Russian withdrawal sparks ‘panic’ in Damascus currency markets

AMMAN: The black-market exchange rate for the Syrian pound reached a record high last week following two weeks of “panic” in Damascus currency markets, an economist who has tracked the Syrian currency since 2012 told Syria Direct.

The exchange rate began its ascent on March 15, the day after Vladimir Putin’s announcement that Russia would withdraw the “main part” of its forces from Syria, rising from SP452 to the dollar to SP459. On March 26, the exchange rate surpassed SP500 for the first time before peaking at SP513 on Monday March 28, Syria-Stocks reported.

What does it mean? “When you see a jump like this in a currency market, it is because something happened that wasn’t anticipated,” says Steve H. Hanke, professor of applied economics at the Johns Hopkins University and Director of the Cato Institute’s Troubled Currencies Project.

In this case, the “something” was Russian President Vladimir Putin’s announcement on March 14 that Moscow’s objectives in Syria were “generally fulfilled” and that his country would withdraw the “main part” of its forces from Syria.

“That was clearly a shock— and a sort of panic attack ensued,” Hanke said about Moscow’s withdrawal. “People started selling the pound very heavily.”

The currency is probably stabilizing “because people realized the Russians were only dialing back and not leaving completely.”

Now the pound appears to be “returning to its previous slow crawl downward,” says Hanke, referring to the declining value of the currency.

As of March 30 the exchange rate has dropped back to SP502 to the dollar, reports Syria-Stocks.

The panic room   

On March 13, after Putin’s “withdrawal” announcement, Syrians in Damascus began selling their pounds for dollars, driving up the price of the latter while simultaneously devaluing the Syrian pound, reported Al-Hayat earlier this week.

In order to avoid losses, some Syrian business owners chose to close their doors to customers—fearing that the pounds being paid for their products would be worthless in a few hours. 

“I’m going home early today,” a Damascus shopkeeper told Al-Hayat on Monday. “I don’t want to sell at a different price every hour and feel like I’m cheating someone or being cheated. I’d rather close up and not sell in these conditions.”

 Storekeepers in the old Damascus market of al-Hariqa close up shop in recent days. Photo courtesy of eSyria.

But Hanke, who has tracked the Syrian pound on a daily basis since 2012, says any talk of a “collapse” is hyperbolic.

“Since March 19 there has been a six percent increase in the exchange rate—which is faster than the usual trend, but now things are returning to normal.”

 The Syrian pound’s slow descent. Photo courtesy of the Cato Institute. Note that the y-axis is inverted to display the declining value of the pound.

This week, following the Syrian regime’s recapture of the desert town of Palmyra, in which Russian warplanes and helicopters bombarded Islamic State positions, the black-market exchange rate dropped from SP513 to the dollar to SP502 to the dollar.

‘Dollarization’ nation

The prices of most commodities, in both regime- and rebel-controlled Syria, are now directly tied to the dollar.

“This is what we call dollarization,” says Hanke referring to the process by which some countries tie their currency to a strong foreign currency, such as the dollar or euro.

“But in Syria’s case the process is voluntary and spontaneous,” he adds.

The reason for this “spontaneous” dollarization is a high rate of annual inflation, estimated at approximately 80 percent per year by Hanke, rendering it impossible for traders to turn a stable profit dealing strictly in Syrian pounds.

 Syrian prices elevated but steady since 2014. Photo courtesy of the Cato Institute.

Most salaries and other incomes are still paid in the Syrian currency.

“Civilians who do not have access to dollars from relatives living abroad are impacted heavily by the depreciation of the pound,” says Mahmoud a-Shami, a citizen journalist in the Idlib countryside.

“Their salaries and other incomes are in pounds, but the prices of goods are directly tied to the dollar,” says a-Shami.

For the more than a million Syrians living in encircled cities and towns, prices are tied to supply, which is scarce.

“People living under siege have lived much worse days than this,” Radwan Ghanun, an economist from East Ghouta, told Syria Direct.

“At the height of the siege, people in East Ghouta were buying sugar for $50 a kilo.”