In from the cold: Assad’s diplomatic redemption

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Speed slow 135 gigabytes of network busy taxes and fees extra. See mintmobile.com. Hello, and welcome to the Intelligence from the Economist. I'm Ora Ogunbi.

And I'm Jason Palmer. Every weekday we provide a fresh perspective on the events shaping your world. For largely historical reasons, America has just piles of different banks, more than 4,000 of them. But that number is shrinking, particularly among small community banks that fit their small communities far better than the big players do.

And have you ever heard of UK Chak Trang or volleyball, but played with your feet? Or the martial art Kon Khmer? These are just some of the niche sports that have been introduced to this year's Southeast Asian Games. And the host country has a good reason why. But first, Tomorrow the Arab League will meet in Saudi Arabia for a regional summit that even its own members snub from time to time. In 2016, when Morocco was scheduled to host a meeting, it decided not to bother, calling the event a waste of time. And last year, Mohammed bin Salman, the Saudi crown prince, procured a doctor's note to skip the gathering in Algeria altogether. But there's one man who is more than happy to attend the sit down in Jeddah. Bashar Al Assad. Syria was suspended from the Arab League in 2011 when the dictator began his brutal crackdown on dissent, which ended up escalating into a bloody civil war. What's changed in the country since then? More than half a million people have been killed and many more displaced. But that hasn't stopped the Arab league from welcoming Mr. Assad back into the fold this month. It seems that after 12 years of bloodshed, one of the 21st century's worst war criminals is making a comeback.

The Arab League tends to be a club of ruthless dictators, but even by its own standards, Bashar Al Assad stands out.

Greg Karlstrom writes about the Middle east for the Economist.

He plunged the country into civil war starting in 2011 to preserve his grip on power. Displaced half the Syrian population, wrecked the Syrian economy, and even after winning that war, has shown no concessions toward political reform or accountability for war crimes. He's also openly antagonized some of his Arab neighbors by flooding the region with illicit drugs and by building very close ties with Iran, which is an arch rival to some Arab states. And yet, despite all of that, he's managed to work his way back into the region's diplomatic club.

What made the Arab League change its tune?

One reason for it is this broader spirit of detente in the region. Over the past few months, you had Saudi Arabia and Iran making a deal in March to re establish diplomatic ties after a seven year rupture. Turkey and Egypt, which fell out ten years ago, are also trying to end their animosity. The blockade of Qatar, which was imposed in 2017, that was ended after several unsuccessful years. So everywhere you look in the Middle east these days, you have old foes who are still really foes, pretending that they are now friends. When it comes to Syria, though, there's also something that many of its Arab neighbors hope to get in return for allowing it back into the diplomatic fold.

Like what? What are they hoping to get in return from Syria?

I would point to three things in particular. The first is Syrian refugees, which are seen as a burden in some of the countries that host them. And most of the almost 6 million Syrian refugees are hosted in neighboring countries. So you have Lebanon, where there are about 2 million or so. The country is going through a profound economic crisis right now, and Syrians are often scapegoated for the crisis. The Lebanese government would like them gone. Something similar in Turkey, which of course not a member of the Arab League or an Arab state, But it is pursuing its own reconciliation with the Assad regime now in the hope of being able to send Syrian refugees home. The second thing is Iran. There is a hope, I think a misguided hope in some Arab countries that by having closer ties with Syria, it can convince the regime to distance itself from Iran, which provided, of course, years and years of military support to help Bashar Al Assad survive the civil war. And then the final thing has to do with Captagon, the illicit drug which Syria has now become the world's leading producer of. And it has flooded countries, particularly in the Gulf. This is a problem that the regime has created, and it's a problem that Gulf states now hope that they might be able to solve by restoring ties with the regime.

And Greg, do you think Syria's neighbors will be successful in getting what they want?

I wouldn't be very optimistic. When you talk to Syrian refugees, when you look at surveys that are conducted by aid organizations. What you consistently hear is that they don't want to go home to a country that is still ruled over by an unrepentant Assad regime and where the economy has been ravaged by more than a decade of war. And so I think the idea that they might voluntarily be convinced to go home is a fanciful one. When it comes to Iran, the Assad regime has maintained almost half a century of ties with the clerical regime in Tehran. It's a very important relationship for the Syrian government. And I find it very hard to imagine Bashar al Assad would turn around and kick out the very Iranian forces that helped keep him in power. I think the one place where they might get something is when it comes to drugs. The day after Syria was readmitted to the Arab League, there were reports that a leading Syrian drug smuggler had been killed in what was supposedly a Jordanian airstrike in southern Syria. That seemed like a sort of goodwill gesture to the regime, offering up a well known drug smuggler to show that it was going to change policy somewhat when it came to captagon. But it's a small gesture. This wasn't destroying the main production facilities, beefing up border security to prevent drugs from getting into Arab countries. This was offering up one man as a sort of sacrifice.

Okay, so that's what the other Arab states might be able to get out of this. But what does this mean for Mr. Assad?

The first and most obvious thing that he gains is political and diplomatic legitimacy. He has now re established bilateral ties with most of the countries in the Arab world. He is expected to go to Saudi Arabia on Friday for the annual Arab League summit and speak there like any other head of state. So he has ended now his isolation in the Arab world. That's the first step, he hopes from there to perhaps chip away at his diplomatic isolation in the west as well. But the bigger goal in all of this is money investment. Syria has been destroyed by a decade of war. It is under American sanctions and European sanctions. It talks about looking elsewhere for help with reconstruction and investment, turning to countries like Russia, Iran, China. They have proved either incapable or unwilling of providing much money to the Syrian government. And so it is starved for cash to try and rebuild and to try and ameliorate what is a very profound socioeconomic crisis inside Syria right now. And he's hoping that by entering into the Arab League, that might open the possibility at least of attracting investment from countries like the wealthy Gulf states.

And Greg, you mentioned the potential for reconciliation with the west. Is that realistic given just how brutal Mr. Assad's regime has been in the short term?

I don't think it is. There is very little support in America for reconciliation with the regime, for lifting sanctions on the regime. Similarly, in Europe, the European Union has been able to keep a very tough line, even though you do have a few countries in Europe that would be keen to restore ties with the regime in the hope of perhaps being able to send home Syrian refugees. That being said, I think there is a recognition certainly in America that they are not going to get in the way of Arab states restoring ties. They have given what one Arab diplomat described to me as a yellow light to reach out to the regime. So they are allowed to pursue ties. They are allowed to invite Syria back to the Arab League. America is not going to make a big deal, public fuss about that. But the message they got from the Americans was try to get something out of it. Don't just give Syria a political win in exchange for nothing. That does raise a bigger question going forward though, which is if these diplomatic relations grow into economic relationship, if there are countries in the Gulf or elsewhere that are keen to invest or do business in Syria, which again is under Western sanctions, it creates a difficult question for America in particular of whether to continue to enforce those sanctions or not.

And what's your view? Should they continue to enforce these sanctions?

You can see the argument against lifting sanctions, which is, apart from it being morally unsavory, it sets a very bad precedent for regimes everywhere that if you simply hold on long enough, you can find a way to outlast sanctions and be welcomed back into the fold. That being said, the point of sanctions is to drive political change. It's not to impose economic pain. That's meant to be a means to an end. And I think it's very clear now in Syria that sanctions are not going to drive political change, in part because the bad actors that are meant to be punished are not suffering. They're doing quite well from looting the country and selling drugs. And so the impact of these sanctions is falling predominantly on ordinary Syrians who desperately need the country to be rebuilt, the infrastructure to be repaired. And so I think there's a very strong argument to say that these sanctions have outlive their usefulness and really need to be rethought, which carries a very sad lesson, which is that no matter how awful, how blood soaked you are, you can eventually find a road to diplomatic redemption. If you create enough problems for enough people, eventually they have to come talk to you to Find a solution.

Greg, thank you for joining us.

Thank you.

Recently I visited Abacus bank, founded almost 40 years ago to give residential and commercial real estate loans to new immigrants.

John Fasman covers American business and society for the Economist.

The bank's headquarters are in the heart of Manhattan's Chinatown. When I visited on a weekday afternoon, it was pretty empty. There was one customer conducting a transaction in Shanghainese. Abacus has branches in Chinese neighborhoods in three of New York's five boroughs. Tellers speak multiple Chinese languages to suit the needs of immigrants arriving from all over China. The bank's current director, Jill Sung, told me that Abacus stays in business by providing services. The Chinese American community, particularly newer arrivals, needs things like safe deposit boxes.

Like, all these immigrants may not have a stable place to live necessarily because they have to move around to job to job. So they would use their safe deposit box as a place to store their valuable items, like their id, their passbook.

Critics of these small community banks, typically defined as having less than $10 billion in assets, say they're inefficient relics. Others worry about their future if more banks get caught up in the crisis that began with Silicon Valley Bank. But as I found in my visits to Abacus and another community bank that serves rural areas and small towns in upstate New York, community banks fill a niche that their bigger peers don't.

So are there a lot of small banks like Abacus in America?

There are. Particularly compared to other countries. There are in total around 4,100American banks. And almost all of those around 97% of them are small banks. And they are really, really small. Despite their vast number, they hold less than 14% of all assets and deposits. And detractors of community banks get one thing right. They really are an artifact of history. America has long had a preference for local community banking and a suspicion of big banks. And it wasn't until 1994, if you can believe it, banks were actually allowed to cross state lines. So these banks are tiny. There are lots of them, and they're an integral part of American financial history.

And even now, there's a lot more of them than, as you say, in other countries.

Yeah. So in Britain, for instance, where you are, there are 325 banks. There are about 80 banks in Canada. So America's numbers are way, way, way more than their peers. But compared to their historical numbers, right now America has relatively few banks. In 1921, America had more than 30,000 banks, and as recently as 1984, it had almost 15,000. Now, what's happened since then are two things really. You've had mergers that have driven down numbers. You've had some bank failures in the wake of the savings and loan crisis in the 80s and the financial crisis in the aughts. But America still has way more banks than its peer countries.

And you say that these small banks offer something that the large banks don't. What do you mean by that?

Well, what they offer is a really, really strong focus on the community they serve. So I mentioned that I went to see another bank in upstate New York. This was in Canandaiga, which is a little town in the Finger Lakes about five hours north of Manhattan. I met the lending director for the bank. He told me that he and his team, when someone applies for a loan, they go to visit the site and they decide whether to grant loan applications not just on hard numbers, but also on other factors. What's the site like? What's the person like? What does the community need? Jill Sung at Abacus told me that they provide services like passbook savings which require actual tellers. That's really labor intensive. And most big banks just don't find that profitable.

The economics is not there, the efficiency is not there. I mean, a lot of the banks now are trying to move to ATM machines instead of a teller because the cost of employees, the labor laws, all that is very, very high.

Advocates also lends to recent immigrants trying to buy their first home or trying to buy a multiple family dwelling. Bigger banks may reject those applicants as too high risk. It may not fit their algorithms. But these are the sort of bread and butter for smaller banks and nobody else really does that sort of thing. A report from the fdic, which is an American banking regulator, said that community banks account for an outsized proportion of small business loans and agricultural loans. These are things that take a lot of time to look into and that big banks might just not be interested in.

And we've been talking a lot lately on the show about how healthy or otherwise America's banking sector is. Where do these smaller banks figure in? Are they subject to the same kinds of risks?

Well, so far most of the trouble has been at mid sized regional lenders like Silicon Valley bank or Signature bank or First Republic, not the really, really small ones that I've been writing about. Community banks haven't been as susceptible to these sorts of problems because they have a different business model. They rely a lot more heavily on interest from loans for their revenue rather than fees from investment banking or wealth management or deposit fees. So that means they have less volatility and greater earnings pressure when interest rates fall. Now, that's the opposite of what's been happening places like Silicon Valley and Signature bank, which face pressure from rising interest rates.

But based on what you've been saying, there are still big consequences in those communities that these banks serve.

Well, regulators are less worried about community banks because if some of them fail, they're generally too small to pose much systemic risk. That doesn't mean that there aren't consequences if a small bank fails. There's a great paper I read from the Philadelphia Fed that said that when a community bank is acquired, there's an overall loss in business loans and in the area that the acquirer once served. And so what might happen if a community bank fails is that you'll have people, small businesses, farms, unable or less able to get the loans they need to run their business. So while trouble in the world of community banks might not herald the next financial crisis, their decline might make things really tough for America's homeowners and small businesses in the areas that they serve.

Thanks very much for joining us, John.

Jason, it's great to be back.

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Last night was the closing ceremony of the Southeast Asian Games. For the first time ever, the Games were hosted by Cambodia. You might not have heard about the Southeast Asian Games or the Sea Games as they're otherwise known. The competition isn't talked about much outside of the region, but if we go by medal count, it's arguably the world's biggest sporting event. There are over 580 up for grabs. That's nearly double the number of medals won at the last Olympics. But what are all these medals for?

In many ways, the Sea Games are similar to other big tournaments.

Vishnu Padmanabhan is a news editor at the Economist.

Athletes from all over the region come together to compete on the track, on the field, and the pool. But many of the sports they compete in, they can seem very niche.

Niche how? Tell us a bit more about these less traditional disciplines.

So there's sports like Sepak Takro, which is a Southeast Asian version of volleyball, except you use your feet and not your hands. Then there's Phuke Chatrang, which is a Cambodian version of chess.

Okay, Vishnu, I can barely hear anything. That doesn't sound like much of a sport to me.

Yeah, there are many more interesting sports that were featured in these Sea Games, including obstacle racing, dance, and even esports or video games. And this inclusion of niche sports is a tradition at the Sea Games.

Okay, so there's a range of slightly niche sports. Is there any reason for that?

Yes. Part of this reflects the fact that there are many traditional sports in the region that are very popular, such as Sepak Tatra. But the bigger reason is that the hosts of the Games can decide what sports to include. So in some cases, they may choose events as a way to develop the sport in a region. So one example of this would be the inclusion of cricket, which is barely played in the region, but was featured in these games for only the second time. It was included partly because the Cambodian cricket body felt including cricket in the Sea Games would help develop the sport in the country and the region. But in most cases, the inclusion of niche sports is explained by a simpler, more strategic reason. It allows the host to win more medals. The logic being that the easiest way to boost medal count is to hold events for which there is little or no competition.

I see. And was that the case in this latest competition? Is that what Cambodia was trying to do?

Yes, definitely. So at this edition, Cambodia has included some sports that are unique to Cambodia, such as Khulba Kator, a martial art. It has also been strategic in the sports it has not selected. So, for example, bodybuilding was dropped from this edition because Cambodia faced an athlete shortage as two of the most famous bodybuilders had been banned for drug use. So they just dropped the entire event.

And did this clever strategy work for Cambodia?

Yes, hugely. At the last Games in 2021 in Vietnam, Cambodia only won 63 medals. This time, it has won 282. In any sporting event, hosts enjoy some benefits, but hosts of the Sea Games really experience a huge bump. So, for example, when the Philippines hosted the Games in 2019, it was crowned the overall champion with 387 medals, thanks in part to the inclusion of baseball and other Filipino pastimes. But at the next edition In Vietnam in 2021, these sports were no longer included and the Philippines won just 226 medals. So such manipulation can boost medal counts, but in the long run, it can also have adverse effects. For example, it could hurt the broader sporting ambitions of the region.

And why is that?

So the Sea Games are held every two years to help athletes prepare for the Olympics and the Asian Games, which is the bigger continental tournament. But when resources are put towards these more offbeat events, mainstream sports can suffer. And this is reflected in the performance of Southeast Asian countries in these bigger events. For example, in the last Olympics, Southeast Asian countries only won 13 medals between them. There's another cost. Tinkering with the lineup can also hinder the other stated goal of the Games, which is to promote regional unity. At these Games, Thailand was incensed that the kickboxing event was given a Cambodian name, Khul Khmer, instead of being called Muay Thai. So in response, Thai kickboxers boycotted the Games and the episode just aggravated a regional rivalry.

But Vishnu, would you say that for the host country, this is all worth it if it means winning lots and lots of medals?

Yes, to an extent, because winning lots of medals plays well to the home crowd. So Cambodia finished fourth this year in the medals table. Last time it came eighth. So that can be good for domestic politics, especially for authoritarian regimes such as Cambodia. Its strongman, Hun Sen has spent lavishly on hosting these Games. It's the first time Cambodia has hosted the Sea Games. China has helped as well by financing a brand new stadium. Tickets were given for free. And this is a stark contrast to what happened last time. Cambodia were meant to host the Sea Games in 1965, and they had to withdraw from hosting it because of political unrest. And so, after decades of such strife and war, Cambodia has had an opportunity to show off its progress. And that's what it's done.

Vishnu, thank you so much for your time.

Thank you. Thank you for having me.

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