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THE CAESAR ACT POTENTIAL IMPACTS ON A SYRIAN ECONOMY IN CRISIS Flash Report 26 June 2020

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EXECUTIVE SUMMARY

Syria is entering one of the most critical, and least predictable, phases since the beginning of the country’s brutal 10-year conflict. While the COVID-19 pandemic, and the 5 March ceasefire agreement in northwestern contributed to an almost unprecedented pause in fighting in recent months, some observers suggest that a piece of US legislation known as the ‘Caesar Act’ could threaten the future stability of Syria’s economy, as well as potentially its government, in a way not seen since the early days of the conflict. And while there are already some indications of early impacts on the Syrian economy as a result of the Caesar Act, which came into force on 17 June, it has proven difficult so far to discern economic problems from before Caesar and after Caesar. The expected impacts from the act may in fact take some time to emerge.

What is the Caesar Act? In December 2019, US President Donald Trump effectively forbids business activity engaging with signed into law the Caesar Syria Civilian key sectors of the Syrian economy (natural gas Protection Act, otherwise known as the ‘Caesar and petroleum production and construction). The Act’.1 Named after a defector who fled Syria in law would level sanctions against anyone who 2013, smuggling out tens of thousands of leaked provides significant support to, or engages in images detailing industrial-level abuse inside the transactions with, the Syria government, in theory Syrian government’s detention facilities, the law exempting both the country’s northwest and recommends “diplomatic and coercive economic northeast, which are currently under the control means...to compel the government of Bashar al- of rival authorities. However, the act is likely to Assad to halt its murderous attacks on the Syrian indirectly impact these territories in a number of people and to support a transition to a ways, and could reconfigure Syria’s economic government in Syria that respects the rule of law, relations with neighboring states (including human rights, and peaceful co-existence with its , itself experiencing a severe economic neighbors.”2 Although the legislation itself is so crisis that is interconnected with Syria’s own). broad as to evade simple characterization, in On 17 June 2020, the first sanctions under the effect it threatens secondary sanctions against Caesar Act came into force, with the US any ‘foreign person’ knowingly engaging with the government imposing a total of 39 designations government of Syria or senior government under the act as well as Executive Order 13894. officials, paramilitary organizations fighting on the side of Damascus and individuals already The US Department of the Treasury imposed under US sanctions with regards to Syria; and sanctions on 24 entities and individuals who “are

Cover image: ‘Damascus from above’ by Pixel whippersnapper, licensed under CC BY-NC 2.0

1 The Caesar Syria Civilian Protection Act was incorporated into a 2 US Congress, ‘H.R.31 - Caesar Syria Civilian Protection Act of 2019,’ larger package of legislation known as the National Defense Au- thorization Act (NDAA) for Fiscal Year 2020 (S1790), ostensibly the U.S. administration's 2020 defense budget.

MERCY CORPS THE CAESAR ACT > 2 actively supporting the corrupt reconstruction allowing illicit economic activity to flourish, efforts of Syrian President Bashar al-Assad.” empowering (often interconnected) armed groups and business networks, and destroying key Additional sanctions announced by the US State agricultural, industrial and civilian infrastructure. Department on 17 June also targeted several The gradual disintegration of the national members of Bashar al-Assad’s inner circle and economy has also been accelerated by wartime leading security officials – many of whom were damage, and whole areas of the country falling already under US and/or EU sanctions. Asma al- outside the control of central government means Assad, wife of President al-Assad, was subjected that increasingly critical sources of income – such to US sanctions for the first time. as grain production in Al-Hasakeh, or oil and gas fields in Deir-ez-Zor – remain in the hands of rival authorities backed by foreign powers. Protectionist policies introduced by the Syrian government in an attempt to shore up the value of the also appear to have failed, and may account for some of the most recent depreciations in its value.4

Celebrated by some Syrians as the best available

The US government has promised there are more route towards justice and accountability after sanctions to come. In a statement announcing the years of egregious rights abuses committed by the sanctions, US Secretary of State Mike Pompeo Syrian government throughout the country's warned: “We will continue this campaign in the uprising and ensuing conflict, others fear that the coming weeks and months to target individuals Caesar Act will either contribute to an all-out and businesses that support the Assad regime collapse of the Syrian economy, or will negatively and obstruct a peaceful, political resolution of the affect ordinary Syrians.

3 conflict.” And yet, the Syrian economy's vital signs were

Pro-government media outlets and government already suffering immediately before the Caesar officials in Damascus routinely blame Syria’s Act came into force. economic woes on previous sanctions which have On 8 June, the fell to its lowest-ever been imposed by the US and other western value – over 3,000 SYP per USD, a fall of nearly countries since 2011. This is, of course, a gross 50% compared with just days earlier – further simplification of realities on the ground. The ratcheting up food prices, inflation and poverty Syrian government has undoubtedly played a rates. Shop closures, strikes, street protests and significant role in Syria’s economic collapse, by growing criticism online all point to growing

3 US Department of State, ‘Syria Caesar Act Designations.’ June 2020 4 For more information see: Humanitarian Access Team, ‘Govern- ment of Syria responses to the financial crisis.’ May 2020

MERCY CORPS THE CAESAR ACT > 3 disquiet about deteriorating conditions across rise, basic items (including medicine) disappear the country. Meanwhile, competing authorities in from the shelves, and families inch closer to food control of northwest and northeast Syria are insecurity and absolute poverty. already attempting to isolate themselves from a Concerns within government-held areas appear collapsing Syrian pound, further entrenching firmly fixed on the now: nobody seems to know territorial divides – this time, along economic what comes next. It is therefore vital to examine lines – in the process. Ordinary Syrians are the state of Syria’s economy and to begin trying to bracing for what could be the toughest period yet discern the current, and coming, impacts of the for government-held Syria as prices continue to Caesar Act. Current Economic Trends and Potential Impacts

1. Syrian pound collapses to record lows

The Syrian economy has been rocked by There are already suggestions that recent record unprecedented falls in the value of the Syrian falls in the value of the pound were tied to the pound, which dropped by nearly 50% (to around looming implementation of the Caesar Act before 3,100 SYP per USD) compared with 4 June, the 17 June – something that James Jeffrey, the US previous week, when its value remained around administration’s lead Syria diplomat, claimed 2,000 SYP per USD. This followed another fall from during a virtual town hall event with Syrian around 1,000 SYP per USD at the beginning of the activists recently, stating that the Caesar Act had year. already had a hand in devaluing the pound.5

The pound crisis is not new. Poorly managed monetary policy over the past decade has left Syria’s Central Bank almost completely empty of foreign cash reserves. An initial, not insignificant, decline in the pound began late last year – around the time Congress passed the sanctions – dropping from 670 SYP to more than 1,200 SYP per By 15 June, the Syrian pound gained back some USD. Lebanon’s concurrent economic crisis was value, and is now hovering under the previously also gathering speed at the time, and the COVID- unprecedented level of 3,000 SYP per USD. 19 pandemic has taken its toll on the Syrian However, ongoing economic instability could economy since. However, it was a widely easily change that. publicized spat between Assad’s presidential palace and Syrian tycoon (and cousin to Assad)

5 Asharq al-Awsat, ‘US official: Our sanctions contributed to the de- terioration of the lira,’ 9 June 2020,

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Rami Makhlouf, which broke out in public in May, withdrawal limits and the also that sent the Syrian pound further into a tailspin. depreciated, those deposits lost value themselves. 7,8 As the Lebanese crisis continues, Despite some minor improvements to the value of Lebanon may seek to distance itself from a Syrian the pound earlier in the year, it appears that economic collapse to protect its own access to protectionist policies by the central government – dollars, and attract International Monetary Fund including restrictions on import licenses and support. crackdowns on the black market – have failed to stave off an accelerating collapse. Imad Khamis, Syrian prime minister at the time, told the People’s Assembly on 9 June that between 2017 and 2020, the government had expended some $20 billion in attempts to stabilize the pound against the dollar, adding that Syria is looking for a loan from Russia as a result.6 Although Khamis did not elaborate on what basis this amount was calculated, some observers have taken the stated With regional ties becoming more unstable, and numbers as explanation for the more rapid within Syria, whole areas of the country falling out depreciation in the past week. Assad later sacked of central government’s control after 2012, key Khamis, on 12 June, in a likely attempt to absorb sources of income – grain production across public discontent over the economy, and also northeastern Syria, and fuel exports from the remove an official who has been prone to making Deir-ez-Zor oil and gas fields being just two unhelpful statements at a time when the vast examples – remain in the hands of rival majority of Syrians are suffering. authorities backed by foreign powers. While this reality complicated Syria’s economic prospects External factors have made government attempts during the past decade of conflict, it will only at stabilization all the more difficult. The become more deleterious once the government concurrent collapse of Lebanese currency and struggles to secure key imports such as grain, fuel banks, which have long served as Syria’s lifeline and medical supplies. Rival authorities have to the international financial system, saw already introduced measures to isolate Lebanese banks restrict access to dollar holdings themselves from the Syrian pound. So far, the – including some $30 billion in Syrian deposits Syrian government has been unable to ordinarily used for financing imports. As many as consistently make up for shortfalls through 80% of Syrians reportedly store money in imports via Iran and Russia, and the Caesar Act Lebanon – as Lebanese banks introduced

6 Syrian Arab Republic Prime Ministry, ‘The economic situation and 7 Financial Times, ‘Turmoil in Lebanon is hurting Syria’ 27 Novem- the reality of living, under the dome of the council ...Sabbagh: Fol- ber 2019 low-up on citizens’ cases...Engineer Khamis: Self-reliance to over- 8 Syria Direct, ‘Syrian pound plummets to new low as policies fail to come hostile measures against our country’, 7 June 2020, stop freefall’, 3 June 2020,

MERCY CORPS THE CAESAR ACT > 5 could make securing those same imports more remittances transferred from abroad to get by.9 difficult. If Syria is unable to rely on imports from Rising food prices and inflation could see more Lebanon, its key economic partner, it may be goods disappear from markets, forcing yet more forced to engage more with northeastern Syria. Syrians further into food insecurity. There are already reports of shortages of medical supplies At the same time, some of the Syrian in pharmacies, as suppliers struggle to import government’s measures could prove to be self- necessary materials to produce drugs locally. defeating. Crackdowns against money transfer offices have continued. Such closures were One of the biggest questions surrounding the reported in several government-held areas Caesar Act is just what impact it will have on the including Damascus city, the Damascus Syrian economy, particularly because the act itself countryside and Homs, where authorities arrested is so broad in scope.10 At present, concerns within 15 currency merchants. While the Syrian government-held areas appear firmly fixed on the government seeks to get its hands on all available now: rising prices, the ever-dwindling purchasing dollars, any ongoing crackdown on informal power of salaries, and shop closures. Nobody money transfers (known as hawalas) will hit seems to know what comes next. But ordinary ordinary Syrians hardest, many of whom rely on Syrians know they stand to lose the most.

2. Protests in government-held Syria point to growing popular discontent over deteriorating socio-economic conditions

Protesters have taken to the streets in several increase as food prices increase and goods Syrian cities in response to the rapid depreciation disappear from local markets altogether. of the Syrian pound as well as a broader The largest protests were seen in As-Sweida city, deterioration in socio-economic conditions provincial capital of Syria’s southern Druze across government-held Syria. Well over 80% of majority province. As-Sweida has seen protests Syrians already live under the poverty line, and before – including small socio-economic protests further drops in the value of the pound will impact in As-Sweida city in May 2020, and another uptick millions of people’s purchasing power and access in socio-economic protests at the beginning of to even basic commodities. According to the UN’s 2020 – but the size and scope of the latest World Food Programme (WFP), 9.3 million people protests are uncommon in the region. across Syria are food insecure, a number that will Demonstrators chanted songs associated with Syria’s 2011 uprising and even directly called for

9 Family networks also use these remittances to support friends or For more information, see: Tom Rollins, “‘Poverty everywhere’: Pal- relatives experiencing dire economic hardship as a result of the estinians in Syria living in desperate conditions,” Middle East Eye, broader economic downturn. For example, a Palestinian-Syrian 20 February 2020, family, some of whom were displaced to Europe, used transfers to 10 War on the Rocks, ‘Will more Syria sanctions hurt the very civil- support a former neighbour after she was forced onto the streets. ians they aim to protect?’ 10 June 2020.

MERCY CORPS THE CAESAR ACT > 6 the overthrow of Assad, prompting several As-Sweida’s special ethnic-sectarian, social and messages of solidarity and unity from demos in political conditions allow for greater room for formerly opposition-held Tafas in Dar’a province protests compared with other government-held as well as rebel-held towns in the northwestern areas of the country, as it has managed to forge province of Idleb. for itself something of a ‘third way’ throughout the post-2011 uprising and conflict. As-Sweida’s There were also reports of smaller historical quasi-autonomy from central demonstrations on 8 June within areas of government in Damascus has meant that neither Damascus that have never fallen out of the government nor opposition forces have ever government’s hands throughout Syria’s conflict – exerted direct control over the province, and local including Jaramana in southeastern Damascus, armed groups and political structures have Domar, to the west of the capital, and Zakia in the sought to maintain some degree of independence Damascus countryside. Counter-protests in from Damascus since 2011. The Syrian support of Assad were reported in Tartous, Latakia government’s intelligence agencies and security province on 8 June, and in As-Sweida city itself on branches do not enjoy the same levels of 10 June. penetration into society in As-Sweida that they do Many of the areas where protests occurred can be in other nominally government-held areas. Even described as under ‘nominal government control’, so, the Syrian government has attempted to largely because they maintain some degree of gradually reassert control for some time now.11 autonomy from central government. While the explicitly political demands raised at the As- Sweida protests are rarely heard in public in government-held Syria, the fact that demonstrators singled out Assad is relatively unprecedented. Generally, those looking to publicly criticize government policy go to great efforts to make overtures towards the president, On 9 June, authorities arrested civil activist Raed focusing their criticism instead on local or lower- al-Khateeb, who participated in several recent level officials who may be held accountable by the protests in As-Sweida.12 This arrest fits with a presidential palace in the face of rising public broader trend of targeted government responses anger (the latest example being former prime aimed at quelling dissent in recent months, minister Khamis.). including arrests against individuals (including citizen journalists) as well as piecemeal

11 These attempts include co-opting Druze religious and political fully fledged militias) to assert control, target perceived rivals and structures, and using allies on the ground to recruit into pro-gov- sow discord – likely with a view to later capitalise on unrest. ernment armed or intelligence groups. Government security agen- 12 Al-Khateeb remains in detention at the time of writing. cies, and Hezbollah, have used proxies (family-based armed for- mations, criminal gangs recruited from local Bedouin tribes and

MERCY CORPS THE CAESAR ACT > 7 legislation designed to muzzle particular sections explicitly anti-government (the Sheikh of Dignity of the population.13 The following day, a group of Movement or the recently disbanded group, plainclothes men said to be from the security Single Artery) could play an intermediary, or more services attempted to abduct Ruwad Sadiq, active, role should the Syrian government another anti-Assad activist, although local escalate and seek to silence protests. In the past, shopkeepers reportedly intervened to protect groups like Rijaal al-Karama have intervened in Sadiq.14 On 15 June, another anti-government arrests carried out by the Syrian government, and protest in the center of Sweida was set upon by a clashed with Hezbollah-backed formations. counter-protest in support of Asssad; scuffles and However, the longer the Syrian government is fistfights broke out, before demonstrators unable to stabilize the Syrian pound, or fend off scattered. Authorities reportedly arrested several public anger by alleviating negative socio- demonstrators afterwards. economic conditions, there is greater risk of It remains unclear how the Syrian government will protracted protest movements both in As-Sweida respond should protests continue. The trajectory and around the country and, if that happens, of protests will act as a gauge of just how escalating responses from the security apparatus. autonomous As-Sweida still is from central In the south, General Intelligence and Military government, both in terms of Druze religious and Security would be likely candidates to oversee political structures as well as security actors. that response.15 The security agencies responsible Smaller groups that either identify as positively would largely depend on the geography (province, neutral (the Rijaal al-Karama Movement) or more city, neighborhood) where protests occurred.

3. Internal borders of rival territorial control hardened along economic lines

Rival authorities in differing areas of territorial or engage in transactions with the government of control are already introducing measures to isolate Syria, a hardening of internal borders between their local economies from the Syrian pound – the government-held areas and different territorial hope being that these policies can stave off the zones could occur and have longstanding economic worst of the expected economic implosion and – but also political and security – aftershocks. The threat of sanctions. This is solidifying territorial act will also separate Syrians from the diaspora, divisions within Syria; because the Caesar Act ibna’ al-dakhil and ibna’ al-kharij,16 by creating a theoretically only applies to individuals who support

13 Recent regulations included restrictions on the work of photogra- 15 General Intelligence chief Hussam Louqa heads the security com- phers, a ban on certain social media posts, and the arrest of sev- mittee for the south of Syria, while the Military Security branch is eral managers of local news pages on Facebook. In May, Syria’s Bar generally regarded as the most influential branch in the south. Mili- Association also announced its intention to monitor social media tary Security is said to enjoy good relations with Hezbollah. posts by lawyers, threatening to hold accountable those posting 16 Kheder Khaddour, Twitter, 10 June, 2020, https://bit.ly/3cVRdbU material that the association deemed unacceptable. ,!بين ساحتي المحافظة والفخار، أخر التطورات في السويداء ؟ (Suwayda24, ( 14 10 June 2020,

MERCY CORPS THE CAESAR ACT > 8 divide between those living with the Caesar Act’s the for small and medium-scale consequences and those outside the country. transactions, and the dollar for larger business transactions. The Turkish Post Office With economic pressures growing, in early June subsequently flooded the Aleppo countryside separate authorities began a bidding war over the with Turkish currency in the form of coinage. On purchasing prices for wheat produced in 11 June, the Syrian Interim Government, which northeastern Syria, in an attempt to coax wheat supports local councils in these areas, announced farmers to supply their regions. The Syrian it was intensifying meetings with Turkish officials government aimed to offer better prices and to preserve savings of citizens residing in the encourage farmers in northeastern Syria to northwest along with other measures to be deposit produce at its own cereal reception announced later. centers, motivated by its struggle to reliably source grain through Russia in recent months. Amid the bidding war, on 6 June, the Kurdish-led self-administration in the northeast forbade sales of grain to other regions of the country, ostensibly banning sales to competing authorities within

Syria. Then on 7 June, the self-administration fixed wheat prices to the dollar in an attempt to avoid fluctuations as a result of the depreciating pound. Also on 14 June, the HTS-affiliated Syrian Salvation Altogether this means that, at present, the Syrian Government (SSG) announced it would follow suit government does not have guaranteed sources by permitting use of Turkish lira for transactions for bread – a crucial staple for the population – in Idleb governorate. The price of bread is now set heading towards winter. It cannot be discounted according to the Turkish lira, while SSG employees that the self-administration may be using this will also be paid in lira. Authorities at the Bab al- monopoly over the wheat trade as a future Hawa crossing between Idleb and lifted bargaining tool in ongoing negotiations with customs duties Turkish imports of wheat and Damascus. This ploy could yield results if Lebanon flour, likely in an attempt to encourage Turkish attempts to distance itself from Syria exports, stabilise fluctuations in bread prices and economically, forcing Damascus towards alleviate the risk of bread shortages in the future. northeastern Syria to offset economic shortfalls. Other measures to alleviate economic burdens on civilians in these areas included supplying Authorities in northwestern Syria are turning to bakeries with flour and wheat at reduced prices, the Turkish lira to isolate opposition-held regions while authorities distributed cash and from the Syrian pound and integrate even more humanitarian assistance baskets to some of the with the Turkish economy. On 8 June, local poorest families in cooperation with councils in Azaz and Marea (in the Aleppo humanitarian organizations. countryside) announced they would begin using

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Attempts by competing authorities to isolate their motivated by economic and political factors, but local economies from the Syrian pound, and also humanitarian factors. deteriorating economic indicators in government- Should Damascus struggle to supply basic held areas, will reflexively damage the value of commodities in areas under its control, hardening the pound in government-held Syria further by internal borders will see an explosion in cross- decreasing demand and cross-line trade. line smuggling and illicit economic activities. A Even though the Caesar Act only applies to way to offset shortfalls in supply, smuggling will individuals and entities supporting the also help government-affiliated business government of Syria, local authorities in non- individuals and entities to better evade future government held areas are working to avert any sanctions that may be issued under the auspices future risk from the sanctions. The self- of the Caesar Act. However, further down the line, administration has already taken steps to, in its expanded use of smuggling creates greater risk of own words, avert this risk.17,18 There is some conflict, particularly among pro-government consensus that northeastern Syria’s local militias, war economy networks and tribes economy is already more dollarized, and so will engaged in smuggling activities, as various actors likely cope better with pound fluctuations. Even move to control smuggling revenues. That so, trade will be immediately impacted as dynamic will only be compounded if new actors business figures or businesses facilitating cross- attempt to enter these markets. Post-conflict line trade with government-held areas would be contexts in government-held areas have already liable for sanctions. In the northwest, meanwhile, witnessed similar clashes, but they will only millions of original residents and displaced increase in frequency and intensity if both Syrians are at risk of food insecurity meaning that competition and demand increase. currency changes by local authorities there are

Current Economic Trends and Potential Impact by Region

Syrian government well as longstanding sanctions, nobody is quite sure how yet. Prices on basic commodities and Government-held Syria was already years into a inflation have continued to rise, workers’ salaries multi-faceted economic crisis before President have only become weaker, and reports suggest Trump signed the Caesar Act into law late last goods (including, crucially, medicine) are already year. Although the act is widely expected to have disappearing from shelves. These basic indicators major, far-reaching impacts on the Syrian will deteriorate further after 17 June, leading to economy, compounding the current situation as greater food insecurity and poverty rates. There

17 Al-Monitor, ‘Sanctions on Syrian government also threaten Wash- 18 On 8 June, the self-administration formed an economic crisis unit ington's Kurdish allies,’, 9 June 2020, comprising senior administration figures as well as economic ex- perts, with the stated aim of supporting public sector workers and averting risk from anticipated sanctions.

MERCY CORPS THE CAESAR ACT > 10 are signs that economic pessimism was already residing in the area through rising unemployment increasing prior to the implementation of the act rates and shortages of basic materials including on 17 June, which may go some way to explaining fuel and medical supplies. If prices continue to some of the recent rapid falls in the value of the rise, humanitarian organizations may be forced to pound, although it is difficult to discern concrete introduce ‘austerity’ measures to adjust finances economic impacts given the fact the Syrian pound for projects already underway before the Caesar has been in tailspin for several months now. Act came into force. Civilians in the northwest are the most food insecure compared with any other Northwest area of the country, meaning even small price Despite the Caesar Act not being applicable there, fluctuations will have large impacts. The Caesar northwestern Syria has already witnessed a Act may ultimately impact northwest Syria by number of significant economic changes, as contributing to the destabilization of the pound opposition-affiliated authorities in Aleppo and reducing trade. province and HTS-affiliated authorities in Idleb province braced for 17 June. These moves to Northeast further integrate with the Turkish economy have Despite the Caesar Act not being applicable there, already seen Turkish cash and coin currency flood authorities in northeastern Syria have introduced markets in the northwest, with authorities setting a series of significant economic measures in commodities’ prices according to the Turkish lira, preparation for 17 June. Attempts to isolate the lifting customs duties, and paying public sector local economy from the Syrian pound have so far employees in the lira. In Aleppo, exchange rates not succeeded in slowing price hikes for basic remain unstable, and there is currently no commodities. In Al-Hasakah, for example, prices regulatory body tasked with controlling prices. for bread and amperes for electricity generators Meanwhile in Idleb, measures to alleviate doubled when compared with previous weeks, economic burdens on civilians may not keep up while in Ar-Raqqa the price of fruit and vegetables with rising prices for food, fuel and other items. has increased by 50%. Economic uncertainty While it may be too early to adequately assess the resulted in shop closures and strikes in some impacts of these measures, any further areas. Although humanitarian agencies do not deterioration in the Syrian pound risks appear to have altered programming as a result destabilizing the local economy, which could have of recent economic instability, fluctuations in serious impacts on the lives of millions of civilians prices could impact their local supply chain.

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CONTACT

Nicholas Bodanac Humanitarian Access Team [email protected]

The Humanitarian Access Team (HAT) was estab- lished in Beirut in March 2015 in response to the collective challenges facing the remote humani- tarian response in Syria. Successful humanitarian and development interventions require a nuanced and objective understanding of the human ecosys- tems in which these interventions occur. To this end, the HAT’s most important function is to col- lect, triangulate, synthesize, analyze and opera- tionalize disparate data and information. Since 2015, HAT analysis has provided a forward-looking template for international interventions in Syria, and facilitated an increasingly nimble, adaptive, integrated, and ultimately impactful international response to the Syrian conflict.

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