Syria effect on Russia’s economy

Drawing by Alexei Iorsh

Drawing by Alexei Iorsh

Developments in Syria are unlikely to seriously affect the world’s oil markets but, if Russia remains involved there for a prolonged period, it stands to lose economic support from the Gulf monarchies. The Syrian military engagement could also see Ankara drive a hard bargain on the Turkish Stream gas pipeline from Russia to Turkey.

The war in Syria, like any other war in the West Asia region, has a strong economic quotient, taking place as it is in a region surrounded by the world's largest oil and gas fields. Multiple oil and gas pipelines are located or planned in the neighbourhood of the war zone. Inevitably, the war in Syria and Russia's involvement in it will lead to both short- and long-term consequences for the country.

Syria is not a major player in the global hydrocarbons market. Even during its most prosperous years in the early 2000s, Syria was producing around 520,000 barrels of oil daily, barely 0.6 percent of total global production.

Since the civil war began in Syria and the introduction of European sanctions, oil production has fallen rapidly and early this year, official figures show Syria producing around 30,000 barrels daily.

Gas production in Syria is also not large; about 5.5 billion cubic metres annually now, compared to 9 billion cubic meters in 2010. So no matter how the war unfolds in Syria, no matter who wins the civil war, the situation of Syria’s oil and gas industry is unlikely to have any serious impact on the global oil market.

Knock-on effects for Russia

Russia faces much more serious economic consequences by its direct involvement in the Syrian crisis. Although Russian officials claim the Russian air force is bombing positions of the ISIS militants, sources in the region say that the main target of these attacks is the "moderate" Syrian opposition fighting against forces of Syrian President Bashar al-Assad.

Given that the key states in the region, Turkey and Saudi Arabia, are supporting the Syrian Sunni opposition, the longer Russia’s military is engaged there and the larger the Russian armed forces' involvement in the Syrian civil war, the more political and economic problems will arise for Russia in the region.

The Russian Direct Investment Fund has announced the creation of investment partnerships with sovereign wealth funds of Saudi Arabia and the United Arab Emirates. As part of these plans, these funds have expressed willingness to invest, respectively, $10 billion and $7 billion in projects in Russia.

In a situation where western financial capital markets have effectively been closed to Russian banks and companies, capital inflow from the Gulf countries was considered by Russian authorities as a possible and desirable alternative. In case of a protracted Russian military operation in Syria, these plans may be badly hit.

The gas issue

Turkey, due to its geographical position, is beginning to play a key role in the construction of transport infrastructure between Europe and Asia. By all appearances, the country will start the construction of several pipelines in the coming years, which would be able to deliver gas from Iran, Azerbaijan and Turkmenistan to Europe.

In addition, the pipelines may be laid to Turkey through Syria from Israel and Qatar. But if the Israeli project provides for the construction of the offshore gas pipeline outside the territorial waters of Turkey, the pipeline from Qatar must inevitably pass through Syria.

It is clear that as long as there is civil war in Syria, the construction of a gas pipeline on its territory is out of the question. In theory, this situation could be to the benefit of Gazprom, which is heavily promoting its Turkish Stream project, but is faced with serious constraints in access to the Turkish market and big problems in relations with its Turkish partners after lame statements by representatives of Gazprom on the active involvement of Greece.

However, Gazprom cannot seriously expect that the inability to get gas from Qatar will make Turkey softer in negotiations with the Russian company, since the country’s gas needs will be satisfied without restriction in any case.

In addition, it seems that the Qatari gas pipeline to Europe has already moved to the front of the line. To start a cost-effective supply of gas through Turkey, the ability to pump 15-20 billion cubic meters a year is needed, and that amount of gas is already there (Azerbaijan, Iran, Iraq, Turkmenistan) – these countries could increase production while the pipeline is being built.

As a result, the Russian military operation in Syria, in the short term, neither holds any significant losses (expenses) for Russia, nor promises any significant gains. At the same time, in the event of a more serious and long-term involvement in the civil war in Syria, Russia may face significant economic losses.

Sergey Alexashenko is a non-resident senior fellow at Brookings Institution (Washington D.C.) and served as the first deputy chairman of the Central Bank from 1995-1998.

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