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As the Middle East largely shrugs off the financial crisis, mid-sized companies are looking to the region as a fast-growing alternative to lumbering western markets. Foreign direct investment statistics show that investment into the region fell by 15 per cent in 2009, with the United Arab Emirates registering the largest drop of 70 per cent as Dubai struggled with its real estate crash.
But other oil-rich Gulf states proved more resilient. Saudi Arabia, the single largest investment destination, fell by only 7 per cent, while Qatar boosted the amount of investment it attracted.
Nevertheless, the Middle East remains a tough market for newcomers to crack. From newly open destinations such as Iraq and Libya to more established markets in the oil-rich Arab Gulf states, foreign companies face many risks in navigating complex political systems, patronage networks and unclear legal environments.
The Middle East’s big oil producers have spent their way through the financial crisis, focusing their fiscal firepower on grandiose infrastructure projects, and shoring up fragile banking sectors with generous state support. Real estate markets, however, have felt the brunt of the crisis and continue to wobble.
Thousands of contractors and service providers to the construction industry have had the risks laid out clearly. As revenues dried up, developers stopped payments, leaving many companies stranded with few options for recompense.
The UAE, one of the most developed markets in the region, has been badly hit by the real estate crash in Dubai and Ajman, as well as by the more moderate declines in Abu Dhabi. Companies are learning their lessons the hard way, via court and arbitration proceedings, which have ballooned in the past couple of years.
“For clients coming from northern jurisdictions, the legal structure here is not close to what they are used to,” says Dubai-based Thomas Wilson of Kilpatrick Stockton, a law firm. “It is necessary to be as rigorous as at home in establishing contractual obligations, but you also have to be aware that firms’ contractual obligations do not assure that rights in contract will be enforced as predictably as in their home jurisdiction.
“You can’t rely on the courts to enforce your rights to the extent you might in your home jurisdictions, so you have to mitigate risks in other ways: relationships, strong contracts. These can be used to go to the counterparty with which you have built a strong relationship to convince them of the moral obligation to the meet the terms.”
Many contractors and consultants that have survived the storm are writing off losses and moving to other markets in the region. Mr Wilson’s advice: never let payment fall out of sync with the work schedule.
Those not used to Gulf markets should remember that personal relationships with partners remain the most important aspect of a business plan. “These markets operate on a relationship basis – and the strengthening of these relationships takes time and investment,” says Warwick Hunt, regional managing partner for PwC, the consultancy, which is expanding its footprint across the Middle East as demand for audit and transactional work returns.
“You have to have a focus on hiring nationals, especially in the Gulf Co-operation Council,” he says. “Organisations have to be seen to be investing in the region – quite rightly, there can be intolerance to ‘fly-in, fly-out’ executives with a suit and briefcase. You have got to be seen to engage.”
One area of particular focus is Iraq, a potential investment spot for those seeking to benefit from the opening-up of the oil and gas sectors. Yet all the investment problems associated with the oil-rich Gulf are multiplied when considering the war-torn country.
Politics, corruption and bureaucracy combine to create a cauldron of risk that companies need to consider carefully. Security is much improved compared with the situation a few years ago, but even today there are incidents every day outside the placid Kurdish regions.
Larger oil and gas firms have the clout to open doors more quickly than smaller companies, says Julien Barnes-Dacey, Iraq analyst with Control Risks Group, a business risk consultancy. “Western companies are looking as there is huge potential, but at the moment the risks remain high, especially in terms of security,” he says.
The other country in which oil-based riches are colliding with politics to deleterious effect is Iran. The incremental tightening of United Nations sanctions against financial dealings with the Islamic republic is having a stark effect on trade flows into the country as western powers seek to hamper its nuclear programme.
But the introduction of US extraterritorial sanctions is having an additional impact on foreign investors in the republic, especially smaller companies that are unlikely to receive significant support from their home governments.
New sanctions provisions, which focus on isolating members of the ruling establishment and limiting investment in oil, gas and petrol imports, also threaten punitive measures against companies that deal with sanctioned entities or individuals.
“The sanctions have added an element that makes subsidiaries liable for operations activities of related entities in Iran,” says Marie Bos, Middle East analyst with Control Risks. “Either do business with us or with them.”