Photo: LOUAI BESHARA/AFP/Getty Images
Western governments, despite sanctioning Syrian president Bashar al-Assad, have become one of the regime’s largest sources of hard currency. Assad does not merely profit from the crisis he has created. He also has created a system that rewards him more the worse things get. It is time to change the incentives, change the system, and start thinking strategically about Syria’s future.
Aid diversion in Syria is an old story. The regime has long directed aid to areas it deems loyal and impeded aid to areas formerly held by the opposition. The Syrian regime also diverts food baskets to military units. One-fifth of children under five suffer from malnutrition, but when aid agencies ship in high-protein biscuits to save children’s lives, soldiers eat those biscuits with their tea, and the children starve.
But there is an even more systematic way that the regime is redirecting aid into its coffers. The Syrian government makes international aid agencies use a distorted exchange rate, which allowed it to divert nearly 51 cents of every international aid dollar spent in Syria in 2020. That money propped up the Central Bank of Syria—an institution sanctioned by the United States, the European Union, and the United Kingdom—with foreign reserves. UN bodies do not have to adhere to Western sanctions. But humanitarian aid is meant to reach people in need, not the government.
Donor governments profess to have a strategy focused on helping the Syrian people in the face of an oppressive government. They continue to sanction the regime and its allies for atrocities against Syria’s civilian population, and they have generously provided around $2.5 billion in aid every year since 2014 to help those in need. But as they seek to help those suffering under Syrian government rule, they are simultaneously helping secure the government that is causing the suffering.
UN agencies transfer money needed for their operations to private banks operating in Syria or with “correspondent banks” in other countries. In either case, the agencies exchange foreign currency (typically U.S. dollars) for Syrian pounds at a rate set by the Central Bank of Syria. That rate is often significantly lower the one determined by supply and demand as reflected in the black market (see graph below). Private banks must then sell half of their hard currency directly to the Central Bank of Syria. Of course, government influence is pervasive throughout the banking sector, giving the regime additional tools to reward and punish the population.1
The amount of aid lost through the inflated exchange rate is significant, and it has grown as the Syrian pound (SYP) has plummeted in value since the onset of the civil war, particularly in the last two years. Before the war, the exchange rate was about 50 SYP to the U.S. dollar. By March 2021, the freely exchanged rate had plunged to 4,700 SYP to the U.S. dollar. Yet, the Central Bank would only allow aid agencies to use the official rate of 1,500 SYP to the dollar. That meant that nearly two-thirds of aid funds spent in-country were lost in the exchange before the assistance even hit the ground. Reportedly, the United Nations negotiated for a preferential rate earlier this year to combat the discrepancy. Since then, the official rate rose to 2,500 SYP to the dollar, but that still left the aid response struggling with a gap of 32 percent with the black market rate in September 2021.
Enforcing the artificial exchange rate is a clear policy of the regime to extract more funds to replenish its dwindling foreign reserves. Earlier this year, the Syrian government shut down unofficial currency exchange services and arrested their operators in an effort to force Syrians sending remittances to rely on official channels offering the lower rate. While some Syrians continue to use unofficial hawala companies, the international aid agencies registered in Damascus cannot.
While the issue seems hopelessly complex, it is not difficult to understand the scale of potential losses. Although UN agencies were unable or unwilling to provide figures on the amount of aid dollars exchanged in Syria when contacted by the authors, the United Nations’ own database provides part of the answer.2 The authors went through all 779 procurement entries for 2019 and 2020 and identified the contracts that were likely paid in Syrian pounds based on the location of the contractors.3
The data show that in 2020, UN agencies converted a minimum of $113 million to procure commodities and services in Syrian pounds. Given that the money was converted at the unfavorable official exchange rate, that means that $113 million in procurement resulted in $60 million in donors’ “excess” dollars being diverted. When combining data from 2019 and 2020, the figure reaches $100 million.
This estimate is modest for several reasons. For one, it only includes procurement figures for UN agencies, not international nongovernmental organizations (NGOs) operating in government-held areas. Secondly, NGOs and UN agencies also use Syrian pounds to pay staff salaries, provide cash assistance, and carry out other activities outside of procurement. Since such currency in government-controlled areas must also be obtained at the official exchange rate, the humanitarian response has actually lost much more than $100 million over two years.
The authors were also unable to identify all contractors used by the United Nations. This was partly because some of their names in the procurement database are suppressed for “security reasons” or “privacy reasons.” Using the data available as of October 10, 2021, 18.5 percent of total procurement contracts were suppressed across 2019 and 2020, amounting to $75 million.4 As a result of these gaps, it is likely that this exchange rate results in the loss of tens of millions more Western aid dollars every year.
Of course, the distortion of exchange rates is not a problem exclusive to Syria. Lebanon’s central bank commits to unfavorable exchange rates as the currency has collapsed in the last two years. Aid agencies there face many of the same issues. Yet, there are two major differences between Lebanon and Syria. First, Lebanese have been using U.S. dollars alongside Lebanese pounds for years, and the government itself has endorsed direct dollar assistance to the needy as a way of preserving the value of aid. The Syrian government consistently has treated the use of dollars as a medium of exchange as a form of treason.
The other clear difference is that the U.S. and EU governments are trying to work with the Lebanese government to coax it back to solvency. By contrast, the stated policy of U.S. and EU governments is to isolate the Syrian regime for its war crimes. Giving the Syrian government access to hard currency—which using a manipulated exchange rate does—not only gives the government funds it can use at will, but also undermines the policy of isolating the Assad government. As donor fatigue sets in and needs continue to rise in Syria, ensuring every dollar reaches those in need will be more critical than ever before.
And collective negotiations could lead to movement on the issue. While the Syrian government is often intransigent, it has been willing to be flexible on the exchange rate issue. For example, in September 2021, the regime allowed Syrian exporters to exchange 50 percent of their export revenues at the black market rate rather than the official rate. Donor governments should demand similar concessions for life-saving humanitarian aid.
If those concessions are not forthcoming, donor governments should lead the way in negotiations as aid agencies are caught between submitting to regime demands or losing the ability to program altogether. The U.S. State Department declares that its goals are to help Syrians in need and “deprive the regime of the resources it needs to continue violence against civilians.” Yet, there is ample preliminary evidence that neither goal is being met in government-controlled areas.
As Russia, the Syrian government’s stalwart ally, regularly threatens to cut off UN aid to non-government-held areas in the hopes of centralizing more assistance through Damascus, donor governments and UN agencies aiding Syria should be prepared to confront Moscow on this diversion. Otherwise, Western governments will pour hundreds of millions more dollars into regime coffers, undermining their own stated policies and buttressing the regime without any accompanying behavioral change that benefits the Syrian people. Doing so will entrench disparities in Syria and will fuel the conflict for years, if not decades, to come.
Karam Shaar is the research director of the Operations and Policy Center. Munqeth Othman Agha is an Independent researcher. Natasha Hall is a senior fellow with the Middle East Program at the Center for Strategic and International Studies in Washington, D.C.
Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).
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1 For example, the Central Bank can even affect how the remaining dollars in private banks are spent. When private sector importers want to access U.S. dollars to fund their imports, they buy U.S. dollars at a rate set by the Central Bank. The Central Bank and the Ministry of Economy and Trade must also approve the import certificates of private merchants. Given the lack of transparency and absence of separation of powers between the Central Bank and the regime apparatus, there are myriad other ways that the regime can use this currency that are unknown.
2 The authors emailed the regional office of the UN Office for the Coordination of Humanitarian Affairs (OCHA) and representatives of the World Food Programme, the United Nations Development Programme, the UN High Commissioner for Refugees, the Food and Agriculture Organization of the United Nations, and the United Nations Children's Fund but received no response. The authors contacted the Financial Tracking System (FTS) of the United Nations, which stated that they do not have data on the amount of money exchanged into Syrian pounds and tracking such information was beyond the scope of their mission.
3 The authors contacted the authors of the Annual Statistical Report on UN Procurement (ASR), who did not answer questions on the procedure for unlocking suppressed procurement contracts.
4 The suppressed contractors and the reason for suppression actually change over time for historical data. Using data downloaded in August 2021, 16 percent of the overall value of contracts related to entities was suppressed for security reasons over 2019 and 2020, which adds up to $64 million. Just two months later, it increased to 18 percent at $75 million.
