Economy, Domestic Economy

What Does Iran’s Business Opening Mean for Regional Arab States?

Jebel Ali Port played an active role in UAE-Iran trade, which mostly came in the form of reexports during the sanction years.  Jebel Ali Port played an active role in UAE-Iran trade, which mostly came in the form of reexports during the sanction years.  

In January, senior diplomats from across the world formally announced the lifting of sanctions against Iran. In principle, this put a definitive end to 37 years of various degrees of sanctions imposed on the country.

Boardrooms of global Fortune 500 companies and regional conglomerates alike have been lit up with debate on what this means for their business over the past 10 months, but two things are certain.

First, the opening up of the nation to the world is arguably one of the most prolific global business opportunities of our generation.

Second, the answer to the above question depends heavily on your company’s origin, DNA and risk appetite, reads an article published by Live Trading News. Excerpts follow:

For the majority of the largest European and Asian companies, excluding China, this marks a much-awaited opportunity to return to Iran, where many had investments, manufacturing facilities and large-scale operations prior to the financial sanctions imposed on Iran in 2011.

Chinese and American companies view the current situation as more of a threat and for different reasons.

Chinese firms have greatly benefited from the international sanctions on Iran over the past few years, which provided a window through which an inflow of Chinese products flooded the market without much foreign competition. The lifting of sanctions will see an inevitable curtailing of Chinese dominance in this market.

For American companies, the situation is more complicated.

Although US companies’ foreign subsidiaries are technically allowed to engage with Iran, there is still a minefield of regulatory, transparency and legal challenges that have left many hesitant to take even preparatory steps.

So, what does Iran opening up mean for Arab states in the Persian Gulf region?

There are both significant opportunities and many challenges, and to understand the complex nature of Iran’s ties with the Arab states, Iran’s status in the macroeconomic fabric of the Middle East should be understood.

  Business Opportunities

Iran’s large market spells big opportunity for Arab businesses, which have a number of advantages over global competitors. The first of these advantages is geography.

It comes as no surprise that most Fortune 500 companies that are entering Iran are predominantly doing so via the UAE or Turkey, primarily due to proximity and logistical ease, as well as ease of communication, travel and management of business operations.

Secondly, Arab states in the region have already established gray channels into Iran.

Many foreign companies are surprised when they first visit Iran and realize the market is flush with their products and the products of all their competitors.

The UAE and the wider Arab region have acted as Iran’s unofficial backdoor during the sanctions, and distribution and supply chain channels are already carved out in these markets. In fact, Jebel Ali Port played an active role in UAE-Iran trade, which mostly came in the form of reexports during the sanction years.  

The challenge will be to keep these channels open, once official channels are established.

Third and perhaps most importantly, companies in the Persian Gulf region know how to operate in volatile and high-risk emerging markets. This is why many of their companies have done well in emerging Asia and Africa. Due to the ability of these companies to take risks, regional companies have an opportunity to enter Iran faster than their foreign rivals.

Finally, there are a number of sectors where such companies are primed to flourish.

For starters, the bank and financial sectors in the Arab region are expected to witness an increase in longer-term business opportunities. The region’s top construction players, which may be suffering from the contraction of the sector at home, might also find a welcome respite in Iran.

Construction growth in the country is primarily driven by the residential segment–accounting for 45% of the market–due to a severe shortage of housing stock. The demand stands at 1.5 million housing units per year, of which Iran is able to provide less than 50%.

Infrastructure projects and construction of manufacturing plants are also expected to see sharp growth rates that cannot be met with local capacity alone.

Thus, all adjacent industries, from the excavators and heavy machinery sector to the construction materials sector, will be prime growth segments.

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