What the lifting of Iranian sanctions will mean for GCC countries

On July 14, it was announced that the P5+1 – the United States, United Kingdom, France, China and Russia, plus Germany – had achieved a long-term nuclear deal with Iran. According to the US, the deal will “verifiably prevent Iran from acquiring a nuclear weapon and ensure that Iran’s nuclear programme will be exclusively peaceful going forward”.

The Iranian nuclear narrative has experienced several twists and turns over the past several years. Iran has been under sanctions in one form or the other for more than three decades now. An Iranian nuclear deal has significant geopolitical as well as investment implications for the GCC, along with the fact that there are anticipations of removal of sanctions in a phased manner.

The major geo-economic impact on the GCC is that Iranian energy supplies can increasingly replace, over the long term, GCC shipments to lucrative markets like China, Japan, South Korea and India. For instance, media reports in India, which has traditionally ranked as the second-most important market for Iran after China, indicate that a landmark Iran nuclear deal that eliminates sanctions could mean that New Delhi can increase its import volumes from Iran.

A couple of days after the July 14 deal, Iran said that it would commence talks with India for finalising a mechanism to recover more than $6.5 billion in oil dues that are held by Indian refiners.

The GCC countries have a range of stances towards Iran. For instance, Oman played a key role in the 2013 secret talks between the US and Iran that paved the way to the current situation wherein Iran sits at the threshold of a potential nuclear deal. Oman also signed an accord with Tehran in early 2014 to construct a $1bn natural-gas pipeline from Iran to Oman.

The long delayed Middle East to India Deepwater Pipeline, which would export gas from Iran and Oman to India, is expected to be revived in the aftermath of the deal. Qatar has also sought to maintain an amicable stance with Iran. Qatar shares its gasfields with Iran, which makes it requisite for Doha to maintain stable and cordial relationships with Iran, a key military power in the region. There are also business considerations in terms of supply and demand. There are reports that indicate Kuwait and Iran are exploring options as to whether Iran could export gas to Kuwait via Iraq, given Kuwait’s growing needs for natural gas.

As the table indicates, the UAE is Iran’s largest non-oil trading partner. The UAE is Iran’s largest source of imported goods, worth about Dh100bn. As energy-producing countries, Iran and the GCC have traditionally been able to mutually offer little diversity in traded items. The GCC (excluding Saudi Arabia) exports to Iran are almost totally from the UAE, which accounted for 96.7 per cent of total bloc exports in 2013.

In terms of imports from Iran, the UAE accounted for 62.5 per cent of the total imports from Iran into the GCC. The next major importer is Oman, at 26 per cent. With respect to investment opportunities, containing about 40 industrial sectors in the stock exchange, Iran has a diverse industrial portfolio. Iran’s geographical linkages to a significant market of 350 million people in the neighbouring territories (Central Asia, the Caucasus and Afghanistan area) is a major advantage to be tapped if the sanctions are completely lifted.

With respect to Saudi Arabia, the political differences between Riyadh and Iran are thick, with little sign of rapprochement in the near future. Trade between the two countries appears to be non-existent.

For the FCC region, the Iranian nuclear deal has far-reaching ramifications. For several GCC countries, Iran’s reintegration into the global economic architecture holds promise of new businesses and regional development. However, political risks persist, especially in light of the recent entry of Russia in support of the Assad regime in Syria.

The potential removal of sanctions means that investors from the GCC, especially the UAE, will look towards opportunities to develop projects in Iran. However, strong political differences between Iran and the UAE do carry the risk of derailing relationships.

M R Raghu is the managing director of Marmore, a research house based in Kuwait and focusing on economies in the Middle East and North Africa

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