Syrian regime's human rights abuses and repression of citizens elevates risks for companies

January 2012

The uprisings and protests that have rocked the Arab world have demonstrated the interlocked nature of our global economy.  While the wider world at large has started to feel some of the consequences stemming from the ongoing upheaval, no one knows with any certainty what the long-term impact will be.  The shorter-term impacts on human rights are clear, however, and very significant.  Nowhere is this more evident than in Syria, where a brutal regime has reportedly killed over 5,000 of its citizens.   A report by a UN Human Rights Council panel late last year found that of the approximately 5,000 killed at least 256 were children killed by government forces between mid-March and early November, with some of them tortured to death.

"Torture was applied equally to adults and children," said the report. "Numerous testimonies indicated that boys were subjected to sexual torture in places of detention in front of adult men, and a 2-year-old girl was shot to death just to prevent her from growing up to be a demonstrator.”

The brutal and systematic oppression of the Syrian people has drawn an international response that is liable to have consequences for companies doing business in Syria.  Late last year, the European Union (EU) announced that it will be establishing sanctions against top Syrian government officials. While the U.S. has welcomed the EU decision it has yet to announce sanctions of its own though clearly the longer that violent repression continues the more likely it is that the U.S. will feel forced to act.  The Arab League has placed observers in Syria, which seems to have hindered the level of overt repression but stimulated a renewed level of public protest that has resulted from citizens feeling safer will likely escalate tensions. 

Recently, Arab League observers have complained that Syrian security forces have not been protecting them, prompting the foreign minister of the United Arab Emirates to remark,  "Unfortunately there have been attacks on monitors, especially those from (Gulf) countries, attacks from non-opposition elements."  It is unclear whether the Arab League will continue its efforts past January 19.  A decision to pull out could signal a new round of repression and further elevate the risks.

Global companies face multiple risks associated with conducting business in countries that oppress their citizens or have ties to terror.  Institutional investors are taking these risks more seriously, as a May 2011 IPE article attests.  The article “Geopolitical risk of investments must be taken more seriously” points out that most such risks could have been anticipated.

A significant proportion of western businesses with involvement in countries such as Syria have much to lose. A quick look at IW Financial’s (IWF) global compliance database reveals that one fifth of companies from the 2010 Fortune Global 500 list have current business operations linked to Syria.

While publically traded companies with ties have already been operating within an existing sanctions regime that has existed since 2004, increased instability, government oppression, and the potential for additional sanctions or regime change have significantly elevated the risk profile for companies doing business in Syria.

Syria’s Risk Profile

The risks to businesses operating in Syria, particularly those linked directly with the Syrian government are contractual, operational, and reputational. Contractual risks apply to consequences resulting from breaches of existing or new sanctions as well as risks posed to future business by regime change.  Operational risks apply to current operations that may suffer as a result of instability.  Reputational risks apply to branding, trust, and consumer opinion issues.

Contractual Risk
One company with contractual risk and a large stake in the continuation of the Syrian state is Total.   Total has been present in Syria since 1988, primarily through the Tabiyeh Gas Project and its Deir Ez Zor permit. The Deir Ez Zor license is operated by Deir Ez Zor Petroleum Co. (DEZPC), a 50-50 joint venture with the state-owned Syrian Petroleum Co. TOTAL became involved in the Deir Ez Zor project after acquiring Elf Aquitaine, a French oil company active throughout the Middle East, in 1999. The Tabiyeh Gas Project, a new contract effective as of October 2009, will allow the company to enhance production in the Tabiyeh gas field in Syria. (Company website, 07/2011)

Given the circumstances in Syria, investors in Total face a high level of uncertainty.  What could happen to Total’s joint venture if there is regime change?  Will increased UK sanctions impact Total?  Will sanctions from the U.S. increase?  It is likely that these kinds of questions will continue until the situation in Syria is somehow resolved.

Operational Risk
One example of a business risk is TUI AG, whose their subsidiary, Oft Reisen offers tours to Syria for German travelers. (Oft Reisen website, 01/2010)  Given the current circumstances in Syria, it is hard to see Syrian tourism as a good line of business.

Air France-KLM is another company that faces operational risks in Syria.  As of 2011, Air France offers daily service to Damascus, Syria. According to the Air France website, in 2007 the company increased non-stop flights between Damascus to Paris five times a week on its Airbus 320 aircraft. Air France and KLM Royal Dutch Airlines (KLM) also offer a special service for oil and gas industry professionals called the Petroleum Club. Damascus is listed as part of the Petroleum Club's network of oil destinations. In addition, the Air France website lists an agent, Air France Malki, in Damascus. (Company website, 09/2011)

Together with WAM Acquisition, Lufthansa, and Iberia, Air France–KLM holds an approximate 15 percent ownership stake in Amadeus, a travel services company. (Amadeus Q1 Report, 05/2010; Amadeus Press Release, 04/08/2010) Amadeus Syria, a joint venture with state-owned Syrian Arab Airlines, has offices located in Damascus and Aleppo, where the company has "a dedicated on-ground team who oversee and support our partners across Syria", according to General Manager of Amadeus Syria, Mazen Kokash. Amadeus acts as the exclusive distribution partner for Syria Arab Airlines via a 10-year agreement with the Middle East airline network, Arab Air Carriers Organization, of which Syria Air is a regional member. (Business Intelligence Middle East, 09/02/2009; Amadeus website, 06/2010) That agreement is currently still in place. (Amadeus Second Quarter Report, 2011)

Reputational Risk
One example of a company with potential reputational risk is Blue Coat Systems, Inc.  Various news reports have surfaced that Syrian President Assad’s regime has been using devices manufactured by Blue Coat Systems to intercept internet communications.  This is roughly the equivalent of tapping a phone.  While Blue Coat Systems did not directly ship these devices to Syria, the devices found their way to Syria through a third party distributor who was located in the United Arab Emirates.  Despite the fact that the devices were not directly shipped to Syria from the company, Blue Coat Systems is currently under scrutiny for their equipment’s role in helping to facilitate the current protestor crackdown.  (Washington Post online, 11/17/2011; Wall Street Journal online, 10/29/2011; Company website, 01/11/2012)

The certainty of uncertainty

As long the situation in Syria remains unresolved companies doing business in Syria will face higher levels of risks and uncertainty.  Investors typically don’t like either.

About IW Financial

Established in 2001, IW Financial offers asset managers and institutional investors a broad range of ESG research, analytics, and consulting services designed to help organizations incorporate ESG into their investment process.  Clients rely upon IW Financial for developing or implementing ESG guidelines, interpreting legislative mandates, ESG model and product creation, portfolio customization, and compliance and engagement services.

IWF’s global compliance solutions cover a broad range of corporate involvement factors across a global universe of publicly traded companies incorporating bottom up and top down issue centric research.  Our compliance list solutions address both legislative and values/faith based investment mandates.

For more information on our global compliance solutions contact sashapagella@iwfinancial.com.