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Insight: Syria government struggles with supplies, but holding on

Syrians wait in line to buy bread at al-Shaalan market in Damascus August 28, 2013. REUTERS/ Khaled al-Hariri
Syrians wait in line to buy bread at al-Shaalan market in Damascus August 28, 2013. REUTERS/ Khaled al-Hariri

By Yara Bayoumy and Maha El Dahan

BEIRUT/ABU DHABI (Reuters) - For a government under siege from rebels and international sanctions, President Bashar al-Assad's administration shows no lack of confidence in being able to go on feeding its people.

But as official media offer glowing reports of new bakeries serving up tasty, subsidized bread and ministers assure Syrians of ample stocks in state granaries, repeated failures of tenders to import wheat and other staples tell a different story - one echoed in tales from the streets of scarcity and rising prices.

Syria's worst harvest in decades, as civil war rages, means more pressure to import on a government whose currency reserves are dwindling - even if support from Assad's sponsor Iran, and a shrinking population to support as Syrians flee the country and provinces fall to rebel control, ease the burden and buy time.

"Extreme urgency" is a phrase cropping up in increasingly frequent emails and faxes that Syria's state food import board has been sending to firms trading grain in world markets, inviting them to tender for shipments of wheat, rice and sugar.

Traders in Europe and Asia speak of invitations every other week, compared to every other month in normal times. Yet for all the urgency in the emails from Damascus, tender after tender has failed to end in goods being shipped - mainly, traders say, because Syria insists on unrealistic conditions that simply ignore how financial sanctions have crippled its ability to pay.

"The government is in extreme denial about its food stocks," said one trader based in the United Arab Emirates whose firm had long been a supplier to Syria, notably of rice, but refused to bid at auctions where the chances of payment seemed remote.

Now, he said: "We have just stopped dealing with Damascus."

Like other traders with knowledge of Syrian tenders, he spoke on condition of anonymity.

Quite how Syria's stocks of grain stand is impossible to say with confidence. State grain buying agency Hoboob, or the General Establishment for Cereal Processing and Trade, insists it has 3 million metric tons of wheat in store, equivalent to a year's supply for the entire 22 million population.

Many engaged in the cereals trade, both inside and outside Syria, doubt that. Estimates collated by Reuters from more than a dozen grain officials and local traders in late July after the harvest suggested Syria would need to import 2 million metric tons of wheat in the coming year to meet normal needs after a crop of 1.5 million metric tons, under half the prewar norm.

PSYCHOLOGICAL WARFARE

Syrian Prime Minister Wael al-Halqi denounced last week what he called U.S. psychological warfare aimed at undermining the economy and told state media the government had vital supplies.

The same week, an item on state news agency SANA appeared to address concerns among people in the capital about shortages.

Reporting the opening of a new state bakery that would serve up 13 metric tons of bread daily, it quoted customers praising the quality of the loaves and quoted a minister, Samir Qadi, saying: "Wheat is available and in large amounts at the warehouses."

Even in good times, bread provides about 40 percent of the typical Syrian's daily calories, according to U.N. data, and war and poverty may be increasing dependence on such staples.

The United Nations' food aid agency, the World Food Programme (WFP), found in a study published in early July that Syrians were typically having to spend at least some 50 percent more on food than a year ago, with families reporting they now spent between 40 and 80 percent of their budgets on eating.

Some four million Syrians need food aid, says the U.N.

Subsidized state loaves, costing just 15 Syrian pounds or a few U.S. cents, are still available in government-held areas, though people can wait for hours in line, pushing up market prices for bread that is privately baked, or diverted from state stores, to as much as 10 times those of subsidized loaves.

Damascenes speak of middlemen who buy bread from bakeries across the capital and sell it for a premium round the corner to people unwilling to spend hours queuing for bread. Shopkeepers say they regularly pay bribes to government inspectors in order to ignore increasingly unrealistic state price controls.

Rising prices have prompted people to hoard some foodstuffs, people in the capital say. Some believe such concerns could undermine support for Assad:

"It seems to me that people are ready to launch another revolution," said a Damascus accountant who uses the name Abu Yahya. "This one will be the bread revolution."

SHRINKING RESERVES

For Faysal Itani, a fellow at the Atlantic Council, a Washington think-tank, shrinking currency reserves and a 75-percent slump in the exchange rate that multiplies the cost of imports put the Syrian government in a very difficult situation.

"It's very safe to say it's dire," said Itani.

"The government essentially can either rely on foreign support, with Iran being the most likely candidate, and printing money. They've done both. There's no way otherwise they could finance spending."

Syrian officials were unavailable to respond to those comments but on Tuesday state television said Damascus had signed "major contracts" with Iran that would cover its needs for food, medical and other supplies.

Backing from Tehran, for whom Assad is a key ally in the Arab world, may help explain Syria's apparent indifference to its series of failed international purchase tenders.

Foreign traders, from firms large and small whose business it is to ship the wheat surpluses of North America and Europe to buyers around the world, speak of puzzlement at conditions Damascus set which put off virtually all would-be sellers.

Among such conditions, notably, have been placing the onus on suppliers to gain access to Syrian funds which have been frozen by sanctions and demanding that suppliers give Syria cash in advance of the sale to guarantee that they will deliver.

"Syria's attempts to buy wheat, rice and other food using frozen funds have not been successful because they are putting the duty of the seller to sort out the payment in their own country," said one commodities trader in Germany.

He added: "The Syrian government is still imposing the same conditions as in normal times on its purchasing conditions with huge penalty payments if conditions are not met.

"The risk is too big for trading houses."

Known as a bid bond, Syria has asked those tendering to sell it cereals to put, say, 1 million euros in cash in a Syrian account in advance. Such a condition is typical from buyers whose business is in demand. It deters traders who are unsure of sourcing the supply and penalizes them if they fail to deliver.

In better times, Syria imposed bid bonds on its suppliers. But for a government whose ability to pay is now in doubt, it has helped put off many firms from even replying on tenders.

BID BOND

One source contacted by Reuters at Hoboob in Damascus defended the condition, saying: "The bid bond that is asked for shouldn't change, this is a normal condition for any tender.

"If traders feel there is an increased risk in dealing with Syria then this should be reflected in their prices not a change of the whole tender terms."

But for the trader in the Emirates, no price could compensate for the risks of delivering rice or wheat to Syrian ports and then finding that it could not be paid for.

"Offering higher prices just doesn't make any sense," he said. "Dealing with them is like someone telling you they will give you a glass of water but then put that glass of water in a dark locked room and you can't get to it."

The government has offered to pay for food with funds held in frozen bank accounts abroad, according to documents reviewed by Reuters and confirmed by trade sources.

European Union and U.S. sanctions do not target food going in to Syria. But they do target some state institutions and, in particular, they are aimed at crippling financial flows, making it very hard for Assad's government to do business in the world.

An analyst who observes the Syrian economy says the government has turned to a small number of private merchants to buy food staples and then sell them to the government at a premium.

But foreign traders said many were reluctant to deal even with private Syrian firms because of concerns about payment.

Some factors may help the government, at least for a while. Above all, refugee outflows mean there are 2 million fewer mouths to feed overall in the country. And huge areas inside Syria are also beyond Assad's control, leaving millions reliant on their resources and disparate rebel movements.

Although that also reduces the government's access to the domestic harvest, the economic analyst said: "The central government saves a tremendous amount of money by splitting Syria in two, three, four parts - where some parts are getting virtually no governance whatsoever."

Itani at the Atlantic Council said that situation could allow Assad's government to prolong its survival: "It just wants to hold on to the basic levers of power.

"They're not interested in economically sustaining the chunk that they don't control - for obvious reasons ... So if they set their aims low enough, they can survive for a long time, printing money, relying on the Iranians, the Russians perhaps.

"I don't see why they can't do it for a long time."

(Additional reporting by a journalist in Damascus, Michael Hogan in Hamburg, Jonathan Saul in London, Gus Trompiz and Valerie Parent in Paris; Writing by Yara Bayoumy; Editing by Alastair Macdonald and Giles Elgood)

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