Sometimes lost among the headlines of bloodshed and regional strife, parts of the Middle East offer attractive investment opportunities. But even in these areas, the spread of sectarian violence poses complications, write Beazley Group’s Roddy Barnett, political risk underwriter, and Emma Whiteacre, country risk analyst.


The interplay between Saudi Arabia and Iran is hugely important in determining the course of developments across the region. At a time when Iran’s geopolitical fortunes appear to be in the ascendant, the Saudi monarchy is hyper-alert to the prospect of its historic rival gaining influence over the future direction of Iraq.
The establishment of the Islamic State in the north of Iraq and eastern Syria is a pivotal development. The sustained strength of ISIS as a viable force, and the potential disintegration of the state of Iraq into Sunni, Shia and Kurdish regions, is not in the interests of any of the regional leaders and such threats are therefore prompting a new calculus of alliances of convenience.

The Islamic State is probably unsustainable, vulnerable to overreach, to a concerted military onslaught from its many enemies, and an inability to convert short-term submission of the Sunni communities into long-term allegiances. But its territorial gains across eastern Syria, northern Iraq and minor encroachments into Lebanon and Jordan are raising hackles and having a profound impact.

The Saudi Arabian monarchy, whose sympathies in Iraq remain with the Sunni minority and which has supported the rebel forces in Syria against President Bashar al Assad, is becoming increasingly concerned about further radicalisation under ISIS. It already faces threats from the now-banned Muslim Brotherhood domestically, as well as from AQAP in Yemen and hostile Shia minorities at home in the oil-producing east and in neighbouring Bahrain.

Iran, whose proxies in Syria, Iraq and across the Levant have fuelled the conflicts, is throwing its weight behind the Iraqi leadership and funnelling further support to Shia militias. Meanwhile the West is losing interest in supporting the rebels against Assad, and placing greater emphasis on prospects for the thawing relations with Iran to pursue common ends in Iraq. Assad, in turn, is taking advantage of the opportunity to rebrand his regime as a bulwark against Sunni extremism while benefiting from ISIS over-stretch. And Turkey, still wary of the prospect of demands for Kurdish independence, is nonetheless supporting the Kurds in their resistance against the Islamic State.

While trade and investment flows in Syria had already been decimated by the civil war, Iraq’s post-war prospects have been robust due to the resumption of strong oil export flows. The large geographical buffer between the Islamic State and the bulk of the oil industry in the south will ensure that investment will continue flowing inwards and oil outwards. But the total disarray at the heart of the state will make the operating environment challenging and will prevent the infrastructure upgrades essential for facilitating more exceptional growth.

The threat to the Kurdish oil industry is of particular concern, as it has attracted significant investment despite disputes between regional and central governments about contracts and revenue distribution. Following US air strikes around Mosul, Kirkuk and Irbil, and the equipping of Peshmerga forces by the US and EU, it appears that IS forces are being held at bay. If the situation deteriorates, however, we can expect to see policy notifications – particularly where companies are taking precautionary measures such as removal of assets or are attempting to secure assets prior to their withdrawal from the site.

Progress on an agreement between Iran and the West over its nuclear programme is a double-edged sword for Saudi, which is reluctant to see Iran’s global rehabilitation. As things stand, Iran’s economy is almost exactly half the size of Saudi Arabia – worth US$366bn in 2013, versus Saudi’s US$745bn, according to IMF figures – and smaller than UAE, which is worth US$396bn. But the potential growth that rapid economic liberalisation could unleash
is not lost on the Saudis.

If the Iranian economy were to grow at a not inconceivable rate of 10% per year, while Saudi growth continues to follow the trajectory currently envisaged by the IMF, it could outstrip the Saudi economy within 15 years. At the World Economic Forum in Davos earlier this year, President Hassan Rouhani suggested that Iran could become one of the world’s 10 largest economies in the next three decades. While the Saudi Arabia growth outlook is robust, it lacks structural growth drivers, such as the impetus that would be provided by deep economic reform or privatisation that could enable it to keep pace with a liberalising Iran, where the lifting of sanctions would foster significant foreign trade and investment interest.

The Gulf states have long been set on an entirely separate trajectory from their more turbulent neighbours and have resisted the turmoil of the Arab Spring through a combination of tactical concessions, targeted repression and strategic redistribution of oil wealth. They are expected to continue to outperform by virtue of these hydrocarbons, strong development in their technology and broader non-oil economies and political stability. But they cannot entirely escape the influence of the Saudi/Iran struggle for dominance. Already divided due to Qatar’s support for the Muslim Brotherhood in Egypt and Saudi, they face a less supportive geopolitical environment in the coming years.

The monarchical Sunni leaders across the Gulf have traditionally considered Iran an adversary by virtue of its covert support for their Shia populations, and have benefited from the frozen relations between Iran and the West in the form of military and financial arrangements with the US in particular. Qatar, UAE, Bahrain and Kuwait all host US military bases and are concerned that as Iran’s relations with the West improve, so theirs will become of less strategic value and their comparative advantage will diminish.

While these states all face their own internal risks, their outlooks are broadly, and independently, robust. Moreover, they could benefit enormously from Iran’s economic liberalisation. Oman is already pushing ahead with plans to build a US$1bn natural gas pipeline with Iran. Kuwait is on a charm offensive, with a recent meeting between the leaders resulting in Kuwait’s emir reportedly calling Ayatollah Ali Khamenei ‘the supreme leader of the entire region’.

The UAE, which currently acts as a natural hub for exports to Iran, could redesign its role to take advantage of the likely surge in Iranian exports.

Undoubtedly, there are opportunities in the midst of the destruction and devastation in the heart of the Middle East. Identifying them, and mitigating the acute risks, remains a challenging process. We continue to assess individual risks on their merits. Iraq enquiries dominate, predominantly because significant oil infrastructure and services investments have to be protected against major uncertainties. Appetite and enquiry flow for Saudi Arabia is virtually unchanged from last year, in sharp contrast to Egypt where interest is returning. In Iran, opportunity depends entirely on the lifting of sanctions which may occur over the next couple of years depending on the continued progress of negotiations regarding the country’s nuclear interests.

Intelligence cut-off date: August 21, 2014.