Dubai: Banks in the UAE will need to take the lead before local businesses can start exploring opportunities in earnest from an opening up of the Iranian economy. That would mean offering facilities such as letters of credit, among other things, on orders placed with UAE firms from Iran.
“Due to restrictions imposed by various banks and suppliers we deal with, we would need to get an official go-ahead from them before we can start doing any business with Iran,” said Ashish Panjabi, Chief Operating Officer at Jacky’s Electronics. “Till then the status quo remains.”
There is still time for UAE businesses and the financial services industry to formulate their plans. The final shape of the agreement that will roll back sanctions would be had only by June 30.
In this regard, there will be heavy responsibility placed on banks in the country to state their position on what can — and cannot — be done in terms of business-to-business ties and the movement of goods between the UAE and Iran. And all of which will need to show up clearly on the radar if banks are to sanction the necessary support from their side. “Banks will be circumspect for a while and initially deal with only the highest rated counterparties,” said Sameer Lakhani, Managing Director of Global Capital Partners.
“But there is a long history of cross-border business ... so there is considerable familiarity. So the initial period of hesitation should be short-lived and more a function of how regulatory bodies react to the opening of business flows.
“Beyond standard know-your-customer checks of counterparties that guard against money laundering, local businesses are generally adept in risk taking. Grass roots intelligence is fairly insightful in avoiding standard counterparty risk issues.”
Even if banks become more amenable to Iran exposures, local businesses will also need to be on their guard over the credit periods they are willing to offer on orders placed with them. In the short to medium term, they may not be willing to be that generous on the payback periods.
“It is likely that initial caution will lead to lower credit period requests [from UAE businesses],” said an industry source. “However, given the demand and competitive market dynamics, it will soon be arbitraged away to more normal periods as more competitors enter the field.”
After the immediate euphoria of the deal being struck, businesses are taking on a more cautious attitude towards what their Iran plans should be. For instance, while everyone agrees on that market’s retail potential, local business groups will want a clearer picture to emerge on what can be done and how. What they do not want to see happen is an Iranian firm taking on franchise agreements and then failing to meet their expectations on sales or how the brand is portrayed.
Questioned on whether it saw opportunities in Iran, Salim Kalsekar, Managing Director of Rasasi Perfumes, said: “Rasasi has an aggressive plan in the Middle East and the global market ... but we are not giving the franchise to other investors, but work with professional distributors.”
Meanwhile, Iran’s building materials sector could try and aspire for a presence in the UAE and other Gulf markets. If that were to happen, would it mean it could trigger an intense price war from their end?
“I don’t think so ... Iranian businessmen might be able to sell some commodities in this market,” said Bharat Bhatia, CEO of Conares. “With regards to steel, Iranian traders might need to buy huge quantities in order to address their growing demand. The market sentiment in the UAE remains positive and stronger in this regard.
“Iran has always worried about how to trade with international markets and arrange payment obligations for their imports. The only solution for them was to sell goods at cheap prices and raise cash to fund more value-added products.
“If international sanctions are lifted, traders in that country will be able fund with all the countries and might not offer any goods for cheap, compared to other markets globally.”