria’s telecommunications sector is dominated by two private sector companies: Syriatel, owned by Rami Makhlouf, and MTN-Syria, owned by a South African telecommunications company whose shareholders include the former Lebanese prime minister Najib Mikati. Mikati himself used to own the original phone license and enjoyed close relations with Bashar al-Assad.

The growing importance of private sector firms in Syria’s political economy at the turn of the century, especially in the fields of real estate, insurance, telecommunications, and banking has been exemplified by companies such as Syriatel and MTN-Syria and figures like Makhlouf. 

Promulgated in 1991, investment Law No. 10 opened up previously closed-off sectors to private-sector investments from both Syrian and international investors. Figures close to the regime such as Makhlouf took advantage of the changing economic environment, establishing their own private companies and acting as intermediaries for international capital. Amassing great fortunes in the process, these figures would often then store their money in offshore accounts outside the country. 

Syriatel grew so large that it even began operating in Pakistan and purchased shares in a telecommunications firm operating in Yemen, becoming one of the few Syrian companies with an international presence. 

However, economic liberalization in Syria never entailed a level-playing field for businesses in the country. Minimum investments under the investment Law No. 10 began at SYP 10 million—approximately $250,000 at the time—and approved projects were often granted five to seven years of tax exemptions.

In 2000, the law was amended so that investors could open accounts outside of Syria in foreign currencies and move their profits in and out of the country freely. In reality, the law served to increase sources of rent and generated massive amounts of wealth for those close to the regime.  

Linkages with the regime also meant that domestic capitalist interests were often prioritized during times of conflict, as exemplified with Syriatel’s experience in the early 2000s. 

Syriatel originally began as a joint venture with Orascom, a large Egyptian firm, owned by the Egyptian billionaire, Nagib Sawiris. The company held a 25% stake in Syriatel but primarily saw itself as offering technical expertise and know-how, rather than providing capital. 

“Orascom was fairly cautious about how much money they would commit, but they ultimately didn’t invest as much as Makhlouf wanted because of the structure of the deal,” David Butter, a political and economic analyst at the London-based Chatham House institute, told Syria Direct. 

After a financial dispute between the two sides, a Syrian court froze Orascom’s local assets, worth approximately $49 million. During the legal proceedings, Makhlouf’s brother, Ehab Makhlouf, was quickly appointed as the interim caretaker of Syriatel. The dispute unraveled the partnership, further concentrating power in Makhlouf’s hands.

Making a good deal even better

In Makhlouf’s first video, he claimed that his company was paying more than SYP 12 billion in taxes each year, demonstrating the immense size of the company and its ability to fill the state’s coffers. 

However, a detailed look at the telecommunications sector paints a more complicated picture of the sector and its relationship to the state. 

In the 1990s, when most mobile phone licenses were being handed out globally, most countries operated a licensing system with a formal auction that would select the highest bidder. Lebanon and Syria, however, were major exceptions to this rule; both countries opted for a Build-Operate-Transfer (BOT) contract instead and a relatively opaque bidding process.

“In a way, that was a quasi-state system and a disadvantage on the consumer side due to the lack of competition and low levels of investment,” explained Butter. 

Even in 2003, when Syriatel tried to raise more capital by offering shares for sale, it only managed to sell 15% of what was on offer, having to ultimately rely on an extension and Gulf-based investors to sell all seven million shares it offered for the sale. 

However, after a few years, it soon became clear that the sector was beginning to take off. By 2007, the number of subscribers to the two operators increased to 4.6 million from just 400,00 in 2002. Syriatel alone grew by 31.5% in 2005 and increased profits by over 20% over the subsequent years. 

But Makhlouf was not the only one profiting from the growth in the telecommunications sector. In 2006, the sector accounted for 3.7% of Syria’s total GDP and paid approximately SYP 21.6 billion ($430 million) in license fees and SYP 17.6 billion ($350 million) in taxes. These contributions were equivalent to roughly 9% of the government’s budget revenue and were a vital source of income for the state as oil revenues began to fall that year.

As the sector grew, so did the government’s coffers. The 15-year BOT contracts offered to both companies in 2001 mandated that they had to progressively increase their contribution to the government over the course of the 15-year period. They would have to pay 30% of their revenues for the first three years, 40% for the fourth and fifth years, and 50-60% for the remaining years.

By 2009, both companies paid SYP 41.1 billion—almost $900 million at the time—in fees to the government, in addition to taxes. However, with only a few years to go until their contracts would expire, both companies sought to renegotiate their licenses with the government. 

In an ultimately one-sided deal, the two companies converted their contracts into 20-year licenses by paying a one time fee of SYP 25 billion each (when this was agreed in 2010, it was equivalent to $500 million, but when it was paid in 2014, it was equivalent to only $150 million). In return, the companies would be allowed to continue their operations in the country but the percentage of revenues transferred to the state would decrease gradually. Their license fee was reduced to 50% of revenues for 2015, 30% for the years 2016 and 2017, and finally to only 20% for 2018 until the end of the contract in 2034. 

According to Imad Sabbouni, the Minister of Communications and Technology, “we worked out that it is much more profitable for the state’s revenues if the two companies buy out their licenses now.” The expectation was that a third operator would enter the market, thereby shoring up any potential revenues lost. 

The Syrian government even increased mobile phone rates three times for consumers—in 2013, 2015, and 2016—but the structure of the deal mainly benefitted MTN-Syria and Syriatel and not the government. Moreover, a third operator was never added and the government increasingly lost out on an important source of funds. 

According to Syria Report, a specialist economic publication, the deal represented a major loss for the Syrian treasury. Because of the reduced percentage of revenues paid in license fees, it is estimated that the government lost out on approximately SYP 200 billion in revenues from 2015-2018—roughly the same amount that is now being demanded from the telecommunications sector.   

That the government realized it had been losing on significant sources of revenue suggests that the recent actions are indicative of an increasingly cash-strapped government seeking to fundamentally reorder networks of political and economic power in the country. 

“This could be a retroactive change in the rules of the game. It was probably tilted too much in their [Syriatel and MTN-Syria] favor, so the regime might want to grab some money back. It’s not going to send a good message to the business community, but we’re also talking about a state where there is only a facade of business regulation,” Butter said.

Restructuring the sector

While the spotlight has been on Makhlouf and his assets, deeper changes in the telecommunications sector have been taking place since 2019 as the government has begun searching for ways to increase its sources of revenue.

In the summer of 2019, rumors started spreading that Makhlouf, and even some of his brothers, were placed under house arrest—although this has never officially been confirmed. Nonetheless, in September 2019, the Anti-Money Laundering and Counterterrorism Commission ordered local banks to provide bank statements for both MTN-Syria and Syriatel from January 2017 to September 2019.

One of the largest state-owned banks, Real Estate Bank, subsequently froze the bank accounts of Syriatel and its affiliated companies. Two months later, the government also froze assets belonging to MTN-Syria, its chairman and its board members.

During the shakeup, the vice-president of MTN-Syria, Bassem al-Taji, stepped down and was replaced by Nisreen Ibrahim, who represents one of MTN-Syria’s minority stakeholders, Teleinvest Ltd.

Teleinvest owns a 24% stake in MTN-Syria and is a subsidiary of the Saudi conglomerate, Dallah al-Baraka Holding. Registered in the Cayman Islands, presumably for tax purposes, Teleinvest has been one of MTN-Syria’s long-term investors, having bought its stake in the company back when MTN-Syria was known as Spacetel. Some speculate that Teleinvest represents the regime’s interests via Ms. Ibrahim.

This month, however, has witnessed far more drastic and wide-ranging measures being taken against the highly-profitable and lucrative sector.

Following the government’s request that MTN-Syria and Syriatel pay the government over SYP 200 billion in fees, the chairman of the board at MTN-Syria, Bashir al-Munajid, resigned on May 10 along with two other board members, Naser Sabeh and George Fakiani.

A week later, on May 17, Syria’s state news agency, SANA, reported that the Syrian Telecommunications Regulatory Authority (SYTRA) announced that “its work with MTN-Syria and its partners had been completed, and was moving onto a second phase in order to find a mechanism whereby the company can pay the amount owed to restore its license.”

The next day, Teleinvest announced that it was willing to pay the entire company’s fee requested by SYTRA. To do so would mean that Teleinvest would be the new owner of the mobile operator license, meaning that a Saudi-linked company would be responsible for managing one of Syria’s largest private-sector contracts.

Nonetheless, that same day, MTN-Syria’s management also stated that it would be studying the request for the license payment, thereby contradicting Teleinvest’s claim and making it unclear as to who would be in charge of operating the license.

However, it remains unclear as to whether the Saudi conglomerate, Dallah al-Baraka Holding is even the main shareholder of Teleinvest or whether Teleinvest represents figures close to the regime. Dallah al-Baraka’s owner, Saleh Kamel—one of Saudi Arabia’s richest businessmen—very recently died on May 18, 2020, after suffering a heart attack. Moreover, he was allegedly stripped of much of his assets after being detained at the Ritz Carlton in November 2017, as part of Crown Prince Muhammad bin Salman’s “crackdown on systematic corruption,” making it even less likely that Teleinvest represents Dallah al-Baraka’s interests.

Like MTN-Syria, Syriatel has also undergone fundamental changes in its management structure over the past week. On May 16, SYTRA published a letter from executive managers stating that they had agreed to the government’s request to increase the company’s license fee to 50% of their revenues. 

In response, Ehab Makhlouf resigned as vice-chairman and Muhammad Jalili, a member of the board, followed suit. 

At the behest of SYTRA, the Damascus Securities Exchange proceeded to temporarily freeze all of Makhlouf’s shares in companies listed on the exchange, including high-value shares in 12 of Syria’s 14 private banks. The freeze is supposed to hold until Makhlouf and his company have paid the fee requested by SYTRA with regards to Syriatel’s phone license.  

Given the restructuring of the entire telecommunications sector, it appears that the Syrian government is aiming to reorganize economic power in the country in order to strengthen its own sources of rents and wealth. Rather than reducing the crisis to a personal dispute between Makhlouf and Assad, or even perceived Russian and Iranian meddling, the changes that have taken place over the past year point to the government’s willingness to marginalize a section of the pre-war capitalist class and replace it with new business networks.  

“Unlike in 2014 and 2015 when the regime had lost significant territory and was negotiating from a weak bargaining position, it now feels much more secure to pursue aggressive measures. The poor economic situation has prompted the regime to accumulate forms of capital by targeting one of the most profitable sectors and its political networks,” explained Daher.  

A third operator?

How exactly the regime will reorder economic power and strengthen its own business network ultimately remains an open question. Some commentators have suggested that the state-operator, Syrian Telecommunications Establishment (STE), could take over and expropriate the assets of Syriatel and MTN-Syria. 

But if history is any indicator, making space for a third operator—on more favorable terms with the government—may be the most possible outcome, even if unlikely in the near future.

When Syriatel and MTN-Syria (formerly known as Spacetel) signed their 15-year BOT contracts in 2000, the terms of the contract stated that the government was not allowed to introduce a new competitor into the market for seven years. 

However, as early as 2005, the Ministry of Communications and Technology—headed at the time by Bashir al-Munajid—began preparing tender documents for a third mobile operator, with speculations that the state-owned STE was interested in taking up the role. 

In 2007, the STE said that a third operator would most likely enter the market by 2009, confirming that it was interested in operating the network itself but was still studying the market. In the meantime, international companies such as Vodafone, Kuwait-based MTC, and UAE-based Etisalat were all interested in operating in the growing Syrian market. 

But only in late 2010 did the government issue a tender for a third mobile phone license. Of the six companies that put in bids, five were pre-selected: Saudi Telecom, Etisalat, Qatar-based QTel (now Ooredoo), France Telecom (now Orange), and Turkcell. 

But in March 2011, France Telecom, Etisalat, and Turkcell dropped its bids days before the deadline, citing unfavorable terms of the contract for their reasons. It is understood that the new operator would have to pay 25% of its revenues to the government. 

With three companies having dropped out and major protests breaking out throughout the country, the government indefinitely postponed the bid for a third mobile phone operator.

Five years after talks of a third operator had subsided, the Minister of Communications and Technology, Ali al-Dhafir, expressed interest in granting a third mobile operator in 2016. Subsequently, in January 2017, Prime Minister Imad Khamis visited Iran and signed a memorandum of understanding with Tehran granting a third mobile phone license to the Mobile Telecommunications Company of Iran (known under its brand name as Hamrahe Aval). 

Yet later that year, al-Dhafir raised doubts about the prospect of a third operator in Syria and the deal was ultimately postponed. Although it is unclear why exactly the deal was postponed, there were rumors that Damascus was worried about the idea of a company with ties to the Iranian Revolutionary Guards Corps (IRGC) having access to the Syrian communications system. 

The issue resurfaced in February 2019 when the Minister of Communications and Technology, Iyad Khattab, told the People’s Assembly (Parliament) that negotiations between the two countries were taking place, but nothing substantial came of it. 

“Having a company linked to the Pasdaran [IRGC] is a big deal from a security point of view. Makhlouf may have been pushing against it as well. I think that’s why the deal ultimately didn’t go through,” said Daher. 

But now, with the telecommunications sector in crisis, the issue has again come to the fore. Last week, a prominent Iranian lawmaker, Heshmatollah Falahatpisheh, said that Iran has spent $20-30 billion in Syria and wants it paid back in the future. 

Without completely ruling out the possibility of a third license being granted to an Iranian operator, Butter remained skeptical of jumping to conclusions. “I see no evidence of substantive negotiations for a third license. Something similar happened with an oil concession, and it got some attention because it went through parliamentary commentary, but this hasn’t even got that. If it did manage to happen, it would be written off the debt as the Iranians would not expect to pay [for a license fee],” said Butter.

Alternatively, the regime’s own business networks could also be mobilized to operate the third license in the country. There have been talks of figures such as Asma al-Assad, her cousin Muhannad al-Dabbagh, or Samer Foz being interested in such a venture, but this largely remains unsubstantiated rumors. 

“It’s still a possibility that cannot be ruled out, but to challenge the control of Syriatel on the market is quite a challenge and would entail a lot of investments. In a period where Syria is not completely controlled by the regime, for a business to invest, you need a lot of capital and networks in different areas. It’s not easy at all,” said Daher.