The race is on to expand business ties with Iran in the wake of the P5+1 nuclear agreement.
The expectation of sanctions relief has energized Dubai’s resident multinational corporations, law firms, accountancies and consultants. The lure for Dubai is the potential of Iran’s economy to become number one in the region.
The invitations are coming in fast. The period between mid-September and mid-December is perennially the height of the business calendar here in Dubai, when temperatures cool and visitor numbers rise amidst a myriad of global conferences, trade fairs, and major tourism events. Unlike previous years, however, the conclusion of the P5+1 nuclear agreement with Iran has unleashed a stream of Iran-themed seminars, talks, conferences and symposia into the mix. Law firms, accountancies, trade associations and individual consultants are vying to advise current and potential clients regarding the opportunities and pitfalls of doing business in an anticipated post-sanctions Iran.
While some governments and major multinational businesses are sending high-level delegations to Tehran to burnish ties, others are preaching exceeding caution, aware of the complexities surrounding sanctions removal and wary of penalties for missteps. Whichever approach is followed, Dubai is playing a key role for those examining what the putative re-opening of potentially the largest economy in the region means for their businesses. Despite the challenges that will face any firm seeking to successfully transact in Iran in the near term – and they are many and significant – the prospects of a diversified, industrial economy underpinned by a population of nearly 80 million, the world’s largest gas reserves (18 percent of the global total) and 10 percent of the globe’s proven oil reserves, are highly compelling to say the least.
As a prominent American businessman of Iranian heritage told me shortly after the passage of the deal: “Iran is finally within grasp… the country of the future in the region and beyond.” Others, especially European and Asian firms likely to be less impacted by residual U.S. sanctions, seem to agree, and most of them are already in Dubai. There are no shortage of invites...
The More Things Change...
Resting along the southern shore of Dubai Creek, looking out upon the dhows and abras plying their waterborne trade, one can easily intuit the interwoven history of the communities and peoples connected by the warm, shallow sea that links Persia and the Arabian Peninsula. In one of Dubai’s older creek-side neighborhoods, both the locale and its vernacular architecture are known as Bastikia, redolent of the region in southern Iran from which the builders of this place departed just over a century ago. They came seeking Dubai’s friendlier terms of trade, and ended up integrating themselves, their families and their traditions into what has evolved into one of the world’s most vibrant and cosmopolitan centers of commerce. Although the reverie of an ancient scene is likely to soon be broken by the roar of four giant engines bringing an A380 super-jumbo in to what is now the world’s busiest international airport, the impression of continuity with times past remains.
Turning away from the Creek, moving southward through the glass canyon formed by tall towers lining the Sheikh Zayed Road and toward the resplendent achievement of the Burj Khalifa, you are entering a new Dubai, one built on global trade, logistics, finance, and luxury tourism – and well-positioned to benefit as the conduit for an Iranian reopening. The Dubai International Financial Center is home to 22 of the world’s top 30 banks, while the city’s 65,000 hotel rooms play host to over 13 million tourists annually. The port of Jebel Ali is the largest and busiest port in the region, and a modern, fully-automated metro system links the city together.
Reflective of the endurance of those earliest trading ties, certain family names, undoubtedly Farsi yet seamless amidst this particular Arabian cityscape, adorn office blocks, auto dealerships, and high-rise apartments. Iranian schools, an Iranian hospital, Iranian banks and businesses survived and thrived here despite the recent decades of enmity that characterized Iran’s relations with its Arab neighbors and the West following the ascent of the Islamic Republic. Through that period, Dubai remained the point through which Iranians could access the outside world, and the outside world could access Iran.
Looking toward a post-sanctions environment in 2016, Dubai’s unique combination of proximity, connections, and familiarity with the Iranian market will see it further emerge as the hub for international businesses assessing or pursuing entry into Iran. In late August 2015, just prior to launching its new five-times-weekly service to Iran’s second-largest city Mashhad, Emirates Airlines estimated that it can fly nearly 8,000 tons of freight goods to Mashhad yearly, in addition to the 17,500 tons it already sends to Tehran via its SkyCargo freight division. Trade with Mashhad, Emirates said, would mainly consist of Iranian exports of fruit, vegetables, carpets, saffron, and nuts, as well as its imports of meat, pharmaceuticals, medical equipment, machinery and motor parts - all sectors exempt from sanctions. In some ways it is a far cry from the days of pearls, silks and spices, and represents an expansion rather than a re-starting of the Dubai- Iran trading nexus, but increases in air traffic thus far are significant and a harbinger of things to come.
The potential opportunities in the market are significant and varied. The primary focus thus far, even in a low-oil-price environment, has been Iran’s oil and gas sector, and Iran will waste no time in marketing its opportunities to international oil companies (IOCs). Iran’s oil and gas road show kicks off in December 2015 in London, with 50 upstream projects already identified as well as the promise of the announcement of a new contract model for upstream investment. European and Asian IOCs are likely to lead the way, although U.S. majors should not be left too far behind. Teneo Intelligence MENA analyst Crispin Hawes notes that, while lagging somewhat in making connections due to uncertainty over the negotiations/sanctions outcomes, U.S. IOCs will still likely find the Iranians receptive when they are able to enter. Hawes believes that “although there is a ‘first-mover’ advantage for IOCs when engaging in a new territory or, as in this case, a re-opened territory, Iranian oil and gas officials are extremely keen to engage with U.S. IOCs, particularly the marquee operators.” That said, U.S. investment in Iran will likely face the risk of restrictions on U.S. entities trading with Iran being maintained or extended for the foreseeable future.
In addition to the upstream oil and gas projects, the Iranians have announced 170 more investment projects in other sectors to include major infrastructure enhancements, estimating over $80 billion of investment will be required to build new roads and a new high-speed railway. One local Iran analyst reported earlier in 2015 that Iran needed $90 billion in investments in their power sector alone. Iran’s existing position as a consumer market will remain large and attractive to international suppliers; Iran spends over $70 billion on food and over $20 billion on clothing. All of the Gulf’s petroleum-based economies are executing diversification strategies to drive high-value job growth for burgeoning youth populations and reduce their reliance on oil, to varying degrees of success. Iran, however, will be re-investing into already existing downstream industries, whether it be petrochemicals, automotive or light manufacturing, giving them a distinct competitive advantage against some of their neighbors in spurring non-oil growth.
At a recent seminar in Dubai hosted by the Institute of Chartered Accountants in England and Wales, a regional advisor quoted the Iranian government’s Vision 2025 strategy as targeting over 1 trillion dollars of foreign investment by 2025. The strategy highlighted the petrochemical sector, in which Iran aims to triple this sector’s value and directly compete with regional players in Saudi Arabia and the UAE. Relatively low wage levels and access to cheap feedstock in the form of its enormous domestic gas reserves will allow it to be highly competitive. The automotive industry currently accounts for 10 percent of Iran’s GDP; Iran currently produces 1.1 million cars per year and over the next decade aims to increase production to 3.1 million per year, with 1 million yearly destined for export. The head of the Iranian civil aviation authority has indicated that Iran must augment its ailing and aging fleet with the purchase of 400-500 new passenger aircraft over the next ten years. Reflective of this need, Dubai will host Aviation Iran in March 2016, a new global aerospace industry event bringing together key players in airport infrastructure, aircraft, and aviation services.
As successive delegations of public officials and corporate executives make their way to Tehran from European and Asian capitals, the ground work for accessing the Iranian market is being laid by their regional Middle East and Africa operations, many of which call Dubai home. Despite the tantalizing prospects of the Iranian market outlined above, most of those evaluating opportunities in Iran are not blinded by optimism. Those based in Dubai, or who have been elsewhere in the neighborhood for some time, will have an intrinsic sense of the complex geo-politics surrounding Iran’s presence in the region, the disputes, and the sometimes violent outcome of Iranian-Gulf rivalries in various locales. Their thinking also will have been tempered by previous false dawns, chastened by unmet hopes for reform in Iran and its policies and stalled efforts toward a thawing of international relations.
Sanctions… and Other Hurdles
Those managing expectations in terms of the timeline for real opportunity in Iran do so with good justification. Firstly, while most European Union (EU) and United Nations (UN) sanctions will have been lifted as part of the adoption and implementation of the nuclear deal, the bulk of the U.S.’ complex sanctions regime, which is related to non-nuclear policy aims, will remain in place for the foreseeable future. (The exception here being the civil aviation sector, which could see an opening in late 2015 based on a review of Iranian compliance with the deal.) This does indeed give European and Asian firms a head start in assessing and entering the market, but regardless of the speed with which non-U.S. sanctions infrastructure can be lifted, one of the biggest challenges prospective entrants are likely to face will be utilizing banking and payment structures. Under the current deal, U.S. banks and related entities will still be prohibited from dealing with Iran or facilitating trade and investment there. Even with a return to the international SWIFT electronic bank transfer system, significant reform and technological advancement will be needed in the Iranian banking sector to fully support investment and grow new business.
Other challenges are numerous. Serious questions remain about the Iranian government’s capacity and capability to negotiate and process new petroleum sector deals. Analysts state that because of this, the likely ensuing delays caused by capacity constraints and grievances over the contract model, some large-scale investors in the oil and gas sector in particular may be reluctant to push forward right away, especially if the price of entry is set too high. In other sectors, companies will encounter the pervasive presence of Iranian military and other government entities amongst putative private sector companies as well as deep and ingrained inefficiencies and corruption – the World Bank ranks Iran 130 out of 189 countries in its annual Doing Business report while Transparency International places Iran at 136 out of 175 countries in its Corruption Perception Index. In addition to the published reports, personal anecdotes from those recently returned from Iran are not hard to come by and flow easily along with the coffee at Iran-focused events.<
Remaining U.S. sanctions, geo-politics, nuclear deal compliance reviews and manifest challenges aside, 2016 will see the further reemergence of Iran and its reintegration into the regional growth strategies of global businesses. While one cannot ignore the significant challenges and legal complexities associated with accessing the market, governments and businesses are voting with their feet – or via increased daily flights to Tehran as it may be – and that momentum and optimism, appears well-established. Requirements for rigorous due diligence, strategic stakeholder engagement, and robust market intelligence and compliance review will only continue to grow as more firms, both foreign and Iranian, seek new opportunities. No doubt much of this will be happening in and from Dubai.