The relatively warm relations between Muscat and Tehran mean there should be opportunities in for Oman’s banking sector in Iran
Oman has often ploughed its own furrow when it comes to Gulf politics. Muscat was the first to reject a single currency in 2006 for instance, and in 2012 it came out strongly against a Saudi proposal for a broader political union in the wake of the Arab Spring uprisings. So it wasn’t altogether a surprise when it emerged in late 2013 that Oman had been hosting secret talks between Iranian and US officials. Providing a neutral venue for the two sides to meet helped to lay the foundations for the deal to remove Iranian sanctions that was struck in Vienna in July this year.
The initiative bought Muscat some goodwill from both Washington and Tehran, and perhaps some suspicion from some of its other Gulf neighbours. Now that the sanctions-lifting deal has been concluded and with Iran about to re-enter the economic mainstream, can Oman’s banks take advantage of the opportunities?
The UAE, and Dubai in particular, is usually cited as the GCC country with the most to gain from Iran reconnecting with the world, but given the relatively warm political relations between Muscat and Tehran, coupled with the geographic proximity, there ought to be opportunities for Oman too. Such issues can be sensitive and not all Omani bank executives are comfortable talking about the issue on the record, but it’s something that many are keeping an eye on.
“If international relations are normalised, or at least relaxed, then Oman does stand to benefit from increased bi-lateral trade and investment,” says Lloyd Maddock, chief executive officer of Ahli Bank. “Iranian manufacturers would view the Oman special economic zones as an attractive location to establish plants. Similarly, Omani banks would have opportunities to support their customers’ Iran business development.”
Figures from the World Bank show that the value of trade between Iran and Oman has in fact been increasing even as sanctions have tightened, although it has changed markedly in character. In 2009, Oman exported $641 million worth of goods to Iran, mainly fuel, textiles and machinery, but by 2013 the figure had slipped to $323 million, most of which was food. In contrast, the value of imports into Oman from Iran has surged from $117 million in 2009 to $561 million in 2013, almost all of which was fuel.
Among the GCC states, Oman is now the second largest importer of Iranian goods after the UAE, buying a quarter of all imports from Iran coming into the six-country bloc, according to the Kuwait Financial Centre (Markaz). This presents an obvious foundation to build on. “Oman will stand to benefit enormously upon the lifting of trade sanctions on Iran,” says Raghu Mandagolathur, head of research at Markaz. “We foresee a number of opportunities for Oman banks especially in the areas of trade finance and financing Oman industries which seek to invest and expand their operations in the Iranian economy.”
The most obvious sign of strengthening ties at the moment is the deal to build a $1 billion sub-sea pipeline between the two countries so that Oman can import gas. An agreement was signed in 2013 although some of the details have yet to be finalised. Another route to strengthen the ties lies in some of Oman’s special economic zones, says Maddock, which are attached to its ports at Sohar, Duqm and Salalah. These offer an alternative to international companies wanting to service the Iranian market without sending their goods through the Strait of Hormuz to Dubai.
Being the closest to Iran, Sohar is perhaps the most obvious jumping off point for the Iranian market, although Iranian investors were also among those in a delegation that visited Duqm Special Economic Zone in November. Oman’s banks appear ready to take advantage of any interest as soon as it emerges, particularly in areas such as trade finance. “The lifting of Iranian sanctions is expected to significantly improve the already close relations between Oman and Iran,” says Rashad Ali al-Musafir, acting CEO of Bank Sohar. “Given Iran’s newfound freedom in a post-sanctions era, and the Sultanate’s openness for foreign investment, significant Iranian investments could be expected into Oman. Banks will naturally be the first recipients of Iranian investment flows, which could lead to reciprocal opportunities in trade finance, syndications and project finance.”
How quickly the opportunities emerge remains to be seen. The sanctions are likely to start being lifted in the opening months of next year and some of the effects on Oman could be seen relatively quickly after that, says Steffen Dyck, senior analyst in the sovereign risk group at Moody’s Investors Service. “Growth in bilateral trade would probably increase relatively quickly once sanctions are lifted, given the geographical proximity and historical ties, which should benefit both exports to and imports from Iran,” he says.
Further down the line, Omani banks may want to look at opening branches or representative offices in Tehran. For now none of the Oman banks have a presence in Iran, although the Central Bank of Oman says that two Iranian banks, Bank Melli and Bank Saderat Iran, maintain branches in the Sultanate.
But taking advantage of the opportunities will not necessarily be straightforward. “Services exports, including travel, logistics, financial and communication services, would benefit if Oman manages to capitalise on its comparatively closer relations,” says Dyck. “However competition with the UAE and Dubai in particular would also intensify.”
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