Assessing the Business and Market Risks of a Potential U.S. Attack on Syria

As the warm hope of an Arab spring has given way to the cold chill of a Syrian fall, global executives are weighing the business implications of Syrian President Bashar Assad’s chemical arsenal and punitive actions that are being considered, including, despite recent overtures for a diplomatic solution, the very real possibility of a U.S. attack to degrade Assad’s capability to make war.

Risk assessments fluctuate daily as sabers rattle, diplomats negotiate and countries posture. Setting aside politics and diplomacy, I want to look at the situation from a purely business perspective, through the eyes of business executives from around the globe.

Syria has, for some time, ranked as a bad business bet. Even before the current standoff, Coface, a French global credit insurer that rates the business climate in 158 countries, gave the country its lowest rating. Among the problems: poor company transparency, red tape, nepotism, corruption, a shortage of skilled labor and the absence of a consistent framework for direct foreign investment.

The U.S. Department of State closed the U.S. Embassy in Syria in February 2012 and recommends that U.S. citizens avoid the war-torn country. If you are going to live in or visit Syria, the State Department recommends that you hire a private security detail and enroll in its Smart Traveler program, which will keep you abreast of the latest travel alerts and potential dangers. The Czech Republic is offering limited assistance to U.S. citizens through its embassy in Damascus.

Without a doubt, the Syrian conflict has regional implications. While Syria has very little oil exports, the risk of a U.S. military strike sparking a broader Middle East conflict has world markets concerned. The current Syrian regime is allied with Iran and Russia, adding to the stakes. Then there is the question of whether the Syrian rebels have any affiliation with Al-Qaeda and other terrorist groups.

With political tensions running high and millions of Syrian refugees fleeing into neighboring countries, the State Department has added Turkey, Lebanon, Pakistan and Iraq to a long list of countries that U.S. citizens should avoid. Near term and longer term, the situation in Syria and in the broader region is unpredictable and potentially volatile.

From a global risk perspective:
Economic risk. Syria’s agriculture and oil economy has already been wracked by civil war and sanctions, to the point that the recent escalation of tensions should not have a material effect on the global economy. As long as the conflict remains confined within Syrian borders, this analysis should hold.
Oil prices. Although Syria’s oil production is negligible, The Economist reports in its Free Exchange Economics blog that energy analysts are concerned that military action could foster anti-Western sentiment throughout the Arab world. The overarching concern is that U.S. military action in Syria could amplify violent anti-Western sentiment in Egypt, a key gateway for oil coming from the Middle East, and disrupt the flow of oil around the world. This would spike the price of oil, creating economic hardships for emerging markets, particularly India and Turkey.
Portfolio risk. Markets seem to favor diplomacy over aggression, according to John Studzinski, global head of Blackstone Advisory partners, who told CNBC that President Obama’s recent decision to give diplomacy another try helped ease investor anxiety. Airline stocks rose and oil prices fell on news that the Obama administration had reached a deal with Russia for Syria to hand over its chemical weapons by the middle of next year. However, this fast-track implementation is not without risk, as its execution would take place during a civil war – creating enormous logistical challenges. Furthermore, a U.S. strike has not been ruled out. Any attempt by Syria to “game” its response may risk reprisals.
Supply-chain risk. Given Syria’s limited manufacturing output, there doesn’t seem to be much concern here, with the exception of the regional oil supply-related risks noted earlier and the potential effects on global supply chains.

By all counts, it would appear that a diplomatic solution to the Syrian conflict that is faithfully executed is the best scenario from a business-risk perspective. Clearly, there are broader issues involved. Have you been evaluating the risks of a U.S. attack on Syria on your business interests? Setting aside politics, what do your tea leaves tell you? I’d love to get your perspective.

Jim

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