New deal between Dubai and Iran creates opportunities

Dubai’s position as a centre of trade is likely to pay off again in the next few years as the deal between Iran and Western powers results in the reintegration of the country into the global economy. Located just across the Gulf, Dubai is already a conduit for goods in and out of Iran. The question now in the emirate is what opportunities will the opening create. Discussions are focused on which impacts could be immediate and which long term, what sectors would be most affected and what to expect from Iranian investment in Dubai. Nasser Al Madani, assistant director-general of the Dubai Airport Freezone Authority, told OBG, “Iran’s opening is a real business opportunity for companies operating from Dubai’s free zones.”

Potential 

Theories vary, as does the degree of enthusiasm among players in Dubai’s economy, but expectations are underpinned by market signals and economic research echoing positive sentiments. Iran has long been shut out from the majority of the global economy in various ways, including sanctions from the US and Europe, and exclusion from global banking infrastructure that facilitates cross-border financial flows. Yet in April 2015 the country signed an agreement with Western powers that allows oversight and limitations placed on its nuclear programme in exchange for the lifting of certain economic sanctions, and in January 2016 sanctions were lifted. This will happen in stages as the agreement’s conditions are met and compliance is ensured. If the process proceeds as outlined, it could create a 1% boost to real GDP growth in the UAE over the next three years, according to the IMF’s 2015 Article IV consultation. “The UAE is well positioned to benefit from an opening of the Iran market by serving as a trans-shipment point for renewed trade activity,” the report said.

Promising Sectors 

Market sentiment agrees with the notion that Dubai will benefit from an opening in Iran. Stocks on the Dubai Financial Market General Index saw their biggest gain in the two months after the pact was announced on April 2, 2015. The following week DP World saw its shares rise by 9%. The government-owned firm manages ports including Dubai’s Jebel Ali container port, which it said would benefit from more open trade with Iran. After sanctions were lifted, CNBC reported in January 2016 that Iranian markets “soared” and that despite lower oil prices the country’s stock market jumped 5%. However, enthusiasm has been somewhat tempered by low oil prices and concerns that increased Iranian production could contribute to this trend.

Infrastructure upgrades inside Iran also present an investment opportunity for foreign investors. While the obvious change for Iran itself is the chance to expand and revitalise its oil and gas sector, the country’s economy is a diversified one in which there are investment opportunities in a range of industries, according to Ali Borhani, founder of Incubeemea, a Dubai-based advisory firm. “Once you get past the obvious oil and gas story, there is a huge consumer story,” he told OBG. “Agriculture has great potential as well. Dubai is going to be an immediate beneficiary because its role as an intermediary will only increase.”

Dubai’s trade with Iran is widely expected to grow given its proximity just across the Gulf, as well as the fact that it has long been home to an Iranian community. There are an estimated 400,000 Iranians in the UAE and some 10,000 Iranian businesses in the emirate, according to a July 2015 report from The Economist. These expectations are also based on the recent past, as the UAE was Iran’s second-largest trading partner in 2009, with only the bilateral relationship with China exceeding it, according to Bloomberg. However, trade declined in recent years as the sanctions regime against Iran intensified, and the UAE slipped on a yearly basis to Iran’s fourth-largest trading partner by 2013. Their bilateral trade relationship peaked in 2011, with $23bn in goods and services changing hands. However, that figure was $17bn by 2014, according to a July 2015 report from Dubai-based daily The Khaleej Times.

Immediate Impacts

In the short term, the opportunity for Dubai is centred on trade and logistics. Iran’s reintegration is expected to result in a wave of inbound imports, ranging from heavy equipment needed to revive oil and gas fields and exploration to consumer goods. Iran’s busiest port is Shahid Rejaei, across the Strait of Hormuz from Dubai. This port and a number of smaller ones are not expected to be able to handle the influx in traffic. Over the long term, however, Iranian port capacity is expected to increase. Furthermore, shortly after sanctions were lifted Iran Air signed a $27bn deal with Boeing and ordered 118 jetliners from Airbus. In terms of air links, Iran Air flies to a limited number of international destinations, and Dubai’s Emirates airline is expected to carry many connecting travellers. In July 2015 it announced a service to Mashhad, Iran’s second-largest city. Smaller carriers, such as the low-cost flydubai, have also boosted flight frequency to Iran.

Another key sector will be financial services. Dubai’s banking sector will see leaps in demand for trade finance. An estimate by Middle East Global Advisors pegs the revenue opportunity for banks globally at $105m a year between 2015 and 2018. That is based on an assumption that trade finance generally costs 1% of a shipment’s value, and the projection that additional imports to Iran over the period will be valued at around $42bn. Based on Iran’s trade profile before and after 2010, when the sanctions were first implemented, the UAE would be the country poised to capture most of this new business, at about 29% of the total. Others ramping up imports would be China (10%), South Korea (7%) and Germany (8%).

Further Afield

Beyond the immediate demand for facilitating trade, Iran’s economic opening is likely to impact Dubai’s financial services sector, in which various intermediaries will facilitate trade and investment. However, the notion of regionally oriented companies servicing Iran from a headquarters in Dubai is not limited to that sector. For example, in June 2015 Sweden’s Assa Abloy, the world’s largest maker of locks, acquired Dubai’s Prometal Group, a manufacturer of security doors. Johan Molid, the company’s president and CEO, told Sweden’s TT News Agency that the move was intended to leverage the Iran opportunity by selling doors there. Hussain Asrar Haghighi, executive vice-president of Dubai’s Iranian Business Council, told Dubai-based daily Gulf News that early-stage demand would be seen for spare parts for machinery, food, cement and steel. The Iranian Business Council’s membership ranks are an indicator of how the sanctions against Iran have impacted Dubai, as well as how ending them would increase links. There are currently about 100 members, a figure that has shrunk from 450 in 2008.

New Funds

For the banking sector specifically, one important question is how Iran would use an estimated $100bn in frozen assets stranded outside of the country that were freed up as a result of the lifting of certain sanctions in January 2016. More than half of that total, a figure which was calculated by the Institute of International Finance, could be deployed to recapitalise Iran’s state-owned banks, according to Constantinos Kypreos, senior credit officer at global ratings firm Moody’s. “Recapitalisation is much needed to unlock the growth potential of the Iranian banking sector. The repatriation of frozen assets, and potential interest from foreign investors and financial institutions, would also allow domestic banks to strengthen their solvency levels,” said Kypreos in a September 2015 report on Iran’s banks.

However, it is also expected that some of Dubai’s banks may investigate direct investment in the country’s banking sector. Another financial sector opportunity is Islamic finance, including banking and underwriting for sukuk, or sharia-compliant bonds. Iran’s entire financial system is sharia-compliant, and given Dubai’s recent focus on becoming a global hub for sukuk issuance, Iran beckons as a logical spot to recruit new customers seeking to raise finance.

Inward Investment 

The potential opening in Iran is also seen as impacting inward investment in Dubaian real estate. Properties in the emirate have always been considered an investment opportunity for foreigners, but Iranian participation has flagged in recent years as sanctions made it difficult to move money into and out of Iran. Realtors in Dubai say that this has resulted in pent-up demand among Iranians for investments outside the country and that some of it will be used to buy residences in the emirate. Given price drops in real estate in 2014 and 2015, as oil prices have depressed demand, Iranians with cash to spend could find good deals in the emirate, according to Middle East Global Advisors. The firm stated, “The return of the Iranian investors into the Dubai property market will fill the gap of the fleeing Russian investors and absorb some of the overcapacity that has left Dubai’s property market sentiment sluggish.”