Political unrest has stymied three major Gulf investment projects in Syria and harmed efforts to attract capital needed to boost the economy after decades of Soviet-style controls, business figures say.
Two months of street protests against the autocratic rule of President Bashar al-Assad have hit many parts of the country, enduring despite a bloody military crackdown that human rights groups say has killed around 1,000 civilians.
"Syria looked like it was a stable country and like it was beginning to try and modernize," said Theodore Roosevelt IV, managing director of investment banking at Barclay's capital.
But the grassroots upheaval suggests "the optimism that some people had about Syria seems to have been misplaced," he told Reuters on the sidelines of a business conference in Amman.
"What is happening in Syria now is disturbing for investors. You see a government repressing its own people." Mr. Roosevelt added that investors could look again if Syria emerged from the crisis with "strong civic institutions and a rule of law."
The state-owned Qatar Diar real estate company has halted a central Damascus project with a planned built-up area of 2.5 million square meters. A smaller project that the company had started on the Mediterranean seafront near the city of Latakia, one of the protest hotspots, is now also at a standstill.
Fahed Darwish, head of Syria's Free Zones Investment Committee, told the al-Watan newspaper this week that the Diar project was "history ... Qatari Diar has left."
Qatar, a United States ally, has been one of the few large investors in Syria in sectors other than oil, along with the United Arab Emirates. Foreign companies, such as Total, still operate in Syria's small oil sector.
Drake and Scull, an international engineering firm based in the United Arab Emirates, said on Thursday it was halting work on a $28 million subcontract in Syria's central city of Homs, where tanks and troops were deployed to stamp out protests.
"We hope that the political situation will become better," a company official told Reuters.
Another Qatari firm, Qatar Electricity & Water Co has shelved plans to build two power plants in Syria.
Syria's central bank was forced to raise interest rates on bank deposits three weeks ago to support the Syrian pound.
Syria has seen steady growth over the last five years, partly as a result of Assad's gradual lifting of state economic controls. But unemployment has remained high and agriculture has suffered from drought and poor management of water resources.
The International Institute of Finance has estimated that Syria's economy will shrink by 3 percent this year, a steep fall from 4 percent growth in 2010, in the wake of the unrest.
Syria's economy has undergone gradual liberalization while capital controls state involvement in various businesses remained.
US sanctions, first imposed on Syria in 2004 for its support of militant groups, helped deter Western investors and have stayed in place despite a short-lived thaw in relations, before the clampdown on popular unrest.
The sanctions targeted the state-owned Commercial Bank of Syria, the country's largest, and restricted the sale of US technology to Syria.
Washington has described the crackdown on protesters as barbaric and expanded sanctions imposed on top Syrian officials to include Assad himself. The European Union followed suit.
A businessman in Damascus said the new sanctions had no direct impact on economic activity but they would make investors reluctant to go into further partnerships with members of Assad's inner circle, especially his cousin Rami Makhlouf, who has been subject of specific sanctions for public corruption.
Makhlouf, who has been denounced by demonstrators as a symbol of Assad family corruption, maintains that he is a legitimate businessman. The tycoon controls several businesses, including Syria's largest mobile phone operator, duty free shops, an oil concession, airline company and hotel and construction concerns, and shares in at least one bank.
Bankers said they have detected a flight of capital in the last two months. Syrian depositors have been wary of placing large sums in the nascent banking system, preferring to put their money in established, and much larger, banking hubs in neighboring Lebanon and elsewhere.
Depositors have withdrawn the equivalent of at least $680 million from privately owned banks, the equivalent of seven percent of deposits held there, since the pro-democracy demonstrations erupted, according Abdel Qader Dweik, head of Qatar International Islamic Bank's subsidiary in Syria.
Gulf investors control at least two other banks in Syria out of the 14 in private hands. They announced three large real estate projects in the country in the last six years, after a relaxation of laws restricting private investment, but they have struggled to clear bureaucratic hurdles.
"Most of the projects that have taken off the ground are continuing, but the ones that were planned have been effectively scrapped," a business source in Damascus said.
The three biggest were Diar's development, a $500 million project by Emaar Properties in Yafour district outside Damascus, and a $1 billion project next door by Majid Al-Futtaim Group that had been delayed before the unrest.
Bankers said expansion plans have been also put in hold in Syria's banking sector. "It has become physically difficult to operate because of the security clampdown, let alone to expand," said a Lebanese banker who declined to be named.