At a time when oil prices are half of what they were a year ago, the retail price of gasoline in Lebanon has been stagnant or climbing. For example, in July 2007 when the price of Brent crude was around $78 per barrel, the government raised taxes on gasoline which pushed the price from $14.90 per 20 liters — the standard measurement for gasoline in Lebanon — to $15.64 per 20 liters. This is roughly the same price of gasoline in today’s retail market, at a time when crude sells at around $50 per barrel. Needless to say, this illogical development is confusing for the consumer.

In 1985, then Minister of Finance Camille Chamoun issued a governmental decree abolishing state subsidies on gasoline; so legally the subsidy was removed. However, the government has levied a tax on gasoline, which it increases or decreases at will. When the government decreases the tax, gasoline prices drop giving the feel of a subsidy.

Further exacerbating the situation is that most people in Lebanon rely on private transport. Lebanon’s approximately 1.4 million registered vehicles consume around five million liters of gasoline per day, according to Bahij Abou Hamzeh, president of the Association of Petroleum Importing Companies (APIC) in Lebanon.

Another factor experts in Lebanon point to is unfair competition. “There is an oligopoly controlling gasoline imports to Lebanon and this is the heart of the problem,” says Jad Chaaban, professor of economics at the American University of Beirut and acting president of the Lebanese Economic Association. “The prices are set by the Ministry of Energy in consultation with the APIC. When you have an oligopoly controlling an import sector you cannot pass on decreasing or rising prices with the same efficiency as when you have a competitive market.”

Collusion in a free market

For his part, Abou Hamzeh admits that the association does collude with the Lebanese Ministry of Energy, but insists that the market is open to anyone who has the means to set up the infrastructure.

“We regulate the market in cooperation with the ministry but we have to do it because it’s the only product in Lebanon that has a ceiling for the price,” claims Abou Hamzeh. “The government is setting the ceiling of the price on a weekly basis. This doesn’t mean we cooperate in order to monopolize the market; it’s not what we are after.”

Abou Hamzeh blames the government who earlier this year raised the level of taxes on gasoline to $6.35 per 20 liters of imported gasoline when the price of oil was at around $35 per barrel. Abou Hamzeh adds that the gasoline price ceiling, set weekly, is too low. “The government imposes a ceiling according to the international prices and a small margin to cover additional costs,” says Abou Hamzeh. “This margin does not cover our costs. We cannot continue like this; we are making a loss not a profit.”

Whether or not competition is fair, one thing does remains clear: that the government is making a lot of money. Most estimates are that government revenues from gas tax will increase this year to around $466 million as opposed to $199 million in 2008. On March 19, the Lebanese General Confederation of Labor Unions gathered in front of the Lebanese parliament to protest the high prices and taxes on gasoline and around 150 cars blocked one of Beirut’s main commercial districts.

Tax of necessity

The government, however, seems to have little choice when it comes to removing the tax, since it is already drowning in a sea of debt and in need of more revenue. Furthermore, according to a high ranking member at the Ministry of Finance who spoke on condition of anonymity, the government must keep the higher gasoline tax in place because it has already reneged on two of its other promises made to donors at Paris III: the five to seven percent taxation on bank deposits and the increase of Value Added Tax (VAT). The cherry on top may be that many in the government are reluctant to enact policy due to the upcoming elections in early June.

“When we protest the government tells you, ‘you are right but now we have to have the election’,” says Abou Hamzeh.

Whatever the reasons may be, for the immediate future it seems that the high gasoline prices and price fixing will continue. Once again it seems it will be Lebanon’s people and industries that pay the final price.

Turkey has high hopes of becoming a major transit hub for land and sea cargo freighting, linking Central Asia and the Middle East with Europe, though it will need to invest heavily in infrastructure if its hopes are to be fulfilled. The transport grid already has around 11,000 kilometers (km) of rail lines; 430,000km of roads, including 62,000km of motorways and main roads; a network of ports along its Black Sea, Aegean and Mediterranean coasts and at least one airport in each of its 81 provinces. Even so, the results of a joint study conducted by the European Commission and Turkey’s Ministry of Transport and Communications, released in 2008, showed Turkey has a long way to go before its transport network can service the future needs of the economy.

The Transport Infrastructure Need Assessment (TINA) said priority should be given to improving transport in the North-South and East-West axes to better integrate Turkish transport with international transport networks; upgrading intermodal transport facilities and services, and improving the country’s ports and maritime connections. These improvements will be needed if the assessment’s projections are correct. The report said Turkey’s road freight demand would reach at least 305 million tons by 2020, more than 230 percent up on 2004, the base year used for the study. Train hauled cargos are predicted to more than double to 31.5 million tons, while the merchant marine is expected by 2020 to lift its base total by around 60 percent to 25.3 million tons.

Finding the cash

To meet this demand, Turkey will need to invest more than $25 billion by 2020, with $11 billion dedicated to its rail network and $10.75 billion on roads, according to TINA. The key challenge will be to raise this cash at a time when many other calls are being made on the limited national treasury — including upgrading electricity generation and distribution grids, resolving environmental issues such as waste water processing and improving the health and education services. Though some of this funding gap could be filled by assistance from the EU through its trans-European transport network (TEN-T) program, most of the money will have to come from the state or the private sector, both of which are currently finding it hard to raise funds due to the tight credit markets.

Some of these major projects are well advanced, such as the Marmaray rail project which includes a tunnel beneath the Bosphorus that will link Europe to Asia, and a new high-speed train connection between Ankara and Istanbul. However others, such as duplication of many of the country’s main rail lines, remain on the drawing board. While the government is looking to upgrade and extend infrastructure links with limited fiscal means, the transport industry may find itself in less of a position to enjoy the benefits of the improved networks, at least in the short-term. With Turkey’s economy slowing, in line with those of its major export markets, there has been a fall in demand for long haul road, rail and maritime freighting.

The outline of decline

According to figures released by the Turkish Exporters Association (TIM) in March, overseas sales dropped 35 percent year-on-year in February to $6.87 billion. Industrial output is also contracting, down by 17.6 percent in December compared to the same month in 2008, the Turkish Statistical Institute reported. Lower industrial production means fewer raw materials are being freighted to factories, fewer finished products need to be shipped out, while falling export demand sees reduced calls being made on Turkey’s cargo haulage capacity.

The number of long haul trucks being shipped across the Dardanelles Strait is down by more than 20 percent so far this year, according to local ferry officials. Additionally, according to Erol Yücel, assembly chairman of the Turkish Chamber of Shipping, the steep drop in demand for shipping capacity due to low cargo levels has seen rental prices for ships fall by as much as 98 percent. Turkish exports, and therefore production and the transport sector, may get a boost from the sharp drop in the value of the local currency, with the Turkish lira hitting an all-time-low of 1.78 against the US dollar on March 10. With the cost of Turkish goods becoming more attractive, trade could pick up, helping the transport sector onto the road to recovery.

Peter Grimsditch is Executive’s Turkey correspondent

The economies of Syria and Lebanon have been closely intertwined since before they achieved independence from France in the 1940s. Now, with the two countries having recently opened embassies in one another’s capitals for the first time, an increasingly open and private-sector economy in Syria and a period of relative regional stability, there is now more potential than ever to take advantage of trade opportunities. These include not just goods, but services, expertise and labor – all of which illustrate Syria and Lebanon’s interdependent relationship.

Historical economic ties

Lebanon began its trade relationship with Syria in 1926 when it became an independent republic under French control. That same year, the Port of Beirut opened and Lebanon became Syria’s gateway to the world.

When Lebanon and Syria achieved independence from France in 1943 and 1946 respectively, the two countries continued a mutually beneficial economic relationship wherein Syria took advantage of Lebanon’s services, technical expertise and modern banking system, and Lebanon was able to make use of Syria’s labor force.

This complementary relationship was reinforced further in 1958. That year, Egypt and Syria merged to form the United Arab Republic, which led to the nationalization of Syria’s economy, leading many Syrian entrepreneurs to relocate to – or at least deposit their money in – Lebanon.

Lebanon’s civil war, from 1975 to 1990, marked the end of an era for the small eastern Mediterranean country’s reputation as the “Switzerland of the Middle East,” so-called because of its renowned top-quality banks in a stable climate. Still, during this time Syrians continued to use Lebanon’s banks because of their reliable services and secrecy policies.

Following the end of the war in 1990, Lebanon’s need for help with its reconstruction created a boom in need for Syrian labor. Throughout the 1980s and 1990s there were as many as a million Syrian laborers in Lebanon in any given period. At the same time, while wealthier Syrians waited for economic reform in their country, they used Lebanon’s renowned financial services and shopped at Beirut’s high-end retail stores to purchase items not available in Syria.

That all changed in February 2005 when Lebanon’s former Prime Minister Rafiq Hariri was assassinated.  Syria was implicated in the assassination, but denies any involvement. Violent attacks on Syrian workers caused most of them to flee Lebanon, Syrians withdrew billions of dollars from Lebanese banks and Syrian shoppers abandoned their weekend trips to Beirut during a period of nationwide anti-Syrian sentiment.

The following years saw a thaw in Syrian-Lebanese political relations. Business has returned, but not at the same rate as before. Today, there are an estimated 300,000 Syrian workers in Lebanon, less than half of the pre-2005 level. Syrians who brought their business back home in 2005 have kept it there for the most part, mainly because luxury retailers and private banks in Syria have improved their quality and services to a level comparable to that of Lebanon.

With Syria’s ongoing economic opening and Lebanon beginning to warm-up politically to its next door neighbor, it appears that the two countries are in a good position to return to their traditionally mutually beneficial economic relationship.

“Even during the most difficult of times, trade relations slowed down, but then improved. This cannot stop. After… 2005, the only way left to go is up,” says Syrian political analyst Sami Moubayed.

Syria has traditionally resorted to trade pressure whenever relations with Lebanon have been tense

Politics and geography of trade

When it comes to trade between the two countries, Syria is at a definite political and geographic advantage. With a 375 km border with Syria that constitutes the only route for overland trade — the 79 km border to the south has been closed since 1948, when Israel became a state — Lebanon is dependent on Syria for its trade with most of the world. Transit through Syria represents 60 percent of Lebanon’s trade.

“Syria has traditionally resorted to trade pressure, whenever relations were [tense] between the two countries, to affect the political flow between Syria and Lebanon,” says Moubayed. “There are no other outlets from Lebanon, except the sea, or Israel, for ground trade. When pressure of this sort is applied, it certainly affects political events, always in Syria’s favor, however.”

In 1950, for example, Prime Minister Khaled al-Azm would shut the border, to pressure Lebanon into changing political dialogue, or positions, knowing that if the borders with Syria were sealed, its trade with the outside world would suffer.

More recently, in 2005 and 2006, Syria shut its borders with Lebanon, again to put political pressure on its smaller neighbor.

Still, goods usually reach their intended recipient somehow, regardless of political pressure.

“It’s a myth that the Syrian-Lebanese border is or can be closed to goods from the other side of the border,” says Samer Abboud, assistant professor in the department of political science at Susquehanna University in Pennsylvania. “The border is quite porous and will remain so even if there is full trade liberalization and improved transportation networks.”

 Nevertheless, currently there is some hope that better political relations will open the door for joint development projects.

“While private investment continues to grow in Syria, what’s missing are bilateral projects,” says Jihad Yazigi, editor of the Damascus-based economic bulletin, the Syria Report. “It’s not enough to open the borders if you don’t have strong government commitments. At the government level, there’s little coordination. Even in the West, there’s government involvement in bilateral projects. For big projects, private business can’t do much.”

For example, Yazigi suggests, “With daily power outages in Lebanon and Syria, we need more power plants.” Or, “Maybe the two countries could find a way to share water better.” He believes, “The two countries need to debate publicly.”

“Despite the obstacles – transport, financing, long border crossings – inter-Arab trade represents almost 20 percent of total Arab trade, when oil is factored out,” noted Abboud. “This is a very high figure and speaks to the already existing trade between countries that need to be supported through infrastructural and institutional developments.”

Getting goods across the border

At any time of the day or night, cars and trucks can be seen lined up at the official Syrian-Lebanese overland border crossings and in the Bekaa Valley, flare lights signal communication between smugglers.

No matter how cumbersome the process of trade between Lebanon and Syria, the two countries continue to meet the demand for one another’s products – be it at one of the three official border crossings, using the unofficial crossings or catering to the niche markets on either side of the border.

For Lebanese consumers, that often means clothing, agriculture, oil and other products that are less expensive in Syria.

But in the past several weeks this has been changing, with oil and some agriculture prices in Syria surpassing those of Lebanon – a sign of the times for both countries.

“Some prices of goods in Syria are higher than in Lebanon. The situation is completely different after 2000. Usually, Lebanon is the free market and Syria is the closed market. Now that is changing,” says Syrian economist Samir Aita.

Syrians are buying Lebanese goods, including everything from Portland cement, Lebanon’s biggest export to Syria, to Western products that can’t be found in Syria. There is a thriving black market of American products that are illegal due to the United States’ sanctions imposed on Syria.

Most of these items tend to be electronics, such as computer parts, which can be “re-exported” from Lebanon at an extra fee. “We (the Lebanese) don’t do this for free,” says Beirut-based Hussein Zeaiter, assistant professor of business and economics at the Lebanese American University.

“Illegal trade is probably higher than official trade,” estimates Abboud. “Illegal trade patterns have always existed between the two countries. While there is a host of trade in illegal goods – drugs and weapons – most of the actual trade is in basic products that are just taken across the border on a daily basis in cars and taxis and goes unreported or under-reported by officials. Export receipts are also a huge problem on the border.”

He adds that, “there have been few attempts to regulate it because the illegal trade functions almost as its own economy with powerful networks controlling large swaths of trade, or, on the micro-level, border officials being bribed to look the other way.” 

Illegal trade functions almost as its own economy, with powerful, large-scale networks

 Swapping labor for expertise

Throughout their history, Lebanon and Syria have been able to use the other’s workforce to their mutual advantage. Lebanon has benefited from Syria’s cheap laborers, who have been willing to do jobs that most Lebanese refuse to do, which in turn eases Syria’s high unemployment rate.  At the same time, Syria has benefited from Lebanon’s well-educated entrepreneurs and bankers who have helped Syrian private investors before and during the country’s economic opening.

“Lebanon has been an important place for services to Syrians,” notes Aita. “But in the last three to four years, Syria has been working to capacity.” As for Lebanon’s traditional role as Syria’s banker, he sees Syria beginning to hold its own in that sector.

“A lot of top management bankers have been coming from Lebanon to Syria,” Aita says. “But this is diminishing. Now, there is a lot of Syrians working at Lebanese banks.” Syria’s unprecedented growth rate last year of 6.5 percent and its own construction boom, combined with Lebanon’s continued anti-Syrian sentiment and a trend toward favoring Egyptian workers, has meant a continued steady decline in Syrian laborers in Lebanon.

“Mistakes on both sides meant that Syrians are no longer going to Beirut for shopping and services the way they did in the past,” Aita says. “And now there’s less need for Syrians to go to Lebanon.”

It does indeed seem that Syria is no longer closed economically.  However slowly, the dynamic is changing. Aita concludes by saying, “Lebanon’s role as Syria’s banking hub will disappear in three to four years. Both countries will have to rethink their roles toward themselves and each other.”